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  **SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549** **FORM 20-F**   o **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR12(g) OF THE SECURITIES EXCHANGE ACT OF 1934****or**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934****Forthe fiscal year ended December 31, 2006****or**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from           to****or**   o **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934****Date of event requiring this shell company report                                         **     **Commission file number:**  **1-14860****Swisscom AG**(Exact name of Registrant as specified in its charter)**Switzerland**(Jurisdiction of incorporation or organization)**Alte Tiefenaustrasse 6,****3050 Bern, Switzerland**(Address of principal executive offices)Securities registered or to be registered pursuant to Section 12(b) of the Act:     **Name of each exchange****Title of each class** **on which registered**American Depositary Shares, each representing one-tenth ofone Registered Share, Nominal Value CHF 1 per share New York Stock Exchange          Registered Shares, Nominal Value CHF 1 per share* New York Stock Exchange * Listed, not for trading or quotation purposes, but only in connection with the registrationof American Depositary Shares pursuant to the requirements of the Securities and ExchangeCommission Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None      The number of outstanding shares of each of the issuer’s classes of capital or common stock asof December 31, 2006: 51,801,943 Registered Shares, Nominal Value CHF 1 per share.     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.         Yes þ No o       If this report is an annual or transition report, indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.         Yes o No þ       Indicate by check mark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.         Yes þ No o       Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):     Large accelerated filer þ Accelerated filer o Non-accelerated filer o     Indicate by check mark which financial statement item the registrant has elected to follow.         Item 17 o Item 18 þ       If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).         Yes o No þ    
 

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**TABLE OF CONTENTS**       **Page**INTRODUCTION  1 ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS  3ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE  3 ITEM 3: KEY INFORMATION  3 Selected Financial Data  3 Risk Factors  8 ITEM 4: INFORMATION ON THE COMPANY  17 Overview  17 Fixnet  22 Mobile  32 Solutions  37 Other  42 Corporate  44 Other Participations  44 Divestments/Discontinued Operations  45 Networks and Technology  45 Property, Plant and Equipment  49 Research and Development  50 Regulation  51 ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS  61 Introduction  61 Summary of Results  63 Critical Accounting Policies  63 Accounting developments  65 results of group operations  66 Fixnet  71 Mobile  78 Solutions  83 Other  88 Corporate  92 Liquidity and Capital Resources  94 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  100 Directors and Senior Management  100 Compensation  105 Employees  106 Share Ownership  109 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  110 Major Shareholders  110 Relationship and Transactions with the Swiss Confederation  110 ITEM 8: FINANCIAL INFORMATION  113 Financial Statements  113 Legal Proceedings  113 Dividend Policy  117 ITEM 9: THE OFFER AND LISTING  119 Markets  119 Price History  120 ITEM 10: ADDITIONAL INFORMATION  121 Memorandum and Articles of Association  121 Corporate Governance  124 Exchange Controls  126 Taxation  127 Documents on Display  129 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  130 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES  131 ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  132 ITEM 14: MATERIAL MODIFICATIONS  132 ITEM 15: CONTROLS AND PROCEDURES  132 ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT  134 
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       ** ** ITEM 16B: CODE OF ETHICS  134 ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES  134 ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES  135 ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS  135 ITEM 17: FINANCIAL STATEMENTS  136 ITEM 18: FINANCIAL STATEMENTS  136 ITEM 19: EXHIBITS  137 SIGNATURE  138  EX-1 EX-12 EX-13
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**INTRODUCTION****Presentation of financial and other information**Swisscom publishes its financial statements in Swiss francs (“CHF”). Unless otherwise indicated,all amounts in this annual report are expressed in Swiss francs. Solely for the convenience of thereader, certain amounts denominated in foreign currencies appearing primarily under the headings“*Item 4: Information on the Company – Divestments/Discontinued Operations*” and “*Item 5: Operatingand Financial Review and Prospects*” have been translated into Swiss francs. These translationsshould not be construed as representations that the amounts referred to actually represent suchtranslated amounts or could be converted into the translated currency at the rate indicated.Swisscom’s annual audited consolidated financial statements for the years ended December 31, 2006,December 31, 2005 and December 31, 2004, included in this annual report, are prepared in accordancewith International Financial Reporting Standards (“IFRS”), which differ in certain significantrespects from Generally Accepted Accounting Principles in the United States of America (US GAAP).For a reconciliation of such differences between IFRS and U.S. GAAP as they relate to Swisscom, seeNote 43 to the consolidated financial statements.As used in this annual report, the term “Swisscom”, unless the context otherwise requires, refersto Swisscom AG and its consolidated subsidiaries. The term “Confederation” refers to the SwissConfederation.**Cautionary statement regarding forward-looking statements**This annual report contains statements that constitute “forward-looking statements” within themeaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.Securities Exchange Act of 1934, as amended. In addition, other written or oral statements, whichconstitute forward-looking statements have been made and may in the future be made by or on behalfof Swisscom. In this annual report, such forward-looking statements may be found, in particular,in “*Item 4: Information on the Company*” and “*Item 5: Operating and Financial Review and Prospects*”and include, without limitation, statements relating to: **•** the implementation of strategic initiatives;  **•** the development of revenue overall and within specific business areas;  **•** the development of operating expenses;  **•** the anticipated level of capital expenditures and associated depreciation expense; and  **•** other statements relating to Swisscom’s future business development and economicperformance.The words “anticipate”, “believe”, “expect”, “estimate”, “intend”, “plan” and similar expressionsidentify certain of these forward-looking statements. Readers are cautioned not to put unduereliance on forward-looking statements because actual events and results may differ materially fromthe expected results described by such forward-looking statements.Many factors may influence Swisscom’s actual results and cause them to differ materially fromexpected results as described in forward-looking statements. Such factors include: **•** general market trends affecting demand for telecommunications services;  **•** developments in the interpretation and application of existing telecommunicationregulations in Switzerland and the possibility that additional regulations may beimposed in the future;  **•** developments in technology, particularly the timely rollout of equipment;  **•** the evolution of Swisscom’s strategic partnerships and acquisitions, including costsassociated with possible future acquisitions and dispositions;
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 **•** the effects of tariff reductions and other marketing initiatives;  **•** the outcome of litigation in which Swisscom is involved; and  **•** macroeconomic trends, governmental decisions and regulatory policies affectingbusinesses in Switzerland generally, including changes in the level of interest or taxrates.Swisscom disclaims any intention or obligation to update and revise any forward-looking statements,whether as a result of new information, future events or otherwise.
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**PART I****ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**Not Applicable.**ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE**Not Applicable.**ITEM 3: KEY INFORMATION****Selected Financial Data****Selected Consolidated Financial and Statistical Data**The selected consolidated financial data below have been extracted or derived from, and arequalified by reference to, the audited consolidated financial statements of Swisscom. Theconsolidated financial statements were prepared in accordance with IFRS, which differ in certainsignificant respects from U.S. GAAP. For a reconciliation of the significant differences betweenIFRS and U.S. GAAP as they relate to Swisscom, see Note 43 to the consolidated financialstatements.                     CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**  **2003**  **2002**    **Consolidated Income Statement Data:**                    *Amounts in accordance with IFRS:*                    **Net revenue**  **9,653**   **9,732**   **10,057**   **10,026**   **10,415** Capitalized costs and other income  296   260   195   231   228    **Total**  **9,949**   **9,992**   **10,252**   **10,257**   **10,643**                      Goods and services purchased  1,840   1,831   1,847   1,706   2,073 Personnel expenses  2,278   2,173   2,194   2,266   2,329 Other operating expenses  2,044   1,817   1,823   1,798   2,004 Depreciation  1,280   1,286   1,542   1,537   1,546 Amortization  155   108   151   142   114    **Total operating expenses**  **7,597**   **7,215**   **7,557**   **7,449**   **8,066**                      **Earnings before interest and taxes**  **2,352**   **2,777**   **2,695**   **2,808**   **2,577** Financial expense  (240)  (160)  (272)  (226)  (495)Financial income  189   242   138   213   197 Share of profit (loss) of affiliatedcompanies  30   13   22   (9)  94 **Income before income taxes**  **2,331**   **2,872**   **2,583**   **2,786**   **2,373**                      Income tax expense (1)  (462)  (535)  (392)  (467)  (313)   **Net income from continuingoperations**  **1,869**   **2,337**   **2,191**   **2,319**   **2,060** Discontinued operations(2) (3)  36   9   (243)  (408)  (933)   **Net income**  **1,905**   **2,346**   **1,948**   **1,911**   **1,127**    Net income attributable to equity holdersof Swisscom AG  1,599   2,022   1,596   1,571   826    Net income attributable to minority interest  306   324   352   340   301    
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                     CHF in millions except per Share and          ADS amounts **Year Ended December 31,**  **2006**  **2005**  **2004**  **2003**  **2002**    **Basic earnings (loss) per share****(4)**                    -from continuing operations  28.27   33.64   28.42   29.89   26.00 -from discontinued operations(3)  0.65   0.15   (3.76)  (6.16)  (13.79)-net income  28.92   33.79   24.66   23.73   12.21 **Diluted earnings (loss) per share****(4)**                    -from continuing operations  28.27   33.64   28.42   29.88   25.98 -from discontinued operations(3)  0.65   0.15   (3.76)  (6.16)  (13.78)-net income  28.92   33.79   24.66   23.72   12.20 Basic and diluted earnings per ADS(4)  2.89   3.38   2.47   2.37   1.22                      *Amounts in accordance with U.S. GAAP:*                    **Net revenue**  **9,671**   **9,767**   **10,113**   **10,057**   **10,424** Net income from continuing operations  1,553   2,066   1,968   2,066   1,780 Net income (loss) from discontinuedoperations(3)  36   263   145   (8)  (994)Cumulative effect of a change inaccounting policy  0   —   —   38   (1,649)   **Net income (loss)**  **1,589**   **2,329**   **2,113**   **2,096**   **(863****)**   **Basic earnings (loss) per share**                    -from continuing operations  28.08   34.52   30.41   31.21   26.31 -from discontinued operations(3)  0.65   4.40   2.24   (0.12)  (14.69)Cumulative effect of a change inaccounting policy  —   —   —   0.57   (24.38)-net income  28.73   38.92   32.65   31.66   (12.76)**Diluted earnings (loss) per share**                    -from continuing operations  28.08   34.52   30.41   31.19   26.29 -from discontinued operations(3)  0.65   4.40   2.24   (0.12)  (14.68)Cumulative effect of a change inaccounting policy  —   —   —   0.57   (24.35)-net income  28.73   38.92   32.65   31.64   (12.74)Basic earnings per ADS(4)  2.87   3.89   3.27   3.17   (1.28)Diluted earnings per ADS(4)  2.87   3.89   3.27   3.16   (1.27)
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                     CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**  **2003**  **2002**    **Consolidated Balance Sheet Data:**                    *(end of period)*                    *Amounts in accordance with IFRS:*                    Cash and cash equivalents  673   1,023   2,387   3,104   1,512 Other current assets  2,883   4,180   3,790   2,805   2,857 Property, plant and equipment  5,795   6,000   6,190   6,760   7,274 Investments in affiliated companies  221   191   58   41   682 Other non-current assets  6,025   2,015   1,807   1,923   2,270 Assets from discontinued operations(3)  —   —   —   1,685   2,135    **Total assets**  **15,597**   **13,409**   **14,232**   **16,318**   **16,730**    Short-term debt  1,568   137(5)  158   319   827 Trade accounts payable and other current liabilities  2,616   2,461   2,287   2,204   2,170 Long-term debt and finance lease obligations  5,015   2,299   2,212   2,433   2,626 Accrued pension cost  719   805   1,118   1,113   1,101 Accrued liabilities and other long-term liabilities  1,176   1,083   1,004   948   935 Liabilities from discontinued operations(3)  —   —   **—**   794   886    **Total liabilities**  **11,094**   **6,785**   **6,779**   **7,811**   **8,545** Minority interest  67   623   663   731   781 Shareholders’ equity  4,436   6,001   6,790   7,776   7,404    **Total equity**  **4,503**   **6,624**   **7,453**   **8,507**   **8,185**                         *Amounts in accordance with U.S. GAAP:*                    Assets continuing operations  19,867   17,549   17,734   18,360   18,654 Assets discontinued operations(3)  0   —   —   1,012   1,165    **Total assets**  **19,867**   **17,549**   **17,734**   **19,372**   **19,819**    Long-term debt and finance lease obligationscontinuing operations  8,785   6,259   5,665   6,102   6,590 Long-term debt and finance lease obligationsdiscontinued operations(3)  —   —   —   36   23 Total long-term debt and finance lease obligations  8,785   6,259   5,665   6,138   6,613 Shareholders’ equity  3,413   5,191   5,863   6,523   5,587                      **Consolidated Cash Flow Data:**                    *Amounts in accordance with IFRS:*                    Cash provided by operating activities  3,264   3,432   4,066   4,708   3,698                      Capital expenditures:                    Fixed-line networks  457   353   360   497   479 Mobile networks  199   238   434   381   295 Other intangibles  229   189   103   98   70 Buildings  154   104   13   6   2 Other  285   203   226   183   281    **Total capital expenditures**  **1,324**   **1,087**   **1,136**   **1,165**   **1,127**    
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                       **Year Ended December 31,**  **2006**  **2005**  **2004**  **2003**  **2002**    **Statistical Data:**                    Fixed-line access lines                    (*end of period, in thousands*)                    PSTN lines  2,891   2,922   3,007   3,086   3,163 ISDN lines  856   900   924   924   911    **Total fixed-line access lines**  **3,747**   **3,822**   **3,931**   **4,010**   **4,074**                         Traffic (*in millions of minutes*):                    National fixed-line telephony(6)  9,024   9,483   10,211   10,957   12,316 Outgoing international fixed-linetelephony(7)  1,245   1,282   1,316   1,341   1,394 Mobile telephony(8)  4,432   3,688   3,404   3,335   3,331                      Total xDSL lines (*end of period, inthousands*)  1,368   1,098   802   487   195 Swisscom Mobile subscribers(9)(*end of period, in thousands*)  4,632   4,281   3,908   3,796   3,605 Number of full-time equivalent employees(*end of period*)  17,068   16,088   15,477   16,079   17,171 **Notes to Selected Consolidated Financial and Statistical Data**  (1) In 2002, Swisscom restructured its operations resulting in a weighted average statutory taxrate of 23%. For 2004 and 2005, the weighted average statutory tax rate was further reduced to22.3%. For 2006, the weighted average statutory tax rate was 22.1%. See Note 14 to theconsolidated financial statements. (2) Swisscom sold debitel in June 2004 and granted the purchaser vendor loan notes amounting toEUR 210 million in connection therewith. The vendor loan notes were initially recognized atfair value and in the following period using the effective interest rate method. See Note 37to the consolidated financial statements. The purchaser prematurely repaid the entire loan inthe first six months of 2005 and made a payment of CHF 351 million, representing the nominalvalue of the loan and the contractually agreed interest. The difference of CHF 59 millionbetween the recoverable value of the loan and the payment was recorded under discontinuedoperations. (3) As a result of the sale of debitel in June 2004, Swisscom treats debitel in its consolidatedfinancial statements as a discontinued operation. (4) Earnings per ADS are based on the ratio of one-tenth of one share to one ADS. The basicweighted-average number of shares outstanding in 2002, 2003, 2004, 2005 and 2006 was67,647,928, 66,199,789, 64,715,609, 59,835,529 and 55,299,323, respectively. (5) Total debt at December 31, 2002 included debt outstanding to the Swiss Post in the aggregateprincipal amount of CHF 0.8 billion. In the course of 2003, Swisscom repaid the remainingoutstanding loans of CHF 0.8 billion. (6) Represents total traffic generated by customers of Fixnet and Solutions. Includes trafficfrom Swisscom’s fixed-line network to mobile networks and to private user networks. Does notinclude Internet traffic and traffic generated from Swisscom-operated public payphones,Swisscom’s toll-free, cost shared and premium rate telephone number services for businesscustomers or by Swisscom’s information services. (7) Represents total traffic generated by customers of Fixnet and Solutions. Based on minutes asdetermined for customer billing purposes. (8) Includes minutes from all outgoing calls made by subscribers of Swisscom Mobile. Figuresinclude voice minutes only. (9) Swisscom does not include accounts of any prepaid customer with inactivity of more thantwelve months in its subscriber figures. As of December 31, 2004, approximately 124,000customers, which had not registered with Swisscom on a timely basis, as required by law sinceJuly 2004, were deactivated.
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**Dividend Information**The following table shows, in respect of each of the years indicated, information concerning thedividends per share paid in Swiss francs and in U.S. dollars. Dividends were declared in Swissfrancs and converted into U.S. dollars using the noon buying rate for Swiss francs per U.S. dollaron the date of the shareholders’ meeting at which the relevant dividend was approved. As used inthis annual report, the term “noon buying rate” refers to the exchange rate for Swiss francs perU.S. dollar, as announced by the Federal Reserve Bank of New York for customs purposes as the ratein The City of New York for cable transfers in foreign currencies.           **Dividend per Share****Year Ended December 31,** **(CHF)** **(USD)**2002(1)  12   9.15 2003(1)  13   10.01 2004  14   11.77 2005  16   12.61 2006(2)  17   n/a  (1) In both 2002 and 2003, shareholders received an additional distribution of CHF 8 per share(equivalent to USD 4.93 per share and USD 6.00 per share, in each case on the date of theshareholders’ meeting at which the relevant distribution was approved) following par valuereductions. (2) The Board of Directors has proposed a dividend of CHF 17 per share in respect of fiscal year2006, which is subject to approval by the Annual General Meeting to be held on April 24, 2007.In September 2006, Swisscom completed a share repurchase program, in which it repurchasedshares by issuing tradable put options, in an aggregate amount of CHF 2.2 billion. Forinformation on Swisscom’s return policy, see “*Item 8: Financial Information – DividendPolicy*”.**Exchange Rate Information**The following table shows, for the years indicated, information concerning the noon buying rate,expressed in Swiss francs per U.S. dollar. The noon buying rate on April 20, 2007 was CHF 1.2081.       **Average****Year Ended December 31,** **Rate****(1)**2002  1.5497 2003  1.3374 2004  1.2393 2005  1.2507 2006  1.2456  (1) The average of the noon buying rates on the last business day of each full month during therelevant periodThe following table shows, for the periods indicated, information concerning the high and lownoon buying rates for the Swiss franc, expressed in Swiss francs per U.S. dollar.         **Month** **High** **Low**October 2006  1.2752   1.2424 November 2006  1.2566   1.1966 December 2006  1.2253   1.1911 January 2007  1.2470   1.2125 February 2007  1.2532   1.2189 March 2007  1.2332   1.2079 
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**Risk Factors****Risks Related to Swisscom’s Business*****Amendments to the Telecommunications Act require Swisscom to offer unbundled access to its localloop and other related services, which could negatively affect its fixed-line business and overalloperating results***The Swiss telecommunications market has been open to competition since the Swiss TelecommunicationsAct (Fernmeldegesetz) (the “Telecommunications Act”) entered into force on January 1, 1998. Whilethe Telecommunications Act contained provisions designed to facilitate competition in thefixed-line telephony market, Swisscom was not required, prior to 2007, to unbundle its local loop.Although Swisscom provides access services to the vast majority of Swiss fixed-line telephonycustomers, many of whom continue to use Swisscom as their default provider of national andinternational calling services, competition has resulted in a loss of market share and marginpressure for such calling services.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which enteredinto effect on April 1, 2007. Swisscom is now required to offer, among other things, unbundledaccess to its local loop in the form of full access on a cost-oriented basis as well as accessrebilling. Unbundling of the local loop in the form of full access allows competitors to offeraccess services to customers in Switzerland without having to build local loops of their own,although they still have to make significant investments in their own network infrastructure inorder to connect to the local loop. By doing so, competitors would be able to offer broadbandaccess without using Swisscom’s wholesale broadband access services. Moreover, with accessrebilling, competitors are able to bill customers directly for the access services provided bySwisscom. As a result, Swisscom’s competitors are able to offer their customers a full range offixed-line services, including access, and their customers will receive a single bill covering allthese services. Accordingly, competition in the access market is expected to increase and Swisscommay lose market share in the national and international calling markets.Unbundling of the local loop requires market-dominant providers to also offer bitstream access toother providers for four years on a cost-oriented basis. Swisscom’s competitors have historicallyprovided ADSL services to its customers based on a wholesale contract with Swisscom on commercialterms. Regulated bitstream access would therefore enable Swisscom’s competitors to offer ADSLservices at lower rates than they have in the past. Market-dominant providers must make bitstreamaccess available at the main distributor frame and over their copper network in the local loop.Accordingly, if Swisscom is deemed to be market-dominant and is required to provide bitstreamaccess, its competitors will be required to make significant upfront investments in their ownnetwork infrastructure in order to reach Swisscom’s main distributor frame for bitstream datatraffic and will have to build their own access lines within four years or switch to full access.In addition, competitors will not be entitled to use Swisscom’s fiber optic lines, even if Swisscomis deemed to be market-dominant. Nonetheless, the Telecommunications Act amendments are expected tocause competition to increase. With increased competition, Swisscom’s share of the broadband access(xDSL) market is likely to decline and Swisscom could be required to lower its broadband accesstariffs to remain competitive. While a portion of any lost retail access revenue will becompensated for by additional wholesale revenue for access services provided to Swisscom’scompetitors, those services must be provided on a cost-oriented basis. Accordingly, theintroduction of bitstream access could have a significant and adverse effect on the growth andprofitability of Swisscom’s access business.Swisscom does not believe that it is market-dominant in the market for bitstream access, and ittherefore does not intend to offer competitors bitstream access on a cost-oriented basis. Swisscomexpects competitors to challenge its position in court. Such proceedings may be costly to defendand may result in Swisscom being deemed to be market dominant.The impact of the amendments to the Telecommunications Act on Swisscom will depend on certaindetails, including the type of products to be unbundled, the manner in which unbundling will occurand the applicable prices, which remain to be determined.Overall, the amendments to the Telecommunications Act could negatively affect Swisscom’s fixed-linebusiness by reducing revenues and causing margins to decline. Because fixed-line services continueto account for a significant part of Swisscom’s overall revenues, the amendments could adverselyaffect Swisscom’s consolidated results as well.
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***Regulation of mobile access or call origination, mobile termination or mobile roaming maynegatively affect Swisscom’s mobile revenues and overall profitability***While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobiletelephony in Switzerland has not yet been the subject of extensive regulation. However,developments in the EU and Switzerland could result in additional regulation in the future,especially with regard to mobile access and call origination, mobile termination and mobileroaming.On July 12, 2006, the European Commission submitted a proposal for a regulation on public mobilenetwork roaming within the Community that would impose price caps on roaming charges that wouldcause roaming prices to decline by up to 60%. The European Parliament and the Council of Ministerswill vote on roaming price limits in the spring of 2007. If approved, such limits would enter intoeffect in the summer of 2007.While Switzerland is not a member state of the EU and therefore is not subject to EU legislation,EU directives and implementing legislation in various EU countries have served as points ofreference for the development of the Swiss regulatory regime. Because the majority of Swisscom’sroaming traffic is with the EU member states, EU-wide regulation would likely increase marketpressure on mobile network operators in Switzerland, including Swisscom Mobile. With respect toroaming charges, which have been the subject of numerous Swiss media reports, EU legislation couldalso lead to intervention by the Swiss Competition Authority or the Swiss Pricing MonitoringAuthority (*Preisüberwacher*).In October 2002 the Competition Commission launched an investigation into the termination feescharged by three mobile phone operators, including Swisscom. On February 5, 2007, the CompetitionCommission imposed a fine of CHF 333 million against Swisscom Mobile. Although Swisscom intends toappeal, it may be required to pay large fines or recognize a provision. For more information, see“*–The Swiss Competition Commission may require Swisscom Mobile to pay large fines and reduce itsmobile termination prices*”.Regulation of mobile termination fees or roaming charges would have a material and adverse effecton Swisscom’s mobile revenues and lead to additional pressure on margins and reduced profitability.Since the mobile business has been a major source of Swisscom’s profitability in recent years,these regulatory changes would adversely affect Swisscom’s business as a whole.***The Swiss Competition Commission may require Swisscom Mobile to pay large fines and reduce itsmobile termination prices***In October 2002, the Competition Commission initiated proceedings against Swisscom Mobile inconnection with mobile termination fees. These are the fees mobile network operators charge eachother for connecting incoming calls to their network. On April 7, 2006, the Secretariat of theCompetition Commission proposed to the Competition Commission that it impose a fine of at least CHF489 million. On February 5, 2007, the Competition Commission issued a decision in which itdetermined that Swisscom Mobile has a market-dominant position which it has abused by demandingdisproportionately high termination fees. As a result, the Competition Commission imposed a fine ofCHF 333 million. The fine relates to the period from April 1, 2004 (when a new amendment to theSwiss Antitrust Law entered into effect) to May 31, 2005 (when Swisscom Mobile lowered its mobiletermination fee from CHF 0.335 to CHF 0.20). Investigations into the mobile termination feescharged by Swisscom Mobile after May 31, 2005 will continue. For more information, see “*Item 8:Financial Information – Legal Proceedings – Other Regulatory Proceedings*”.The CHF 333 million fine is based on the maximum legal fine amount (equal to 10% of the revenuerealized in Switzerland during the previous three years), the severity of Swisscom Mobile’s allegedanti-trust violations, the relevant timeframe, the amount of Swisscom Mobile’s supposedly excessprofits and the lack of mitigating factors. It is based on the assumption that prior to June 1,2005, Swisscom Mobile’s mobile termination fees of CHF 0.335 were too high. The CompetitionCommission’s includes indications that CHF 0.10 is deemed appropriate as a cost-oriented andnon-abusive price.Should Swisscom Mobile be legally found to be market-dominant with regard to the termination ofcalls on its network, other mobile and fixed-network service providers could demand that SwisscomMobile set its mobile termination fees on a cost-oriented basis. Ifthis were to occur, the Federal Communications Commission(“ComCom”) would be responsible for determining the relevant prices. For more information, see “*Item 8:Financial Information – Legal Proceedings – Proceedings Relating to Mobile TerminationInterconnection*”.
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The Competition Commission’s decision indicates that the competition authorities are willing tostrictly enforce the Antitrust Law and impose large fines and that they may consider cost-orientedpricing as a reference under circumstances where it is difficult to determine an appropriatenon-abusive price. The approach indicated by the competition authorities’ actions may requireSwisscom to reduce prices for mobile termination and other services and impact other competitionproceedings against Swisscom. It could also give rise to civil actions brought by competitors orconsumers. Reducing prices, particularly to cost-oriented levels, may have a significant negativeimpact on Swisscom’s profitability.Swisscom intends to appeal and, based on a legal assessment of the current situation, it has notrecorded any related reserves in its financial statements as of December 31, 2006. If Swisscom’sassessment proves to be inaccurate, it may result in large fines, the recognition of a provisionand a cash outflow.***Service providers are increasingly able to offer Swisscom’s core telecommunications services usingalternative technologies***The availability of alternative technologies capable of supporting telecommunications services isincreasingly enabling competitors to provide services which fully substitute for Swisscom’s coreservices (fixed-line voice and data services and mobile telephony).With market penetration rates for mobile having reached 98% in Switzerland by the end of 2006(based on data published by mobile network operators), mobile telephony is increasingly used as asubstitute for fixed-line telephony, resulting in a decline in access lines and fixed-line trafficrevenues. To the extent a Swisscom Fixnet customer opts to use Swisscom’s mobile services, SwisscomMobile benefits from this trend. Where a customer switches to another mobile service provider,however, Swisscom may no longer earn any revenue from this customer. Some of this loss iscompensated for by wholesale revenue which Swisscom Fixnet and Swisscom Mobile derive fromcollecting fees for terminating calls on their networks and for routing calls between the mobilenetworks of other mobile network operators. However, with direct mobile interconnection mobilenetwork operators are able to terminate their traffic directly on each other’s networks instead ofrouting traffic through Swisscom Fixnet, bypassing Swisscom entirely.While the continuing substitution of mobile for fixed-line telephony has negatively affectedSwisscom’s fixed-line business, Swisscom faces an even greater threat from cable network operators,in particular Cablecom, the largest cable network operator in Switzerland, as well as fromelectrical power providers and local municipalities offering telecommunication services via theirown high-capacity fiber networks. Having made significant investments in their cable networks toallow for bidirectional data transfer, Cablecom and other cable network operators have been able toleverage their existing networks into platforms for competing directly with Swisscom in its corecompetencies by offering voice and data services, as well as high speed Internet access services,to customers throughout Switzerland. In such cases, Swisscom not only loses revenue derived fromsuch customers, it may also cease to have a direct relationship with such customers. Sincemid-2004, Cablecom and other cable network operators have been adding subscribers to their voicetelephony services at a rapid rate and Swisscom expects this trend to continue.There are also numerous service providers with minimum network infrastructure who take advantage ofinterconnection rates and leverage the public Internet to provide low cost national andinternational calling services using Voice over Internet Protocol (VoIP). The increasingpopularity of peer-to-peer communication also means that international calls may be placed atminimal cost. As the quality and convenience of using these IP-based services has improved inrecent years, they have become a viable alternative to traditional fixed-line services for manyusers, a trend Swisscom expects to continue and accelerate in the future. As in the fixed-linebusiness, the popularity of IP-based peer to peer communication is having an increasinglydisruptive effect on Swisscom’s mobile business due to substitution of instant messaging for SMSand of VoIP-services for mobile voice telephony services. While Swisscom continues to deriverevenue from providing its infrastructure for some of these services, and has itself introduced amobile instant messaging service, revenue is likely to decline overall as a result of the increaseduse of these services.***Increased competition may have a significant impact on the revenues and profitability of Swisscom’sfixed-line broadband business, which may not allow Swisscom to recoup its investment in fixed-linebroadband infrastructure and multimedia services***The provision of broadband access has been a fast-growing business for Swisscom over the lastseveral years, partially offsetting declines in its traditional fixed-line business. In order tocontinue to grow this business, Swisscom is making significant capital expenditures to increasedownload capacity by upgrading its network.
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However, there is a risk that increased competition may negatively impact this growth and preventSwisscom from realizing a return on its investment.Swisscom faces strong competition particularly from cable network operators, including Cablecom,who are able to offer broadband Internet access via cable. Cable network operators areparticularly well positioned to combine voice, data and Internet access services with multimediacontent. In response to this increased competition, Swisscom is making capital expenditures toenhance its broadband and IP networks to be able to combine its core activities in voice andInternet services with multimedia services such as TV and video on demand. However, Cablecom hasalready been offering multimedia services for some time, and Swisscom may not be successful inacquiring significant market share. Swisscom’s television services, which were introduced in late2006 ultimately may not be competitive with services offered by cable network operators.If Swisscom is unable to acquire significant market share in the multimedia services market, it mayfurther lose customers to cable network operators and experience higher customer churn. If Swisscomwere forced to significantly reduce its retail prices as a result of increased competition andprice pressure, this would have a significant impact on the revenues and profitability ofSwisscom’s fixed-line broadband business.***High penetration and increasing competition in the mobile telecommunications market have caused perminute prices to decline and could cause customer retention costs to increase substantially suchthat Swisscom may not be able to maintain its current market share***With mobile penetration having reached 98% in Switzerland at the end of 2006 (based on datapublished by mobile network operators), prices have declined, it has become more difficult toacquire new customers and Swisscom has been driven to increase its focus on customer retention.Swisscom already faces substantial competition from the other two mobile licensees in Switzerland,Orange and TDC (Sunrise). Competition for business customers is particularly intense, as Orangeand TDC (Sunrise) have been increasing their efforts to win market share in this segment. InDecember 2003, ComCom awarded GSM licenses to Tele2 andIn&Phone, which further intensified competition in the mobile business market. In response tocompetition, Swisscom has introduced budget service plans and service plans where calls are billedon a per-call or per-hour, rather than per-minute, basis. As a result, the average price perminute of mobile traffic has declined. Furthermore, given the high rate of mobile penetration andincreasing competition, customer retention costs could increase substantially. If Swisscom isunable to attract new or retain existing customers in the mobile market, its mobile revenues wouldsuffer and it would lose market share. At the same time, further declines in average minute pricesand an increase in the cost of customer retention would put additional pressure on margins andcould lead to a substantial decline in profitability.***Actual or perceived health risks and other problems relating to mobile devices or transmissionmasts could lead to decreased mobile communications usage, stricter regulation of radiationemissions from mobile base stations and antennae and additional compliance expenditures***Concern has been expressed that the electromagnetic signals from mobile devices and base stationsmay pose health risks or interfere with the operation of electronic equipment, including automobilebraking and steering systems.At least one study has indicated that UMTS radiation has an impact on the well-being of humans.While the impact of UMTS radiation on the well-being of humans is supposedly small, the results ofthe study are statistically significant. Additional studies, which attempt to replicate this studywhile correcting certain of its scientific shortcomings, have been concluded and did not confirmthe results of the above-mentioned study. Since these replication studies only examined theshort-term effects of UMTS radiation, however, a risk remains that such radiation could be found tohave adverse long-term effects on the well-being of humans. Studies of long term effects startedrecently. In addition, new research on the impact of electromagnetic fields (50Hz) on DNAstructures is currenctly being conducted. The results of these studies are not yet available, butthey may have a negative impact, depending on the outcome. If these studies confirm that UMTSradiation may have adverse health effects, the use of mobile devices based on UMTS technology islikely to decline. Media coverage of any actual or perceived health risks could even lead to adecline in the use of mobile devices generally, causing Swisscom’s customer base and average usageper customer to decline, which would have a material adverse effect on Swisscom’s mobilecommunications business. Similar risks exist if mobile devices are found to interfere with vitalelectronic equipment, which could cause consumers to sharply curtail their use of such devices, orlead public authorities to restrict use in certain areas or during certain activities.
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Any findings of adverse health effects may cause regulatory authorities to set stricter emissionstandards for the UMTS network than currently apply. As a result, Swisscom could be required toinstall additional antennae or take other precautionary measures. These regulatory measures couldhave a severe and adverse effect on Swisscom’s mobile business. Swisscom may be unable to recoupits investment in its UMTS network and may be required to take significant write downs.Even if stricter regulatory measures are not adopted, environmental and health concerns are makingit more difficult, and more costly, to find acceptable sites for base stations. This could impairthe build-out of Swisscom’s wireless infrastructure, primarily the mobile network.***If Swisscom is not able to benefit from a potential increase in market demand for integratedcommunication solutions and IT services, its solutions business and other businesses catering tobusiness customers would suffer***Providing basic telecommunications services to business customers has become a commodity businesscharacterized by low margins. Swisscom believes that to grow in this market in the future, it willhave to provide enhanced business solutions. Accordingly, it has upgraded its data networks toenable it to provide integrated data and voice services with greater flexibility, scalability andperformance. If demand for integrated communications solutions does not develop as currentlyanticipated, however, Swisscom may not be able to recoup the cost of these investments and itsfuture growth prospects will be diminished. Moreover, Swisscom faces intense competition from otherplayers in the market for integrated communication solutions and IT services, some of which havemore experience than Swisscom and who are able to offer services on a global basis. As a result ofthese factors, and due to Swisscom’s primarily domestic focus, there can be no assurance thatSwisscom will benefit proportionately from any upturn in market demand.***The expansion of Swisscom’s outsourcing business exposes it to the risk that it may not achieveexpected cost savings, the risk of project failure and the risk of fines***In recent years, Swisscom has expanded its business in the outsourcing market. Outsourcingcontracts are typically multi-year engagements under which Swisscom takes over management of aclient’s technology operations, business processes, network and/or IT infrastructure. Generally,Swisscom also takes over the clients’ employees associated with the outsourced operations and maybecome responsible for the related employee obligations, such as pension and severance commitments.The successful implementation of certain outsourcing projects depends, among other things, onSwisscom’s ability to rapidly optimize the outsourced operations by reducing costs and onSwisscom’s ability to accurately forecast the rate at which it will be able to reduce such costs.If Swisscom is not able to realize anticipated efficiencies, or if it fails to implement suchefficiencies on the schedule predicted, it may not be able to perform these contracts on aprofitable basis. In addition, some of these contracts may permit termination fees or impose otherpenalties if Swisscom does not meet performance levels specified in the contracts. Because thesecontracts extend over multiple years, a considerable amount of time may pass before Swisscomrecognizes that its forecasts are inaccurate and that it is unable to implement anticipated costreductions. In the mean time, Swisscom may enter into additional contracts based on the same orsimilar assumptions and forecasts, compounding its losses.Other outsourcing contracts require Swisscom to implement complex systems and solutions forclients. As clients’ needs develop and become more complex, the risk increase that Swisscom willfail to meet a client’s needs or that a project will fail entirely. The failure to implement asuccessful solution could lead to termination of a contract after Swisscom has already investedsignificant resources in the respective project, expose Swisscom to contractual fines and/or resultin significant damage to Swisscom’s reputation and credibility in the outsourcing market.***Swisscom may make investments and acquisitions, including potentially large acquisitions outsideits home market, which would entail a variety of important risks***Swisscom continues to actively consider investment opportunities, including large acquisitionsoutside its home market. Although the strategic goals for 2006 to 2009 announced by the SwissFederal Council, as Swisscom’s majority shareholder, have limited Swisscom’s flexibility in thisregard, acquisitions that fulfill specified criteria may still be undertaken and Swisscom expectsto continue to consider international investment opportunities.On April 10, 2007, Swisscom launched an all-cash friendly public tender offer for 98.26% of theshares of FASTWEB S.p.A. (“Fastweb”), Italy’s second largest fixed-network operator and leadingprovider of IP-based services. Swisscom already acquired 1.74% of Fastweb’s shares in March 2007.Swisscom is offering all
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Fastweb shareholders EUR 47.00 per share for a maximum total consideration of EUR 3.7 billion. TheFederal Council has indicated that it considers the proposed Fastweb transaction to be consistentwith the strategic goals. The offer period will end on May 15, 2007.Swisscom will fund the transaction (which will potentially involve refinancing Fastweb’s existingdebt in the amount of EUR 1.1 billion) via financial debt and, depending on the final acceptancelevel of the offer, by selling the 4.9 million treasury shares it acquired for CHF 2.2 billion in2006 through its share buyback program. These shares represent 8% of Swisscom’s share capital.Swisscom faces various risks related to the Fastweb tender offer, including the risk that, due toadverse market conditions, it will not be able to generate the expected level of proceeds byselling its treasury shares. This would require Swisscom to increase the amount of debt assumed tofinance the transaction. Because the consideration offered in the tender offer is denominated ineuros, Swisscom will also be exposed to risks related to the exchange rate between Swiss francs andeuros until the Fastweb transaction closes. Moreover, if the tender offer is successful, Swisscomwill continue to be exposed to foreign exchange risks which may reduce the value (in Swiss francs)of dividend payments received in euros from Fastweb.The Fastweb transaction and other significant acquisitions would entail a variety of otherimportant risks as well. There can be no assurance that Swisscom will be able to successfullyexecute the business plan pursued in connection with any specific acquisition, such as leveragingthe target’s expertise in certain areas, or realizing other anticipated benefits, includingsynergies, from the transaction. This risk may be compounded in the case of cross-bordertransactions, such as the proposed Fastweb transaction, as political and cultural factors may makeit more difficult to implement management and other changes. Although Swisscom will seek toconduct due diligence on potential targets, the opportunity to do so may be limited and it ispossible that a transaction will entail costs that are higher than anticipated, that a target willhave liabilities for which Swisscom is not entitled to indemnification or that write downs will berequired, including of any goodwill arising out of such a transaction. Moreover, should Swisscomenter into a large acquisition, such as the proposed Fastweb transaction, Swisscom could incursubstantial debt, which could negatively affect earnings and lead to an increase in leverageratios, thereby reducing Swisscom’s future financial flexibility. Such debt may also increaseSwisscom’s exposure to interest rate risks.Additional risks are associated with smaller Swisscom investments at home or abroad. Swisscom mayrealize a loss on investments it makes in start-up companies, in uncertain technologies or incompanies targeted for growth with potentially risky business plans, if such companies are unableto implement their business plans or pursue an unsuccessful strategy. For example, a risk existsthat Hospitality Services (formerly Swisscom Eurospot) will be unable to repay loans received fromSwisscom, that Swisscom will have to record an impairment charge in connection with its investmentin Antenna Hungária, and/or that Swisscom will incur losses in connection with its recently startedbusiness based on an interactive TV remote control marketed under the “Betty” brand name.***Swisscom depends upon a limited number of suppliers, particularly for the supply of next generationfixed and mobile network components***Swisscom’s ability to provide and roll out reliable, high quality and secure products and servicesdepends upon, among other things, the adequate and timely supply of transmission, switching,routing and data collection systems, related software and other network equipment. If Swisscomwere unable to obtain adequate supplies of equipment in a timely manner, or if there weresignificant increases in the costs of such supplies, Swisscom’s operations would be adverselyaffected. This is particularly true with respect to network equipment and services that Swisscomrequires to upgrade its existing fixed and mobile networks to enable new broadband and multimediaservices based on new technologies, such as ADSL, very high bit-rate digital subscriber line(VDSL), symmetric digital subscriber line (SDSL), EDGE, UMTS and HSDPA. While Swisscom seeks todiversify its suppliers, it currently has only one supplier of ADSL equipment, who is also thesupplier of VDSL and SDSL equipment, and one supplier of UMTS and EDGE equipment, who will also bethe supplier of HSDPA equipment. Swisscom also depends on the timely supply of mobile handsetswhich can be used in the UMTS, EDGE and HSDPA networks.***Network failures may result in the loss of traffic, reduced revenue and harm to Swisscom’sreputation***Modern telecommunication networks are vulnerable to damage or interruption caused by systemfailures, hardware or software failures, computer viruses or external events such as storms,floods, avalanches, fires, power loss or intentional wrongdoing. Swisscom has experienced networkfailures in the past. In June 2004,
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Swisscom’s IP network for business customers was disrupted for several hours due to a softwarefailure. If the disruption had continued for a longer period, it would have had significantadverse consequences, in particular for the banking sector. In 2005, flooding disrupted bothSwisscom’s mobile and fixed-line networks. While mobile coverage was quickly restored, thousands ofcustomers remained without broadband access (xDSL) and other fixed-line services for weeks. Theflooding caused Swisscom to incur additional repair costs and reduced revenue from affectedcustomers. The risk of network failures can never be entirely eliminated. Any such failure may harmSwisscom’s reputation and could result in customer dissatisfaction and reduced traffic andrevenues.***Complex IT systems may fail to operate properly, hampering Swisscom’s business development***Swisscom relies for many of its most important data processing functions on complex IT systemswhich have been developed over a long period of time. Older systems have been upgraded and adaptedon an ongoing basis and new systems have been introduced. As a result, there is a lack ofharmonization in Swisscom’s IT systems which may affect Swisscom’s ability to compete with newerservice providers. Swisscom may be required to make further investments in its equipment andsystems in order to facilitate the provision of flexible and cost-effective services to customers.Any failure to do so may harm Swisscom’s competitive position. Further adaptation and extension ofSwisscom’s IT systems, in particular its billing, order management and customer relationshipmanagement systems, would be complex and time-consuming and could therefore hamper Swisscom’sbusiness development.Swisscom’s triple-play strategy for future growth and the continuing convergence amongtelecommunications technologies and devices will require it to integrate a variety of media andtechnologies. Swisscom may experience difficulties integrating existing systems and new equipmentdesigned to facilitate the delivery of multimedia services as such equipment may not operateproperly in connection with Swisscom’s existing equipment and networks. Technical difficulties maydelay the implementation of Swisscom’s growth strategy and may lead to customer dissatisfaction,both of which could harm Swisscom’s reputation and result in reduced revenues and profitability.***Swisscom’s relations with the trade unions******could deteriorate***In 2005, Swisscom entered into a new collective bargain agreement with the trade unions. Theagreement, which entered into effect in January 2006, is of unlimited duration unless terminated byeither party on six months’ notice to the end of a calendar year. The agreement will first becometerminable on December 31, 2007. Termination of the collective bargaining agreement, theinitiation of new negotiations and staff reductions could damage labor relations or even lead towork disruptions, which in turn could negatively affect Swisscom’s profitability andcompetitiveness.***Swisscom is involved in a number of legal proceedings which, if decided against Swisscom, could inthe aggregate have a material adverse effect on its results***Swisscom is involved in several legal proceedings that are described in more detail under “*Item 8:Financial Information – Legal Proceedings*”. Swisscom’s position as the principal telecommunicationsprovider in Switzerland has attracted the attention of its competitors in Switzerland and of theSwiss regulatory authorities. In addition, Swisscom is regularly involved in legal disputes withcompetitors as a result of its leading position in the fixed-line and mobile communications marketsin which it operates. For example, Swisscom was recently involved in a legal proceeding withrespect to fixed-fixed interconnection fees. In April 2006, the Federal Court issued a rulingrequiring Swisscom to retroactively reduce its interconnection prices. Following the FederalCourt’s ruling, Swisscom paid an amount of CHF 101 million in 2006 and it expects to be required tomake further payments in future years. As of December 31, 2006, Swisscom’s provisions for potentialfuture payments amounted to CHF 484 million.Although Swisscom believes that most of the proceedings it is involved in would not individuallyhave a material adverse effect on its results of operations and financial condition, in theaggregate these proceedings could have such an effect. This risk has been heightened by the latestapproach indicated by the Swiss Competition Commission in its investigation of Swisscom Mobile’smobile termination fees. While the results of those proceedings are not directly applicable toother cases, they may signal greater scrutiny by the Competition Commission in enforcing theAntitrust Law coupled with higher potential fines.
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**Risks Related to Ownership by the Swiss Confederation*****The interests of the Swiss Confederation, which owns a majority stake in Swisscom, may differ fromthose of Swisscom and could hamper Swisscom’s development***The Swiss Confederation holds a majority of Swisscom shares. Any reduction of the Confederation’sholding below a majority would require a change in law. Swisscom may not undertake a capitalincrease that would otherwise have the effect of decreasing the Confederation’s shareholding toless than a majority, unless the Confederation agrees to participate in the capital increase.Swisscom’s ability to raise additional equity capital could therefore be constrained.In addition, for as long as the Swiss Confederation maintains a controlling interest in Swisscom,it will be able to influence Swisscom’s strategy. In December 2005, the Swiss Federal Council, asSwisscom’s majority shareholder, announced its new strategic goals for 2006 to 2009 which limitSwisscom’s flexibility for corporate acquisitions. The strategic goals permit holdings abroad onlyif they support Swisscom’s core business within Switzerland or can be shown to further otherstrategic-industrial logic. The Federal Council expects that Swisscom will not enter into anyinvestments in foreign telecommunications companies with a universal service obligation mandate.Finally, the Federal Council has indicated that net debt should be restricted to no more than oneand a half times earnings before interest, taxes, depreciation and amortization (EBITDA), althoughwith regard to Swisscom’s recent repurchase of a 25% interest in Swisscom Mobile from VodafoneInternational Holdings B.V., the Federal Council decided that debt incurred in connection with thepurchase would not be taken into account in determining Swisscom’s compliance with the net debtlimitations. The Federal Council has also indicated that it considers the proposed Fastwebtransaction to be consistent with the strategic goals. Nonetheless, as a result of the FederalCouncil’s position, Swisscom could be limited in its ability to undertake other major corporateactions, such as acquisitions or entry into strategic partnerships, either at the parent companylevel or through subsidiaries, which are important elements of its strategy. Swisscom may also belimited in its ability to incur debt to finance such an acquisition and may be prevented fromoptimizing its balance sheet structure.***The sale of a substantial stake in Swisscom by the Swiss Confederation could negatively affectSwisscom’s share price and reputation***As of January 31, 2007, the Swiss Confederation held a 54.8% stake in Swisscom.On April 5, 2006, the Swiss Federal Council adopted a dispatch on the Confederation’s holdings inSwisscom for submission to the Federal Assembly. The proposal recommended that theTelecommunications Enterprise Act of 1997 (the “TUG”) be amended to transfer power to the FederalCouncil to sell the government’s controlling interest in Swisscom. In May and June of 2006, thisproposal was narrowly rejected by both chambers of the Federal Assembly. In response to severalparliamentary requests, the Federal Council has reaffirmed its intention to reexamine legislativeproposals that would permit the sale of the Confederation’s holdings in Swisscom, given that thereasons in favor of privatizing Swisscom were not denied by the Federal Assembly. Such areexamination is not expected to take place before 2008. Future sales by the Swiss Confederationmay occur, whether as a result of similar, new initiatives or as part of a reduction the SwissConfederation’s stake to the current legal minimum shareholding of 50%-plus-one-share. Swisscomwill have only a very limited ability to influence the structure or details of such sales. Thesale or distribution of a significant number of Swisscom’s shares by the Swiss Confederation maycause the market price of Swisscom’s shares and ADSs to decline.In addition, part of Swisscom’s reputation for reliability and trustworthiness among its customersis due to its ownership by the Swiss Confederation. If the Swiss Confederation sells a significantportion of its stake in Swisscom, Swisscom’s reputation may be impaired, it may lose customers tocompetitors, and the market price of Swisscom’s shares and ADSs may decline.
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**Risks Related to Swisscom’s Shares*****Currency fluctuations may adversely affect the trading prices of Swisscom’s ADSs and the value ofany distributions Swisscom makes***Because Swisscom’s stock is traded in Swiss francs and the ADSs are traded in U.S. dollars,fluctuations in the exchange rate between the two currencies may affect the relative value ofSwisscom’s ADSs. In addition, should Swisscom make any distribution on its common stock in Swissfrancs, the depositary will convert such distributions to U.S. dollars. If exchange rates fluctuatebefore the depositary converts the currencies, U.S. shareholders may lose some of the value of thedistribution.***Shareholders’ rights are governed by Swiss law and differ in some respects from the rights ofshareholders under U.S. law***Swisscom is a stock corporation organized under the laws of Switzerland. The rights of holders ofSwisscom’s shares, and therefore, many of the rights of its ADS holders, are governed by Swisscom’sarticles of incorporation and by Swiss law. These rights differ in some respects from the rights ofshareholders in typical U.S. corporations. In particular, Swiss law significantly limits thecircumstances under which shareholders of Swiss corporations may bring derivative actions.***It may not be possible for shareholders to enforce judgments of U.S. courts against members ofSwisscom’s Board of Directors or Group Executive Board***Swisscom is a Swiss stock corporation. The members of its Board of Directors and Group ExecutiveBoard are non-residents of the United States. In addition, Swisscom’s assets and the assets ofmembers of its Board of Directors and Group Executive Board are located in whole or in substantialpart outside the United States. As a result, it may not be possible for shareholders to enforceagainst Swisscom or members of its Board of Directors and Group Executive Board judgments obtainedin the United States courts based on the civil liability provisions of the securities laws of theUnited States. In addition, awards of punitive damages and judgments rendered in the United Statesor elsewhere may be unenforceable in Switzerland.
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**ITEM 4: INFORMATION ON THE COMPANY****Overview****Business**Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensiverange of products and services to residential and business customers. As the leading provider offixed-line services, Swisscom offers analog and digital access services. In addition, Swisscomoffers broadband services over existing subscriber lines. As of December 31, 2006, Swisscomprovided 3.7 million fixed-line telephone access lines in Switzerland, of which 0.9 million weredigital or ISDN lines and 1.4 million were being used for broadband access. In 2006, Swisscombilled an aggregate of 9.0 billion national and 1.2 billion international retail voice trafficminutes. In addition, Swisscom billed an aggregate of 16.2 billion minutes of national transit andinterconnection traffic on behalf of other telecommunication service providers. Swisscom is alsothe leading mobile telecommunications service provider in Switzerland, with over 4.6 millionsubscribers to its mobile service as of December 31, 2006. Swisscom also offers a full range ofstate-of-the-art data services, from leased lines to integrated solutions for its businesscustomers. In 2006, Swisscom’s net revenues amounted to CHF 9.7 billion.Swisscom operates a variety of state-of-the-art telecommunications networks which enable the quickand cost-effective introduction of innovative services. Swisscom’s PSTN/ISDN network featuresfully digitalized transmission and local switching and fully integrated ISDN. Swisscom has upgradedits access networks to provide broadband connectivity services in the local loop. Broadbandtechnologies operate, like ISDN, over existing copper lines, but offer higher speed for datatransmission. Swisscom’s broadband service is available to approximately 98% of the population ofSwitzerland, and its fastest offering provides download speeds of up to 6 Mbit/s. In 2006, Swisscomcompleted the first phase of its very high-bit rate digital subscriber line (VDSL) infrastructuredeployment, and is able to offer VDSL to over 25% of households with speeds of up to 30 Mbit/s.Swisscom also operates several data networks used for the provision of packet switched, frame relayand asynchronous transfer mode (ATM) data services and, to an increasing extent, IP and Ethernetcommunication. Swisscom’s mobile telephony network is a digital mobile dual band network based onthe international GSM standard. In order to respond to increasing demand for mobile data services,Swisscom introduced nationwide Enhanced Data Rates for GSM Evolution (EDGE) coverage. EDGEtechnology permits faster transmission of data via existing GSM installations. Swisscom has alsobuilt out a separate “third generation” UMTS network. UMTS is a mobile radio system that createsadditional mobile radio capacity and enables broadband media applications while also providing highspeed Internet access. Swisscom is currently capable of providing UMTS service to approximately90% of the Swiss population. In addition, Swisscom enabled high-speed downlink packet access(HSDPA) in selected densely populated urban areas in 2006. HSDPA is a packet-based data servicewith a theoretical downlink data transmission rate of up to 8-10 Mbit/s over a 5MHz bandwidth. Asdescribed in more detail below, Swisscom is currently making targeted investments in both itsfixed-line and mobile networks to increase coverage where needed, as well as to enhance capacityand upgrade functionality. See “– *Networks and Technology*”.The expanded capacity provided by Swisscom’s upgraded networks and new technology (*e.g.,*VDSL) haveallowed Swisscom to introduce a variety of new services, such as Bluewin TV. This service,introduced in November 2006, provides subscribers with over 100 television channels and over 70radio channels, hundreds of on-demand films and live sports coverage. Video is seamlessly streamedto subscribers’ televisions over their high-speed Internet connections. Swisscom intends tocontinue to expand its service offerings to take advantage of its evolving networks.The following table sets forth Swisscom’s capital expenditures for the periods indicated.             CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**    Fixed-line network  457   353   360 Mobile network  199   238   434 Other  668   496   342    **Total**  **1,324**   **1,087**   **1,136**    
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**Recent Developments**On April 10, 2007, Swisscom launched an all-cash friendly public tender offer for 98.26% of theshares of FASTWEB S.p.A. (“Fastweb”), Italy’s second largest fixed-network operator and leadingprovider of IP-based services. Swisscom already acquired 1.74% of Fastweb’s shares in March 2007.Swisscom is offering all Fastweb shareholders EUR 47.00 per share for a maximum total considerationof EUR 3.7 billion. The offer is conditional on, among other things, Swisscom achieving aparticipation of greater than 50% of Fastweb’s share capital. Fastweb’s board of directors hasruled in favour (“espresso parere favorevole”) of the Swisscom tender offer, after taking intoaccount the fairness opinions provided by its financial advisors. The offer period will end on May15, 2007.Fastweb is Italy’s leading alternative broadband telecommunications provider with more than onemillion customers, 2006 revenues and net loss of EUR 1.26 billion (CHF 2.04 billion) and EUR 124million (CHF 200 million), respectively. Fastweb delivers innovative telephony, Internet andtelevision services in more than 130 cities via state of the art broadband IP networks. Fastweb’sexperience in operating its fully IP-based broadband network, expanding and commercialising opticalnetworks, and developing and marketing broadband-based multimedia services is expected to be highlyvaluable to Swisscom. In return, Swisscom intends to support Fastweb’s plans to position itself inItaly as a mobile virtual network operator.Swisscom will fund the transaction (which will potentially involve refinancing Fastweb’s existingdebt in the amount of EUR 1.1 billion) via financial debt and, depending on the final acceptancelevel of the offer, by selling the 4.9 million treasury shares it acquired for CHF 2.2 billion in2006 through its share buyback program. These shares, representing 8% of Swisscom’s share capital,were acquired by issuing tradable put options. Depending on the acceptance level of Swisscom’stender offer and following the closing of the Fastweb transaction, Swisscom may review its futurepayout policy with a view to further increasing its attractiveness. See “*Item 8: FinancialInformation – Dividend Policy*”.On February 5, 2007, the Competition Commission issued a decision in connection with the mobiletermination proceedings in which Swisscom is involved. See “*Item 8: Financial Information – LegalProceedings – Other Regulatory Proceedings”.*In this decision, the Competition Commissiondetermined that Swisscom Mobile has a market-dominant position which it has abused by demandingdisproportionately high termination fees and imposed a fine of CHF 333 million. Swisscom rejectsboth the charge that it misused its dominant market position and the sanction. Swisscom intends toappeal to the Swiss Federal Administrative Court and, if necessary, in the final event to the SwissFederal Supreme Court. Based on a legal assessment of the current situation, Swisscom has concludedthat the sanction is unlikely to ultimately be upheld. Accordingly, Swisscom did not record anyrelated reserves in its financial statements as of December 31, 2006.On December 20, 2006, Swisscom repurchased a 25% stake in Swisscom Mobile AG from VodafoneInternational Holdings B.V., which originally acquired its interest in April 2001. As a result ofthe transaction, Swisscom Mobile AG is now a wholly-owned Swisscom subsidiary. The purchase priceof CHF 4.25 billion was fully financed by a group of four financing institutions who each providedequal loans. These bank loans were syndicated in a banking consortium in the first quarter of 2007.The loan is divided into two tranches. The first tranche of CHF 1.5 billion has a term of one yearwith an extension option for one further year. The second tranche of CHF 2.75 billion has a term offive years. The bank loans will become due for immediate repayment if the Confederation’s share ofSwisscom’s share capital drops below 35% or if another shareholder can exercise control overSwisscom. The Federal Council has decided that these loans will not be taken into account indetermining Swisscom’s compliance with the net debt limitations contained in the government’sstrategic goals.In conjunction with the transaction, Swisscom Mobile entered into comprehensive, exclusivecooperation and branding agreements with Vodafone Group Plc and certain affiliates thereof,respectively. The agreements set out the terms on which Swisscom Mobile and Vodafone will continueto cooperate in certain areas. In addition, Vodafone has agreed to pay Swisscom 25% of the amountof any fine imposed by the Competition Commission in connection with the pending mobile terminationproceedings.
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**Background**Prior to January 1, 1998, Swisscom was the state monopoly service provider and was subject only tolimited competition. On January 1, 1998, the Swiss telecommunications market was opened tocompetition with the implementation of the Telecommunications Act. Since then, a large number ofcompetitors have entered the Swiss market, with intense competition in both fixed-line and mobiletelephony and in services provided to business customers.Although Switzerland is not a member of the EU, the Swiss market has been liberalized on theschedule and in the manner set forth in the EU directives mandating the liberalization oftelecommunications services in member states. In March 2006, the Swiss Parliament adoptedamendments to the Telecommunications Act which entered into force on April 1, 2007. Allmarket-dominant service providers are now required to offer, among other things, unbundled accessto their local loop on a cost-oriented basis in the form of full access as well as bitstream accessfor a limited period of four years. See “ – *Regulation – Unbundling of the Local Loop and OtherAccess Regulation*”.The Telecommunications Act initially required Swisscom to provide certain basic telecommunicationsservices, comprising Universal Service, throughout Switzerland until December 31, 2002, with anumber of such services subject to price ceilings. Swisscom’s Universal Service license was laterrenewed for a five-year term (2003-2007) and ISDN access became part of Universal Service subjectto a price ceiling.Swisscom is the sole applicant for the 2008-2017 Universal Service license. The new license willinclude the obligation to offer broadband internet access to every household in Switzerland.Swisscom, which is already capable of providing broadband access to more than 98% of the Swissmarket, will be able to fully comply with the new obligation without significant new investment.The new obligation is technologically neutral and ISDN will no longer be explicitly required. Thenew license is expected to be awarded by the end of June 2007 at the latest.Historically, Swisscom’s operations were a part of the Swiss PTT, a dependent agency of the SwissGovernment. The TUG established Swisscom as a special statutory stock corporation. The TUGprovides that the Swiss Confederation must hold a majority of the capital and voting rights ofSwisscom. As of January 31, 2006, the Swiss Confederation held a 54.8% stake in Swisscom.On April 5, 2006, the Swiss Federal Council adopted a dispatch regarding the Swiss Confederation’sholdings in Swisscom. The main proposal contained in the dispatch recommended that the TUG beamended to permit the Federal Council to sell the Confederation’s controlling interest in Swisscom.The proposal was later narrowly rejected by both chambers of the Federal Assembly. In response toseveral parliamentary requests, the Federal Council has reaffirmed its intention to reexaminelegislative proposals that would permit the sale of the Confederation’s holdings in Swisscom, giventhat the reasons in favor of privatizing Swisscom were not denied by the Federal Assembly. Suchreexamination is not expected to take place before 2008.Swisscom’s principal executive offices are located at Alte Tiefenaustrasse 6, 3050 Bern,Switzerland. For a list of Swisscom’s subsidiaries and affiliated companies, see Note 41 to theconsolidated financial statements.**Strategy**Swisscom is active in a highly dynamic market that is characterized by constant change. Thecontinually changing requirements of Swisscom’s residential customers are one of the forces drivingthe pace of change in terms of demand and corresponding service offerings. The market is also beingshaped by ongoing process optimization among Swisscom’s business customers and by rapidtechnological changes, both requiring Swisscom to constantly adapt to new needs in order to graspassociated opportunities.To confront these challenges, Swisscom announced a new “TIME” strategy in spring 2006 that is basedon three pillars:**•** ***Maximize***performance in Swisscom’s home market.Swisscom aims to further expand its already high level of customer loyalty by building onits leading portfolio of products and services and excellent customer care. Residentialcustomers want integrated access and increasingly convergent voice, data and multimediaproducts and services. They expect simplicity and support when dealing with the growingnumber of technological options available. In response to the developing needs of theseresidential customers, Swisscom is expanding its portfolio of
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  convergent products and services to include, among other things, services that can be easilyand securely accessed using a variety of devices (e.g., phone, computer, TV). Similarly,Swisscom will meet the future needs of business customers by providing them with a portfolioof convergent Information and Communications Technology (ICT) products and services,improved international connectivity and excellent customer service.  The push toward convergence will not only benefit Swisscom’s customers, it will also allowSwisscom to significantly reduce costs and complexity by eliminating cross-functionaloverlaps between its business activities. Swisscom believes it can achieve substantial costreductions in the future by (1) combining its fixed and mobile infrastructure in a single“all-IP network”, (2) optimizing its IT infrastructure, (3) setting up shared servicecenters for IT and administrative applications as well as (4) eliminating redundancies inits sales infrastructure.   These measures will allow Swisscom to prepare for future changes while continuing to provideits customers with the highest level of service. **•** ***Extend***services to new markets and customers.Swisscom intends to offer a wider range of ICT solutions to existing and new customers, bothdomestically and abroad. This will allow Swisscom to exploit new sources of growth as it movesalong the value chain. For example, in November 2006, Swisscom launched its TV over Internetprotocol (IPTV) service “Bluewin TV”. Swisscom will follow its customers abroad, offeringsolutions beyond the borders of Switzerland through international expansion and cross-borderalliances. It will gradually expand vertically, entering new markets where such expansion issupported by clear industrial logic. Finally, Swisscom will engage in selective acquisitions tosecure its market position and accelerate growth (*e.g.,*Swisscom Mobile’s acquisition of Minickhelped Swisscom secure a leading position in European content delivery).**•** ***Expand***by leveraging core competences in closely related business areas.Swisscom will continue to apply its competencies in European markets with substantial growthprospects, but which have not reached the same maturity level as the Swiss market. Swisscomwill also expand its presence in domestic market segments where it is not yet the marketleader. To achieve these goals, Swisscom will establish and grow new businesses (as it didwith Hospitality Services), and it will continue to consider larger transactions abroad(within the bounds of the Federal Council’s strategic goals), such as the proposed Fastwebtransaction described above. Such transactions will be subject to a set of stringent testsconcerning: industrial logic, growth and short term operating free cash flow accretion,business benefits for Swisscom and/or the target, quality of management and the existence ofa favourable competition and regulatory environment.While the first pillar is primarily aimed at optimizing Swisscom’s current core business, thesecond and third pillars are clearly focused on growth. The TIME strategy will open new businessopportunities that will distinguish Swisscom from the competition, generate further growth and helpoffset the decline in Swisscom’s traditional core business (voice communications and accessservices).The strategic goals of the Federal Council limit Swisscom’s ability to enter into acquisitions.The Federal Council expects Swisscom not to enter into any investments in any foreigntelecommunications company with a universal service obligation (USO) mandate and to limit net debt(not including CHF 4.25 billion in bank loans used to finance Swisscom’s repurchase of a 25% stakein Swisscom Mobile AG from Vodafone International Holdings B.V.) to a maximum of one-and-a-halftimes EBITDA as reported on a consolidated basis. Nonetheless, the Board of Directors has analyzedthe Federal Council’s strategic goals for 2006 to 2009 and believes they provide sufficient leewayfor the company’s further value-adding development. Moreover, the Federal Council has indicatedthat it considers the proposed Fastweb transaction to be consistent with the strategic goals. Formore information, see “*Item 7: Major Shareholders and Related Party Transactions – Relationship andTransactions with the Swiss Confederation – The Confederation as Shareholder – Strategic Goals*”.Should no suitable investment opportunities arise, Swisscom intends, in accordance with itsdividend policy, to return capital it does not require to its shareholders. Annual dividends areexpected to continue to amount to approximately half of Swisscom’s net income. For information onSwisscom’s return policy, see “*Item 8: Financial Information – Dividend Policy*”.
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**Overview of Business Segments**In 2006, Swisscom operated in the following business segments: **•** **Fixnet**provides access, fixed-line voice, Internet and a comprehensive range ofother fixed network telecommunication services to residential and business customers.In addition, Fixnet provides wholesale services and also offers a variety of otherservices, including the provision of leased lines and the operation of a directoriesdatabase. Until 2006, Fixnet also sold customer equipment through the Swisscom shops.  **•** **Mobile**provides mobile telephony, data and value-added services in Switzerland andsells mobile handsets.  **•** **Solutions**provides national and international fixed-line voice telephony services tobusiness customers and offers leased lines, Intranet services and integratedcommunication technology solutions, including outsourcing services, to businesscustomers.  **•** **Other**covers mainly the provision of IT services through Swisscom IT Services, thebroadcasting businesses of Swisscom Broadcast and Antenna Hungária in Switzerland andHungary, the billing services and customer cards business of Accarda and the operationof a pan-European network for broadband Internet connectivity through HospitalityServices (formerly Swisscom Eurospot).  **•** **Corporate**includes Swisscom’s headquarter functions, group-company shared services,property rentals through the real estate company, Swisscom Immobilien, and Swisscom’sprograms under its social plan.The following table sets forth external revenue generated by Swisscom’s segments for the periodsindicated.             CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**    Fixnet  4,130   4,319   4,555 Mobile  3,541   3,651   3,679 Solutions  1,072   1,123   1,279 Other  840   571   476 Corporate  70   68   68    **Total**  **9,653**   **9,732**   **10,057**    
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**Fixnet****Overview**Through Fixnet, Swisscom is the leading provider of fixed network telecommunication services inSwitzerland, which it provides to residential, business and wholesale customers. In 2006, Fixnetgenerated total revenue of CHF 5.0 billion, including sales of CHF 0.8 billion to other Swisscombusiness segments. With external revenues of CHF 4.1 billion, Fixnet accounted for 42.8% ofSwisscom’s consolidated net revenue in 2006.Services provided by Fixnet include: **•** **Access.**Fixnet provides access services, including traditional analog, digital andbroadband access services, to residential and business customers. As of December 31,2006, Fixnet provided 3.7 million fixed-line telephone access lines, including 0.9million ISDN lines, and offered xDSL access to approximately 1.4 million subscriberlines.  **•** **Retail Traffic.**Fixnet provides national and international fixed-line voicetelephony services to residential and small and medium-sized business customers. In2006, Fixnet carried an aggregate of 8.7 billion minutes of national telephony anddial-up Internet traffic and 0.9 billion minutes of outgoing international traffic.  **•** **Wholesale Traffic.**Fixnet provides a wide range of wholesale services to Swisscom’sother segments (which results in the recognition of intersegment revenue) and to othertelecommunications providers. In 2006, Fixnet billed a total of 16.2 billion minutes ofnational interconnection and transit traffic.  **•** **Other Traffic.**Fixnet operates public payphones, provides operator services andoffers prepaid calling cards.  **•** **Other.**Fixnet also offers a variety of other services, including the provision ofleased lines and the operation of a directories database. Until 2006, Fixnet also soldcustomer equipment through the Swisscom shops.Effective January 1, 2007, Swisscom reallocated certain responsibilities within the group in orderto refine and enhance the customer focus of each segment. Fixnet and Mobile will continue to focuson residential customers. In addition, Fixnet will focus on meeting the needs of small andmedium-sized enterprises. Solutions is now responsible for larger corporate accounts, and hasassumed related functions which were transferred from Fixnet and Mobile. In addition,responsibility for Swisscom shops was transferred from Fixnet to Mobile, reflecting the fact thatmost of the products and services offered in Swisscom shops are related to mobile communications.See “ *– Other – Customer Equipment*”.The following table sets forth external revenue generated by Fixnet for the periods indicated.             CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**    Access  2,081   1,992   1,876 Retail traffic  974   1,082   1,240 Wholesale traffic  351   483(1)  691 Other traffic  105   130   158 Other  619   632   590    **Total**  **4,130**   **4,319**   **4,555**     (1) In 2005, Swisscom contributed its international wholesale business to a joint venture withBelgacom. As Fixnet only has a minority stake in this new company, certain associated revenues(and costs) are no longer recorded by Fixnet.In order to strengthen its competitive position in the retail fixed-line market, Swisscom aimsto increase usage of its broadband access services and to strengthen customer loyalty. Swisscombelieves that demand for broadband connectivity services will continue to increase and is activelymarketing broadband connectivity in the retail market. Swisscom believes that combining its coreactivities, voice and Internet, with multimedia services, such as TV and video on demand (aso-called “triple-play” strategy), will be an effective means of competing with cable networkoperators.
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In line with this strategy, Fixnet launched its Bluewin TV service at the beginning of November2006. Swisscom has incurred, and expects to incur, significant start-up costs in connection withthe launch of this service. Bluewin TV provides subscribers with over 100 television channels andover 70 radio channels, hundreds of on-demand films and live sports coverage. Rather than sendingtelevision and video signals by broadcasting or transmitting them via cable connections,subscribers use their high-speed Internet connections to seamlessly stream video to theirtelevisions. Swisscom’s triple play strategy is further supported by Swisscom’s 2005 acquisition ofa 49% strategic stake in CT Cinetrade AG, a Swiss media company whose activities include a pay-TVchannel, video and DVD film rights, as well as movie theaters. See “ *– Other Participations –Cinetrade*”.By providing television and multimedia content over its network, Swisscom competes with cablenetwork operators, who are particularly well positioned to combine voice, data and Internet accessservices with multimedia content. For more information, see “*Item 3: Key Information – RiskFactors – Risks Related to Swisscom’s Business – Increased competition may have a significantimpact on the revenues and profitability of Swisscom’s fixed-line broadband business, which may notallow Swisscom to recoup its investment in fixed-line broadband infrastructure and multimediaservices*”.**Access**Fixnet provides homes and businesses in Switzerland with analog and digital telephone access linesas well as a variety of supplementary services. In addition, Swisscom offers Internet accessservices to residential and business customers as well as broadband Internet access services toother Internet service providers on a wholesale basis. In 2006, external revenue from accessservices amounted to CHF 2,081 million.**VoiceAccess**Swisscom’s analog voice access service, provided over the public switched telephone network (PSTN),consists of providing connections between a customer’s premises and the PSTN for basic voice,facsimile and Internet services. Each PSTN access line provides a single telecommunicationschannel. Swisscom offers its PSTN customers a wide range of supplementary services includingcaller identification, call forwarding, call waiting, engaged line callback, three-party conferencecalling and caller identification suppression services. In 2006, PSTN services comprised 39% oftotal access revenue.Swisscom’s digital voice access services are provided over the integrated services digital network(ISDN). ISDN allows a single access line to be used for a number of purposes simultaneously,including voice, Internet, data and facsimile transmission. ISDN provides higher qualityconnections with faster transmission of signals, and increases the bandwidth capacity of the accessnetwork. ISDN also supports a full range of supplementary services. Swisscom offers both basicISDN access lines with two channels and primary ISDN access lines with thirty channels.The following table sets forth, for the periods indicated, selected data relating to access linesprovided by Fixnet to residential and business customers.             In thousands of lines **As of December 31,**  **2006**  **2005**  **2004**    PSTN(1)  2,891   2,922   3,007 ISDN(2)  856   900   924    **Total access lines**  **3,747**   **3,822**   **3,931**     Total access channels  4,929   5,043   5,175  (1) Each PSTN line provides one access channel. (2) ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides twoaccess channels and a primary ISDN line provides 30 access channels.The number of ISDN lines declined in 2005 and 2006 due to the increasing use of broadbandaccess services, which are also offered over PSTN lines, and because of the introduction of calleridentification on PSTN by mid-2005, which up to then had only been offered over ISDN. The totalnumber of access lines also declined due to (i) the growing market share of Cablecom, Switzerland’smajor cable network operator, which offers voice and Internet access over its own infrastructureand (ii) the effects of mobile substitution. Swisscom expects this trend to continue.
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Swisscom does not receive revenue in connection with the initial in-house installation of accesslines, which is generally performed by independent contractors. Most of the supplementary servicesavailable are included in the monthly subscription.The following table sets forth information relating to Swisscom’s charges in effect in 2006 for theprovision of voice access services.         CHF (including VAT)        **Activation Fee** **Monthly Fee**   PSTN  43.00   25.25 ISDN basic with up to 3 access numbers  43.00   43.00 ISDN basic with up to 7 access numbers  43.00   53.80 ISDN basic with up to 10 access numbers  43.00   63.90 ISDN basic with 1 access number and Direct Dial In(1)  170.20   53.80 ISDN primary  914.60   538.00  (1) Direct Dial In enables calls to be directed straight to end-user terminals connected to aprivate branch exchange.Under the terms of the Universal Service license, the provision of ISDN access is includedwithin Swisscom’s Universal Service obligation and is subject to a price ceiling of CHF 40.00(excluding VAT). PSTN access is subject to a price ceiling of CHF 23.45 (excluding VAT).Additional charges may be levied for the provision of supplementary services. See “*– Regulation –Universal Service*” and “*– Regulation – Price Ceilings for Universal Service*”.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which enteredinto force on April 1, 2007. Swisscom is required to offer, among other things, unbundled access toits local loop on a cost-oriented basis in the form of full access as well as access rebilling.Unbundling of the local loop will also require market-dominant providers to offer bitstream accessfor a limited period of four years on a cost oriented basis. See “*– Regulation – Unbundling of theLocal Loop and Other Access Regulation*” and “*Item 8: Financial Information – Legal Proceedings*”.**Internet Access**Swisscom is the leading Internet service provider for retail customers in Switzerland, offeringbroadband Internet access over digital subscriber lines (xDSL) and narrowband Internet access as adial-up service over ISDN and PSTN lines. In addition, Swisscom Fixnet provides broadband Internetaccess to other Internet service providers on a wholesale basis.The following table provides information about the number of access subscribers for the periodsindicated:             In thousands of lines/subscribers **Year Ended December 31,**  **2006**  **2005**  **2004**    Retail xDSL lines  936   708   490 Wholesale xDSL lines  432   390   312    **Total xDSL lines**  **1,368**   **1,098**   **802**                 Retail narrowband subscribers(1)  282   410   523  (1) Includes active access subscribers only, defined as all paid-access subscribers and thosesubscribers to Swisscom’s free-access services who had accessed their accounts at least oncein the last 40 days.In recent years, growth in the access area has come from xDSL technology, which offerssignificantly higher transmission speeds compared to ISDN. Because xDSL may be offered over atraditional PSTN line, xDSL growth has contributed to a decline in the number of ISDN lines.Swisscom offers residential Internet users and small businesses Internet access service packagesfacilitating high-quality Internet access using both narrowband and broadband access technologies,IP-based communication services, personal information management services and shared hostingservices. Internet access over xDSL is offered on a flat-fee basis for high bandwidth users, andon a minutes-of-use basis for 300kbit/s low bandwidth users. In March 2006, Swisscom completed theacquisition of Cybernet (Schweiz) AG from the Viatel Group, strengthening its position in thismarket. Cybernet focuses its activities on the small and
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medium-sized business market, where its core businesses include connectivity, data centers ande-business. Effective January 1, 2007, Cybernet was merged into Fixnet.Swisscom seeks to increase the number of subscribers to broadband access services by offering newbroadband services and significantly increasing the bandwidth of its xDSL lines. Swisscom continuesto complement its existing network with VDSL technology (very high bit-rate digital subscriberlines), which will allow Swisscom to offer downstream speeds of up to 30 Mbit/s.The following table sets forth information relating to Swisscom’s charges in effect in 2006 for theprovision of broadband access services.               **Downstream / upstream**      CHF (including VAT) **bandwidth (kbit/s)****(2)** **Monthly Fee** **Hourly rate**   ADSL 300(1)  300/100   9.00   2.40 ADSL 2000  2000/100   49.00   — ADSL 3500  3500/300   69.00   — ADSL 5000  5000/300   99.00   —  (1) Pay-as-you-go service. In mid-November 2006, ADSL 300 replaced the previous ADSL 150 servicepackage for new customers, which had offered downstream/upstream bandwidth capacity of 150 /50 kbits/s. The monthly and hourly fees remained unchanged. (2) In mid-March 2006, ADSL 2000 replaced the previous ADSL 600 service package for new customerswhich had offered downstream/upstream bandwidth capacity of 600 / 100 kbits/s, ADSL 3500replaced ADSL 1200, which had offered 1200 / 200 kbits/s, and ADSL 5000 replaced ADSL 2400,which had offered 2400 / 200 kbits/s. In March 2007, the respective bandwidth capacities werefurther enhanced. The monthly fees remained unchanged. Bandwidth capacities are maximumfigures; actual capacity depends on the quality and length of copper access lines.On October 20, 2005, the Competition Commission launched an investigation against Swisscom(Swisscom AG and Swisscom Fixnet) to determine whether its ADSL wholesale prices were abusivelyhigh and prevented other Internet service providers from realizing sufficient profits in the retailmarket (price-squeezing). This investigation is still pending. See “*Item 8: Financial Information –Legal Proceedings – Other Regulatory Proceedings*”.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which enteredinto force on April 1, 2007. Market-dominant providers are required to offer bitstream access toother providers on demand for four years on a cost oriented basis. See “*– Regulation – Unbundlingof the Local Loop and Other Access Regulation*”.**RetailTraffic**Swisscom provides comprehensive national and international calling services to residential andbusiness customers. Fixnet’s business customers are small and medium sized enterprises that do notrequire customized telecommunications solutions. External revenue attributable to national trafficand outgoing international traffic originating on the fixed-line network generated by Fixnetcustomers amounted to CHF 974 million in 2006.Retail traffic has declined in recent years, mainly due to a significant decline in local areatraffic and Internet traffic. In 2005 and 2006, the continued growth in the number of broadbandaccess lines contributed to the decline in Internet traffic, while increased competition reducedvoice traffic. Swisscom expects that retail traffic will continue to decline.Swisscom believes it is well-positioned to remain the leading provider of national traffic andoutgoing international calling services in the Swiss market. To this end, Swisscom continues toimplement new measures designed to maintain its market share in national and internationaltelephony traffic and to increase customer loyalty.
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***Traffic.***The following table sets forth, for the periods indicated, selected information relatingto Fixnet’s national and outgoing international fixed voice telephony traffic.             In millions of minutes(1) **Year Ended December 31,**  **2006**  **2005**  **2004**    Local and long distance traffic  6,312   6,628   7,205 Fixed-to-mobile traffic  926   925   949 Internet traffic  1,487   2,252   3,323    **Total national retail traffic**  **8,725**   **9,805**   **11,477** International retail traffic(2)  903   926   955    **Total retail traffic**  **9,628**   **10,731**   **12,432**     (1) Figures do not include traffic generated from Swisscom-operated public payphones or fromcalling cards. (2) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.In 2006, 57% of the outgoing international traffic generated by Fixnet customers (excludingoutgoing international mobile traffic) was directed toward three countries: Germany, France andItaly.***Tariffs.***Swisscom offers a variety of tariff packages targeting different customer segments. Undersome tariff packages, Swisscom’s national traffic charges are calculated on the basis of callduration, time of day, day of the week, and whether the call is fixed-to-fixed or fixed-to-mobile.Swisscom has also implemented pricing models under which customers pay a monthly subscription feeallowing them to make national and international calls at reduced per-minute rates, on aprice-per-call basis or even for free during certain off-peak times or to other members of a closeduser group. These new pricing models have effectively resulted in an overall tariff reduction.Local and long-distance fixed-fixed calls within Switzerland are billed on a per-minute basis asfollows:         CHF/minute(1) **Peak**(2) **Off-Peak**(3)   National fixed-fixed tariff  0.08   0.04  (1) Calls are charged in incremental steps of CHF 0.10 without a set-up charge. (2) Monday to Friday, from 8:00 a.m. to 5:00 p.m. (3) Monday to Friday, from 5:00 p.m. to 8:00 a.m., as well as on Saturdays, Sundays and holidays.National fixed-to-mobile calls are billed as follows:         CHF/minute(1) **Peak**(2) **Off-Peak**(3) Tariffs applicable to calls terminating on:        Swisscom Mobile  0.41   0.31 TDC (Sunrise) Mobile  0.49   0.39 Orange / Coop-Mobile        prior to September 1, 2006  0.55   0.45 as of September 1, 2006  0.49   0.39 Tariff applicable to other mobilenetwork operators  0.55   0.45  (1) Calls are charged in incremental steps of CHF 0.10 without a set-up charge. (2) Monday to Friday from 7:00 a.m. to 7:00 p.m. (3) Monday to Friday from 7:00 p.m. to 7:00 a.m., as well as on Saturdays, Sundays and holidays.Swisscom’s international calling charges are generally based on duration, destination and dayof the week. In recent years, Swisscom has substantially reduced its international calling charges,both through tariff reductions and volume discounts. Swisscom has a weekday rate applicable fromMonday to Friday and a weekend rate for Saturday and Sunday and five tariff groups.
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The following table sets forth information relating to Swisscom’s international tariffs in effectat the end of December 2006 for calls to the countries generating the most outgoing internationaltraffic.         In CHF/minute, including VAT(1) **Weekday**  **Weekend**    Germany, Austria, France, Italy, United Kingdom, United States, Canada  0.12   0.10 Portugal, Spain, Netherlands  0.25   0.20 Serbia, Montenegro, Turkey  0.65   0.50  (1) Calls are charged in incremental steps of CHF 0.10 without a set-up charge. A surcharge isapplied for calls to foreign mobile networks.Swisscom offers a variety of promotions, such as discounts for evening and weekend calls,temporary discounts and new pricing models designed to improve price perception and reduce churn.Under its Universal Service obligation, Swisscom is required to provide, subject to price ceilings,comprehensive local and national long distance calling services throughout Switzerland untilDecember 31, 2007. Swisscom’s current tariffs are well below the applicable ceiling. See “ *–Regulation – Price Ceilings for Universal Service*”.**WholesaleTraffic**Swisscom provides various wholesale services to other telecommunications providers, includingnetwork operators, service providers and resellers. Swisscom’s portfolio of wholesale servicesincludes basic interconnection services, which Swisscom offers to all licensed operators,registered service providers and others entitled to interconnection under the TelecommunicationsAct. See “ *– Regulation – Interconnection by a Market-Dominant Provider”.*Effective July 1, 2005, Swisscom and Belgacom, the leading telecommunications company in Belgium,formed a new joint venture company, named Belgacom International Carrier Services (BICS), combiningtheir international wholesale activities. See “ – *Other Participations – Belgacom InternationalCarrier Services*”. Fixnet’s wholesale business now consists only of its wholesale nationalbusiness. In 2004 and 2005, Fixnet’s international wholesale operations contributed CHF 445million and CHF 256 million to Swisscom’s wholesale traffic revenues, respectively.As of July 1, 2005, a large portion of Swisscom’s wholesale international traffic ceased to berouted through Fixnet, and is now routed directly through BICS. As Fixnet only has a minority stakein the joint venture, associated costs and revenues should not have been recorded by Fixnetfollowing the Belgacom transaction. Nonetheless, international incoming traffic to be routedthrough BICS in Switzerland to Swisscom’s Mobile network continued to be routed through Fixnet’snetwork until June 2006. Traffic to domestic third party networks has been, and will continue tobe, routed through Fixnet’s network in the future. The associated revenues and costs are recognizedby Fixnet.Since February 2003, direct mobile interconnection has been available, and mobile network operatorshave been able to terminate their traffic directly on each other’s networks. As a result, trafficbetween networks, which had previously been routed via Fixnet’s wholesale network, was initiallyrouted directly, resulting in a decrease in traffic over Swisscom’s network in 2004 and 2005. In2006, however, traffic between other telecommunication providers that was routed through SwisscomFixnet rather than through a direct interconnection increased again.Swisscom has a standard interconnection offer which it markets to all licensed operators,registered service providers and others eligible for interconnection under the TelecommunicationsAct, and it complements this standard offer with a portfolio of extended interconnection servicesand wholesale products. In 2006, external revenue from national wholesale services amounted to CHF351 million.
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The following table sets forth information relating to Fixnet’s national interconnection andtransit traffic for the periods indicated.             In millions of minutes **Year Ended December 31,**  **2006**  **2005**  **2004**    Wholesale national traffic(1)  16,160   17,524   18,576  (1) Based on minutes as determined for customer billing purposes. Includes traffic related tothird party revenues for access, termination and transit services.Swisscom’s standard interconnection offer encompasses a set of basic interconnection serviceswhich Swisscom is required to offer under the Telecommunications Act. The standard offer comprisesinterconnection between access points on the Swisscom network and competitors’ access points,originating, terminating and transit services, access to Swisscom’s emergency, national andinternational directory enquiry services, as well as access to the Business Numbers of Swisscom andother service providers.Under the Telecommunication Act, the interconnection rates charged by a market dominant providermust be cost-oriented. Interconnection rates are based on the long run incremental costs (“LRIC”)of an efficient operator and may not include historical costs. See “ *– Regulation –Interconnection by a Market-Dominant Provider*”.The following table sets forth information relating to Fixnet’s interconnection prices for theperiods indicated.             CHF/minute(1) **As of December 31,**  **2006**  **2005**  **2004**    Regional termination  0.0107   0.0112   0.0114 National termination  0.0150   0.0175   0.0186 Regional carrier selection  0.0108   0.0113   0.0115 National carrier selection  0.0151   0.0176   0.0187  (1) Includes set-up charge. Calculated based on the weighted average price of a call of fourminutes duration, whereby the traffic split in peak, off-peak and night calls was taken intoconsideration.In 2006, Swisscom reduced its standard interconnection rates by up to 15%. Due to a FederalCourt decision from April 2006 and its impact on the cost calculation according to LRIC, prices for2007 will not be published until the middle of 2007 and will be applied retroactively to January 1,2007. See “ *– Regulation – Interconnection by a Market-Dominant Provider*” and “*Item 8: LegalProceedings – Proceedings Relating to Fixed-Fixed Interconnection*”. Swisscom expects to continueto adapt its interconnection charges from time to time as it realizes further cost savings throughnetwork optimization or improvements in efficiency.**OtherTraffic**Swisscom generates other traffic revenue from the operation of private and public payphones (whichSwisscom is required to maintain as part of its Universal Service obligation), operator servicesand from the sale of pre-paid cards. In 2006, Swisscom realized external revenue of CHF 105 millionfrom these services.**Other**Other services comprise the sale of customer equipment, the provision of leased lines, theoperation of a directories database and a variety of other services.**CustomerEquipment**Swisscom is a leading provider of customer equipment to residential customers in the Swisstelecommunications market. Swisscom purchases all of the telecommunications equipment that it sellsor rents under the Swisscom brand name from third-party suppliers. In addition, Swisscom sellstelecommunications equipment under third-party brand names. Swisscom primarily offers residentialcustomers PSTN and ISDN corded and cordless telephone handsets and facsimile machines. Swisscomalso offers mobile handsets and a variety of other products through its Swisscom shops, includingADSL modems. In 2006, sales of customer equipment generated external revenue of CHF 238 million.
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Swisscom uses both Swisscom shops and third-party distribution channels to distribute customerequipment. The approximately 100 Swisscom shops were transferred from Fixnet to Mobile effectiveJanuary 1, 2007, reflecting the fact that most of the products and services offered in Swisscomshops are related to mobile communications. Nonetheless, the comprehensive range of fixed-networkofferings in such shops will remain unchanged, and revenues from sales of fixed-network voiceequipment will continue to be recognized by Fixnet.**Leased Lines**Fixnet offers small and mid-sized enterprises a full portfolio of leased lines throughoutSwitzerland. Customers can choose among a wide range of bandwidths and a selection of differentservice levels. Swisscom has contracts with approximately 62 wholesale customers in Switzerland.Corporate customers, the primary customer segment for leased lines, are targeted through Solutions.See “ *– Solutions – Leased Lines National*”. In March 2006, the Swiss Parliament adoptedamendments to the Telecommunications Act which entered into force on April 1, 2007. Swisscom isrequired to offer, among other things, access to leased lines on a cost-oriented basis in areaswhere it is deemed market dominant. See “ *– Regulation – Unbundling of the Local Loop and OtherAccess Regulation*”. In 2006, the provision of leased lines generated external revenue of CHF 144million.**Directories**Swisscom Directories operates, maintains and sells Switzerland’s most comprehensive telephonedirectory database. This database includes over 6 million residential and business entries and isupdated daily with subscriber information from Switzerland’s major telecommunications serviceproviders. Swisscom Directories is also responsible for the production, marketing and distributionof printed telephone books, as well as the operation, production and development of electronicdirectories that are also accessible on the Internet. In 2006, Swisscom Directories generatedexternal revenue of CHF 122 million.The directories’ business is regulated under the Telecommunications Act. Every telecommunicationservice provider is required to provide its regulated data, including daily data updates. In 2002,Swisscom Directories was appointed by all major telecommunication providers as their data agent andis now responsible for centrally handling the provision of regulated data.**Other**Other revenue comprises mainly Internet narrowband traffic to third-party ISP numbers. Inaddition, it provides a range of value added services and data services to residential customers.In 2006, external revenue from these services amounted to CHF 115 million.**Competition**In the area of fixed network telephony and related services, Swisscom faces intense competition,particularly in the national and international calling markets. Since 2004, price competition hasintensified due to increased competition from cable network operators, especially Cablecom, thelargest cable network operator in Switzerland, and from Internet service providers. Swisscomexpects price competition to further intensify in 2007.**Access****.**As recently as three years ago, Swisscom did not face significant competition in theresidential access market, mainly due to the fact that Swisscom had not yet been required tounbundle its local loop. However, competition has increased since mid-2004, when Cablecom startedoffering telephony services over cable on a commercial basis and thereby began to compete directlywith Swisscom’s PSTN and ISDN access services. In March 2006, the Swiss Parliament adoptedamendments to the Telecommunications Act which entered into force on April 1, 2007. Swisscom isrequired to offer, among other things, unbundled access to its local loop on a cost-oriented basisin the form of full access as well as access rebilling. Unbundling of the local loop will requiremarket-dominant providers to also offer bistream access on a cost-oriented basis for a limitedperiod of four years. See “ *– Regulation – Unbundling of the Local Loop and Other AccessRegulation*”. Unbundling the local loop gives competitors direct access to Swisscom’s customers andthe ability to offer them a full range of services without the need to use Swisscom as anintermediary. In addition to losing access revenues, unbundling the local loop is likely to lead toincreased competition for national and international traffic as, for the first time, customers willbe able to choose among competing full-service providers of fixed-line telephony.
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Swisscom’s principal competitors in the Internet access market are Cablecom and TDC (Sunrise). TDC(Sunrise) offers narrowband dial-up access through its own network as well as ADSL broadband accessthrough a reselling agreement with Swisscom Fixnet.In the market for broadband access, Swisscom faces stiff competition from cable network operators,including Cablecom, who offer broadband Internet access via cable. Cable network operators areparticularly well positioned to combine voice, data and Internet access services with multimediacontent. In response to this increased competition, Swisscom is making capital expenditures toenhance its broadband and IP network and it is working to complement its existing network with VDSLtechnology to provide downstream speeds of up to 30 Mbit/s. These efforts enable Swisscom tocombine its core activities in voice and Internet services with multimedia services such as TV andvideo on demand. At the beginning of November 2006, Swisscom launched its Bluewin TV service basedon its broadband network. However, cable network operators have been offering multimedia servicesfor some time and Swisscom may not be successful in acquiring substantial market share. With therollout of broadband mobile services based on UMTS, DVB-H and other wireless broadband accesstechnologies, Swisscom may face additional competition from broadband mobile service providers.In order to compete with cable operators more effectively, Swisscom has successively increased thecapacity of its broadband access services since 2003. The most recent upgrades occurred in March2006 and March 2007 and more than doubled the bandwidth for most service plans.After revoking, on October 17, 2005, a provisional order from May 6, 2002 relating to a petitionfiled by two of Swisscom’s competitors, the Competition Commission announced, in a letter datedOctober 20, 2005, that it was opening a new investigation of Swisscom and Swisscom Fixnet, basedprimarily on allegations made by one of Swisscom’s competitors, TDC (Sunrise). The CompetitionCommission believes facts exist which indicate Swisscom may be abusing its dominant position. Inaddition, the Competition Commission wants to examine whether its ADSL wholesale prices wereabusively high and prevented other Internet service providers from realizing sufficient profits inthe retail market (price-squeezing). This investigation is still pending. See “*Item 8: FinancialInformation – Legal Proceedings – Other Regulatory Proceedings*”.***National Retail Traffic*****.**Swisscom faces increasing competition in the national retail trafficmarket, especially from Cablecom. Currently, Swisscom’s principal competitors in the nationalretail traffic market are TDC (Sunrise), Cablecom and Tele2. In 2007, prices are expected toremain under pressure, mainly due to increased competition from cable network operators, mobilenetwork operators and Internet service providers offering Internet telephony (known as Voice overIP) services.Tariffs for fixed to mobile calls, which are accounted for in national traffic, are expected toremain under continuous pressure due to regulatory framework in which Swisscom operates. See “ *–Regulation – Mobile Telecommunications*”.Swisscom’s competitors for national long distance service depend on Swisscom for the provision ofwholesale origination and termination access and transit services. As a result, the pricing ofthese services has had an important impact on the development of retail competition. Since January1, 2000, Swisscom has been required to calculate its interconnection costs in any market in whichit is market-dominant on the basis of the long-run incremental cost of an efficient operator andmay no longer include historical costs. As a result, interconnection prices have steadilydeclined. Because interconnection rates calculated on the basis of long-run incremental costs onlycover the additional cost to Swisscom of giving other providers access to its network and do notinclude the historical costs incurred by Swisscom in building out its network, Swisscom’scompetitors may be able to offer retail services at lower prices than Swisscom while still coveringtheir costs. See “ *– Regulation – Interconnection by a Market-Dominant Provider*”.***International Retail Traffic*****.**Swisscom also faces strong competition in the outgoing internationalcalling market. Swisscom’s principal competitors in the outgoing international traffic market areTDC (Sunrise), Tele2, Cablecom and Solaris, which focus their marketing on offering reduced ratesfor calls directed to countries of high traffic volume. The development of interconnection pricingwill also impact competition in the area of outgoing international telephony.Over the long term, Swisscom expects that additional market share will be lost in the area ofinternational fixed voice telephony due to the increasing use of Voice-over-IP technologies andincreased low-price competition. The international rates are therefore expected to come underadditional pressure.
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***Wholesale Traffic*****.**In 2006, Swisscom continued to face increasing competition in the nationalwholesale market from various network providers such as TDC (Sunrise), Verizon, Cablecom and Colt,currently offering services between major Swiss cities and international outgoing services toresellers.***Other Traffic*****.**In the public and private payphones market, Swisscom does not face significantcompetition. However, the overall market for public and private payphone use is expected todecline further due to increasing use of mobile phones and phone cards issued by other operators.In the market for operator services, Swisscom faced only limited competition in 2006, as it wasallowed to use the well-known 111 access number until the end of the year. Effective January 1,2007, Swisscom switched to a new service number, 1811. Swisscom’s competitors received similarservice numbers. The new competitive landscape will result in a significant reduction in trafficvolume for Swisscom’s operator services.***Customer Equipment***. In the area of customer equipment, Swisscom competes directly with equipmentmanufacturers and third-party vendors. A number of Swisscom’s principal suppliers of telephonesand other customer equipment, including mobile handsets, also compete with Swisscom. Vigorouscompetition and rapid technological change in the sector, as well as increasing competition fromcompanies that are also active in other sectors of the telecommunications market, have led tofalling prices.***Leased Lines*****.**In 2006, Swisscom continued to face intense competition in the market for nationalleased lines, particularly in metropolitan areas. Swisscom’s main competitors in this market areCablecom, TDC (Sunrise) and Colt. In March 2006, the Swiss Parliament adopted amendments to theTelecommunications Act which entered into force on April 1, 2007. Swisscom is required to offer,among other things, access to leased lines on a cost-oriented basis, which is expected to intensifycompetition. See “ *– Regulation – Unbundling of the Local Loop and Other Access Regulation*”.***Directories*****.**Swisscom faces significant competition in the directories market from onlinedirectory operators, internet search engines and traditional direct marketing companies enteringthe market. Under the amended Telecommunications Act, which entered into effect on April 1, 2007,prices charged for regulated data must be cost-oriented. Swisscom therefore expects prices tocontinue to decrease. Barriers to entry remain low, particularly in the online directory market,and Swisscom Directories expects competition to increase further.
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**Mobile****Overview**Swisscom Mobile is the leading provider of mobile telephony services in Switzerland, with 4.6million mobile subscribers as of December 31, 2006. In 2006, Swisscom’s mobile activitiesgenerated total revenue of CHF 4.0 billion, including sales of CHF 0.5 billion to other Swisscombusiness segments. With external revenues of CHF 3.5 billion in 2006, Swisscom Mobile accountedfor 36.7% of Swisscom’s consolidated net revenue.The following table sets forth the external revenue generated by Mobile for the periods indicated.             CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**    Base fees  635   677   691 Connectivity voice  2,040   2,203   2,286 Connectivity data and value-added services  667   604   521 Other mobile revenue(1)  199   167   181    **Total Mobile**  **3,541**   **3,651**   **3,679**     (1) Includes revenue from the sale of handsets sold through sales channels other than Swisscomshops and from the business with prepaid billing, device management and content servicesthrough the subsidiaries SICAP, Swapcom and Minick.Most of Swisscom’s mobile telephony revenue is generated from monthly subscription fees andtraffic charges for mobile voice telephony, which accounted for 76% of its external revenues in themobile segment in 2006.With the successful implementation of services enabled by high speed GPRS, PWLAN, EDGE, UMTS andHSDPA technologies, Swisscom believes that an increasingly significant portion of its mobilerevenue will be generated by mobile data services, value-added services, Internet access ande-commerce services. In November 2003, Swisscom implemented the Vodafone live! portal, providingmobile information, entertainment, community and lifestyle premium services, and Swisscom has addedsignificant new features such as a short news broadcasts that can be viewed on mobile handsets.These services are attracting an increasing number of subscribers, making it the fastest growingcontent offering. Swisscom believes that such services will contribute to the generation of futurem-commerce revenue and enhance customer retention. Consequently, Swisscom moved to acquire MinickHolding AG in December 2006. Minick develops and operates mobile Internet portals, multimediaservices and news applications such as M-Voting, Teletext-Chats, SMS and MMS. The company is alsoactive in mobile marketing and mobile video streaming. The acquisition will support Swisscom’sexpansion into a business area closely related to its core competence and its triple play strategy.In April 2006, Swisscom upgraded its Mobile Unlimited service, which enables seamless datadownload/synchronization via a PC card, by adding HSDPA to the existing list of supported mobilebroadband technologies (GPRS, PWLAN, EDGE, UMTS) which Swisscom believes will contribute in thefuture to the generation of data revenues.On February 5, 2007, the Competition Commission imposed a fine of CHF 333 million against SwisscomMobile for alleged misuse of mobile termination fees. Swisscom rejects both the charge that itmisused its dominant market position and the sanction. Swisscom intends to appeal to the SwissFederal Administrative Court and, if necessary, in the final event to the Swiss Federal SupremeCourt. Under the terms of Swisscom’s recent repurchase of a 25% interest in Swisscom Mobile fromVodafone, Swisscom is entitled to claim from Vodafone 25% of any sanction ultimately imposed inthis matter. For more information, see “*Item 3: Key Information – Risk Factors – Risks Related toSwisscom’s Business – The Swiss Competition Commission may require Swisscom Mobile to pay largefines and reduce its prices*” and “*Item 8: Financial Information – Legal Proceedings – OtherRegulatory Proceedings*”.
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**Cooperation with Vodafone**On December 18, 2006, Swisscom Mobile entered into comprehensive, exclusive cooperation andbranding agreements (together, the “Agreements”) with Vodafone Group Plc and certain affiliatesthereof (together, “Vodafone”), respectively. The Agreements were entered into in conjunction withSwisscom’s repurchase of a 25% interest in Swisscom Mobile that Vodafone had originally acquired inApril 2001. The Agreements set out the terms on which Swisscom Mobile and Vodafone will continue tocooperate in certain areas, replacing a previous service agreement, which was terminated. TheAgreements will run for five years and may be extended by two-year periods.Under theAgreements, Swisscom Mobile and Vodafone agree to provide each other with access to theirrespective products and services and to provide consultancy and supporting services in agreedcircumstances. The Agreements provide a framework for co-operation in the areas of roaming andproduct development and set forth the terms for mutual use of Swisscom Mobile’s and Vodafone’strade names and marks. Under the Agreements, Swisscom Mobile pays a flat fee for licensing rights,services and products provided by the Vodafone group companies. In the event Swisscom Mobileprovides products to Vodafone, it will receive certain royalties.Swisscom Mobile believes its cooperation with Vodafone enhances its competitive position in themobile market. Through this cooperation, Swisscom Mobile has access to Vodafone products, servicesand know-how. Swisscom Mobile may also participate in Vodafone’s worldwide arrangements for theprocurement and/or supply chain management of infrastructure, handsets and other products, whichenables Swisscom Mobile to realize cost savings.In 2006, Swisscom generated revenues from the co-operation with Vodafone in the amount of CHF 96million and paid an amount of CHF 180 million for services purchased from Vodafone. These paymentsprimarily related to roaming charges that each of Swisscom Mobile and Vodafone paid the other forthe use of the other’s network by its customers.**Network Service Offerings**Swisscom’s mobile services are provided using the global system for mobile communications (GSM)standard as well as the Universal Mobile Telecommunication System (UMTS), the dominant digitalstandards in Europe and much of the rest of the world. Swisscom’s GSM network covers 99% of thepopulation of Switzerland, and its UMTS network covers 90% of the population. For more informationon Swisscom’s mobile network, see “ – *Networks and Technology – Mobile Telecommunications Network*”.Swisscom Mobile is the leading public wireless LAN (PWLAN) network operator in Switzerland,currently operating approximately 1,032 hotspots in Switzerland. In addition, Swisscom Mobileoffers access to additional hotspots through roaming agreements, mainly with Swisscom’s HospitalityServices (formerly Eurospot). For more information on these networks and Swisscom’s PWLAN services,see “ *– Networks and Technology – Mobile Telecommunications Network*” and “*– Other – HospitalityServices*”.Through recent capacity enhancements and functional upgrades of its network, such as theimplementation of Enhanced Data Rates for GSM Evolution (EDGE) and high-speed downlink packetaccess (HSDPA) technology, Swisscom is able to provide customers a variety of enhanced servicessuch as live-TV. Swisscom’s EDGE service is available to 99% of the population of Switzerland.In cooperation with Swisscom Broadcast, Swisscom Mobile has also been testing the digitaltransmission standard DVB-H (Digital Video Broadcasting Handheld), which is based on radiobroadcasting technology and provides mobile users TV reception on handheld devices. Swisscombelieves that it can provide its customers with a true broadband experience by providing seamlessconnectivity through a variety of technologies, e.g. HSDPA, UMTS, EDGE, WLAN and DVB-H. For furtherinformation on Swisscom’s mobile network, see “ *– Networks and Technology – MobileTelecommunications Network*”.**Base Fees**Swisscom’s base fees are generated from monthly subscription fees paid by Swisscom’s postpaidmobile subscribers and include revenue generated from the sale of SIM cards. For more informationon Swisscom’s mobile subscribers, monthly base fees and SIM card fees, please see “*– ConnectivityVoice*”, below.
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**Connectivity Voice**As the leading provider of mobile telephony services in Switzerland, Swisscom offers its customersmobile telephony services in Switzerland as well as abroad. Swisscom has roaming agreements with453 mobile network operators worldwide covering 187 countries and earns revenue from thoseoperators when their subscribers make mobile phone calls in Switzerland.***Traffic***. The table below sets forth, for the periods indicated, the volume of traffic relating toSwisscom’s mobile telephony business.             In millions of minutes **Year Ended December 31,**  **2006**  **2005**  **2004**    Connectivity Voice (1)  4,432   3,688   3,404  (1) Includes minutes from all outgoing calls made by Mobile subscribers as well as serviceaccounts and traffic generated by service accounts.For information on average monthly minutes of use and average monthly revenue per mobilecustomer, see “*Item 5: Operating and Financial Review and Prospects – Results of Operations bySegment – Mobile*”.***Principal Products***. Swisscom currently offers a wide variety of mobile products, including pre-and post-paid products and products where calls are charged on a per minute, per hour or per callbasis.All of Swisscom’s mobile products except its data-only and prepaid, low-cost products provideSwisscom customers with the full range of mobile services, allowing them to make and receive callswithin Switzerland or internationally, using the same telephone number over GSM and/or UMTS systemsin countries where Swisscom has roaming agreements.In 2005, Swisscom introduced new products designated as “liberty” products, for which subscribersare charged on a per-hour basis when calling numbers in Swisscom’s networks. By launching theseproducts, Swisscom successfully stimulated customer usage, increasing average usage per month andthe loyalty of its customers.***Subscribers*****.**The following table shows the total number of subscribers to Swisscom’s mobileservices as of the dates indicated.             In thousands(1) **As of December 31,**  **2006**  **2005**  **2004**    Postpaid  2,805   2,640   2,518 *Of which subscribers to liberty products*  *1,142*   *570*   *—* Prepaid(2)  1,827   1,641   1,390 *Of which subscribers to liberty products*  *466*   *65*   *—*    **Total Subscribers**  **4,632**   **4,281**   **3,908**     (1) Includes service accounts. (2) Swisscom does not include accounts of any prepaid customer with inactivity of more thantwelve months in its subscriber figures. A customer is deemed inactive after a period oftwelve months without making a call or sending a SMS message.Since 1995, the number of mobile customers in the Swiss marketplace has grown each year, withoverall market penetration reaching 98% at the end of 2006, based on data published by mobilenetwork operators. Swisscom expects growth in the mobile market to continue, although at a slowerrate in light of high market penetration. With growing market penetration, Swisscom increasinglyfocuses on customer retention.In order to promote customer retention, Swisscom pursues various customer loyalty and win-backactivities, including incentives for 12 and 24-month contract commitments, handset subsidies andhandset renewal possibilities, which enabled Swisscom to maintain a low customer churn rate. WhileSwisscom’s mobile business relies primarily on Swisscom shops for sales and marketing, it is alsoexpanding its use of indirect and alternative sales channels.
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***Tariffs*****.**The following table provides an overview of the range of tariffs applicable as ofDecember 31, 2006, in Swisscom’s principal product categories. All tariffs include VAT.                       **SIM**  **Monthly**          **Night and** (CHF) **Card Fee**  **Base Fees**  **Peak**(1)  **Off-Peak**(2)  **Weekend**(3) **Chargeper Min.**                    Postpaid products  40   10-75   0.19-0.70   0.15-0.70   0.15-0.70 Prepaid products  40   —(4)  0.37-0.99   0.37-0.90   0.37-0.80                      **Charge per Hour/Call (liberty products)**                    Postpaid products  40   12/25   0.50 / 0.70   0.50 / 0.70   0.50 /0.70 Prepaid products  40   —(4)  0.80   0.80   0.80  (1) Monday to Friday from 7:00 a.m. to 7:00 p.m., except holidays. (2) Monday to Friday from 6:00 a.m. to 7:00 a.m. and 7:00 p.m. to 10:00 p.m. (3) Monday to Friday from 10:00 p.m. to 6:00 a.m., weekends and holidays. (4) Customers who use prepaid mobile products are charged an initial fee for the SIM card only;there is no fee for recharging the card.Swisscom offers a variety of tariff and service packages targeting different customersegments. Swisscom has introduced lower-cost products for residential and business customers,which have effectively resulted in an overall tariff reduction. Because Swisscom’s mobilecustomers can switch from one tariff to another, which Swisscom believes helps to prevent customerchurn, the introduction of these new tariffs has led to a decline in the number of subscribers toSwisscom’s higher priced services. Swisscom expects that pressure on tariffs in both theresidential and business segments will remain fierce in the future. Regulation of mobile accesscould still result in Swisscom being required to sell its competitors mobile telephony minutes on acost-oriented basis for resale, which would put additional pressure on turnover.For calls placed and received outside Switzerland, customers are generally billed using a fixedtariff model under which tariffs vary depending on the user’s geographic “zone”. This modelprovides the customer high cost transparency and good cost control. However, customers also havethe option of being billed using a surcharge model under which a roaming surcharge is added to thetariffs imposed by the local mobile network operator.**Connectivity Data and Value-Added Services**Connectivity data and value-added services comprise mainly short messaging services (SMS), datatraffic and services.Short messaging services (SMS), one of the most popular mobile data services, allows messages withup to 160 letters to be sent via a digital mobile phone. In 2002, Swisscom launched a multimediamessaging service (MMS), which is a further development of its SMS service.The table below sets forth, for the periods indicated, the numbers of SMS messages sent.               **Year Ended December 31,**  **2006**  **2005**  **2004**    Number of SMS messages (in millions)(1)  2,107   1,991   1,986  (1) Includes service accounts and traffic generated by service accounts. Does not includewholesale SMS messages.The mobile data service Vodafone live! allows customers to take and send picture messages,download games and ringtones and to access information and entertainment services, such as livetelevision, which now includes 29 television channels. These mobile entertainment and mobile dataservices are continually upgraded either globally through Vodafone or locally through Swisscom.E-mail synchronization services have been the primary growth driver for data services, and areexpected to continue growing.Swisscom Mobile utilizes standardized interfaces to enable platforms used by third parties to offermobile data and other services to Swisscom mobile subscribers. Examples of such services includepremium priced SMS and MMS, which allow point of sale payment through mobile handsets.
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**Other*****Customer Equipment Sales*****.**Swisscom uses both Swisscom shops and third-party distribution channelsto distribute customer equipment. As of January 1, 2007 responsibility for overseeing theapproximately 100 Swisscom shops was effectively transferred from Fixnet to Mobile, reflecting thefact that most of the products sold in such shops are related to mobile communications.Nonetheless, revenue from sales of fixed-network voice equipment through Swisscom shops willcontinue to be accounted for in Swisscom’s Fixnet segment. For more information on Swisscom shops,see “*– Fixnet – Other – Customer Equipment*”.***SICAP*****.**SICAP, a wholly owned subsidiary of Swisscom Mobile AG provides prepaid billing services tomobile network operators worldwide and so-called over-the-air (OTA) solutions, through whichprepaid GSM SIM-card settings can be modified. In 2006, SICAP acquired a 100% interest in Swapcom.Swapcom, a French company founded in 1999, provides software solutions for remotely manageddevices and messaging platform services as part of a customized mobile multimedia serviceportfolio. Future revenues from multimedia services and applications largely depend on real-timedevice setting and control, for which OTA is key.**Competition**In its mobile business, Swisscom faces competition primarily from the two other original mobilelicensees in Switzerland, Orange and TDC (Sunrise), which also hold Swiss UMTS licenses. InDecember 2003, ComCom awarded GSM licenses to two other competitors, Tele2 and In&Phone. Tele2launched a city network in Zurich in June 2005 and plans to expand its services to other cities bybuilding out its own network and through a national roaming agreement it entered into with TDC(Sunrise). In&Phone has launched campus networks throughout Switzerland and entered into anational roaming agreement with TDC (Sunrise) in early 2006. Swisscom expects competition,especially for business customers, to remain strong in 2007 due to increased tariff pressure andcompeting enhanced data solutions. Competition in the residential segment is expected to be drivenby handset subsidies, with enhanced customer service quality growing in importance as a basis forcompetition.
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**Solutions****Overview**Solutions is the leading provider of telecommunication services to corporate customers inSwitzerland with complex needs. In 2006, Solutions generated total revenue of CHF 1.2 billion. Withexternal revenues of CHF 1.1 billion in 2006, Solutions accounted for 11.1% of Swisscom’sconsolidated net revenue in 2006.Effective January 1, 2007, Swisscom reallocated certain responsibilities within the group in orderto refine and enhance the customer focus of each segment. Whereas Fixnet and Mobile will continueto focus on residential customers and the needs of small and medium-sized enterprises, Solutions isnow responsible for larger corporate accounts, including approximately 6,000 of the largestcorporate accounts. Accordingly, Solutions has extended its business-to-business (B2B) portfolioand now resells Swisscom Mobile’s products for corporate customers. For this purpose, SwisscomMobile’s employees catering to corporate customers were transferred to Solutions, although revenuesgenerated from sales of these products continue to be recognized by Swisscom Mobile.Services provided by Solutions include: **•** **National and International Traffic.**Solutions offers national and internationalfixed-line voice telephony services to business customers. In 2006, Solutions carriedan aggregate of 1.8 billion minutes of national telephony traffic and 0.3 billionminutes of outgoing international traffic generated by business customers.  **•** **Leased Lines National.**Solutions offers national leased lines services to businesscustomers.  **•** **Intranet Services.**Solutions offers Intranet services, consisting primarily ofmanaged VPN (Virtual Private Networks) services to business customers.  **•** **Other Service Business.**Solutions offers private network services, businessinternet access and business numbers, which business customers use to provide theircustomers with access to information services. In addition, Solutions offersinternational VPN and leased line services to its customers through partnerships.  **•** **Solution Business.**Solutions offers business customers custom-made modularsolutions to plan, build and run customers’ business communication needs. ** **** ****System Integration.**Solutions provides a comprehensive portfolio of productsand services related to data and telecommunications infrastructure, complimentedby customer interaction management, consulting services, security solutions andlive event support.  ** **** ****Customer Services.**Solutions offers a full range of operations and maintenanceservices in the field of private branch exchanges (PBXs) and in-house local areanetworks (LANs).  ** **** ****Outsourcing.**Solutions’ outsourcing services range from telecommunicationoutsourcing up to complete Information and Communications Technology (ICT)outsourcing. **•** **Other.**Solutions offers rental agreements and various other financing modelsthrough third parties to its business customers as financing alternatives for PBXs.
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The following table sets forth external revenue generated by Solutions for the periods indicated.             CHF in millions **Year Ended**   **December 31,**   **2006**  **2005**  **2004**   National and International Traffic  200   239   297 Leased Lines National  122   147   184 Intranet Services  140   152   173 Other Service Business  230   247   272 Solution Business  338   283   277 Other  42   55   76    **Total Solutions external revenue**  **1,072**   **1,123**   **1,279**    Depending on each customer’s size and the complexity of its communication needs, Solutions marketsits services through a key-account management team and through direct and indirect sales channels.Due to generally high market penetration, implementation of IP-based services, overcapacity and, asa result, high price pressure in the telecommunications market, Solutions has experienced a generaldecrease in revenues from traditional telecommunications services in most of its customer segments.Nonetheless, Solutions’ revenues derived from complex telecommunications solutions have beenrising. Solutions continues to focus its resources on meeting customers’ needs for complextelecommunications services to ensure its long-term growth and, where necessary, will complementits portfolio through new developments, partnerships or acquisitions.**National and International Traffic**Solutions provides national and international fixed-line voice telephony services to businesscustomers. For a description of these voice telephony services, which Swisscom also provides toresidential customers, and of developments impacting the provision of fixed-line telephonyservices, see “*– Fixnet – Access*” and “ *– Fixnet – Retail Traffic*”.The following table sets forth, for the periods indicated, selected information relating toSolutions’ national and international fixed voice telephony traffic generated by businesscustomers.             Traffic (in millions of minutes): **Year Ended**   **December 31,**  **2006**  **2005**  **2004**    Local and long-distance traffic  1,540   1,672   1,779 Fixed-to-mobile traffic  246   258   278 **Total national traffic**  **1,786**   **1,930**   **2,057** International traffic(1)  342   356   361    **Total traffic**(2)  **2,128**   **2,286**   **2,418**     (1) Based on minutes of outgoing international traffic as determined for retail customerbilling purposes. Does not include international wholesale traffic originating outsideSwitzerland. (2) Does not include VoIP traffic.For information on tariffs for national and international traffic, see “ *– Fixnet – RetailTraffic – Tariffs*”.As the quality and convenience of using IP-based services has improved in recent years, they havebecome a viable alternative to traditional fixed-line services for many users, a trend Swisscomexpects to continue and accelerate in the future. Solutions introduced its Voice over InternetProtocol (VoIP) service in the business market in 2006 and expects active migration fromtraditional voice traffic to VoIP services to continue.**Leased Lines National**Solutions is the leading provider of national leased lines in Switzerland. Leased lines are fixedpoint-to-point connections between separate locations, which may be used by the customer for voiceand high volume data or video transmission. Leased lines are used by business customers toassemble their own private networks and byresellers to establish networks in order to offer information services. Swisscom also offersleased line services on a wholesale basis. See “ *– Fixnet – Other*”.
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Solutions also offers managed leased line services to its national leased line customers. Throughactive fault management and automatic rerouting in case of network failure, Solutions’ managedleased line services guarantee up to 99.97% end-to-end availability.The number of national leased lines has declined in recent years, as customers increasingly migrateto high capacity services based on Internet Protocol (IP) due to customer applications requiringhigher flexibility.Solutions’ leased line subscribers pay an initial installation charge based on the type andcapacity of the line and, thereafter, pay a monthly fee based on the type, length and capacity ofthe leased line. In recent years, leased line tariffs have declined due to regulatory pressures andincreased competition from other infrastructure-based operators such as electrical power and cablenetwork operators with their own telecommunication infrastructure and services, whose highbandwidth offerings have become more widely available and have declined in price.**Intranet Services**Solutions’ Intranet services consist primarily of managed VPN (Virtual Private Networks) services,based on multiprotocol label switching (MPLS) technology. As of December 31, 2006, Solutionsmanaged slightly more than 25,000 routers, mainly on behalf of banking and insurance clients, aswell as on behalf of large retailers. Other services within the Intranet services portfolio includeremote access services, which enable access to a company’s Intranet through all commerciallyavailable access technologies and encryption services for customers with strict securityrequirements.**Other Service Business**In the past couple of years, the increased substitution among large business customers of IPservices for frame relay and ATM services has resulted in decreased sales of such services.Solutions completed the process of phasing out services based on frame relay and ATM technologiesat the end of February 2007.Solutions’ business Internet service portfolio includes a full range of Internet access servicesfor customers with high bandwidth requirements (up to several Gbits/s). Solutions also offersservices and applications for business customers and national Internet service providers (ISPs).These services include managed firewall services and spam filtering IP transit services over adedicated backbone. In 2007, Solutions expects to broaden its Internet access services by offeringVDSL technology.In 2006, Solutions launched a VoIP service, providing customers with access to a replacement fortraditional voice services. Solutions also launched an IP Centrex solution in 2006, wherebycustomers are offered a network-based “PBX Solution” (Public Branch Exchange) instead of atraditional in-house PBX switch.Solutions also offers customers “business numbers” – toll-free, cost-shared and premium ratenumbers for both national and international use, which business customers use to provide their owncustomers with access to information services. Solutions also offers premium rate services that,among other things, allow for flat rate charging on a per call or product basis. These numbers aremainly used by business customers as retail sales channels and/or as an additional form of payment.Demand for business numbers has declined over the past few years, primarily as a result ofcompanies using the Internet and informational company websites to distribute information insteadof toll-free or other numbers.Solutions plans to launch a variety of convergence solutions in 2007 that are expected to beimportant sources of future growth. Examples of these offerings include: (1) bundled LAN, WAN andVoIP services; (2) an integrated workplace solution, consisting of a pre-configured computer and aPDA as well as all necessary software and data and voice services; or (3) a single telephoneterminal offering mobile and fixed network telephone connections.Swisscom Solutions AG has concluded a commercial partnership agreement with UK-based Vanco plc,with a view towards offering multinational and international customers services outside of its homemarket in Switzerland. Solutions and Vanco plc have been cooperating as part of the process ofmigrating former Vanco plc customers to Solutions.Solutions offers international leased lines to its business customers through Belgacom (BICS) andother partners. For more information, see “ *– Other Participations – Belgacom International CarrierServices*”.
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Despite the sale of its stake in Infonet Services Corporation in 2005, Swisscom remains theexclusive distributor of Infonet services in Switzerland through Infonet Switzerland AG, in whichSwisscom has a 90% interest, and which is accounted for in the Solutions segment.In the area of international services, Solutions faces stiff price competition due to over-capacityin the international market.**Solution Business**The Solution Business provides customers with customized modular solutions, designing, installingand operating customers’ business communication infrastructure. Together with other Swisscomcompanies or external partners, Solutions is able to offer complete communication solutions.***System Integration***– Solutions provides a comprehensive portfolio of professional services,including consulting services, customer interaction management, security solutions and live eventsupport. In addition, Solutions offers product integration services, including the design,provision, implementation and support of PBXs, LANs and other data and telecommunicationinfrastructure.Solutions has expanded its security services, including Public Key Infrastructure certification,which allows customers to digitally sign and transmit documents with a digital signature recognizedby Swiss law.Effective February 28, 2006, Swisscom Solutions AG took over 300 mid- to large-sized customers, therelated assets and 120 employees from Siemens Schweiz AG, extending its know-how in planning,installing, operating and maintaining company-internal voice and data networks. Furthermore, theparties agreed that Siemens will provide Swisscom Solutions with support, including technicalsupport for its technicians and engineers, and current and future PBX-related products. Solutionsalso agreed to collaborate with Siemens Schweiz AG on a commercial basis.***Customer Service***– Solutions offers a full range of operations and maintenance services relating toprivate branch exchanges (PBXs) and in-house LANs. Solutions operates and maintains the customer’sPBX or LAN remotely and/or via Solutions’ nationwide technical force, or via partners. For in-houseLANs, Solutions has also introduced a variety of services designed to prevent system failures andto ensure that systems are quickly repaired and made operational if a failure does occur.***Outsourcing***– Solutions’ outsourcing services consist primarily of providing telecommunicationsnetwork services. In 2006, Solutions continued to expand its outsourcing activities by winningfurther major national and international contracts. Solutions believes that its outsourcingbusiness will grow further as demand for combined IT and telecommunications solutions (provided bySolutions in cooperation with Swisscom IT Services) increases and as an increasing number ofcompanies decide to focus on their core activities. See also “*Item 3: Key Information – RiskFactors – The expansion of Swisscom’s outsourcing business exposes it to the risk that it may notachieve expected cost savings, the risk of project failure and the risk of fines*”.**Other**Solutions offers its business customers rental agreements and, through third parties, otherfinancing models for PBXs.**Competition***Cablecom*– Cablecom, a cable network operator in Switzerland, operates its own infrastructure andhas invested heavily to upgrade it. This network allows Cablecom to compete with Solutions in thefollowing areas: traffic, VoIP, leased lines, intranet services, and PBX related services. Inaddition, Cablecom is aiming to enhance its product and service offerings throughout Switzerlandby entering into partnerships. Cablecom offers interregional connections throughout Switzerland.*TDC (Sunrise)*– TDC (Sunrise) is one of Solutions’ most significant competitors in traffic, VoIP,leased lines, intranet services, PBX related services and the operation and maintenance of in-houseLANs. TDC (Sunrise) is positioning itself as a full-service provider and offers interregionalconnections throughout Switzerland.
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*NextiraOne*– NextiraOne competes with Swisscom in the following areas: PBX related services,telecommunication infrastructure services, consultancy services and the operation and maintenanceof in-house LANs.*Getronics*– Getronics is one of Solutions’ primary competitors in telecommunication infrastructureservices and the operation and maintenance of in-house LANs.*Utilities and Municipalities*– Electrical power providers and local municipalities compete withSolutions’ leased line business by offering telecommunication services to customers via their ownhigh-capacity fiber networks. Competition in the national leased line market may also increase as aresult of amendments to the Telecommunications Act. See “ *– Regulation – Unbundling of the LocalLoop and Other Access Regulation*”.*International telecommunication companies*– Solutions faces intense competition from Colt (a primecompetitor in the national leased line market), Orange Business Services, Verizon Business, BritishTelecom (BT) and Deutsche Telecom in its international business. This has lead to stiff pricecompetition and a decline in market share. Overcapacity in international networks continues toplace market prices under high pressure. With regard to outsourcing services, BT Global Services,Orange Business Services and T-Systems are Solutions’ main competitors. BT competes on the basis ofits wide service offering and existing consulting know-how as well as its world-wide outsourcingexperience within the telecommunications industry.*Consultants*– BearingPoint, Capgemini and Accenture compete with Swisscom in the operation andmaintenance of in-house LANs, consulting services and security solutions.*Local and niche players*– Many local IT providers with long-established customer relationships playan important role in the market for telecommunication infrastructure services. With regards toconsulting services and security solutions, specialized niche players are also significantcompetitors.*International ICT providers*– Solutions expects additional competition in the mid-term primarilyfrom IT providers, such as IBM and EDS, as well as from traditional software providers, e.g.,Microsoft and Skype, with regard to telecommunication solutions for business customers.
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**Other**Swisscom is also active in a variety of other businesses, including the provision of IT,broadcasting and billing services as well as the provision of high-speed Internet access tobusiness travelers across Europe.The following table sets forth external revenue for the periods indicated.             CHF in millions **Year Ended December 31,**  **2006**  **2005**  **2004**    Swisscom IT Services Group(1)  346   249   207 Swisscom Broadcast  152   150   148 Antenna Hungária Group(2)  162   26   — Accarda Group  118   115   112 Hospitality Services Group(3)  58   31   9 Other(4)  4   —   —    **Total Other**  **840**   **571**   **476**     (1) Includes Comit as of 2006. (2) Acquired in October 2005. (3) Formerly Swisscom Eurospot. (4) Consists primarily of broadband network businesses in Central and Eastern Europe and aninteractive TV remote control (“Betty”) business in Germany and Switzerland.**Swisscom IT Services Group**The Swisscom IT Services Group consists of the Swisscom IT Services and Comit businesses.Swisscom IT Services offers end-to-end business solutions, primarily in the financial services andtelecommunications industries. In addition to business solutions, Swisscom IT Services focuses onsystems integration, IT outsourcing and infrastructure services, including desktop services anddatacenter services. Swisscom IT Services currently manages 85,000 desktop computers nationwide.Approximately 76% of these became part of Swisscom IT Services’ service portfolio over the lastfour years through outsourcing deals.Swisscom IT Services’ customers are largely the Swisscom group companies and several small tolarge-sized financial institutions. In addition, Swisscom IT Services provides IT outsourcingservices to major companies in the transportation, telematics, media, airline and health caresectors, and to parts of the Swiss government.On January 4, 2006, Swisscom IT Services acquired Comit, an IT specialist in the financial servicesindustry, for CHF 69 million. Swisscom IT Services’ financial services unit has been incorporatedinto the newly acquired company. The acquisition strengthened Swisscom IT Services’ know-how in thebanking sector and allow it to offer IT services along the entire value chain. In 2006, Comit wonseveral migration projects for banking platforms and signed outsourcing agreements with severalcantonal banks.***Competition*****.**In the IT services market for business customers, Swisscom IT Services competes withIBM, Hewlett-Packard, T-Systems, EDS, Accenture, CSC and a number of local players.**Swisscom Broadcast**Swisscom Broadcast operates a national network for the transmission and broadcast of analog anddigital signals for television and radio broadcasting. Such services are provided primarily to theSwiss Broadcasting Corporation (*Schweizerische Radio- und Fernsehgesellschaft*) (“SRG”), the mainprovider of public television and radio broadcasting in Switzerland.Swisscom Broadcast provides its services to SRG on freely negotiated commercial terms under along-term contract with SRG that was terminated effective December 31, 2006. In March 2005,Swisscom Broadcast agreed on a new long-term contract with SRG that became effective at thebeginning of 2007 and will run at least until the end of 2010. In 2006, Swisscom Broadcast was paidapproximately CHF 110 million to broadcast SRG programs.Swisscom Broadcast acquired Tele Rätia AG in December 2004, a company providing terrestrial retailTV services. By the end of 2006, Tele Rätia had largely completed the roll-out of a new digitalvideo broadcasting
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terrestrial (“DVB-T”) program offering, which was developed jointly withSwisscom Broadcast. Tele Rätia AG merged into Swisscom Broadcast AG effective June 30, 2006.In 2006, Swisscom Broadcast began testing the DVB-H digital transmission standard (Digital VideoBroadcasting Handheld), along with Swisscom Mobile and other mobile telecommunications companies.DVB-H is based on radio broadcasting technology and provides mobile users with TV reception onhandheld devices.As a result of the increasing migration from analog to digital broadcasting signals, SwisscomBroadcast expects future growth to come from the introduction of the DVB-H digital transmissionstandards.On December 18, 2002, the Federal Council presented the Swiss Parliament a draft of a revised radioand television law. After extensive consultations, the amended law was adopted by the SwissParliament on March 24, 2006. According to the new law, certain obligations will be imposed onproviders of multiplexing devices used to broadcast signals, requiring them to provide otherbroadcasters with access to these devices so that they can deliver their own broadcasting signalsto the public. In addition, operators of transmission and broadcasting networks will have to offertheir services on a non-discriminatory basis to all broadcasting companies. The new law enteredinto effect on April 1, 2007. As Swisscom Broadcast is already in full compliance with this newlaw, it will not affect Swisscom Broadcast’s business.**Antenna Hungária Group**In 2006, Swisscom completed its acquisition of the Hungarian broadcasting network operator, AntennaHungária. Antenna Hungária provides both analog and digital terrestrial and satellite programtransmission. Antenna Hungária’s business communication services include managed leased-line, LAN,voice-data integration, Internet, VPN, VoIP and VSAT services through the country-wide microwavenetwork (2,805 end points for managed lease lines; 2,799 end points for VSAT). Antenna Hungáriaalso provides field maintenance services to other telecom network operators. Antenna Hungária iscurrently running a digital broadcasting trial in two areas and plans to develop new skills andcapabilities to successfully expand into the residential market (DVB-H and DVB-T private) when thenecessary frequencies become available. Swisscom intends to contribute its knowledge of digitalbroadcasting to promote the growth of digital television service in Hungary.Due to Hungary’s entry into the EU in 2004, it is expected that Hungary’s regulations will bealigned with EU requirements. Currently, only analog services are regulated in Hungary. Newlegislation is due to be introduced in the course of 2007 that will include obligations relating to(i) access and interconnection, (ii) transparency, (iii) non-discrimination and (iv) costorientation and price control. This draft regulation will not automatically be applicable in thedigital market. It is currently unclear when the regulations will enter into effect and what impactthey may have on Antenna Hungária’s business.**Accarda Group**The Accarda Group comprises the business activities of Billag AG, Accarda AG and MedipaAbrechnungskasse AG.Accarda AG provides customer loyalty card processing and billing services in the private sector.These loyalty cards are branded by third parties, where they act as issuer, or else are co-brandedwith Accarda AG, where Accarda AG acts as the issuer. Accarda AG either acts as issuer, assumingthe full financing risk, or as processor, in which case the risk is assumed by the third partyissuer. Accarda AG also offers a factoring service whereby outstanding accounts receivable areacquired from the third party issuer. Accarda AG also provides debt collection services to SwisscomGroup companies and to third parties.Medipa Abrechnungskasse AG is a leading service provider in Switzerland’s medical billing industry,providing doctors’ practices, hospitals and health insurance companies with electronic billingservices and debtor management.Billag AG provides billing services to the public sector as part of an agreement to collect radioand television reception fees for the Swiss Broadcasting Corporation (SRG). The current agreementwas due to expire at the end of 2007, but after a recent bidding process, the Federal Department ofEnvironment, Transport, Energy and Communications (UVEK) extended the agreement to 2014.
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**Hospitality Services Group**In 2006, Swisscom Eurospot changed its name to Hospitality Services. Swisscom Hospitality Servicesis a global provider of ICT services (Information and Communication Technology) to hotels and theirguests across Europe and North America (excluding Switzerland, where the market is served bySwisscom Mobile). The Hospitality Services Group operates its network in premium hotels, spanningmore than 2,350 properties in 16 countries and providing approximately 220,000 hotel rooms withcommunication services. Additionally, the Hospitality Services Group supports over 8,500 eventsglobally.In June 2006, the Hospitality Services Group acquired and integrated the U.S.-based CoreCommunications Corporation in order to strengthen its position in the European conference servicesmarket. Hospitality Services North America Corp. (formerly Core Communications) is recognized as aninnovative leader in ICT services for the meetings and events industry and supports medium andlarge events in conference centers and business hotels throughout North America.During 2006, the Hospitality Services Group continued to strengthen its customer relationships,focusing on product line diversification as well as service excellence. In order to better meetcustomer expectations, an expanded product portfolio was introduced in the fall of 2006.**Corporate**The Corporate segment encompasses Swisscom’s headquarter functions, group-company shared services,the real-estate company Swisscom Immobilien AG (“SIMAG”) and its social plan programs (PersPec andWorklink). For a description of PersPec and Worklink, see “*Item 6: Directors, Senior Management andEmployees – Employees – Workforce Deployment and Productivity Improvement*”.**SIMAG**SIMAG manages Swisscom’s portfolio of real estate properties, some of which it leases to othergroup companies and, to a limited extent, to third parties. In addition, it provides facilitymanagement services, such as energy purchasing, and security and cleaning, to third parties andother Swisscom group companies. SIMAG has further expanded its service portfolio to include fleetand business travel management for the Swisscom Group, which it took over from headquarters in2005. For more information on Swisscom’s real estate, see “*– Property, Plant and Equipment*”.**Other Participations****Cinetrade**On April 8, 2005 Swisscom acquired a 49 % stake in CT Cinetrade AG, a Swiss media company whoseactivities include a movie theater chain, a pay-TV channel, video and DVD film rights and which hasextensive experience managing media content and related rights. Cinetrade’s current license(“*Veranstalterkonzession*”) for the pay TV channel was recently renewed and is valid until May 31,2013.The Competition Commission has approved Swisscom’s participation in CT Cinetrade AG from a marketpoint of view. Should Swisscom decide to exercise its option to acquire a majority stake in thiscompany, certain issues regarding the Swiss constitutional law of media independence and the SwissConfederation’s majority interest in Swisscom would have to be examined by regulatory authorities.In 2006, Swisscom paid an amount of CHF 19 million for services purchased from Cinetrade; norevenues were generated from transactions with Cinetrade.**Belgacom International Carrier Services**The international wholesale business is characterized by low margins due to overcapacity and strongcompetition. Effective July 1, 2005, Swisscom and Belgacom, the leading telecommunications companyin Belgium, formed a new joint venture company, named Belgacom International Carrier Services(BICS), combining their international wholesale activities. As part of the transaction (the“Belgacom transaction”), Swisscom received a 28% interest in the joint venture in exchange for itsinternational wholesale business and international network, valued at CHF 36 million. To protectits interests, Swisscom was granted extensive veto rights on decisions by the board of directors.
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In 2006, Swisscom generated revenue with BICS in the amount of CHF 127 million and paid CHF 192million for services purchased from BICS. Revenues and expenses derived from transactions with BICSrelate primarily to incoming and outgoing international voice traffic.**Divestments/Discontinued Operations****debitel**As of December 31, 2003, Swisscom owned 93% of debitel AG, which it had acquired in a series oftransactions in 1999 and 2001. debitel is a network-independent mobile communications serviceprovider in Europe.On June 8, 2004, Swisscom sold its 95% stake in debitel, including 2% it had acquired fromElectronic Partner in connection with this transaction, in a leveraged buyout by funds advised bythe private equity firm Permira (Permira Funds), for a purchase price of EUR 640 million (equityvalue). The purchase price paid in cash amounted to EUR 430 million. The remainder was financed bySwisscom through the conversion of existing intercompany loans in the amount of EUR 210 millioninto two vendor loan notes of EUR 105 million each, assumed by debitel Konzernfinanzierungs GmbH,an indirect 100% owned subsidiary of the entity acquired by Permira Funds in the transaction.Consideration from the sale, including the vendor loan notes, was recorded at fair value uponcompletion of the transaction.A portion of the purchase price was also financed on a senior secured basis by a consortium ofbanks, and repayment of Swisscom’s vendor loan notes was subordinated to the full repayment of thesenior facilities provided by these banks. The vendor loan notes were repaid in full in the firstsix months of 2005 by means of a payment of CHF 351 million, representing the nominal value of theloan and the contractually agreed interest. The difference of CHF 59 million between the estimatedrecoverable value of the loan and the payment received was recorded as income from discontinuedoperations.In connection with the transaction, Swisscom agreed to indemnify the purchaser for any breach ofthe representations and warranties made by it in the purchase agreement and for certainliabilities, including tax liabilities, of debitel. In 2005, debitel became the subject of a taxaudit and Swisscom recorded a CHF 50 million provision for its potential liability under theindemnification. In 2006, the tax audit concluded and resulted in a CHF 14 million tax liability,of which CHF 8 million was paid in 2006. The remaining CHF 36 million of the provision wasreversed in 2006. As a result of the sale, debitel is treated in Swisscom’s consolidated financialstatements as a discontinued operation. Prior years have been restated to facilitate comparison.For further information, see Note 37 to the consolidated financial statements.**Networks and Technology****Overview**Swisscom owns and operates a number of fixed and mobile telecommunications networks to support itsdiverse range of products and services. Swisscom’s fixed-line network and almost all of its datanetworks are managed by Fixnet. Swisscom’s mobile networks are the direct responsibility of Mobile.For more information on Swisscom’s technical equipment relating to its networks, see “*– Property,Plant and Equipment*”.Reduction of network complexity and cost optimization have been central aspects of Swisscom’snetwork strategy in the past. This strategy was accompanied by a rigorous investment policyfocusing Swisscom’s resources on developing and enhancing strategic growth platforms for broadbandand IP technologies.In 2006, Swisscom took further steps toward implementing its triple play strategy and all-IPnetwork concept. The rollout of VDSL, the technological successor to ADSL technology, became thefocus of development activity on the fixed network. As a result, Swisscom’s capital expendituresrelated to its fixed network totaled CHF 457 million in 2006.With respect to its mobile network, Swisscom continues to make significant investments ininfrastructure in order to maintain high service quality, enable new services, increase broadbandcoverage and increase capacity. In 2006, Swisscom’s capital expenditures related to its mobilenetwork totaled CHF 199 million.
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**Fixed-Line Networks**Swisscom operates a highly sophisticated PSTN/ISDN network, principally for the provision of publicvoice telephony, several data networks and a continuously enhanced broadband and IP network thatcarries Internet, voice over IP and TV traffic. These networks are supported by Swisscom’s accessnetworks and its extensive national transmission infrastructure.In keeping up with the general trend toward IP-based networks and services, Swisscom continues toupgrade and optimize its broadband and IP capabilities. In 2006, the entire IP network was upgradedto the next generation of high capacity routers, which included the installment of Ethernet accessrings and IP-based VDSL components (so-called digital subscriber line access multiplexer (DSLAM)).On the other hand, the legacy data networks such as frame relay and asynchronous transfer mode(ATM) were scaled down and phased out at the end of February 2007.The following table shows data relating to Swisscom’s fixed-line network as of the dates indicated.               **Year Ended December 31,**  **2006**  **2005**  **2004**    xDSL Ports (in thousands)  1,471   1,176   849 Transit exchanges  30   30   30 Local exchanges  1,439   1,428   1,408 Kilometers of fiber optic cable  34,300   32,500   31,500 ***Access Networks***. Swisscom’s access network is divided into 923 individual access networks.The local loops which connect customers to Swisscom’s local exchanges use a variety oftechnologies, including radio and copper and fiber optic cables. Since the launch of Swisscom’striple play strategy the amount of fiber optic cable in the access network has significantlyincreased. In addition, the roll-out of VDSL technology also resulted in more fiber in the accessnetwork since it requires closer proximity of active network elements to customer locations.In 2000, Swisscom implemented a broadband connectivity service which connects end-customers toSwisscom’s IP backbone via ADSL technology in the local loop and allows Internet service providersto offer faster IP-based services to these same end-users. ADSL technologies operate, like ISDN,over existing copper lines, but offer higher speed and volume for data transmissions. The serviceis now available to more than 98% of the population of Switzerland.Swisscom’s current service offering provides speeds of up to 6 Mbit/s (downstream) and Swisscomcurrently has the ability to offer xDSL bandwidth of up to 4 Mbit/s (downstream) to approximately80% of Swiss households. xDSL is increasingly complemented by VDSL technology, which allows farhigher speeds. In 2006, Swisscom completed the first phase of its VDSL infrastructure deploymentand is now able to offer VDSL to over 25% of Swiss households at speeds of up to 30 Mbit/sdownstream and 6 Mbit/s upstream. This allows transmission of several standard definition TVstreams or at least two high definition TV streams in parallel to high speed Internet access andvoice over IP. Currently, VDSL connections are only available to customers choosing IP-TV (BluewinTV) service, but Swisscom also plans to start offering VDSL connections to Internet-only users inthe course of 2007.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act, which enteredinto effect on April 1, 2007. These amendments require Swisscom to unbundle the local loop and thelocal subloop. Unbundling requirements are restricted to copper lines only, *i.e.*fiber cables arenot included. Swiss legislation carefully chose this stance not to deter investment into newnetwork infrastructure, in particular fiber. Swisscom welcomed this position and is currentlytaking the necessary measures in order to prepare for copper based unbundling.Starting January 1, 2008, the new Universal Service obligation will require the provision ofbroadband Internet access. Swisscom intends to fulfill its broadband service obligations bydeploying alternative technologies such as WiMAX and satellite transmission in addition to xDSL.***Transmission Infrastructure***. Swisscom’s domestic interexchange transmission system is 100% digitaland, as of December 31, 2006, consisted of approximately 34,300 kilometers of fiber optic cablerepresenting 1,002,000 kilometers of individual optical fibers. Capable of operating at speeds ofup to 10 Gbit/s, fiber optic cable vastly
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exceeds the capacity of traditional copper cable or radio links. All of Swisscom’s exchanges havebeen connected with fiber optics.Swisscom’s core network contains a synchronous digital hierarchy (SDH) transmission system and itsregional network has SDH self-healing rings in selected areas. SDH is a transmission standard fornetworks that use fiber optics, which allows for a simpler and more easily managed network withenhanced reliability.In addition to its “classic” SDH networks, in 2006 Swisscom continued to build out regionalEthernet rings that are used to deliver Ethernet service to business customers as well as toconnect the VDSL equipment deployed close to the customers’ homes. The regional rollout of Ethernetrings has been completed in 2006, but capacity is expected to be added in the coming years,depending on bandwidth usage and customer demand.***PSTN/ISDN Network***. Swisscom’s domestic network connects virtually all Swiss homes and the vastmajority of Swiss businesses, with traffic routed, as of December 31, 2006, through 1,439 localexchanges and 30 transit exchanges. These switches are connected by Swisscom’s transmissioninfrastructure.Swisscom’s ISDN service, which is fully integrated with the PSTN, is based on the ETSI (EuropeanTelecommunication Standards Institute) standard. Swisscom is capable of providing ISDN service to100% of its customers. The Swisscom PSTN/ISDN network offers a high level of quality and security.With four-fold redundancy built into the core network on the transmission layer and two-foldredundancy on the switching layer, Swisscom is able to ensure a very high level of availability.On top of its network switches, Swisscom operates an intelligent network platform, which supports arange of value-added services by associating advanced computer technologies with traditionalswitching techniques.The PSTN/ISDN network is expected to be kept in service at least until 2010, but will no longer beenhanced or upgraded. Swisscom’s focus will be to build a common IP-based voice and multimediaplatform of Swisscom Fixnet and Swisscom Mobile in order to offer fixed VoIP, mobile IP and, mostimportantly, convergent services combining fixed-line as well as mobile services.***Data and IP Networks***. Swisscom owns leased line networks used for managed and unmanaged servicesand a number of switched data networks used for packet switched (X.25), frame relay and ATM datatransmission services. These platforms will be phased out in the course of 2007 reflecting thegrowing trend towards IP-based networks and services.The platforms used for the provision of leased lines and managed bandwidth services include adedicated multiplexing platform which allows transmission speeds ranging from 64 kbit/s up to 2Mbit/s. Swisscom’s SDH platform supports managed and unmanaged services starting at 2 Mbit/s andranging up to 155 Mbit/s and in some cases even up to 622 Mbit/s. The newly built Ethernet platformcan deliver speeds up to 10 Gbit/s.**Mobile Telecommunications Network**Swisscom currently operates one national mobile telephony network, capable of providing service toover 99% of the populated areas in Switzerland. Swisscom’s current mobile network is a digitalmobile dual band network, based on the international GSM standard that operates at both 900 MHz and1800 MHz. Swisscom currently operates 13.6 MHz in the 900 MHz band and 12.4 MHz in the 1800 MHzband. The Federal Communications Commission (“ComCom”) recently decided that it will renewSwisscom’s GSM license when it expires in 2008. In exchange, Swisscom will be required to abandonuse of certain 900 MHz frequencies in exchange for gaining certain 1800 MHz frequencies. Swisscomalso operates a third generation, high bandwidth UMTS mobile radio system using 20 MHz in the 2.1GHz band. The state of the art network architecture allows Swisscom to extend its network in a veryflexible, market driven and cost optimized way.Swisscom’s mobile network consists of base transceiver stations for GSM and UMTS, base stationcontrollers, mobile switching centers and radio network controllers. The base transceiver stationstransmit calls to and from mobile handsets. The base station controllers relay calls between thebase transceiver stations and mobile switching centers, which in turn are connected to the PSTN andISDN network. The base station controllers for UMTS are referred to as radio network controllers.
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The following table shows data relating to Swisscom’s mobile network as of the dates indicated.               **As of December 31,**   **2006**  **2005**  **2004**    Base Transceiver Stations  5,627   5,551   5,481 Base Stations UMTS (Node B)  1,781   1,609   1,308 Base Station Controllers  43   43   43 Mobile Switching Centers  31   31   32 Radio Network Controller  17   17   16 The design of the core network allows for the efficient integration of new technologies such asGPRS, EDGE, UMTS and HSDPA.***GPRS***. In 2001, Swisscom completed implementation of general packet radio service (GPRS) technologyin the network. GPRS is a standard for data transfer on GSM mobile phone networks and utilizes“packet switching” technology. This means that data is divided up into small packets and sent in asimilar way to data transmission on computer networks or when surfing on the Internet. With thistechnology, the user is always online and can send and receive data at any time. In February 2002,Swisscom launched its GPRS service with data capacities of up to 50 kbit/s.***EDGE***. In order to further improve its GPRS services, Swisscom implemented Enhanced Data Rates forGSM Evolution (EDGE) technology in all active GSM locations in early 2005. EDGE is a furtherdevelopment of the GPRS standard that allows considerably higher transmission speeds of between 150kbit/s and 200 kbit/s.***UMTS***. In 2000, Swisscom was awarded one of four universal mobile telecommunication system (UMTS)licenses auctioned in Switzerland, for which it paid CHF 50 million. The license took effect onJanuary 1, 2002 and will be valid for 15 years. Swisscom received one Frequency Division DuplexChannel and one Time Division Duplex Channel in the allocated Frequency Band of 2.1 GHz. UMTS is athird generation mobile radio system that creates additional mobile radio capacity and enablesbroadband media applications while also providing high speed Internet access. Swisscom launchedits UMTS service in 2004. As of December 2006, Swisscom had installed 1,781 UMTS base transceiverstations (Node B), ensuring population coverage of approximately 90%. Swisscom has fulfilled allof the requirements set forth in the terms of the UMTS license.Swisscom is investing in its mobile network to upgrade its existing network, and to further extendthe coverage of UMTS. Swisscom expects to make significant additional investments over the nextseveral years in connection with the continued build-out of its UMTS network. To provide customerswith enhanced services, Swisscom enabled high-speed downlink packet access (HSDPA) in selecteddensely populated urban areas in 2006. HSDPA is a packet-based data service with a theoreticaldownlink data transmission rate of up to 8-10 Mbps over a 5MHz bandwidth.***PWLAN***. Swisscom offers a public wireless LAN (PWLAN) service in Switzerland through SwisscomMobile and across Europe and North America through Hospitality Services. For more information, see” *– Mobile*” and “ *– Other – Hospitality Services*”. PWLAN provides complementary wireless broadbandInternet access through gateways connected to a fixed-line network. Swisscom intends to furtherexpand its PWLAN network in 2007.***WiMAX***. In 2006, Swisscom Mobile was awarded the first WiMAX license in Switzerland. WiMAX is anacronym for Worldwide Interoperability for Microwave Access and refers to broadband wirelessnetworks based on a common standard, which ensures compatibility and interoperability betweenbroadband wireless access equipment. In April 2007 Swisscom started a field trial using the WiMAXcommunications standard in the community of Boltigen (Canton of Berne). This will be the first testof the new technology since receiving the Broadband Wireless Access licence in 2006.**Broadcasting Networks**Swisscom Broadcast operates a terrestrial broadcasting network, including a wireless backbone. Thenetwork components are installed throughout Switzerland on over 500 towers, which are owned bySwisscom Broadcast. Eleven sites are located outside Switzerland in the border regions ofneighboring countries. Swisscom Broadcast’s broadcasting network serves as a feeder network and asa distribution network by gathering signals from their sources (e.g., radio and TV studios) andfeeding them to radio and television transmitters, which then distribute the programs to individualhouseholds. Swisscom Broadcast’s feeder network for gathering and transmitting signals uses bothmicrowave and fiber-optic ATM networks ensuring coverage on a redundant
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basis. The microwave part of the feeder network is also used to feed TV programs from neighboringcountries to local cable network operators. Swisscom Broadcast operates approximately 800 FM radiotransmitters, over 1,000 analog and digital TV transmitters and approximately 30 digital audiobroadcasting transmitters. In addition, Swisscom Broadcast operates approximately 60% of thetransmitters used by private broadcasters in Switzerland.As a result of the increasing migration from analog to digital broadcasting signals, SwisscomBroadcast plans to dismantle its analog infrastructure. Digital broadcasting requires fewerbroadcast sites, as it provides better coverage than the analog equivalent.Antenna Hungária operates a terrestrial broadcasting network with more than 200 towers throughoutHungary. Antenna Hungária operates approximately 118 FM radio transmitters and 44 analog TVtransmitters, and 213 relay stations. Antenna Hungária’s broadcasting network serves as a feedernetwork and as a distribution network by gathering signals from their sources (e.g., radio and TVstudios) and feeding them to radio and television transmitters. The feeder network for gatheringand transmitting signals uses both microwave and fiber-optic networks. The telecommunicationsnetwork consists of a ring-protected national microwave SDH backbone connecting transmitterstations nationwide, and a fiber optical network in Budapest. The access network is built bypoint-to-point and point-to-multipoint microwave links, VSAT and leased wireline connections fromother operators.Antenna Hungária’s nationwide TV networks provide 86% and 96% of the population with access tocommercial and public TV content, respectively. Antenna Hungária’s nationwide commercial and publicradio network covers between 60% and 100% of the population.**Property, Plant and Equipment****Real Estate Property**As of December 31, 2006, Swisscom had real estate property with an aggregate net book value of CHF808 million. Of this amount, CHF 437 million relates to property that Swisscom uses under theleaseback contracts described below and in Note 22 to the consolidated financial statements. Suchproperty was not subject to any mortgages or other security interests as of December 31, 2006.Substantially all of Swisscom’s properties are used for telecommunications installations, researchcenters, service outlets and offices.Swisscom’s real estate portfolio is managed by real estate professionals with a view to realizingvalue from the portfolio. Swisscom sold a significant portion of its real estate portfolio and hasentered into leaseback contracts for some of the buildings sold, a number of which have beenqualified as finance leases. The gain from the sale of these buildings, CHF 239 million in 2001,will be recognized in income over the duration of these leasing contracts. Due to a change in IAS17 as of January 1, 2005, the land and building elements of a lease of land and buildings areconsidered separately for the purposes of lease classification and the land element is no longerclassified as a finance lease. This resulted in a reduction of real estate property andcorresponding leasing liabilities on Swisscom’s balance sheet. In 2005, Swisscom implemented theIAS 16 component approach to depreciating assets.Over the last few years, Swisscom implemented a strategy to steadily reduce its real estatemanagement costs. This strategy included the outsourcing of certain real estate managementfunctions, especially cleaning and maintenance. From 2004 to 2006, Swisscom carried out a programaimed at optimizing workplace infrastructure by moving employees to main buildings and reducing theoffice space allocated per employee. These measures allowed Swisscom to terminate various leasebackcontracts as of March 31, 2006, which resulted in reduced rental and facility management costs.**Technical Equipment**As of December 31, 2006, Swisscom carried assets on its balance sheet that primarily related to itsnetwork infrastructure in the amount of CHF 3,634 million. Of this amount, CHF 21 million relatesto technical equipment for which Swisscom has entered into sale and leaseback contracts. For moreinformation, see Note 22 to the consolidated financial statements.
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**Research and Development**Swisscom’s central research and development expenses (not including software development costs)amounted to CHF 34 million in 2006 and CHF 39 million in both 2005 and 2004.Swisscom believes that continued research and development activities enhance its competitiveness.Swisscom continues to focus its research and development efforts on three main areas: (1) extendingits range of communication services by exploiting the increasing convergence of fixed-linetelecommunication, mobile telecommunication, information and entertainment technologies; (2)enhancing the quality of service and customer care; and (3) exploring network technologies toenable new services as well as to achieve cost efficiencies.Furthermore, in line with its TIME strategy, Swisscom has decided to address and adapt to changingmarket needs. As of 2007, specific emphasis will be placed on selected strategic topics relevant tothe Swisscom Group as a whole in order to broaden existing (convergence) and establish new (TIME)business segments.There are continuous efforts to explore and develop new opportunities, with special emphasis beingplaced on: (1) advanced communication and information services that seamlessly integrate a widerange of networks, applications and devices using state-of-the-art technologies such as Voice overIP, web technologies, voice-controlled interactions and intelligent network technologies, (2)multimedia information and entertainment services provided via broadband through various accessnetworks and terminals, focusing in particular on mobile entertainment and quadruple play (fixedand mobile voice, broadband and TV), (3) emerging network technologies enabling fixed and mobilebroadband services, including home-networking applications, (4) current software technology trendsand their impact on the efficiency of creating new services, on the quality of service and onmanaging communication security, (5) the analysis of emerging business models enabling innovationwith customers and external parties as well as rapid prototyping, and (6) electromagneticcompatibility and perceived health issues arising from existing and emerging service deliverytechnologies.Moreover, Swisscom continues to explore strategies and the use of technology to increase customersatisfaction and customers’ use of new services. In particular, Swisscom takes into account socialand socio-economic trends, diffusion and adoption of telecommunication services, management ofcustomer expectations and new marketing approaches, and applies usability testing in order tooptimize the design of user interfaces.Swisscom is able to respond quickly to promising new technologies with high business potential bydeveloping them as so-called “Innovation Ventures.” In 2006, two exploration projects weredeveloped and turned into successful start-ups: Swisscom Auto-ID Services (RFID services) andCoComment (Web 2.0 application for blogs).Swisscom monitors, on a continuous basis, the consortia that develop technologies and applicationsthat serve as industry-wide standards, such as the Global System for Mobile Communications (GSM)Association, the 3rd Generation Partnership Project (3GPP) Consortium (UMTS services and beyond),the Open Mobile Alliance (OMA, interoperable mobile service enablers), the Moving Picture ExpertsGroup (MPEG, making video signals suitable for transmission at lower bandwidths), the LibertyAlliance (virtual identity management and authentication services), the Digital Living NetworkAlliance (DLNA, home-networking applications) as well as groups dealing with the NGN (NextGeneration Networks) development, including migration to VoIP. In addition, Swisscom participatesin a number of international organizations, e.g., the Home Gateway Initiative (HGI), the Wi-MeshAlliance (IEEE 802.11s), the Wireless World Research Forum (WWRF) and “Fireworks”, the group oftelecommunication operators which jointly monitor standardization activities in order to pursuetheir common interests.Swisscom pursues a number of research initiatives with industrial partners, universities,institutes and other research labs. Under these initiatives, Swisscom and its partners cooperate incarrying out joint projects and by sharing research and development results. Various researchprojects are funded by the European Commission’s Sixth Framework Programme, for example IST-OBAN(Information Societies Technologies – Open Broadband Access Networks) and IST-WIP (InformationSocieties Technologies – All Wireless Network Architecture).Swisscom has a variety of patents and licenses to protect its investments. No single patent orlicense is material to its business.
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**Regulation****Overview**The regulatory framework governing telecommunications services in Switzerland was established withthe entry into effect on January 1, 1998 of the Telecommunications Act. The Telecommunications Actand the implementing ordinances thereunder opened domestic and international public fixed-linetelephony in Switzerland to competition and provided for the granting of national mobiletelecommunications licenses to Swisscom and to new competitors. Switzerland is not a member stateof the EU and therefore is not subject to EU legislation relating to telecommunications. However,EU directives and implementing legislation in various EU countries have served as points ofreference for the development of the Swiss regulatory regime.In March 2003, the Federal Council adopted significant amendments to the TelecommunicationsOrdinance (*Verordnung über Fernmeldedienste*), which is the principal ordinance ontelecommunications services. Based on a decision issued by the Federal Court in November 2004,however, these amendments were not applicable at that time on the grounds that theTelecommunications Act, in the form then in effect, did not provide a sufficient legal basis forsuch amendments.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which enteredinto effect on April 1, 2007. These amendments were intended to bring the Swiss telecommunicationsregulatory regime in line with regulatory developments in the EU and were also designed to reflectsome of the amendments to the Telecommunications Ordinance. Under the revised TelecommunicationsAct, Swisscom is required to offer, among other things, unbundled access to its local loop in theform of full access on a cost-oriented basis as well as access rebilling. Unbundling of the localloop requires market-dominant providers to also offer bitstream access to other providers for fouryears on a cost-oriented basis. Such access must be available at the main distributor frame and islimited to the market-dominant provider’s copper network. Competitors will not be entitled to useSwisscom’s fiber optic lines. These amendments are generally expected to cause competition toincrease.On September 13, 2006, the Federal Council defined the scope of the new Universal Serviceobligation, which will apply for a ten-year period beginning on January 1, 2008 when the existingUniversal Service license held by Swisscom will expire. The new Universal Service license requiresthe provision of broadband access services and additional services for people with disabilities,but omits directory information and call-forwarding services.The Telecommunications Act is intended to ensure that (1) reliable universal service is provided ataffordable prices to the entire population of Switzerland; (2) telecommunications traffic is freefrom interference and respects personal and intellectual property rights; and (3) effectivecompetition in the provision of telecommunications services is allowed to develop. Importantfeatures of the current regulatory framework include:**•** **Open Competition Subject to Licensing and Notification Requirements.**A basic principle ofthe Telecommunications Act is to permit open competition in telecommunications services,subject to licensing and notification requirements. Until recently, most providers oftelecommunication services, independent operators of significant telecommunicationstransmission installations and anyone who wished to make use of radiocommunication frequencieswas required to obtain a license from the regulatory authority. Anyone meeting the conditionsfor a license application was entitled to receive a license, subject to frequency availabilityin the case of licenses to use radiocommunication frequencies. By the end of 2006, more than500 operators had been licensed or registered under this requirement.  The amended Telecommunications Act, which entered into effect on April 1, 2007, nolonger requires anyone who provides telecommunication services and independently operates asignificant telecommunications transmission installation to obtain a license. Nonetheless,anyone who provides telecommunications services must notify the Federal Office forCommunication (*Bundesamt für Kommunikation, BAKOM*) (“OfCom”) and licenses are still requiredfor users of the radio frequency spectrum and for operators with Universal Serviceobligations.**•** **Swisscom to Provide Universal Service until at least December 31, 2007.**As a transitionmeasure under the Telecommunications Act, Swisscom was initially required to provide UniversalService throughout Switzerland until December 31, 2002. In June 2002, ComCom renewedSwisscom’s Universal Service license for a five year term. ComCom opened the tender for thenew Universal
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  Service license in October 2006 and Swisscom was the onlyapplicant. The new license will apply for 10 years following theexpiration of Swisscom’s current Universal Service license inDecember 2007. The new Universal Service license is expected to beawarded by the end of June 2007 at the latest. As it has done inthe past, Swisscom renounced the right to receive contributionsfrom other telecommunications service providers from 2008-2012 forproviding Universal Service. However, Swisscom reserves the rightto request such contribution for the period following 2012. **•** **Price Ceilings on Universal Service.**According to theTelecommunications Ordinance and under the terms of its UniversalService license, Swisscom may not increase the prices charged forcertain specified Universal Services above the price ceiling foreach such service set forth in the regulatory ordinance. Witheffect from January 1, 2003, ISDN has been included in UniversalService and the provision of ISDN access is subject to a priceceiling. The price ceilings do not restrict Swisscom from offeringlower prices or selective discounts in connection with tailoredservice packages or to particular customer segments. The newUniversal Service obligation will include broadband internetaccess, which must be offered together with basic access at aprice of no more than CHF 69 (excluding VAT). Telephone callswithin Switzerland in the fixed network will be subject to a priceceiling of CHF 0.075 per minute (excluding VAT), which correspondsto Swisscom Fixnet’s current peak rates for domestic fixed-fixednetwork calls. **•** **A Market-Dominant Service Provider Must Allow Interconnection toits Network.**A tele-communications service provider that isdominant in a particular market must allow interconnection to itsinstallations and services by other service providers on anon-discriminatory basis, and in particular may not put otherservice providers in a worse position than its internaldepartments or affiliates. The Telecommunications Act andordinances require a market-dominant service provider to publish astandard offer of interconnection services, and contemplates thatthe market-dominant provider and those providers seekinginterconnection will reach negotiated interconnection agreements.Otherwise, the regulatory authority is empowered to determineinterconnection conditions. **•** **Interconnection Prices.**In any market where an operator is deemedto be dominant, it must set its prices for the relevantinterconnection service in a transparent and cost-oriented manner.Since January 1, 2000, such prices have had to be based on thelong-run incremental cost of providing the interconnectionservice, which may include an appropriate return on capitalemployed. **•** **Carrier Selection.**In order to promote competition in nationaland international telephony services, public fixed-line telephonyservice providers are required to provide their users with theability to select their desired national and international serviceproviders on both a call-by-call basis (by dialing a five-digitprefix number), known as “easy access”, and a pre-selection basisfor all calls (subject to call-by-call override), known as “equalaccess”. Mobile telephony service providers are currentlyrequired to provide their users with the ability to select theirdesired international service provider on an easy access basisonly. Public telephony service providers offering Voice over IPare required to provide their customers with the ability to selecttheir desired national and international service providers on acall-by-call basis. **•** **Number Portability.**Under “number portability”, public fixed-linetelephony service providers, mobile telephony service providersand providers of certain services such as toll-free numbers mustallow customers who switch to another service provider within thesame category of service to retain the same telephone number. Thecost of implementing number portability is borne by each serviceprovider. The original service provider may charge a fee to thenew service provider to cover the direct administrative costs ofconnection for a particular customer change.Important features of the amendments to the Telecommunications Act that entered into force on April1, 2007 include:**•** **Unbundling of the Local Loop and Other Access Regulation.**Market-dominant service providers are required to offer fullaccess to the unbundled local loop and the local subloop (but onlywith respect to copper lines), bitstream access for a limitedperiod of four years (also limited to copper lines), access toducts, access to leased lines and access rebilling on acost-oriented basis. **•** **Elimination of Licensing Requirement to Reduce Barriers to Entry.**The former requirement that telecommunications service providersobtain a license to provide most services was eliminated by theamendments to the Telecommunications Act.
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The Telecommunications Act sets forth an overall regulatory framework and provides for thepromulgation of ordinances establishing more detailed rules. The Federal Council has issued anumber of ordinances, the most important of which is the Telecommunications Ordinance (*Verordnungüber Fernmeldedienste*), which covers licensing conditions and procedures, universal servicerequirements (including price ceilings), usage of public lands, interconnection, telecommunicationsconfidentiality and privacy requirements, services in extraordinary circumstances such as civildefense and other matters. The Federal Council has also issued the Frequency Management and RadioLicenses Ordinance (*Verordnung über Frequenzmanagement und Funkkonzessionen*), as well as ordinancesconcerning signal protocols and numbering systems, telecommunications installations and fees.ComCom has issued an ordinance under the Telecommunications Act specifying requirements for numberportability and carrier selection. OfCom and the Department of Environment Transport, Energy andCommunication (*Eidgenössisches Departement für Umwelt, Verkehr Energie und Kommunikation*) (“UVEK”)have also issued ordinances under the Act.Many important matters of regulatory policy were not resolved by the Telecommunications Act, havingbeen left to the legislative bodies and regulatory agencies responsible for the promulgation ofsuch ordinances. As has occurred in other countries, legal challenges to the application of theTelecommunications Act and the interpretation of the ordinances promulgated thereunder have arisenand may continue to arise. While amendments to the Telecommunications Act have to be approved bythe Parliament and therefore take considerable time, ordinances can be amended quite quickly. As aresult of the amendments to the Telecommunications Act, the ordinances mentioned above also had tobe amended. The necessary amendments to the ordinances entered into effect simultaneously with theamendments to the Telecommunications Act on April 1, 2007.**Regulatory Authorities**Under the Telecommunications Act, responsibility for regulation of the telecommunications sectorand the promotion of fair and open competition has been allocated among several regulatory bodies.The two principal regulatory bodies under the Telecommunications Act are the Federal Office forCommunication (*Bundesamt für Kommunikation, BAKOM*) (“OfCom”) and the Federal CommunicationsCommission (*Eidgenössische Kommunikationskommission*) (“ComCom”). OfCom is responsible forday-to-day oversight of the telecommunications sector and answers to UVEK and the Federal Council,as well as to ComCom. ComCom is an independent regulatory agency which is vested withdecision-making authority in the telecommunications sector. The Federal Council has also delegatedcertain limited powers to UVEK.OfCom was created by the Swiss Telecommunications Act of 1992, which separated the principalregulatory functions of Swiss Telecom PTT from its commercial operations and transferred thoseregulatory functions to OfCom, whose senior officers are appointed by the Federal Council. Underthe Telecommunications Act, all residual regulatory functions of Swiss Telecom PTT were transferredto OfCom. OfCom’s duties include supervising compliance by license holders with theTelecommunications Act and the ordinances thereunder, as well as with the terms and conditions oftheir respective licenses, proposing interconnection terms to ComCom for approval in cases wherethe parties fail to agree on interconnection terms, managing the radiocommunications spectrum,managing signal protocols and numbering systems, and issuing certain technical and administrativeregulations. OfCom’s responsibilities also include proposing the text of any amendments to theordinances for approval by the Federal Council, UVEK or ComCom, as the case may be. Decisions madeby OfCom may be appealed in the first instance before the Swiss Federal Administrative Court(*Bundesverwaltungsgericht*) and in the second instance before the Swiss Federal Supreme Court.OfCom also represents Switzerland in specific international bodies. In order to separate the roleof the Confederation as shareholder from its role as regulator, the Telecommunications Act createdComCom as a fully independent regulatory agency, and provided that ComCom would have responsibilityfor all matters affecting the development of competition in the telecommunications market. ComComacts as the exclusive licensing authority under the Telecommunications Act, rules on the terms ofinterconnection in cases where the parties are unable to reach agreement, has the power to obligatea license holder to provide Universal Service if the request for tenders fails to result inadequate Universal Service coverage, and approves the national radiocommunications frequencyallocation plan and national numbering plans. The Telecommunications Act allows ComCom to delegateresponsibility for certain tasks to OfCom. ComCom has delegated responsibility for granting alllicenses to be granted without bidding procedures to OfCom. OfCom must take direction from ComCom,which cannot be overruled by UVEK or the Federal Council in respect of any matter falling withinthe sphere of its regulatory authority. The members of ComCom, who must be independent specialists,are appointed by the Federal Council to four-year terms. ComCom members may not be removed onceappointed, but the Federal Council has the right to not renew the appointment of a member upon theexpiration of his term. ComCom decisions may be appealed before the Swiss Federal AdministrativeCourt.
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UVEK retains certain limited roles under the Telecommunications Act. In the TelecommunicationsOrdinance, the Federal Council has delegated to UVEK the power to regulate the provision ofUniversal Service in remote areas. In addition, UVEK has the right to order the expropriation ofprivate property for the establishment of telecommunications installations if in the publicinterest. UVEK also fixes the amount of administrative charges necessary to cover the expenses ofthe regulatory authorities.**Licensing and Notification Requirements**The amended Telecommunications Act no longer requires that anyone who provides telecommunicationservices and independently operates a significant telecommunications transmission installationobtain a license. Nonetheless, anyone who provides telecommunication services must notify OfCom,and licenses are still required for users of the radio frequency spectrum and for operators withUniversal Service obligations.Licenses for the use of radiocommunication frequencies are subject to availability, taking intoaccount the national frequency allocation plan, and must not eliminate or constitute a seriousobstacle to effective competition unless an exception can be justified on grounds of economicefficiency. In questions relating to effective competition, ComCom may consult with the CompetitionCommission. Radiocommunications licenses are normally granted on the basis of an open request fortenders if there are not enough frequencies to meet all applicants’ present and future needs. Asdiscussed below under “Mobile Telecommunications”, in 1998 ComCom adopted a frequency allocationplan under which there were three national mobile telephony licenses, consisting of the mobiletelephony license automatically granted to Swisscom pursuant to the Telecommunications Act and twolicenses awarded through a competitive process based on designated criteria. In 2003, thisfrequency allocation plan was revised to cover two additional mobile telephony licenses, which wereawarded to In&Phone and Tele2 in December 2003.Under the Telecommunications Act, the regulatory authorities require the payment of administrativecharges to cover their expenses. For 2006, Swisscom was required to pay charges of CHF 7 million,excluding fees relating to the broadband wireless access (BWA) license awarded to Swisscom Mobilethrough a public auction. The charges include license and administrative fees and fees for the useof radiocommunication frequencies and numbering/naming/addressing elements. Under the amendmentsto the Telecommunications Act which were recently adopted by the Swiss Parliament, ComCom will beentitled to levy certain additional charges.Under the amended Telecommunications Act, a failure to abide by the terms of applicable law(including the Telecommunications Act, the ordinances thereunder and the terms of the license) maybe sanctioned by OfCom or ComCom. Such sanctions may include the suspension, revocation orwithdrawal of a license. In addition, to the extent that a provider of telecommunications servicesfails to comply with applicable law, the terms of its license or with a decision having the forceof law, such service provider may be required to pay a monetary penalty equal to up to 10% of itsaverage revenues realized in Switzerland during the previous three years.**Universal Service**One of the principal objectives of the Telecommunications Act is to ensure that affordableUniversal Service is provided to all sections of the Swiss population. Under the TelecommunicationsAct transition provisions, Swisscom was initially required to provide Universal Service throughoutSwitzerland until December 31, 2002. In June 2002, ComCom renewed Swisscom’s Universal License fora five year term. When Swisscom submitted its bid for the 2002-2007 license, it renounced theright to receive contributions from other telecommunication service providers for providingUniversal Service. ComCom opened the tender for the new Universal Service license (to apply for 10years following the expiration of Swisscom’s current Universal Service license in December 2007) inOctober 2006 and Swisscom was the only applicant. The new Universal Service license is expected tobe formally awarded by the end of June 2007 at the latest. As it has done in the past, Swisscomrenounced the right to receive contributions from other telecommunications service providers from2008-2012 for providing Universal Service. Competitors of Swisscom are free to offer some or all ofthe services included in Universal Service. However, Swisscom reserves the right to request suchcontribution for the period following 2012.The Telecommunications Ordinance, as amended in October 2001, defined “Universal Service” ascomprising the following services:**•** **basic access**, consisting of a network connection that enables users to make national and international telephone callsin real-time as well as telefax and data connections with data transmission rates appropriate for Internet access, andentry in the public telephone subscriber directory;
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**•** **additional services**, consisting of information concerning unsolicited calls, call forwarding, suppression of calleridentification, billing information and blockage of outgoing calls; **•** **emergency call services**, including routing to the competent authority, with the ability to determine the caller’slocation; **•** **directory services**, including access to Swiss subscriber directories in electronic form or through voice information ineach official Swiss language; **•** **public payphones**in sufficient number around the clock for incoming and outgoing national telephone calls and outgoinginternational telephone calls, each in real time, with access to emergency call services and to telephone directoriesin each official Swiss language; **•** **transcription services**for the hearing-impaired; and **•** **directory and connection services**for the blind and seeing-impaired.The Federal Council is authorized to periodically modify the services included under the UniversalService obligation in accordance with social and economic requirements and technologicaldevelopments. Since January 1, 2003, Swisscom has been required to provide digital access, inaddition to analog access, based on ISDN or its equivalent, capable of supporting two simultaneousconnections and three different access numbers. On September 13, 2006, the Federal Councilspecified that the new Universal Service obligation includes the provision of broadband internetaccess and additional services for people with disabilities, but omits directory information andcall-forwarding services. Providing broadband internet access to the entire Swiss population mayrequire additional capital expenditures, but the requirement is neutral on the technology to beused and some exceptions are allowed. Swisscom’s current fixed-line broadband network covers morethan 98% of the Swiss population.**Price Ceilings for Universal Service**The Telecommunications Act provides that the Federal Council is to periodically fix upper pricelimits for services that are within the scope of Universal Service. In periodically determiningsuch tariff ceilings, the Federal Council is to strive to set tariffs that are not dependent ondistance.In the Telecommunications Ordinance, the Federal Council established price ceilings for specifiedUniversal Services, effective January 1, 1998. In amending the Telecommunications Ordinance inOctober 2001, the Federal Council imposed new price ceilings for the services comprised withinUniversal Service, which took effect on January 1, 2003, including a price ceiling on ISDN access.In the case of PSTN access, the price ceiling was not changed. The conditions of the currentUniversal Service license are expected to remain in effect until the end of 2007, when existingprice ceilings will be lowered when the new Universal Service license becomes effective in January2008.
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The following table sets forth the price ceilings (excluding VAT) which took effect on January 1,2003:     Maximum charge activation CHF 40.00 Basic Access Line Rental Charge – PSTN (per month) CHF 23.45 Basic Access Line Rental Charge – ISDN (per month) CHF 40.00 Public Payphone Additional Per Minute Charge CHF    0.19(1)               **Peak**(2) **Off-peak**(3) **Night**(4)National Traffic Tariffs (per minute charge) CHF 0.11 CHF 0.09 CHF 0.06 (1) Except calls to helplines 143 or 147 and to the transcription service for hearing-impairedpersons, for which a per use charge of CHF 0.50 applies. Traffic charges for calls from publicpayphones must be the same as for calls from private homes. (2) Monday to Friday from 8:00 a.m. to 5:00 p.m. (3) Monday to Friday from 6:00 a.m. to 8:00 a.m., 5:00 p.m. to 10:00 p.m., as well as onSaturdays, Sundays and holidays from 6:00 a.m. to 10:00 p.m. (4) Daily from 10:00 p.m. to 6:00 a.m.Separate price ceilings have been established for each Universal Service component. However,the Ordinance does not restrict Swisscom from offering lower prices or selective discounts inconnection with tailored service packages or to particular customer segments.The new Universal Service obligation that will apply starting January 1, 2008 will includebroadband internet access, which must be offered together with basic access at a price of no morethan CHF 69 (excluding VAT), which corresponds to Swisscom’s current prices. The new UniversalService obligation will also include a price ceiling of CHF 0.075 per minute (excluding VAT) forcalls within Switzerland in the fixed-line network, which corresponds to Swisscom Fixnet’s currentpeak rates for domestic fixed-fixed calls.**Interconnection by a Market-Dominant Provider**The Telecommunications Act provides that a telecommunications service provider that has a dominantposition in a particular “market” must provide interconnection to other telecommunications serviceproviders on a non-discriminatory basis and in accordance with a transparent and cost-orientedpricing policy, stating the conditions and prices separately for each interconnection service. TheTelecommunications Act authorized the Federal Council to determine the principles governinginterconnection.The Telecommunications Act and ordinances do not define what the relevant “markets” are forpurposes of this interconnection requirement. Under the Telecommunications Act, OfCom is requiredto consult the Swiss Competition Commission (*Wettbewerbskommission*) to determine whether a providerhas a dominant position in a “market”. Under the Swiss Cartel Act, an enterprise is deemed to havea dominant market position if it is able, as regards supply or demand, to behave in a substantiallyindependent manner with regard to the other participants in the market. Market share is only oneamong several criteria for assessing whether or not an enterprise has a dominant market position.In the Telecommunications Ordinance, the Federal Council has specified that a market-dominantprovider must provide interconnection to the necessary equipment, services and information to otherproviders on a non-discriminatory basis, in no worse manner than the market-dominant providersupplies internally to its divisions, subsidiaries and partners. Interconnection is to be madethrough common usage of, for example, telecommunications installations, buildings and land, asnecessary. Those entitled to interconnection from a market-dominant provider under the terms of theTelecommunications Ordinance are (1) licensed providers of telecommunications services, (2)providers of telecommunications services that are obligated to make a notification to OfCom underthe Telecommunications Act and (3) international telecommunications services providers.The Telecommunications Ordinance requires that a market-dominant provider must include at least thefollowing in its basic offering of interconnection services: (1) origination, termination andtransit of all call services included within Universal Service; (2) call identification services,including identification of incoming connections, completed calls, uncompleted calls and similarservices; (3) access to the 08xx value-added (toll-free and shared-toll) and 09xx premium ratevalue-added services; (4) adequate physical connection to thetelecommunications installations of the providers seeking access as necessary to accomplish theservices connection; and (5) access to any other services as to which the provider ismarket-dominant.
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Upon request, a market-dominant provider must make known the technical and commercial terms andconditions of its interconnection services, and the basis on which the interconnection service isoffered must be disclosed in an understandable and unbundled manner. In addition, themarket-dominant provider is required to publish at least once a year the following information: thebasic offering; a description of standard interconnection points and access conditions; and acomplete description of the applicable interfaces and signal protocols. To satisfy theserequirements, Swisscom publishes an interconnection brochure on the Internet and in paper format. Amarket-dominant provider must further promptly make known any changes in the terms of itsinterconnection services offering expected in the following twelve months.The Telecommunications Ordinance requires that prices charged for interconnection services by amarket-dominant provider be cost-oriented. Since January 1, 2000, prices have had to be based onthe following principles: a component related to the cost of providing interconnection; acomponent based on the long-run incremental cost (“LRIC”) of providing the requested services usingthe required network components; a constant mark-up for joint and common costs; and a return oncapital invested at a rate customary for the industry. Costs must assume the expenses andinvestments of an efficient operator using modern equivalent assets and must be forward-looking. Aprovider of interconnection services must use accounting principles consistent with cost-oriented,non-discriminatory and transparent pricing.Following the introduction of LRIC, Swisscom substantially reduced its standard interconnectionrates. Swisscom believes that its current interconnection rates are in line with the Europeanaverage and represent a fair, transparent and consistent implementation of the applicableregulatory requirements. Swisscom expects to continue to reduce its interconnection charges fromtime to time as it realizes further cost savings through network optimization or improvements inefficiency. For information on legal proceedings relating to interconnection, see “*Item 8:Financial Information – Legal Proceedings*”. In addition to market-dominant telecommunicationsservice providers, providers of universal services are also obligated to make a basic offering ofinterconnection to other service providers. Swisscom has developed a standard interconnectionoffer, which it markets to all service providers in the Swiss market eligible for interconnectionunder the Telecommunications Act. See “ *– Fixnet – Wholesale Traffic*”. As of December 31, 2006,Swisscom had concluded interconnection agreements with 32 operators. Interconnection agreements,except for confidential portions thereof, can be consulted by the public at the offices of OfCom.The Telecommunications Act provides that if a service provider that is required to provideinterconnection and an applicant for interconnection cannot reach agreement within three months,ComCom is authorized, on a proposal from OfCom, to set the interconnection conditions. If theinterconnection provider cannot demonstrate that its prices are properly related to costs asrequired, ComCom may determine the interconnection conditions on the basis of market and industrycomparisons.**Unbundling of the Local Loop and Other Access Regulation**Until April 1, 2003, under the terms of the Telecommunications Act and the TelecommunicationsOrdinance, market-dominant service providers were not required to offer unbundled access to thelocal loop or access to leased lines on a cost-oriented basis. This principle was confirmed by theFederal Supreme Court in October 2001 in the Commcare case, in which the Court ruled that leasedlines and transmission media do not fall within the interconnection provisions of theTelecommunications Act and related Ordinance and stated that there is no legal basis for arequirement that Swisscom unbundle the local loop.In response to this decision, and supported by ComCom, in July 2002, the Federal Council proposedamendments to the Telecommunications Act and the Telecommunications Ordinance that would requireSwisscom to offer unbundled access to its local loop and interconnection to leased lines on acost-oriented basis. The proposal would have provided for all three kinds of unbundling, “FullAccess”, “Shared Line Access” and “Bitstream Access”.In March 2003, the Federal Council adopted significant amendments to the TelecommunicationsOrdinance which entered into effect on April 1, 2003. Based on a decision issued by the FederalCourt in November 2004, however, amendments relating to unbundling the local loop were notapplicable at that time, on the grounds that the Telecommunications Act, in the form then ineffect, did not provide a sufficient legal basis for such amendments.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which enteredinto effect on April 1, 2007. These amendments were intended to bring the Swiss telecommunicationsregulatory regime in line with regulatory developments in the EU and reflect some of the amendmentsto the
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Telecommunications Ordinance. Swisscom is required to offer, among other things, unbundledaccess to its local loop in the form of full access on a cost-oriented basis as well as accessrebilling. Unbundling of the local loop in the form of full access allows competitors to offeraccess services to customers in Switzerland without having to build local loops of their own,although they still have to make significant investments in their own network infrastructure inorder to connect to the local loop. Moreover, with access rebilling, competitors are able to billcustomers directly for the access services provided by Swisscom. As a result, Swisscom’scompetitors are able to offer their customers a full range of fixed-line services, includingaccess, and their customers will receive a single bill covering all these services. Accordingly,competition in the access market is expected to increase and Swisscom may lose market share in thenational and international calling markets.Unbundling of the local loop requires market-dominant providers to also offer bitstream access toother providers for four years on a cost-oriented basis. Such access must be available at the maindistributor frame and is limited to the market-dominant provider’s copper network. This requiresSwisscom’s competitors to make significant upfront investments in their own network infrastructurein order to reach Swisscom’s main distributor frame for bitstream data traffic and to build theirown access lines within four years or switch to full access. In addition, competitors are notentitled to use Swisscom’s fiber optic lines. Although Swisscom does not consider itself to bemarket dominant in the market of broadband access, and has never been found by the authorities tobe market dominant in a legally binding proceeding, these amendments are generally expected to leadto significant price pressure.**Mobile Telecommunications**In connection with the opening of the mobile market to competition, ComCom has adopted a nationalfrequency allocation plan under which there were to be a total of three national mobile GSMtelephony licenses. One mobile telephony license was automatically granted to Swisscom pursuant tothe Telecommunications Act.ComCom awarded the two additional national mobile telephony licenses through a competitive processbased on designated criteria in May 1998 to diAX (now TDC (Sunrise) Switzerland AG or “TDC(Sunrise)”) and Orange. diAx was granted the right to use frequencies in the 900 MHz and 1800 MHzbands and Orange the right to use frequencies in the 1800 MHz band. The three GSM licenses wereinitially effective for a ten-year period due to expire on May 31, 2008. As described below,however, ComCom recently decided that these licenses will be renewed.In October 2000, ComCom put further frequencies (GSM 900 MHz and GSM 1800 MHz) in the extended GSMband up for auction. The auction was ultimately suspended, and the frequencies were allocated bymutual agreement. Pursuant to this agreement, Swisscom received 5 MHz, TDC (Sunrise) received 7 MHzand Orange received 2.2 MHz in the GSM 900 MHz band, including frequencies in the extended GSMband. A concession of seven years was granted on the basis of this agreement, with each contenderpaying the minimum price. In 2003, a third frequency block of 2x25 MHz on the GSM 1800 MHz bandbecame available for civilian use and a GSM license was awarded to each of In&Phone and Tele2. Withthe aim to fostering competition in the mobile telecommunication market, Swisscom and the other twoGSM operators were not allowed to participate in the bidding process.In November 2004, ComCom decided to award the remaining frequencies reserved for the GSM standardto the three GSM operators currently active in Switzerland (Swisscom, TDC (Sunrise) and Orange)with the aim of facilitating nationwide coverage in Switzerland for broadband mobile data services.In March 2007, ComCom decided that the GSM licenses of Swisscom, TDC (Sunrise) and Orange will berenewed for a further five years (*i.e.,*until the end of 2013). In exchange for renewing thelicenses, ComCom will require Swisscom and TDC (Sunrise) to concede use of certain 900 MHzfrequencies to Orange in exchange for certain 1800 MHz frequencies.On December 6, 2000, an auction for four UMTS licenses commenced with four operators participating.The UMTS licenses were sold for a total of CHF 205 million to Swisscom, dSpeed (a wholly ownedsubsidiary of TDC (Sunrise)), and Telefónica, each paying CHF 50 million, and Orange, paying CHF 55million. Under the original terms of the UMTS license, each licensee was required to build out itsnetwork to achieve certain population coverage targets by specified dates that were later amendedby ComCom. Swisscom achieved the coverage requirements more than 18 months ahead of the specifieddeadline.
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While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobiletelephony in Switzerland has not yet been the subject of extensive regulation. However,developments in the EU and Switzerland could result in additional regulation in the future.While Switzerland is not a member state of the EU and therefore is not subject to EU legislation,EU directives and implementing legislation in various EU countries have served as points ofreference for the development of the Swiss regulatory regime. On July 12, 2006, the EuropeanCommission submitted a proposal for a regulation on public mobile network roaming within theCommunity that would impose price caps on roaming charges. As Switzerland is not member of the EU,this proposal does not have a direct effect on Swiss legislation and it is unclear if the SwissCompetition Authority or the Swiss Pricing Monitoring Authority (*Preisüberwacher*) intend to takesimilar measures in this area.On December 22, 1999, the Federal Council adopted an ordinance relating to protection againstnon-ionizing radiation (*Verordnung über den Schutz vor nichtionisierender Strahlung*), known as the“NIS Ordinance”, which came into force on February 1, 2000. The NIS Ordinance is designed toprotect the population of Switzerland from non-ionizing radiation emitted by various sources,including mobile antennae, and limits emissions by mobile base stations to specified levels. TheOrdinance applies to mobile and any telecommunications services transmitted over radio, such as GSMor UMTS services. For mobile antennae with a minimum power exceeding 6 watts, constructionauthorizations issued by local authorities are required. Newly-built stations are required tocomply with the emissions standards and existing stations have had to be upgraded to bring theminto compliance. Swisscom has completed the upgrade of its existing stations for compliance withthese standards.The NIS Ordinance is implemented by the cantons, which in the past have used different methods ofmeasuring radiation emissions to determine compliance with the NIS Ordinance, resulting insignificant regional variations in effective emission standards. In July 2002, the Swiss Agencyfor the Environment, Forests and Landscape (“BUWAL”) issued final guidelines for enforcementauthorities on the appropriate methods by which to measure electromagnetic emissions from basestations and masts in the GSM network, but which did not address emission standards for UMTSnetworks. Final guidelines relating to emission standards for UMTS networks were adopted in 2005.These guidelines are generally binding on the cantons, but deviations are permitted under certaincircumstances.**Carrier Selection and Number Portability**Under the Telecommunications Act and ComCom’s ordinance relating to carrier selection and numberportability, public fixed-line telephony service providers are required to provide their users theability to select their desired national and international service providers on both a call-by-callbasis (by dialing a five-digit prefix number), known as “easy access”, and on a pre-selection basis(subject to call-by-call override), known as “equal access”. Public mobile telephony serviceproviders are also required to provide their users the ability to select their desiredinternational service provider on an easy access basis.ComCom has provisionally suspended a further requirement that public mobile telephony serviceproviders implement equal access in their mobile networks until technical development andinternational standards allow implementation thereof.In addition, public fixed-line telephony service providers, public mobile telephony serviceproviders and non-geographical services, such as providers of toll-free numbers, are required toprovide number portability. Number portability means that customers must be given the ability toswitch to another service provider within the same category of service (i.e., fixed-line tofixed-line, mobile to mobile) while retaining the same telephone number. The cost of implementingnumber portability is borne by each service provider. The original service provider may charge afee to the new service provider to cover the direct administrative costs of connection for aparticular customer move.On March 22, 2007, ComCom adopted improved consumer protection measures that are intended toprevent carrier preselection being activated on a telephone line without the subscriber’s explicitconsent. Consequently, it introduced stricter requirements for the procedures that need to befollowed in order to change a consumer’s preselection to a new telephone service provider. Forexample, preselection applications, whether in writing or by telephone, must now include, amongother things, a description of the services offered, confirmation that the applicant is actuallythe subscriber for the relevant connection and an authorization empowering the provider to arrangepreselection on the subscriber’s connection.
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**Leased Lines**Under the Telecommunications Act and the Telecommunications Ordinance, a licensedtelecommunications services provider could be required to provide leased lines at cost-orientedprices in a particular region if it is deemed market dominant in that region. To date, ComCom hasnot taken any action.**Ownership of Lines and Rights of Way**The Telecommunications Act provides that a licensee who has installed lines for the transmission ofinformation by means of telecommunications techniques, or who has acquired such from third parties,owns the respective transmission lines.Prior to the enactment of the Telecommunications Act, Swisscom had the right to use public land(roads, footpaths, squares, waterways, lakes, etc.) free of cost to install and operate lines. TheTelecommunications Act provides that every holder of a telecommunications service license is tohave such a right to use public land free of cost to install and operate lines and publicpayphones, provided that such use does not interfere with the common use of such public land. Theowner of such land (e.g., the Confederation, the cantons or the communities) is to grant thelicensee a corresponding approval in a short and simple procedure. Except for the administrativecosts for such procedure, no charges may be levied on the licensee. Under the TelecommunicationsOrdinance, every holder of a telecommunications service license is also entitled to install andoperate lines that cross railway lines.If the holder of a telecommunications service license cannot reach agreement with the owner ofprivate property on the use of such property by the licensee for the installation and operation oflines, UVEK may grant the licensee the right of expropriation if the establishment of atelecommunications installation on private property is in the public interest.OfCom may, for reasons of public interest, and in particular to protect the national heritage andthe environment, also require the holder of a license for telecommunications services to grantother licensees the right to make joint use of its existing installations if they have sufficientcapacity and in return for appropriate compensation. With respect to this right to joint use ofexisting installations, the interconnection provisions are to be applied by analogy.**International Obligations**Over 70 member countries of the World Trade Organization (“WTO”), representing a substantialmajority of the world’s basic telecommunications revenue, including Switzerland, the members of theEU and the United States, have entered into the Basic Agreement on Telecommunications (“BATS”) toprovide market access to some or all of their basic telecommunications services. This agreementhas been in effect since February 5, 1998. BATS is part of the General Agreement on Trade inServices, which is administered by the WTO. Under BATS, Switzerland and the other signatories havemade commitments to provide “market access”, under which they are to refrain from imposing certainquotas or other quantitative restrictions in specified telecommunications services sectors and toprovide “national treatment”, under which they are to avoid treating foreign telecommunicationsservice suppliers differently than national service suppliers. In addition, a number ofsignatories, including Switzerland, agreed to the pro-competitive principles set forth in areference paper relating to anti-competitive behavior, interconnection, universal service,transparency of licensing criteria, independence of the regulator and allocation of scarceresources.In a decision dated October 3, 2001, (re Commcare AG vs. Swisscom), the Swiss Federal Supreme Courtfound that even if the WTO/BATS provisions were directly applicable in Switzerland, which isuncertain, they do not grant any right to unbundling or to obtain leased lines or transmission oninterconnection terms.
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**ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS***The following discussion should be read in conjunction with Swisscom’s consolidated financialstatements, which have been prepared in accordance with International Financial Reporting Standards(IFRS), which differ in certain significant respects from U.S. GAAP. For a reconciliation of thesignificant differences between IFRS and U.S. GAAP, see Note 43 to the consolidated financialstatements.***Introduction**Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensiverange of products and services to residential and business customers. Swisscom’s core business isthe provision of fixed-line and mobile telephony as well as data services. Fixed-line services areprovided through the business segments Fixnet and Solutions, generating 43% and 11% of Swisscom’stotal revenue in 2006, respectively. Mobile services are provided through the business segmentMobile, generating 37% of Swisscom’s total revenue in 2006. For a more detailed description of theservices provided by each of these segments, see “*Item 4: Information on the Company”*.The principal sources of revenue within each of these segments are: **•** ***Fixnet:***monthly subscription fees for providing telephone and Internet access,charges for making calls from fixed-network access lines, wholesale interconnectioncharges and fees from providing data services to other telecommunication companies;  **•** ***Mobile:***monthly subscription fees, traffic charges for calls made in Switzerland byMobile’s customers, roaming and termination fees paid by other mobile operators, andfees from data services;  **•** ***Solutions:***charges for fixed-line voice telephony services to business customers,fees for providing leased lines and Intranet services as well as integratedcommunications solutions, including outsourcing services.The principal components of Swisscom’s operating expenses include: **•** ***Goods and services purchased***, mainly consisting of interconnection fees for nationaland international voice and data traffic and cost of customer equipment purchased forresale;  **•** ***Personnel expenses***, consisting of payroll and other employee related cost;  **•** ***Other operating expenses***, including cost for customer acquisition and retentionmeasures, marketing and selling expenses, information technology cost, and expenses forrepairs and maintenance.Swisscom’s revenue and results of operations are and may be affected by a number of importantfactors, including:***Regulatory environment.***Since the entry into force of the Telecommunications Act in 1998, the Swisstelecommunications market has been open to competition. The Telecommunications Act containsnumerous provisions designed to facilitate competition, which primarily affect the traditionaltelecommunications services Swisscom offers. For example, under the Telecommunications Act,Swisscom is required to offer standard interconnection services on a cost-oriented basis. As aresult, Swisscom has had to reduce its interconnection rates in recent years – by an average of 6%per year over the three year period under review. Swisscom expects further reductions in 2007. Withinterconnection rates declining, retail tariffs in the fixed-line business have come underpressure, which has negatively affected revenue. Swisscom has also experienced increased pricepressure in the business customer segment of its mobile business and competition is expected tofurther increase after the entry of new mobile virtual network operators (“MVNO”).A number of regulatory initiatives, that recently entered into force or are currently pending, arelikely to further increase competition and put additional pressure on margins. Under amendments tothe Telecommunications Act which entered into force on April 1, 2007, Swisscom is required tooffer, among other things, unbundled access to its local loop on a cost-oriented basis in the formof full access as well as bitstream access for a limited period of four years in areas where it isconsidered to be market dominant. The adoption of these amendments is
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expected to facilitate competition in the access market and may cause Swisscom to lose additionalmarket share in the national and international calling markets.Furthermore, Swisscom’s mobile termination tariffs and roaming charges may become subject toregulation in the future. Regulation of mobile termination fees or roaming charges would have asignificant impact on Swisscom’s mobile revenue and reduce margins and profitability.***Competition and pricing.***Customer behaviour is influenced by economic development. Despite amoderate growth of the Swiss economy since 2003, the economic slowdown Switzerland experiencedseveral years ago fostered customers’ price sensitivity making them more conscious of usage levelsand tariffs. As a result, many of Swisscom’s fixed-line customers have been switching to newlyintroduced tariff plans, which have led to a decline in average tariffs. In the Mobile segment, theintroduction of budget service packages, including those offered by new low-cost competitors, hasled to a significant decline in the number of subscribers to higher priced services, effectivelyresulting in an overall reduction of the average revenue per user (ARPU). As competition in thelow-cost market segment has increased, Swisscom Mobile has introduced new services with lowerprices and limited features, which has further reduced ARPU. Pressure on prices is expected toremain high due to continuing strong competition, especially from cable network operators in thefixed-line business and from new low-cost network operators in the mobile business. To stimulatedemand in its fixed-line and mobile businesses, Swisscom has introduced new services based onbroadband technologies, in which Swisscom has made, and continues to make, substantial investments.Should the economy slow down again, however, customers may again become more reluctant to usehigher priced services.***Customer needs and industry trends.***Customer needs and industry trends are changing. The demand forconvergent and interactive services is increasing, and communication has to be guaranteedirrespective of time or place. The importance of content, attractive applications and informationmanagement is rising, and technology is migrating to standardized IP platforms. This is opening upopportunities for Swisscom to develop attractive new convergent offerings. Thanks to its strongmarket position in several markets, Swisscom can create new added value for the customer withbundled offerings and drive forward into fields that are being transformed in related markets underthe influence of digitization and broadband penetration. Swisscom is therefore looking to grow inthe field of convergence and multimedia, in the Telecommunication, Information, Media andEntertainment (“TIME”) market. The aim is to offset the decline in the traditional business withrevenues from new activities. The future business of successful telecommunications companies looksset to be very different from their current activities: by moving into the TIME market, Swisscomcan respond to changing customer needs.***Technological developments.***In recent years, the telecommunications industry has seen rapidtechnological developments that have resulted in a change in user patterns and given rise to newcompetitive challenges. Traditional telecommunication services, such as fixed-line services, areincreasingly being replaced by mobile phones and other communication technologies, such as Voiceover IP. The availability of alternative technologies capable of supporting telecommunicationsservices is enabling competitors to provide services that substitute for Swisscom’s core services(fixed-line voice and data services and mobile telephony), which creates significant price pressureon Swisscom’s core business.***Personnel expenses*****.**Personnel expenses make up a significant portion of Swisscom’s cost base. Inorder to improve productivity and reduce costs, Swisscom has implemented a workforce reductionprogram. During the three years under review, the program reduced Swisscom’s workforce by over1,100 positions by eliminating positions or transferring them to Swisscom’s employment programs.While this program has resulted in a decrease in personnel expenses in Swisscom’s declining areasof its core business, the benefit has been muted by the fact that Swisscom has had to incurexpenses associated with termination benefits for its outplacement program (PersPec) and incurssalary expenses relating to employees for the period in which they participate in its employmentprogram (Worklink). Swisscom’s continued ability to implement staff reductions in the decliningareas of its core business and to reduce personnel expenses will have a significant impact on itsfuture profitability. In 2006, personnel expenses increased overall due to several smallacquisitions and growth in certain areas of Swisscom’s business, which resulted in an increase inthe total number of employees.***Capital expenditure and depreciation.***Swisscom’s results are affected by the level of itsdepreciation expense, which in turn depends on the timing and level of its capital expenditures.Excluding depreciation expenses from companies acquired in 2006, Swisscom’s depreciation expensesdeclined during the periods under review. This was primarily due to declining depreciation in theFixnet segment as a result of the increasing number of fully depreciated assets. This effect wasonly partially offset by minor increases in depreciation in other segments. In the medium term,Swisscom expects depreciation expenses to remain relatively stable, as the effect of an
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increase in the number of fully depreciated assets is expected to be offset by the results ofincreased capital expenditures related to new fixed-line and mobile broadband technologies.Nonetheless, the rapid pace of technological change may require Swisscom to reduce its estimates ofthe useful lives of its equipment, which would cause depreciation expenses to increase.**Summary of Results**For Swisscom, 2006 was a year of change and renewal, a year marked by a new strategy, a newleadership, but also a year in which Swisscom consolidated its position in the Swisstelecommunications market. The financial development in 2006, however, was negatively impacted bycertain items in the first half of the year as described below.Revenue decreased by 0.8% mainly as a result of a significant reduction in the wholesale price forcall termination on Swisscom’s mobile network in June 2005 and the transfer of the InternationalCarrier Services activities to a joint venture with Belgacom in July 2005. Declining revenues inthe traditional fixed-line business, primarily due to a loss of market share to cable networkoperators as well as the substitution of fixed-line telephony by mobile and internet telephony,were offset by an increase in broadband access revenue reflecting an increase in the number ofbroadband subscribers and an increase in revenues from system integration and outsourcing servicesprovided to business customers.Earnings before interest and taxes (EBIT) declined significantly, mainly due to Swisscom’sdeclining revenues and to expenses recorded in 2006 relating to (i) interconnection proceedings inthe amount of CHF 180 million; (ii) Swisscom’s expansion into new markets; and (iii) a provision inthe amount of CHF 49 million relating to long-term IT outsourcing contracts.Swisscom’s cash flows from operating activities decreased in 2006, mainly due to a decrease in EBITand a first payment relating to a legal proceeding regarding Swisscom’s interconnection tariffs,despite a special contribution to Swisscom’s pension fund in 2005. Nevertheless, Swisscom has, inaccordance with its return policy, returned CHF 3.1 billion to its shareholders through dividendsand a share buy back in 2006. Through the entirely debt funded repurchase of 25% in Swisscom Mobilefor CHF 4.25 billion in December 2006, Swisscom has at year-end a net debt position for the firsttime in years, which optimized Swisscom’s capital structure.On April 10, 2007, Swisscom launched an all-cash friendly public tender offer for 98.26% of theshares of Fastweb. For a more detailed description of Fastweb, see “*Item 4: Recent Developments”*.The offer period will end on May 15, 2007. Swisscom already acquired 1.74% of Fastweb’s shares inMarch 2007. Should Swisscom acquire control over Fastweb, Fastweb will be included in Swisscom’sconsolidated financial statements from the date on which control is obtained. Should this occur in2007, Swisscom’s results of operations and financial position would be significantly different.Excluding the impact of the potential acquisition of Fastweb, Swisscom expects the followingdevelopments in 2007.Swisscom expects to offset the decline in revenue in its traditional fixed-line business as aresult of strong competition and substitution by an increase in revenue from new products andservices. Swisscom expects its 2007 EBIT to be higher than in 2006, when its results werenegatively impacted by provisions for interconnection proceedings and IT outsourcing projects.Excluding these provisions, EBIT is expected to decrease during 2007 due to the lower margin fromnew products and services compared to the margin from Swisscom’s declining traditional business.**Critical Accounting Policies**Swisscom’s financial statements are prepared in accordance with International Financial ReportingStandards (IFRS). In addition, Swisscom reconciles net income and shareholders’ equity to U.S.GAAP. See Note 43 to the consolidated financial statements. The preparation of these financialstatements requires management to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses as well as the disclosure of contingent assets andliabilities. Set out below are the details of certain significant estimates made by management inthe financial statements where it is possible that the estimate of a condition, situation or set ofcircumstances that existed at the date of the financial statements will change in the future due toone or more future confirming events and that the effect of the change would be material to thefinancial statements.
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***Valuation of Goodwill***On December 31, 2006, the carrying amount of goodwill from acquisitions totalled CHF 4,169 million.Swisscom assesses the carrying value of goodwill annually during the fourth quarter, or morefrequently if events or changes in circumstances indicate that such carrying value may not berecoverable. If the carrying value may not be recoverable, impairment is generally measured basedon discounted cash flows.The most significant variables in determining cash flows are discount rates, long-term growthrates, as well as the assumptions and estimates used to determine the cash inflows and outflows.Management determines discount rates to be used based on the risk inherent in the relatedactivity’s current business model and industry comparisons. Long-term growth rates are determinedbased on the long-term average growth rate for the products, industries, or country in which theentity operates, or for the market in which the asset is used. While we believe that ourassumptions are appropriate, such amounts estimated could differ from what will actually occur inthe future and this could result in an impairment charge.***Pension fund accrual***The determination of the liability and expense for pension benefits is dependent on the selectionof assumptions, which attempt to anticipate future events, used by Swisscom’s actuary to calculatesuch amounts. Those assumptions are described in Note 10 to the consolidated financial statementsand include the discount rate, expected long-term rate of return on plan assets and rates ofincrease in future compensation levels. In addition, Swisscom’s actuary also uses subjectivefactors such as withdrawal and mortality rates. The assumptions used for IFRS are consistent withthose used for U.S. GAAP. Approximately 25% of the pension plan assets at December 31, 2006 wereheld in stocks and bonds denominated in foreign currencies, primarily USD, EUR and GBP.For 2006, the expected rate of return on plan assets was 3.9% or CHF 250 million. Due to thefavorable performance of the stock markets, the actual return on assets in 2006 was 5.2% or CHF 322million, generating an excess return of CHF 72 million. However, from the date of inception ofSwisscom’s pension plan in January 1999 to December 31, 2006, the cumulative actual return onassets has been lower than the expected return, which resulted in a cumulative loss of CHF 133million at December 31, 2006. While Swisscom believes that the assumption for the long-term returnis appropriate, should the stock markets underperform or exchange rates change, this would affectSwisscom’s future expense and could lead Swisscom to increase its contributions.The discount rate used for the calculation of the pension liability at the end of 2006 was 2.54%.Should the discount rate decrease by 0.5%, the pension liability would increase by approximatelyCHF 890 million and the annual pension expense would increase by approximately CHF 3 million.The rate of increase in future compensation levels used in 2006 was 0.5%. Should this rate increaseby 0.5%, the pension liability would increase by approximately CHF 90 million and the annualpension expense would increase by approximately CHF 11 million.In connection with the settlement of its obligation to retired employees in 1998, Swisscom retaineda liability for pension indexation based on a contract with the confederation, which up untilDecember 31, 2004, was a guaranteed rate. Effective January 1, 2005, new legislation was introducedto abolish the previously guaranteed pension indexation. As a result of this new legislation,Swisscom reduced its assumption for pension indexation from 1.0% to 0.5%, which resulted in asignificant decrease in the liability in 2004. At December 31, 2006, the liability amounted to CHF177 million. While Swisscom believes that the assumption used to determine this liability isappropriate, should the Government decide to change the indexation, this could affect Swisscom’spension liability and future expense. The PUBLICA legislation has been revised, but Swisscom’sliability has not changed. For more information on Swisscom’s pension plan, see Note 10 to theconsolidated financial statements**.*****Useful lives of technical equipment***Technical equipment, with a net book value of CHF 3,634 million at December 31, 2006, represents asignificant portion of Swisscom’s total assets. Swisscom estimates the useful lives based onhistorical experience as well as taking into account anticipated technological or other changes.Detail of the useful lives is included in Note 2.9 of the consolidated financial statements. Usefullives under U.S. GAAP are consistent with those under IFRS. Changes in technology or in Swisscom’sintended use of these assets may cause the estimated period of use or the value of these assets tochange, which would result in increased or decreased depreciation
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expense. Swisscom performs internal studies annually or when events or circumstances indicate thatthe useful life may no longer be appropriate. Additionally, technical equipment is reviewed forimpairment whenever events indicate that their carrying amounts may not be recoverable. Inassessing impairment, Swisscom follows the provisions of IAS 36 “Impairment of Assets” and SFAS 144“Accounting for the Impairment or disposal of Long-Lived Assets” utilizing cash flows which takeinto account management’s estimates of future operations under IFRS and U.S. GAAP, respectively.***Provision for dismantlement and restoration***As detailed in Note 26 to the consolidated financial statements, management has included aprovision of CHF 369 million at December 31, 2006 for the dismantlement and restoration of mobilestations and analog transmitter stations. In 2005, Swisscom adjusted primarily the cost ofdismantlement and remaining useful lives following a strategic revaluation of the analogtransmitter stations. The dismantlement costs are now expected to be incurred mainly after 2020.The present value of the adjustment to the future expected cost was CHF 77 million. The extensionof the useful lives resulted in a reduction in the present value of CHF 75 million, of which CHF 50million was recorded against the corresponding assets and CHF 25 million under financial income.The provision was based on future estimated cost and was discounted using an appropriate discountrate. While management believes that the assumptions used are appropriate, should they not beaccurate, the amount required could differ from the amount of the provision.With the adoption of IFRIC 1 “Changes in Decommissioning, Restoration and Similar liabilities”effective January 1, 2005 and the adoption of SFAS 143 “Accounting for Asset RetirementObligations” effective January 1, 2003 the difference between the asset retirement obligationunder IFRS compared to U.S. GAAP is no longer material.***Provisions and contingent liabilities******Interconnection proceedings.***Since 2000 Swisscom has been involved in proceedings with regard tointerconnection prices (see Note 27 to the consolidated financial statements). Swisscom hasrecorded a provision and an allowance for receivables on the basis of their own estimate of theexpected outcome of the proceedings. Further development of the proceedings may result in adifferent assessment of the financial consequences in subsequent years and require an increase ordecrease of the recorded provision.***Proceedings before the competition commission (WEKO).***WEKO is currently leading various proceedingsagainst Swisscom. The individual proceedings are described in Note 34 to the consolidated financialstatements. On February 5, 2007, the Competition Commission issued a decision in connection withthe mobile termination proceedings in which Swisscom is involved. See “*Item 8: FinancialInformation – Legal Proceedings – Other Regulatory Proceedings”.*In this decision, the CompetitionCommission determined that Swisscom Mobile has a market-dominant position which it has abused bydemanding disproportionately high termination fees and imposed a fine of CHF 333 million. Swisscomrejects both the charge that it misused its dominant market position and the sanction. Swisscomintends to appeal to the Swiss Federal Administrative Court and, if necessary, in the final eventto the Swiss Federal Supreme Court. Based on a legal assessment of the current situation, Swisscomhas concluded that the sanction is unlikely to ultimately be upheld. Accordingly, Swisscom did notrecord a provision in its financial statements as of December 31, 2006.**Accounting developments**The International Accounting Standards Board, or IASB, has and will continue to critically examinecurrent International Financial Reporting Standards, or IFRS. This process resulted in amendmentsto the existing rules effective from January 1, 2007 and the following year. These are discussed inmore detail under “New accounting principles, not yet mandatory” in Note 2.25 of the consolidatedfinancial statements. There were no material IFRS accounting developments adopted in 2006.
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**RESULTS OF GROUP OPERATIONS**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Net revenue  9,653   9,732   10,057   (0.8)  (3.2)Capitalized costs and other income  296   260   195   13.8   33.3 **Total**  **9,949**   **9,992**   **10,252**   **(0.4****)**  **(2.5****)**Goods and services purchased  1,840   1,831   1,847   0.5   (0.9)Personnel expenses  2,278   2,173   2,194   4.8   (1.0)Other operating expenses  2,044   1,817   1,823   12.5   (0.3)Depreciation  1,280   1,286   1,542   (0.5)  (16.6)Amortization  155   108   151   43.5   (28.5)**Total operating expenses**  **7,597**   **7,215**   **7,557**   **5.3**   **(4.5****)****Earnings before interest and taxes**  **2,352**   **2,777**   **2,695**   **(15.3****)**  **3.0** Financial result  (51)  82   (134)  n.a.   n.a. Income tax expense  (462)  (535)  (392)  (13.6)  36.5 Share of profit of affiliated companies  30   13   22   130.8   (40.9)**Net income from continuing operations**  **1,869**   **2,337**   **2,191**   **(20.0****)**  **6.7** Discontinued operations(1)  36   9   (243)  n.a.   n.a.    **Net income**  **1,905**   **2,346**   **1,948**   **(18.8****)**  **20.4**    Net income attributable to equityholders of Swisscom AG  1,599   2,022   1,596   (20.9)  26.7 Net income attributable to minorityinterests  306   324   352   (5.6)  (8.0) (1)  On June 8, 2004 Swisscom completed the sale of its stake in debitel. As a result, debitelis reported separately as a discontinued operation in the consolidated financial statements.**Net Revenue**Revenue decreased from CHF 10,057 million in 2004 to CHF 9,732 million in 2005 and to CHF 9,653million in 2006, mainly reflecting a decrease in revenue from the fixed-line segments Fixnet andSolutions. Fixnet’s revenue decreased as a result of the Belgacom transaction. (for details, see*“Item 4: Information on the Company – Fixnet – Wholesale Traffic*”), as well as a decrease intraffic revenue reflecting primarily a decline in volumes as a result of a loss in market share tocable network operators and substitution by mobile and IP telephony as well as lower averagetariffs. This decrease was partially offset by an increase in access revenue as a result of anincrease in the number of ADSL subscribers. The decrease in revenue from Solutions was mainly dueto a decrease in revenue from traffic and leased lines as a result of a decrease in traffic volumesand price pressure due to fierce competition and substitution of older technologies through IPbased services. Mobile revenue decreased due to a reduction of termination and inbound roamingtariffs and an introduction of new tariff models, which could not be offset by a continuing growthof the subscriber base as well as an increase in the usage of new data services. These decreases inthe fixed-line and mobile segments were partially offset by acquisitions, especially AntennaHungária in October 2005, and other businesses such as Swisscom IT Services through the acquisitionof Comit in January 2006 as well as an increase in revenue from outsourcing services andHospitality Services (formerly known as Swisscom Eurospot).**Capitalized costs and other income**Capitalized costs and other income increased from CHF 260 million in 2005 to CHF 296 million in2006, mainly due to an increase in capitalized costs as a result of further developments in networkinfrastructure, especially the introduction of the new VDSL broadband technology at Fixnet. Thiseffect was partially offset by a decrease in gains from the sale of real estate property.Capitalized costs and other income increased from CHF 195 million in 2004 to CHF 260 million in2005, primarily due to an increase in gains from the sale of real estate property and an increasein capitalized cost.
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**Goods and services purchased**Expenditure on goods and services purchased slightly increased from CHF 1,831 million in 2005 toCHF 1,840 million in 2006. A decline due to the Belgacom transaction and the conclusion of newroaming agreements with lower international outbound roaming tariffs by Swisscom Mobile was morethan offset by an increase in expenses for customer equipment and services purchased relating tooutsourcing and system integration services and increased sales of mobile handsets as well as anincrease in mobile termination costs due to an increase in mobile telephony usage.Goods and services purchased decreased from CHF 1,847 million in 2004 to CHF 1,831 million in 2005,primarily due to a decrease in expenses as a result of the Belgacom transaction. The decrease waspartially offset by an increase in expenses for customer equipment and services purchased relatingto outsourcing and system integration services at Swisscom Solutions and Swisscom IT Services.**Personnel expenses**Personnel expenses increased from CHF 2,173 million in 2005 to CHF 2,278 million in 2006, mainly asa result of an increase in the average number of employees. The year-end headcount increased by 980full-time equivalent employees or 6.1% to 17,068, primarily as a result of several smallacquisitions such as Comit and parts of Siemens Switzerland as well as an increase in the number ofemployees in growing business areas like Swisscom IT Services. This increase as well as an overallsalary increase could not be compensated for by a decrease in costs for social plan measures.Personnel expenses decreased from CHF 2,194 million in 2004 to CHF 2,173 million in 2005 due to adecrease in pension expenses of CHF 34 million, reflecting a decrease in total interest cost on thepension liability due to a reduction in the interest rate by 0.6% in 2005, and a decrease in costfor social plan measures. A decrease in personnel expenses reflecting headcount reductions mainlyat Fixnet was offset by an increase in the average number of employees in the segment Other, anoverall salary increase and an increase due to the consolidation of Antenna Hungária as of October25, 2005.**Other operating expenses**Other operating expenses increased from CHF 1,817 million in 2005 to CHF 2,044 million in 2006. Theincrease is mainly a result of an increase of CHF 180 million in the provision recorded for thecase against Swisscom by two of its competitors relating to Swisscom’s interconnection prices. See“*Item 8: Financial Information – Legal Proceedings*”. In addition, expenses increased due to severalacquisitions and the expansion into new markets. In 2006, other operating expenses also include aprovision in the amount of CHF 49 million relating to long-term IT outsourcing contracts.Other operating expenses remained relatively stable at CHF 1,817 million in 2005 (CHF 1,823 millionin 2004). A decrease in expenses for repair and maintenance, rental of infrastructure andinformation technology was partially offset by an increase in expenses for consultancy andtemporary personnel due to Swisscom IT Services’ growing outsourcing business and costs relating toSwisscom’s triple play strategy.**Depreciation**Depreciation remained relatively stable at CHF 1,280 million in 2006 (CHF 1,286 million in 2005). Adecrease in the Fixnet segment mainly as a result of an increase in the number of fully depreciatedassets was offset by an increase in depreciation expenses due to several acquisitions, mainlyAntenna Hungária.Depreciation decreased from CHF 1,542 million in 2004 to CHF 1,286 million in 2005 mainly due tothe impairment in 2004 of CHF 155 million relating to sea cable owned by Fixnet as described belowand due to lower depreciation in the Fixnet segment mainly as a result of an increase in the numberof fully depreciated assets.**Amortization**Amortization increased from CHF 108 million in 2005 to CHF 155 million in 2006 due to an increasein investments in intangible assets (mainly Software) related to the development of new productsand services mainly at Fixnet and Mobile.
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Amortization decreased from CHF 151 million in 2004 to CHF 108 million in 2005, principally due togoodwill no longer being amortized as of 2005 in accordance with IFRS 3. For further information,see Note 23 to the consolidated financial statements.**Financial result**Financial result changed from net income of CHF 82 million in 2005 to net expense of CHF 51 millionin 2006, mainly due to interest expense of CHF 75 million that was recorded in 2006 relating to thecase against Swisscom by two of its competitors relating to interconnection prices (See “*Item 8:Financial Information – Legal Proceedings*”), a decrease of CHF 21 million in the net interestresult and a decrease of foreign exchange result by CHF 28 million. This effect was partiallyoffset by gains of CHF 63 million from the sale of financial assets in 2006. Net income of 2005also included CHF 49 million from the reversal of two provisions, one relating to cross-border taxlease agreements and the other to dismantlement and restoration costs as described below.Financial result changed from net expense of CHF 134 million in 2004 to net income of CHF 82million in 2005, mainly as a result of the recognition of a provision in 2004 relating tocross-border tax lease agreements, of which CHF 24 million was reversed in 2005. Further, theincrease was due to a reversal of CHF 25 million of a provision for dismantlement and restorationin 2005, due to a strategic revaluation of cost and the remaining useful lives of the analogtransmitter stations and a write-down of the participation in Infonet Service Corporation in 2004before it was sold at the beginning of 2005. See Note 13 to the consolidated financial statements.**Income tax**Income tax expense decreased from CHF 535 million in 2005 to CHF 462 million in 2006, mainlyreflecting a decrease in earnings before interest and taxes (EBIT). The effective tax rate was19.8% in 2006.Income tax expense increased from CHF 392 million in 2004 to CHF 535 million in 2005, mainlyreflecting an increase in EBIT as well as a capitalization of deferred tax assets of CHF 113million in 2004. In prior years, a valuation allowance was recorded on certain deferred tax assetsas it was considered improbable that benefits would be realized in the future. In 2004, thisassessment changed as a result of organizational changes and deferred tax assets of CHF 113 millionwere capitalized against expenses. The effective tax rate was 18.6% in 2005.For further information relating to income tax expense, see Note 14 to the consolidated financialstatements.**Share of profit of affiliated companies**Swisscom’s equity in net income of affiliated companies increased from CHF 13 million in 2005 toCHF 30 million in 2006. The increase was mainly due to the full-year effects of Swisscom’sinvestments in Cinetrade and Belgacom International Carrier Services in April and July of 2005,respectively. For details on these new investments in affiliated companies, see *“Item 4:Information on the Company– Other Participations”*.Equity in net income of affiliated companies declined from CHF 22 million in 2004 to CHF 13 millionin 2005, mainly due to a reversal of a provision for liquidation cost of Swisscom’s investment inAUCS in 2004.**Discontinued operations**On June 8, 2004, Swisscom sold its stake in debitel to Telco Holding S.à r.l. Luxembourg. As aresult, debitel is reported separately in the consolidated financial statements as a discontinuedoperation. For details on this transaction, see Note 37 to the consolidated financial statements.In 2006, following a tax audit of debitel, CHF 36 million of the provision recorded in 2005, asdescribed in Note 37 to the consolidated financial statements, was reversed. In 2005, income fromdiscontinued operations amounted to CHF 9 million and consists of a gain of CHF 59 million fromearly repayment of the vendor loans granted to the buyers of debitel in 2004, which was partiallyoffset by recognition of a provision of CHF 50 million for risks relating to representations andwarranties in connection with the sale.Revenue and net income of debitel up to the date of completion of the sale in 2004 amounted to CHF1,917 million and CHF 5 million, respectively, including goodwill amortization of CHF 57 million. Aloss on the sale
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of CHF 248 million was recorded in 2004 reflecting primarily the removal of the cumulative currencytranslation loss of CHF 238 million from equity into the income statement.**Outlook**For 2007, Swisscom expects to offset the decline in revenue in its traditional fixed-line businessas a result of strong competition and substitution by an increase in revenue from new products andservices. Swisscom expects its 2007 earnings before interest and taxes (EBIT) to be higher than in2006, when its results were negatively impacted by provisions for interconnection proceedings andIT outsourcing projects. Excluding these provisions, EBIT is expected to decrease in 2007 due tothe lower margin from new products and services compared to the margin from Swisscom’s decliningtraditional business.
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**Results of Operations by Segment**The reporting segments for 2006 were defined as follows: **•** **Fixnet**provides fixed-line voice, Internet and a comprehensive range of other fixednetwork telecommunication services to residential and business customers. In addition,Fixnet provides wholesale services and also offers a variety of other services,including the sale of customer equipment, the provision of leased lines and theoperation of a directories database.  **•** **Mobile**provides mobile telephony, data and value-added services in Switzerland andsells mobile handsets.  **•** **Solutions**provides national and international fixed-line voice telephony services tobusiness customers and offers leased lines, Intranet and other data services as well asintegrated communication technology solutions, including outsourcing services, tobusiness customers.  **•** **Other**covers mainly the provision of IT services through Swisscom IT Services, thebroadcasting businesses of Swisscom Broadcast and Antenna Hungária in Switzerland andHungary, the business with billing services and customer cards of Accarda and theoperation of a pan-European network for broadband Internet connectivity throughHospitality Services (formerly Swisscom Eurospot).  **•** **Corporate**includes Swisscom’s headquarter divisions, group-company shared services,property rentals through the real estate company Swisscom Immobilien and Swisscom’sprograms under its social plan.The following table sets forth net revenue and earnings before interest and taxes (EBIT) for thesegments in place in 2006 for the periods indicated.**Segment results**                         CHF in millions **Net revenue**  **EBIT**   **2006**  **2005**  **2004**  **2006**  **2005**  **2004**    Fixnet  4,969   5,308   5,715   1,049   1,294   1,098 Mobile  4,022   4,168   4,356   1,417   1,477   1,617 Solutions  1,220   1,268   1,437   32   35   87 Other  1,334   1,059   979   (90)  2   (12)Corporate  637   690   608   (35)  (31)  (101)Intersegment elimination  (2,529)  (2,761)  (3,038)  (21)(1)  *—*(1)  6(1)   **Total**  **9,653**   **9,732**   **10,057**   **2,352**   **2,777**   **2,695**     (1) Intersegment profits and losses occur as a result of offsetting intersegment services andsales of assets. These are eliminated in the consolidated financial statements and disclosedin segment reporting in the column “Intersegment elimination”.Effective January 1, 2007, Swisscom reallocated certain responsibilities within the group inorder to refine and enhance the customer focus of each segment. As a result, responsibility forSwisscom shops was transferred from Fixnet to Mobile, reflecting the fact that most of the productsand services offered in Swisscom shops are related to mobile communications. This effect has notbeen reflected in the figures presented but will be reported in 2007, with a restatement of prioryear numbers.
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**Fixnet**Revenue from Fixnet comprises primarily revenue from access services and fixed retail telephonytraffic from residential and business customers, revenue from wholesale traffic services offered tonational and international telecommunication providers and revenue from payphone services, operatorservices and prepaid calling cards. Fixnet also provides leased lines, sells customer equipment andoperates a directories database. See “*Item 4: Information on the Company – Fixnet*”.The following table sets forth the segment results for Fixnet and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Net revenue from external customers  4,130   4,319   4,555   (4.4)  (5.2)Intersegment net revenue  839   989   1,160   (15.2)  (14.7)   **Net revenue**  **4,969**   **5,308**   **5,715**   **(6.4****)**  **(7.1****)**Segment expenses  3,920   4,014   4,617   (2.3)  (13.1)   **Segment EBIT**  **1,049**   **1,294**   **1,098**   **(18.9****)**  **17.9**    ***Segment margin***  ***21.1******%***  ***24.4******%***  ***19.2******%***        The following table sets forth net revenue from external customers generated by Fixnet for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Access  2,081   1,992   1,876   4.5   6.2 Retail traffic  974   1,082   1,240   (10.0)  (12.7)Wholesale traffic  351   483   691   (27.3)  (30.1)Other traffic  105   130   158   (19.2)  (17.7)Other revenue  619   632   590   (2.1)  7.2    **Total Fixnet external revenue**  **4,130**   **4,319**   **4,555**   **(4.4****)**  **(5.2****)**   Fixnet’s total external revenue decreased by 4.4% in 2006 and 5.2% in 2005, mainly due to adecrease in wholesale traffic revenue due to the Belgacom transaction as described below and adecrease in retail traffic revenue reflecting a decline in traffic volumes as a result of a loss ofmarket share to cable network operators and substitution by mobile and IP telephony as well aslower average tariffs through the introduction of flat rates and a reduction of mobile terminationrates. These effects were partially offset by higher access revenue reflecting an increase in thenumber of broadband access subscribers.On February 23, 2005, Swisscom and Belgacom, signed an agreement to combine their internationalwholesale activities by forming a new joint venture company, named Belgacom International CarrierServices (BICS, the Belgacom transaction). The transaction, in which Swisscom received a 28%interest in the joint venture in exchange for its international wholesale business andinternational network, was effective as of July 1, 2005. After the completion, a large portion ofSwisscom’s wholesale international traffic is no longer routed through Swisscom Fixnet, butdirectly through BICS and as Fixnet only has a minority stake in the joint venture, associatedrevenue (and cost) are no longer recorded by Fixnet. However, international incoming traffic to berouted through BICS to Swisscom Mobile’s network continued to be routed through Fixnet’s networkuntil June 2006. Incoming traffic to domestic third party networks will continue to be routedthrough Fixnet’s network in the future, associated revenues and costs will therefore continue to berecognized by Fixnet. For details see *“Item 4: Information on the Company – Fixnet – WholesaleTraffic”.*Excluding the effect of the transfer of the Swisscom shops to Swisscom Mobile, Fixnet expects totalrevenue from external customers to further decrease in 2007, mainly due to a decrease in averagetariffs and traffic volumes as well as in the number of PSTN and ISDN lines due to continuingstrong competition from cable network operators and substitution by mobile telephony. Furthermore,wholesale revenues are expected to
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decline due to a decrease in carrier selection and termination volumes as a result of theintroduction of unbundled products like full access following the revision of theTelecommunications Act in 2006 which entered into force April 1, 2007. On the other hand, theintroduction of TV services and the further increasing number of broadband access subscriber linesare expected to partially compensate for these declines in revenue.***Access.***Revenue from access services consists principally of monthly subscription fees charged tocustomers for providing analog (PSTN) and digital (ISDN) telephone access lines to residences andbusinesses in Switzerland, broadband (xDSL) and narrowband Internet access as well as access lineactivation fees.The following table sets forth certain data relating to Swisscom’s access services:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) PSTN access revenue  808   824   851   (1.9)  (3.1)ISDN access revenue  496   512   514   (3.1)  (0.3)   **Total PSTN/ISDN access revenue**  **1,304**   **1,336**   **1,365**   **(2.4****)**  **(2.1****)**                     xDSL retail revenue  467   345   228   35.4   51.7 xDSL wholesale revenue  204   185   138   10.3   34.2    **Total xDSL revenue**  **671**   **530**   **366**   **26.6**   **45.1**                      Other access revenue  106   125   146   (15.2)  (14.2)                        **Total access revenue**  **2,081**   **1,992**   **1,876**   **4.5**   **6.2**                         Access lines (at period end, inthousands)(1):                    PSTN lines(2)  2,891   2,922   3,007   (1.1)  (2.8)ISDN lines(3)  856   900   924   (4.9)  (2.6)   **Total access lines**  **3,747**   **3,822**   **3,931**   **(2.0****)**  **(2.8****)**                        xDSL subscriber lines (at periodend, in thousands of lines):                    Retail subscriber lines  936   708   490   32.2   44.5 Wholesale subscriber lines  432   390   312   10.8   25.0    **Total xDSL subscriber lines**  **1,368**   **1,098**   **802**   **24.6**   **36.9**     (1) Based on lines in service. (2) Each PSTN line provides one access channel. (3) ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides twoaccess channels and a primary ISDN line provides 30 access channels.Total access revenue increased year over year by 4.5 % and 6.2 % in 2006 and 2005,respectively, mainly driven by an increase in revenue from broadband access (xDSL) lines. Thenumber of broadband subscriber lines continued to increase substantially in 2006, but at adeclining growth rate.PSTN/ISDN revenue continued to decrease in 2006 due to strong competition from cable networkoperators and the continuing substitution, mainly by mobile phones.***Retail traffic.***Retail traffic revenue consists of charges to customers for making national andinternational calls from a fixed-network access line, including calls made from the fixed networkto mobile operators’ networks (“fixed-to-mobile”), as well as charges to customers for accessingthe Internet through narrowband access.
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The following table sets forth certain information relating to Swisscom’s retail traffic:                     CHF in millions (except percentages) (1) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Local and long distance traffic revenue  371   391   435   (5.1)  (10.3)Fixed-to-mobile traffic revenue  355   407   466   (12.8)  (12.8)Internet traffic revenue  48   74   109   (35.1)  (31.8)International traffic revenue  200   210   230   (4.8)  (8.5)   **Total retail traffic revenue**  **974**   **1,082**   **1,240**   **(10.0****)**  **(12.7****)**                        Traffic (in millions of minutes):                    Local and long distance traffic  6,312   6,628   7,205   (4.8)  (8.0)Fixed-to-mobile traffic  926   925   949   0.1   (2.5)Internet traffic  1,487   2,252   3,323   (34.0)  (32.2)International traffic(2)  903   926   955   (2.5)  (3.0)   **Total retail traffic**  **9,628**   **10,731**   **12,432**   **(10.3****)**  **(13.7****)**    (1) Figures do not include traffic or revenue, as appropriate, generated from Swisscom-operatedpublic payphones or from calling cards. (2) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.Total retail traffic revenue declined by 10.0% in 2006 and 12.7% in 2005, primarily due to adecrease in local and long distance traffic revenue and Internet traffic revenue. In addition,revenue from fixed-to-mobile traffic decreased mainly as a result of a reduction in terminationrates by Swisscom Mobile which was introduced on June 1, 2005 and passed on to Fixnet’s customerson July 1, 2005.In both 2006 and 2005, the decrease in local and long distance as well as International trafficrevenue is mainly due to an increase in competition from cable network operators which resulted ina loss of market share, a substitution effect from an increased use of mobile phones and other newcommunication technologies and the migration of local Internet dial-up traffic to broadband access.In 2005, the introduction of new price models introduced at the end of 2004 had a furtherdecreasing effect on local and long distance as well as International traffic revenue.The decrease in revenue from Internet traffic over the three year period under review is a resultof the migration of Internet dial-up traffic to broadband access. Broadband access subscribersgenerally pay a fixed monthly fee, irrespective of the amount of usage, which is recorded underaccess revenue.***Wholesale traffic.***Swisscom recognizes revenue in the Swiss market from providing network servicesto other telecommunication companies. Such services include primarily the standard interconnectionservices Swisscom is required to provide to other telecommunication service providers eligible forinterconnection under the Telecommunications Act. Before the Belgacom transaction (see descriptionbelow), Wholesale international revenue comprised primarily revenue from international terminationtraffic and revenue for international incoming traffic.On February 23, 2005, Swisscom and Belgacom, signed an agreement to combine their internationalwholesale activities as of July 1, 2005 by forming a new joint venture company, named BelgacomInternational Carrier Services (Belgacom transaction). For details on this transaction see “*– Netrevenue from external customers*” above.As a result of the Belgacom transaction effective in July 2005, traffic formerly recorded aswholesale international incoming traffic is now billed to BICS on the basis of domesticinterconnection tariffs. Accordingly, the corresponding volumes and revenues are recorded aswholesale national traffic.
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The following table sets forth certain information relating to Swisscom’s wholesale traffic:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Wholesale national traffic revenue  351   373   446   (5.9)  (16.4)International termination traffic revenue  —   110   245   (100.0)  (55.3)   **Total wholesale traffic revenue**  **351**   **483**   **691**   **(27.3****)**  **(30.1****)**                        Total wholesale telephony traffic (millions ofminutes):                    Wholesale national traffic(1)  16,160   17,524   18,576   (7.8)  (5.7)International termination traffic(2)  —   755   1,508   (100.0)  (49.9)   **Total wholesale traffic**  **16,160**   **18,279**   **20,084**   **(11.6****)**  **(9.0****)**    (1) Based on minutes as determined for customer billing purposes. Includes traffic related tothird party revenue for access, termination and transit services. (2) Minutes of outgoing traffic terminated outside of Switzerland.Total wholesale traffic revenue decreased by 27.3% in 2006 and 30.1% in 2005 primarily as aresult of the Belgacom transaction.Wholesale national traffic revenue decreased by 5.9% in 2006 and 16.4% in 2005, respectively,mainly due to reductions in interconnection and mobile termination rates and a decline in trafficvolume by 7.8% and 5.7% primarily as a result of a loss in market share of other telecommunicationproviders to cable network operators. In 2006, these decreases were partially offset by an increasein transit traffic between other telecommunication providers that was routed through SwisscomFixnet rather than through a direct interconnection.International termination traffic revenue decreased by 55.3% in 2005 mainly as a result of theBelgacom transaction as described in net revenue from external customers above. In 2006, revenuesrelated to international termination traffic ceased completely due to the same reason.***Other traffic.***Fixnet operates public payphones as part of its obligation to provide UniversalService. Also, Fixnet generates revenue from operator services and the sale of prepaid callingcards.The following table sets forth Fixnet’s other traffic revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                  (% change) Other traffic revenue(1)  105   130   158   (19.2)  (17.7) (1) Includes revenue from Swisscom-operated public payphones, operator services and prepaidcalling cards.Other traffic revenue decreased by 19.2% and 17.7% in 2006 and 2005, respectively, mainly dueto increased competition and online substitution for operator services and substitution ofSwisscom-operated public payphones’ services through the use of mobile phones.
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***Other revenue.***Other revenue comprises primarily revenue from the sale of customer equipment, theprovision of leased lines and the operation of a directories database.The following table sets forth Fixnet’s other revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Customer equipment(1)  238   253   250   (5.9)  1.5 Leased lines  144   158   136   (8.9)  16.3 Directories  122   120   113   1.7   5.8 Revenue from other activities(2)  115   101   91   13.9   11.1    **Total other products revenue**  **619**   **632**   **590**   **(2.1****)**  **7.2**     (1) Includes fixed-line customer premises equipment and mobile handsets sold through SwisscomShops.(2) Includes primarily revenue from Internet narrowband traffic to third-party ISP numbers andvalue added and data services to residential customers.In 2006, other revenue decreased slightly by 2.1%, mainly due to a decrease in revenue fromcustomer equipment and lower revenue from leased lines due to the release of a provision in 2005(see description below).Other revenue increased by 7.2% in 2005 due primarily to an increase in revenue from leased linesas a result of the resolution of a pricing dispute and new services provided to BICS. In 2004,Fixnet recorded a provision for a discount as a result of a dispute with one of its competitors.This dispute was settled in 2005 and the provision of CHF 9 million that had been recorded in 2004was released in 2005.**Intersegment net revenue**Fixnet is responsible for building and maintaining the fixed-line network and sells networkcapacity to Solutions and Mobile. Therefore, intersegment revenue comprises primarily revenue fromSolutions and Mobile for the use of the fixed network as well as revenue from Mobile for handsetcommissions due for new mobile subscribers that sign up in a Swisscom shop.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Intersegment net revenue  839   989   1,160   (15.2)  (14.7)Intersegment revenue decreased by 15.2% and 14.7% in 2006 and 2005, respectively, primarily as aresult of a decrease in traffic volumes and tariffs as well as leased lines from Swisscom’sbusiness customers recorded under the segment Solutions (see *“– Solutions”)*and due to the Belgacomtransaction.
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**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Goods and services purchased  489   606   693   (19.3)  (12.6)Personnel expenses  880   944   954   (6.8)  (1.0)Other operating expenses  760   530   580   43.4   (8.6)Depreciation and amortization  757   797   1,072   (5.0)  (25.7)Capitalized costs and otheroperating income  (142)  (111)  (85)  27.9   30.6    **Total external segment expenses**  **2,744**   **2,766**   **3,214**   **(0.8****)**  **(13.9****)**Intersegment expenses  1,176   1,248   1,403   (5.8)  (11.0)   **Total segment expenses**  **3,920**   **4,014**   **4,617**   **(2.3****)**  **(13.1****)**   **External segment expenses**External segment expenses decreased by 2.3 % in 2006. A decrease in goods and services purchasedand personnel expenses was offset by an increase in other operating expenses. **•** Goods and services purchased decreased in 2006 by 19.3% mainly as a result of theBelgacom transaction.  **•** Personnel expenses decreased by 6.8% mainly due to a decrease in terminationbenefits from CHF 50 million in 2005 to CHF 11 million in 2006 as well as a decrease inthe average number of employees.  **•** Other operating expenses increased by 43.4% mainly as a result of an increase of CHF180 million in the provision recorded for the case relating to Swisscom’sinterconnection prices. See “*Item 8: Financial Information – Legal Proceedings*”. Therest of the increase is mainly related to expenses for the development and theintroduction of new products and services.External segment expenses decreased by 13.1% in 2005 primarily due to a decrease in depreciationand amortization as well as goods and services purchased. **•** Goods and services purchased decreased in 2005 by 12.6% mainly as a result of theBelgacom transaction. This effect was partially offset by an increase in expenses forthe purchase of ADSL modems, reflecting the growing number of broadband accesssubscribers.  **•** Personnel expenses decreased by 1.0% mainly due to continuing headcount reductionsin 2005*.*These decreases were partially offset by an overall salary increase as well asan increase in termination benefits from CHF 40 million in 2004 to CHF 50 million in2005.  **•** Other operating expenses decreased by 8.6% mainly due to expenses for energy asstarting in 2005, such expenses were billed as intersegment expenses by Swisscom’sreal-estate company Swisscom Immobilien AG following the introduction of a centralizedenergy cost settlement. Cost reductions in the areas of rental as well as maintenanceand repair were partially offset by an increase in expenses for information technologyrelating primarily to Swisscom’s triple play strategy and IT restructuring projects.  **•** Depreciation and amortization expenses decreased by 25.7% mainly due to (i) aone-time impairment charge of CHF 155 million in 2004 relating to assets in theinternational wholesale business; (ii) an increase in the number of fully depreciatedassets; and (iii) the phase out of one of Fixnet’s three switching platforms in 2004.
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**Intersegment expenses**Intersegment expenses comprise primarily network fees to Mobile for calls from other networksterminating on the mobile network, expenses payable to Mobile for the purchase of mobile handsetsand amounts payable to other divisions for information technology, rental of real estate andmanagement fees.Intersegment expenses decreased by 5.8% in 2006 mainly due to a reduction of the termination ratesfrom Swisscom Mobile.Intersegment expenses decreased by 11.0% in 2005 mainly reflecting a reduction in Mobiletermination rates on June 1, 2005 and a decrease in expenses as a result of the Belgacomtransaction. A decrease in expenses payable to Mobile for the purchase of mobile handsets as wellas a decrease in expenses for information technology were partially offset by energy cost billed bySwisscom’s real-estate company Swisscom Immobilien AG. The introduction of a centralized energycost settlement in 2005 resulted in such cost being recorded as intersegment expenses whereas theypreviously had been recorded as external expenses.Excluding the effects of the transfer of the Swisscom shops to Swisscom Mobile and the provisionrecorded in 2006 related to the legal proceedings in connection with interconnection, Fixnetexpects total segment expenses to decrease slightly in 2007, mainly due to a further reduction intermination rates of mobile network operators in Switzerland.**Segment margin**Segment margin decreased from 24.4% to 21.1% in 2006, due to the additional provision recorded in2006 relating to Swisscom’s interconnection prices. Excluding this expense, the segment marginwould have remained relatively stable at 24.7%.Segment margin increased from 19.2% to 24.4% in 2005, mainly due to a decrease in depreciationexpenses reflecting a one-time impairment charge of CHF 155 million in 2004 relating to assets inthe international wholesale business as well as an increase in the number of fully depreciatedassets. The Belgacom transaction also had a positive effect on the margin as this business wascharacterized by extremely low margins.The transfer of the Swisscom shops to Swisscom Mobile is expected to have a positive impact onFixnet’s margin, as this business was characterized by low margins. Excluding the provisionrecorded in 2006 relating to the interconnection proceedings, Fixnet expects its margin to decreaseslightly as a result of further decreases in revenues which it does not expect to be able to offsetwith cost reductions.
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**Mobile**Revenue from Mobile consists principally of monthly subscription fees, domestic and internationaltraffic charges for calls made in Switzerland or abroad by Swisscom’s customers and roaming feespaid by foreign operators whose customers use their mobile telephones over Swisscom’s networks. Italso consists of fees for using value-added services numbers, data traffic and sending SMS and MMSmessages as well as the sale of mobile handsets through channels other than Swisscom shops. See“*Item 4: Information on the Company – Mobile – Connectivity Voice – Principal Products*”.The following table sets forth the segment results for Mobile and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Net revenue from external customers  3,541   3,651   3,679   (3.0)  (0.8)Intersegment net revenue  481   517   677   (7.0)  (23.6)   **Net revenue**  **4,022**   **4,168**   **4,356**   **(3.5****)**  **(4.3****)**Segment expenses  2,605   2,691   2,739   (2.8)  (1.8)   **Segment EBIT**  **1,417**   **1,477**   **1,617**   **(4.1****)**  **(8.7****)**   ***Segment margin***  ***35.2******%***  ***35.4******%***  ***37.1******%***        The following table sets forth net revenue from external customers generated by Mobile for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Base Fees  635   677   691   (6.2)  (2.0)Connectivity Voice  2,040   2,203   2,286   (7.4)  (3.6)Connectivity Data and VAS  667   604   521   10.4   15.9 Other mobile revenue(1)  199   167   181   19.2   (7.7)   **Total Mobile external revenue**  **3,541**   **3,651**   **3,679**   **(3.0****)**  **(0.8****)**    (1) Includes revenue from the sale of handsets sold to sales channels other than Swisscom shopsand from the business with prepaid billing, device management and content services through thesubsidiaries SICAP, Swapcom and Minick.In 2006, Mobile’s total external revenue decreased by 3.0%. A decrease in Connectivity Voicerevenue as a result of a reduction in termination rates, the introduction of new tariff models anda decrease in inbound roaming tariffs through the conclusion of new roaming agreements with foreignmobile network operators was only partially offset by an increase in the number of subscribers dueto an increase in penetration as well as an increase in the usage of new data and value-addedservices (VAS) and an increase in revenues from the sale of handsets.Mobile’s total external revenue remained relatively stable in 2005. A decrease in ConnectivityVoice revenue as a result of a reduction in termination rates as well as the introduction of newtariff models was offset by an increase in revenues related to the increase in the number ofsubscribers due to an increase in penetration as well as an increase in the usage of new dataservices.Mobile expects total revenue to remain stable in 2007. A further increase in the subscriber baseand an increase in the penetration and usage of new data and value-added services is expected to beoffset by further declines in average tariffs, including a further reduction of mobile terminationrates from CHF 0.20 to CHF 0.18 per minute as per January 1, 2007.
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The following table sets forth certain data relating to Mobile’s subscribers and traffic:                       **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Average number of subscribers(in thousands)(1):                    Postpaid  2,711   2,569   2,449   5.5   4.9 Prepaid(2)  1,751   1,502   1,441   16.6   4.2    **Average number of subscribers**  **4,462**   **4,071**   **3,890**   **9.6**   **4.7**                         Average monthly minutes of use per user(AMPU)(1)(3)  124   120   118   3.3   1.7 Average monthly revenue per user (ARPU)(4)  65   74   81   (12.2)  (8.2)                     Traffic (in millions of minutes)(1):                    Connectivity voice(5)  4,432   3,688   3,404   20.2   8.3                      Number of SMS messages (in millions)(1)(6)  2,107   1,991   1,986   5.8   0.3  (1) Includes service accounts and traffic generated by service accounts. (2) Excludes inactive customers. Swisscom no longer includes accounts of any inactive prepaidcustomer in its subscriber figures. A customer is deemed inactive after a period of twelvemonths without making a call or sending an SMS message. On a yearly average, inactivecustomers were 209,461 in 2004, 141,910 in 2005 and 229,950 in 2006. (3) Includes traffic from all outgoing calls made by Mobile subscribers, excluding inactivecustomers, plus traffic from all incoming calls made to Mobile subscribers from all othernetworks. (4) Includes revenue from all outgoing calls made by Mobile’s subscribers, excluding inactivecustomers, including roaming and data and value added services, plus revenue from all incomingcalls made to Mobile subscribers from all other networks as well as base fee revenue.ARPU reconciliation               **Year Ended** CHF in millions (except where indicated) **December 31,**   **2006**  **2005**  **2004**    Net revenue  4,022   4,168   4,356 less non-connectivity revenue(a)  369   336   386 less inbound roaming revenue(b)  136   169   165 less other non-service revenue  60   43   39    **Service revenue relevant to ARPU**  **3,457**   **3,620**   **3,766**                 Average subscribers (in thousands)  4,462   4,071   3,890              ARPU/month (in CHF)  65   74   81  (a) Consists mainly of revenue from the sale of mobile handsets (b) Consists of roaming fees paid by foreign operators whose customers use their mobiletelephones over Swisscom’s networks.   Swisscom believes that ARPU provides its management and investors with useful informationconcerning the financial performance of its product and service offerings and its abilityto attract and retain high-value customers. (5) Includes minutes from all outgoing calls made by Mobile’s customers and foreign visitorsusing the network of Swisscom Mobile. (6) Excludes wholesale SMS messages.
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***Base Fees.***Net revenue from base fees consists principally of monthly subscription charges,which includes revenue from the sale of SIM cards.Base fee revenue decreased by 6.2% in 2006 as the increase in the subscriber base could not fullyoffset the effect of the continued migration of customers from higher price to lower price tariffsubscriptions.In 2005 Base fee revenue remained relatively stable, the increase in the subscriber base was offsetby the migration of customers from higher price to lower price tariff subscriptions.***Connectivity Voice.***Net revenue from connectivity voice consists principally of the domestic andinternational traffic charges for calls made in Switzerland by Mobile’s customers, roaming feespaid by operators whose customers use their mobile telephones over Mobile’s network and revenuefrom the termination of traffic on Mobile’s network from other Swiss mobile operators.In the course of 2006 Swisscom Mobile concluded new roaming agreements with lower tariffs with anumber of foreign mobile network operators. Although these lower tariffs have a negative impact onrevenues from inbound roaming, Swisscom Mobile’s operating result increased as traffic generated byoutbound roaming of Mobile’s customers exceeds traffic generated by foreign customers.Connectivity Voice revenue decreased by 7.4% in 2006 and 3.6% in 2005, mainly due to the reductionof termination rates effective June 1, 2005 and in 2006 due to the conclusion of new roamingagreements with lower tariffs with a number of foreign mobile network operators. The impact ofthese new lower roaming tariffs did however result in an increase in Mobile’s earnings beforeinterest and taxes as the amount of traffic generated by Mobile’s customers abroad, which generatesan expense payable by Mobile to the foreign network operator, exceeded the amount of trafficgenerated by foreign customers on Mobile’s network.. In addition Mobile introduced the NatelLiberty product family also in June 2005, a new tariff model charging customers on a per callbasis, rather than on a per-minute basis, for which 1,608 thousand subscribers had registered as ofthe end of 2006 (prior year: 635 thousand ). The reduction of termination rates and theintroduction of the new Liberty tariff models resulted in a decrease in the average monthly revenueper user (ARPU) from voice telephony. These tariff reductions however had a stimulating effect ontraffic thereby slightly increasing the average monthly minutes of use per user (AMPU).Theseeffects were partially offset by an increase in revenue resulting from an increase in the number ofsubscribers.***Connectivity data and value-added services.***Net revenue from data and value-added services consistsprincipally of fees generated from SMS messages, data traffic and services, especially from aservice launched in September 2004, enabling seamless data download/synchronization via a PC cardintegrating all mobile broadband technologies.Connectivity data and value-added services revenue increased by 10.4% in 2006 and 15.9% in 2005,mainly due to an increase in the number of subscribers using the new data services as well as anincrease in the average revenue per user from these new services.***Other Mobile revenue.***Other Mobile revenue mainly consists of revenue from the sale of mobilehandsets to third-party outlets and revenue from prepaid billing, device management and contentservices provided to other GSM operators.Key drivers for revenue from the sale of handsets are the demand and sourcing strategies ofthird-party handset resellers as well as the average price per handset sold to the resellers, whichare mainly dependant on the technology and features of the handsets. As this business has a verylow margin, Swisscom Mobile does not actively manage handset sales to resellers and externalrevenue from the sale of mobile handset may therefore be very volatile.In 2006, other mobile revenue increased by 19.2%, mainly as a result of an increase in the numberof handsets sold and an increase in the revenue from prepaid billing, device management and contentservices provided to other GSM operators.In 2005, other mobile revenue decreased by 7.7%, mainly as a result of lower average prices ofhandsets sold.
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**Intersegment net revenue**Intersegment net revenue comprises principally revenue from Fixnet for incoming calls made toMobile subscribers from other networks and revenue from the sale of mobile equipment in theSwisscom shops.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Intersegment net revenue  481   517   677   (7.0)  (23.6)Intersegment net revenue decreased by 7.0% in 2006 and 23.6% in 2005, mainly due to a reduction ofmobile termination rates as of June 1, 2005. The decrease in 2005 was also due to a decrease inrevenue from the sale of handsets through Fixnet’s Swisscom shops.**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Goods and services purchased  955   975   971   (2.1)  0.4 Personnel expenses  311   322   310   (3.4)  3.9 Other operating expenses  472   483   505   (2.3)  (4.4)Depreciation and amortization  385   373   359   3.2   3.9 Capitalized costs and otheroperating income  (21)  (17)  (16)  23.5   6.3    **Total external segment expenses**  **2,102**   **2,136**   **2,129**   **(1.1****)**  **0.3** Intersegment expenses  503   555   610   (9.4)  (9.0)   **Total segment expenses**  **2,605**   **2,691**   **2,739**   **(2.8****)**  **(1.8****)**   **External segment expenses**External segment expenses slightly decreased in 2006. A decrease in other operating expenses andpersonnel expenses was partially offset by an increase in depreciation and amortization. **•** Goods and services purchased remained stable in 2006. New roaming agreements wereconcluded with a number of foreign mobile phone providers in the course of 2006resulting in a substantial reduction in costs for outbound roaming traffic. This wasoffset by an increase in the number of handsets purchased for resale as well as anincrease in costs for the termination of mobile calls in the mobile networks of otheroperators as a result of an increase in the number of subscribers and volume oftraffic. The transfer of expenses from Fixnet (which was previously recorded asintersegment expense) to Belgacom International Carrier Services as a result of theBelgacom transaction in 2005 also had an offsetting effect. Since this transaction,Mobile now routes international outgoing traffic directly through Belgacom. For detailsof the Belgacom transaction see “*Item 4: Information on the company – Fixnet –Wholesale Traffic”.*  **•** Personnel expenses decreased by 3.4%, mainly due to a decrease in terminationbenefits from CHF 8 million in 2005 to CHF 3 million in 2006. A decrease in the averagenumber of employees was offset by an overall salary increase.  **•** Other operating expenses decreased by 2.3%, mainly due to a decrease in advertisingexpenses as well as expenses for repair and maintenance as a result of cost reductionmeasures.  **•** Depreciation and amortization increased by 3.2% mainly due to an increase inamortization of intangible assets (mainly software) following an increase ininvestments related to the development of new products and services.External segment expenses remained relatively stable in 2005. An increase in personal expenses aswell as depreciation and amortization expenses was offset by a decrease in other operatingexpenses.
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 **•** Goods and services purchased remained stable in 2005. A decrease in the number andaverage prices of handsets purchased for resale was offset by a transfer of expensesfrom Fixnet (which was recorded as intersegment expense) to Belgacom InternationalCarrier Services as a result of the Belgacom transaction. Since this transaction,Mobile now routes international outgoing traffic directly through Belgacom. For detailsof the Belgacom transaction see “*Item 4: Information on the company – Fixnet –Wholesale Traffic”.*  **•** Personnel expenses increased by 3.9% due to an overall salary increase as well astermination benefits of CHF 8 million in 2005. These effects were partially offset by aslight decrease in the number of employees as a result of cost reduction measuresinitiated in 2005.  **•** Other operating expenses decreased by 4.4%, mainly due to a decrease in expenses foradvertising and maintenance and repair as part of cost reduction measures. In addition,energy costs are no longer recorded under other operating expenses but underintersegment expenses, following the introduction of a centralized energy costsettlement by Swisscom’s real-estate company Swisscom Immobilien AG in 2005.  **•** Depreciation and amortization increased by 3.9% due to investments made in 2004 forthe rollout of new broadband technologies.**Intersegment expenses**Intersegment expenses comprise primarily network fees to Fixnet for mobile calls terminated onother networks, commissions payable for the acquisition of new customers or the extension ofexisting contracts in the Swisscom shops, rent, information technology cost and management fees.Intersegment expenses decreased by 9.4% in 2006 and by 9.0% in 2005, primarily due to the Belgacomtransaction, which resulted in Mobile routing its international outgoing traffic directly throughthe new company instead of Fixnet and the corresponding costs now being recorded under externalexpenses. In 2005, this effect was partially offset by energy cost billed by Swisscom’s real-estatecompany Swisscom Immobilien AG. The introduction of a centralized energy cost settlement in 2005resulted in such cost being recorded as intersegment expenses whereas they previously had beenrecorded as external expenses.Excluding the impact of the transfer of the Swisscom shops from Swisscom Fixnet to Mobile, Mobileexpects total segment expenses to remain relatively stable in 2007.**Segment margin**Segment margin remained relatively stable in 2006.Segment margin decreased from 37.1% to 35.4% in 2005 primarily reflecting the reduction oftermination rates as of June 1, 2005 as well as the introduction of new tariff models.The transfer of the Swisscom shops from Swisscom Fixnet to Swisscom Mobile is expected to have aslightly negative impact on Mobile’s margin, as this business was characterized by low margins.However, Mobile expects the segment margin to remain relatively stable in 2007.
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**Solutions**Revenue from Solutions comprises primarily revenue from national and international fixed-line voicetelephony services to business customers, revenue from leased lines, revenue from Intranetservices, revenue from other service business and revenue from solution business. See *“Item 4:Information on the Company – Solutions”*.Effective February 28, 2006, Solutions took over 300 mid- to large-sized customers, the relatedassets and 120 employees from Siemens Schweiz AG, extending its know-how in planning, installing,operating and maintaining company-internal voice and data networks. Furthermore, the parties agreedthat Siemens will provide Swisscom Solutions with support, including technical support for itstechnicians and engineers, and current and future PBX-related products. Solutions also agreed tocollaborate with Siemens Schweiz AG on a commercial basis.The following table sets forth the segment results for Solutions and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Net revenue from external customers  1,072   1,123   1,279   (4.5)  (12.2)Intersegment net revenue  148   145   158   2.1   (8.2)   **Net revenue**  **1,220**   **1,268**   **1,437**   **(3.8****)**  **(11.8****)**Segment expenses  1,188   1,233   1,350   (3.6)  (8.7)   **Segment EBIT**  **32**   **35**   **87**   **(8.6****)**  **(59.8****)**   ***Segment margin***  ***2.6******%***  ***2.8******%***  ***6.1******%***        The following table sets forth net revenue from external customers generated by Solutions for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) National and international traffic  200   239   297   (16.3)  (19.5)Leased lines national  122   147   184   (17.0)  (20.1)Intranet Services  140   152   173   (7.9)  (12.1)Other Service Business  230   247   272   (6.9)  (9.5)Solution Business  338   283   277   19.4   2.2 Other revenue  42   55   76   (23.6)  (27.6)   **Total Solutions external revenue**  **1,072**   **1,123**   **1,279**   **(4.5****)**  **(12.2****)**   In 2006 and 2005, Solutions’ total external revenue decreased by 4.5% and 12.2%, respectively,primarily due to a decrease in national and international traffic revenue as a result of a decreasein traffic volumes and lower average tariffs as well as a decline in revenue from leased lines,Intranet services and other services business due to price pressure and the substitution of oldertechnologies through IP-based services. This decrease was partially offset by an increase inSolution Business revenue resulting primarily from the Siemens deal.Solutions expects a slight decrease in revenue from external customers in 2007. Further decreasesin traditional traffic and data services due to fierce competition as well as substitution throughIP-based services are expected to be mostly offset by growth in revenue from system integration andoutsourcing services and new convergent products and services.**National and International Traffic**. Revenue from national and international traffic consists ofcharges to business customers for making national and international calls and comprises the sameproducts as those of the Fixnet segment. See *“– Fixnet – Access” and “– Fixnet – Retail Traffic”.*
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The following table sets forth certain information relating to Solutions’ national andinternational fixed-line traffic revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Local and long-distance traffic revenue  74   87   107   (14.9)  (18.7)Fixed-to-mobile traffic revenue  76   96   122   (20.8)  (21.3)   **Total national traffic revenue**  **150**   **183**   **229**   **(18.0****)**  **(20.4****)**International traffic revenue  50   56   68   (10.7)  (17.6)   **Total traffic revenue**  **200**   **239**   **297**   **(16.3****)**  **(19.5****)**                        Traffic (in millions of minutes)(1):                    Local and long-distance traffic  1,540   1,672   1,779   (7.9)  (6.0)Fixed-to-mobile traffic  246   258   278   (4.7)  (7.2)   **Total national traffic**  **1,786**   **1,930**   **2,057**   **(7.5****)**  **(6.2****)**International traffic(2)  342   356   361   (3.9)  (1.4)   **Total traffic**  **2,128**   **2,286**   **2,418**   **(6.9****)**  **(5.5****)**    (1) Figures do not include VoIP (Voice over IP) traffic. (2) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.Total traffic revenue decreased by 16.3% and 19.5% in 2006 and 2005, respectively, mainly dueto lower average tariffs due to intense competition as well as a decrease in tariffs forfixed-to-mobile traffic following a reduction of termination rates from Swisscom Mobile effectiveJune 1, 2005. In addition, traffic volumes decreased as a result of the continuing substitution offixed-line traffic by mobile or other services such as Voice over IP (VoIP) and a continuingincrease in the usage of the Internet (E-Mail). However, as a result of successful customerwin-back and retention programs, Solutions was able to minimize its loss in voice traffic marketshare, which only slightly decreased in 2006.***Leased Lines national*****.**Revenue from leased lines national comprises revenue from business customersin Switzerland for the provision of leased lines services. See “*Item 4: Information on the Company–Solutions – Leased Lines National”.*The following table sets forth, for the periods indicated, certain information relating toSolutions’ leased lines national revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Leased lines national revenue  122   147   184   (17.0)  (20.1)Revenue from leased lines national decreased by 17.0% and 20.1% in 2006 and 2005, respectively,mainly due to the migration from leased lines to IP-based services, which are recorded underIntranet services revenue, and as a result of a decline in prices due to continuing competitivepressure.***Intranet Services*****.**Revenue from Intranet Services comprises revenue from managed VPN services,based on multiprotocol label switching (MPLS) services offered to business customers. See “*Item 4:Information on the Company –Solutions – Intranet Services”.*
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The following table sets forth, for the periods indicated, certain information relating toSolutions’ Intranet services revenue:                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Intranet services revenue  140   152   173   (7.9)  (12.1)Intranet services revenue decreased by 7.9% and 12.1% in 2006 and 2005, respectively, as a resultof a decline in prices due to strong competition, partially offset by an increase in volumeresulting from the migration from other technologies such as leased lines to new IP basedtechnologies.***Other Service Business*****.**Revenue from Other Service Business comprises mainly revenue from privatenetwork services, business Internet services, international data services, as well as revenue frombusiness numbers. See “*Item 4: Information on the Company –Solutions – Other Service Business”.*The following table sets forth, for the periods indicated, certain information relating toSolutions’ Other Service Business revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Total Other Service Business revenue(1)  230   247   272   (6.9)  (9.2) (1) Includes revenue from Infonet Switzerland.Total other service revenue decreased by 6.9% and 9.2% in 2006 and 2005, respectively, mainlyas a result of a decrease in revenue from private networks and public data networks due tocustomers migrating to more cost efficient IP-based services.***Solution Business*****.**Revenue from Solution Business comprises primarily revenue from CustomerService, System Integration and Outsourcing, providing customers with customized modular solutionsto design, install and operate customers’ business communication infrastructure. Together withother Swisscom companies or external partners, Solutions is able to offer complete communicationsolutions. For a description of these services, see “*Item 4: Information on the Company – Solutions– Solution Business*”.The following table sets forth, for the periods presented, certain information related to revenuefrom solution business of Solutions:                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Customer Service revenue(1)  129   130   148   (0.8)  (12.5)System Integration revenue(2)  167   122   104   36.9   17.8 Outsourcing revenue  42   31   25   35.5   26.0    **Total Solution Business revenue**  **338**   **283**   **277**   **19.4**   **2.2**  (1) Includes primarily maintenance of private branch exchanges (PBX) and local area networks(LAN). (2) Includes primarily the sale and integration of private branch exchanges PBX and local areanetworks (LAN).Total Solution business revenues increased by 19.4% in 2006 compared to 2005, mainly as aresult of the Siemens deal as well as the continuing demand for the integration of data andtelecommunication infrastructure and outsourcing services.Total revenue from solution business increased by 2.2% in 2005, mainly as a result of an increasein System Integration revenue as a result of an increasing demand for the integration of data andtelecommunication infrastructure and an increase in Outsourcing revenue due to newly acquiredoutsourcing projects. These effects
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were partially offset by a decrease in Customer Services revenue due to a declining number formaintenance of PBX equipment and price pressure.***Other revenue***comprises primarily revenue from the rental of private branch exchanges (PBX) tobusiness customers. For a description of these services, see *“Item 4: Information on the Company–Solutions – Other*”.The following table sets forth, for the periods indicated, certain information with respect toSolutions’ other revenue:                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Other revenue  42   55   76   (23.6)  (27.6)Total other revenue decreased by 23.6% in 2006 and 27.6% in 2005, due to a reduction in PBX rentalcontracts reflecting a decreasing demand for PBX rentals.***Intersegment revenue.***Intersegment revenue comprises primarily revenue from system integration,outsourcing, leased lines and intranet services as well as business numbers.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Intersegment net revenue  148   145   158   2.1   (8.2)In 2006, intersegment revenue remained relatively stable.Intersegment revenue decreased by 8.2% in 2005, mainly due to a decrease in revenue for servicesand repairs of fixed and mobile network telephony equipment mainly from Swisscom Fixnet andSwisscom Mobile as Solutions’ service and repair center was sourced out to a third-party providerin the course of 2004.**Segment expenses**                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Goods and services purchased  240   197   150   21.8   31.3 Personnel expenses  279   261   289   6.9   (9.7)Other operating expenses  43   43   59   0.0   (27.1)Depreciation and amortization  34   39   46   (12.8)  (15.2)Capitalized costs and otheroperating income  (8)  (7)  (4)  14.3   75.0    **Total external segment expenses**  **588**   **533**   **540**   **10.3**   **(1.3****)**Intersegment expenses  600   700   810   (14.3)  (13.6)   **Total segment expenses**  **1,188**   **1,233**   **1,350**   **(3.6****)**  **(8.7****)**   **External segment expenses**Total external segment expenses increased by 10.3% in 2006, primarily due to an increase in goodsand services purchased and personnel expenses. **•** Goods and services purchased increased by 21.8% due to an increase in outsourcingand system integration services provided and as a result of the Siemens deal.  **•** Personnel expenses increased by 6.9% due to an increase in the number of employeesresulting from the Siemens deal.
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Total external segment expenses decreased by 1.3% in 2005 primarily due to a decrease in otheroperating expenses and personnel expenses partially offset by an increase in goods and servicespurchased. **•** Goods and services purchased increased by 31.3% mainly reflecting an increase inequipment and services purchased relating to the increase in revenue from outsourcingand system integration services.  **•** Personnel expenses decreased by 9.7% due primarily to a decrease in terminationbenefits from CHF 23 million in 2004 to CHF 0 million in 2005. Excluding terminationbenefits, personnel expenses decreased by 1.9% due to a decrease in the average numberof employees.  **•** Other operating expenses decreased by 27.1% mainly due to a decrease in expenses forinformation technology. Expenses in 2004 included expenses for the development of a newbilling system as well as expenses relating to the preparation of the merger ofSwisscom Enterprise Solutions and Swisscom Systems.  **•** Depreciation and amortization expenses decreased by 15.2%, mainly due to a decreasein capital expenditures in 2004 as a result of continuing retrogressively investmentsin customer premises equipment, since the customers increasingly invest in thisequipment by themselves.**Intersegment expenses**Intersegment expenses comprise primarily network fees payable to Fixnet for telephony and leasedlines and amounts payable to other divisions for information technology, rental of real estate andmanagement fees.Intersegment expenses decreased by 14.3% and 13.6% in 2006 and 2005, respectively, mainlyreflecting a decrease in the volume and prices of telephony traffic (including a reduction ofmobile termination rates) and network services as well as lower expenses for information technologyin 2006, due to the fact that Solutions incurred costs in 2005 for the implementation of a newbilling system.Solutions expects total segment expenses to remain relatively stable in 2007. An increase inexpenses for customer equipment and services purchased related to the growing business withoutsourcing and system integration services is expected to be offset by a further decrease inexpenses related to traffic and leased lines.**Segment margin**Segment margin remained relatively stable in 2006 as a decrease in revenue was offset by costreductions.Segment margin decreased from 6.1% in 2004 to 2.8% in 2005 due to a decrease in revenue that couldnot be compensated by cost reductions.Solutions expects its margin to slightly decrease in 2007 as a decrease in revenue with a highermargin from traditional traffic and data services is expected to be offset by revenue fromintegrated communication solutions with lower margins.
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**Other**The following table sets forth the results for the segment Other and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Net revenue from external customers  840   571   476   47.1   20.0 Intersegment net revenue  494   488   503   1.2   (3.0)   **Net revenue**  **1,334**   **1,059**   **979**   **26.0**   **8.2** Segment expenses  1,424   1,057   991   34.7   6.7    **Segment EBIT**  **(90****)**  **2**   **(12****)**  **n.a.**   **n.a.**    ***Segment margin***  ***(6.7******)***  ***0.2******%***  ***(1.2******%)***        The following table sets forth net revenue from external customers generated by the segment Otherfor the periods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Swisscom IT Services Group  346   249   207   39.0   20.3 Swisscom Broadcast  152   150   148   1.3   1.4 Antenna Hungária Group(1)  162   26   —   n.m.   — Accarda Group  118   115   112   2.6   2.7 Hospitality Services Group  58   31   9   87.1   244.4 Others  4   **—**   **—**   n.a.   —    **Total other external revenue**  **840**   **571**   **476**   **47.1**   **20.0**     (1) Acquisition in October 2005***Swisscom IT Services Group.***Swisscom IT Services Group offers end-to-end business solutionsprimarily in the financial services and telecommunications industries. In addition to businesssolutions, Swisscom IT Services Group focuses on system integration, outsourcing and ITinfrastructure services, including desktop services and data-center services.Revenues from IT Services increased by 39.0% in 2006, mainly due to the acquisition of Comit AG, anIT specialist in the financial services industry, on January 4, 2006. For further information, see*“Item 4: Information on the Company – Other – Swisscom IT Services Group”.*In 2006, Swisscom ITServices Group has further strengthened its position in the outsourcing market and has acquired andextended contracts with significant volumes.IT Services revenue increased by 20.3% in 2005, mainly due to an increase in revenue from IToutsourcing services.Swisscom IT Services expects the outsourcing business, especially in the financial servicesindustry, to grow further and therefore expects revenue to further increase in 2007.***Swisscom Broadcast.***Broadcasting revenue stems from fees for the transmission and broadcasting ofanalog and digital signals for television and radio broadcasting. Such services from SwisscomBroadcast are provided primarily to the Swiss Broadcasting Corporation (the “SRG”).Broadcasting revenue remained stable in 2006 and 2005.Swisscom Broadcast expects revenue to decrease substantially in 2007 due to price reductions as aresult of the renewed service contract with SRG effective from 2007 until 2012. The migration fromanalog to digital
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broadcasting signals will also result in lower revenues due to a decrease in the number of sitesthat will be necessary as digital technology provides better coverage than analog technology. Thesedecreases are expected to be partially offset in 2007 by non-recurring revenues for thedismantlement of analog broadcasting infrastructure.***Antenna Hungária Group.***Antenna Hungária Group generates most of its revenue from analog TV andradio broadcasting provided primarily to Hungarian broadcasting stations. In addition to broadcastdissemination, Antenna Hungária Group generates revenue with telecommunication (data transmission,VSAT, VAS and ISP) and maintenance and repair services. Swisscom acquired Antenna Hungária Group intwo steps in 2005 and 2006.The effect of full-year consolidation of Antenna Hungária Group in 2006 led to an increase inrevenue in 2006.Antenna Hungária Group expects revenue to slightly decrease in 2007 as a result of a price erosionin the analog broadcasting business.***Accarda Group.***Accarda Group comprises the business activities of Billag AG, MedipaAbrechnungskasse AG and Accarda AG, the former Billag Card Services AG, a company that Swisscomacquired in December 2003. Effective July 1, 2005, all activities that had previously been providedby Billag Card Services were incorporated into a newly founded company named Accarda AG that alsoassumed control over Billag AG and Medipa Abrechnungskasse AG as of this date.Accarda AG provides customer card services and billing services in the private sector domain.Billag AG provides billing services to public sector authorities, primarily as part of an agreementto collect radio and television reception fees in favor of SRG. Medipa Abrechnungskasse AG operatesin the field of medical billing.Accarda Group revenue increased by 2.6% in 2006, mainly due to the expansion into new businessareas such as healthcare and collection services.Accarda Group expects revenue to increase in 2007 mainly due to the expansion into new businessareas and to the addition of new customers.***Hospitality Services Group****(formerly Swisscom Eurospot)****.***Hospitality Services provides high-speedInternet access services to guests of the hospitality industry mainly in premium hotels acrossEurope (excluding Switzerland; where such services are provided through Swisscom Mobile) and theUnited States of America.Revenue increased significantly in 2006 and 2005, reflecting the continuing rollout of its businessactivities in Europe and an increase in the usage of its services.Hospitality Services expects this trend to continue and revenue to further increase in 2007.**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Goods and services purchased  164   69   41   137.7   68.3 Personnel expenses  559   419   388   33.4   8.0 Other operating expenses  393   325   296   20.9   9.8 Depreciation and amortization  208   140   169   48.6   (17.2)Capitalized costs and otheroperating income  (43)  (25)  (8)  72.0   212.5    **Total external segment expenses**  **1,281**   **928**   **886**   **38.0**   **4.7** Intersegment expenses  143   129   105   10.9   22.9    **Total segment expenses**  **1,424**   **1,057**   **991**   **34.7**   **6.7**    
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Total segment expenses increased by 34.7% in 2006, mainly due to newly acquired companies such asAntenna Hungária and Comit and to costs recorded relating to a limited number of outsourcingprojects which were acquired by Swisscom IT Services. **•** Goods and services purchased increased by 137.7%, mainly reflecting an increase inexpenses for customer equipment and services purchased relating to outsourcing servicesby Swisscom IT Services (including the acquisition of Comit) and the full-yearconsolidation of Antenna Hungária.  **•** Personnel expenses increased by 33.4%, mainly due to an increase in the averagenumber of employees at Swisscom IT Services, partially reflecting the acquisition ofComit and the integration of employees from outsourcing contracts as well as thefull-year consolidation of Antenna Hungária.  **•** Other operating expenses increased by 20.9% mainly due to the full-yearconsolidation of Antenna Hungária and the acquisition of Comit. In addition, expensesincreased due to the expansion into new markets, which also includes a provision in theamount of CHF 49 million relating to long-term outsourcing contracts, which Swisscom ITServices recorded in the second quarter of 2006.  **•** Depreciation and amortization increased by 48.6% mainly due the full-yearconsolidation of Antenna Hungária.Total segment expenses increased by 6.7% in 2005 primarily due to an increase in goods and servicespurchased, personnel and other operating expenses, including the effects resulting from theacquisition of Antenna Hungária, as well as intersegment expenses, partially offset by a decreasein depreciation and amortization expenses. **•** Goods and services purchased increased by 68.3%, mainly reflecting an increase inrevenue from IT outsourcing services by Swisscom IT Services.  **•** Personnel expenses increased by 8.0%, mainly due to an increase in the averagenumber of employees at Swisscom IT Services reflecting the takeover of employees fromoutsourcing contracts as well as the first-time consolidation of Antenna Hungária as ofOctober 25, 2005.  **•** Other operating expenses increased by 9.8% mainly due to an increase in expenses forexternal employees of Swisscom IT Services, the first time consolidation of AntennaHungária and a provision recorded in 2005 upon a revision of long-term contracts ofSwisscom IT Services. These effects were partially offset by a decrease in expenses forenergy as starting in 2005, such expenses are billed as intersegment expenses bySwisscom’s real-estate company Swisscom Immobilien AG as a result of the introductionof a centralized energy cost settlement.  **•** Depreciation and amortization decreased by 17.2% primarily due to the omission ofgoodwill amortization since, starting in 2005, goodwill is no longer amortized inaccordance with IFRS 3. For further information, see Note 23 to the consolidatedfinancial statements.  **•** Intersegment expenses increased by 22.9%, mainly due to an increase in energy costbilled by Swisscom’s real-estate company Swisscom Immobilien AG. The introduction of acentralized energy cost settlement in 2005 resulted in such cost being recorded asintersegment expenses whereas they previously had been recorded as external expenses.Total segment expenses are expected to increase in 2007 due to the expected growth in revenue.
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**Segment margin**Segment margin decreased from a positive margin of 0.2% in 2005 to a negative margin of 6.7% in2006, mainly due to the costs and a provision relating to long-term IT outsourcing contracts andthe negative impact of the depreciation of revalued fixed assets and amortization of intangibles,which were identified on the acquisition of Antenna Hungária.Segment margin increased from a negative margin of 1.2% in 2005 to a positive margin of 0.2% in2006, primarily due to an increase in revenue and a reduction in goodwill amortization, partiallyoffset by a provision recorded in 2005 relating to outsourcing projects of Swisscom IT Services.After relatively high costs for the expansion into new markets and a provision relating tolong-term IT outsourcing contracts in 2006, it is expected that a further growth in revenue willresult in an increase of the margin of the segment Other.
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**Corporate**The Corporate segment encompasses Swisscom’s headquarter divisions, group-company shared services,the real-estate company Swisscom Immobilien AG (“SIMAG”) and its social plan programs(PersPec and Worklink). For a description of PersPec and Worklink, see “*Item 6: Directors,Senior Management and Employees – Employees – Workforce Reduction and Productivity Improvement*”.SIMAG manages Swisscom’s portfolio of real estate properties, some of which it leases to othergroup companies and, to a limited extent, to third parties. In addition, it provides facilitymanagement services, such as energy purchasing, and security and cleaning, for third parties aswell as for internal use. For more information on Swisscom’s real estate, see “*Item 4: Informationon the Company*– *Property, Plant and Equipment*”.The following table sets forth the results for the segment Corporate and the percentage changestherein for the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Net revenue from external customers(1)  70   68   68   2.9   (0.0)Intersegment net revenue  567   622   540   (8.8)  15.2    **Net revenue**  **637**   **690**   **608**   **(7.7****)**  **13.5** Segment expenses  672   721   709   (6.8)  1.7    **Segment EBIT**  **(35****)**  **(31****)**  **(101****)**  **12.9**   **(69.3****)**    (1) Net revenue from external customers includes rental income, facility management servicesand other revenue.Net revenue decreased by 7.7% in 2006 mainly due to lower intersegment revenue, primarily as aresult of a change in the recording of costs related to apprentices. Until 2005, such costsincurred by Headquarters for apprentices were recharged to the group companies and the income wasrecorded as intersegment revenue. In 2006, such costs were recorded as other operating income,which is included within segment expenses.Net revenue increased by 13.5% in 2005 mainly due to an increase in intersegment revenue from SIMAGfollowing the introduction of a new centralized settlement system for energy costs through whichenergy costs are charged to other group companies by SIMAG. Intersegment revenue from SIMAG alsoincreased due to a group wide space optimization program carried out by SIMAG, whose cost werecharged to the other group companies.Net revenue is expected to increase slightly in 2007. An increase in fees charged by the groupheadquarters as a result of the centralization of human resources services in a shared servicecenter is expected to be partially offset by a decrease in revenues following a group wide spaceoptimization program carried out in 2006.**Segment expenses**                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Personnel expenses  249   228   253   9.2   (9.9)Other operating expenses  377   436   382   (13.5)  14.1 Depreciation and amortization  58   48   48   20.8   0.0 Capitalized costs and otheroperating income  (87)  (56)  (27)  55.4   107.4    **Total external segment expenses**  **597**   **656**   **656**   **(9.0****)**  **0.0** Intersegment expenses  75   65   53   15.4   22.6    **Total segment expenses**  **672**   **721**   **709**   **(6.8****)**  **1.7**    
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Total segment expenses decreased by 6.8% in 2006, mainly due to a decrease in other operatingexpenses and an increase in other operating income, partially offset by an increase in personnelexpenses. **•** Personnel expenses increased by 9.2% as a result of the following:    Costs relating to workforce reduction measures are calculated per segment for theemployees participating in one of the workforce reduction programs and are recordedas part of that segment’s expense. Until 2005 not all of the cost relating totermination benefits recorded by the segment met the criteria for recognition underIFRS and these costs are eliminated in the Corporate segment. As a result of a newsocial plan which was introduced in 2006 no costs were eliminated in 2006. Theamount of termination benefits eliminated, i.e. deducted from personnel expenses,from the Corporate segment was CHF 21 million in 2005. For further information, seeNote 8 to the consolidated financial statements.  **•** Other operating expenses decreased by 13.5% in 2006 mainly due to a decrease inrental costs in connection with the group-wide space optimization program carried outby SIMAG in 2005 as well as a decrease in contractors and consultancy expenses as aresult of a reduced number of projects in 2006.  **•** Capitalized costs and other operating income increased by 55.4% in 2006 mainly as aresult of a change in the recording of costs related to apprentices as described above.This effect was partially offset by a decrease in gains from sale of real estateproperty by SIMAG.Total segment expenses increased by 1.7% in 2005 primarily due to an increase in other operatingexpenses, partially offset by a decrease in personnel expenses and an increase in other operatingincome. **•** Personnel expenses decreased by 9.9% due to the following:    Cost relating to workforce reduction measures are calculated per segment for theemployees participating in one of the workforce reduction programs and are recordedas part of that segment’s expense. Not all of the cost relating to terminationbenefits recorded by the segment meet the criteria for recognition under IFRS. Thesecosts are eliminated in the Corporate segment, i.e. are deducted from personnelexpenses. However, expenses related to employees who have been transferred intoWorklink are recorded in the Corporate segment. For further information, see Note 8to the consolidated financial statements.    The amount of termination benefits eliminated from the Corporate segment increasedfrom CHF 18 million in 2004 to CHF 21 million in 2005, primarily as a result of anincrease in the number of employees who were transferred into Worklink. The decreasein personnel expenses is also due to a decrease in the expense for employees who areemployed by Worklink from CHF 81 million in 2004 to CHF 74 million in 2005reflecting a lower average number of employees**.**    Decrease in pension expense of CHF 9 million. For further details relating topension expenses see Note 10 of the consolidated financial statements.  **•** Other operating expenses increased by 14.1% mainly as a result of the centralizationof energy purchases through SIMAG as well as the cost for the group-wide spaceoptimization program carried out by SIMAG in 2005.  **•** Capitalized costs and other operating income increased by 107.4% due to an increasein gains from the sale of real estate property by SIMAG.Total segment expenses are expected to remain relatively stable in 2007. An increase indepreciation expenses following large investments in leasehold improvements by SIMAG is expected tobe offset by a decrease in costs for workforce reduction programs due to the decreasing number ofparticipants.
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**Liquidity and Capital Resources****Cash flows**Swisscom’s primary source of liquidity is cash generated from operations. The following table setsforth certain information regarding Swisscom’s cash flows:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Net Cash provided by operating activities  3,264   3,432   4,066   (4.7)  (15.6)Net Cash used in investing activities  (4,257)  (1,417)  (1,354)  200.8   4.7 Net Cash provided by / used in financing activities  641   (3,381)  (3,420)  n.a.   (1.1)   **Net decrease in cash and cash equivalents fromcontinuing operations**  **(352****)**  **(1,366****)**  **(708****)**  **(74.2****)**  **92.9**    Net increase in cash and cash equivalents fromdiscontinued operations  —   —   4   —   (100.0)***Cash provided by operating activities***Cash provided by operating activities decreased by CHF 168 million in 2006 mainly due to a decreasein earnings before interest and taxes and a first payout of CHF 101 million relating to theinterconnection proceedings, partially offset by the special contribution to Swisscom’s pensionfund in 2005.Cash provided by operating activities decreased by 15.6% in 2005 mainly due to a specialcontribution of CHF 288 million to Swisscom’s pension fund in connection with changes to the planand an increase in income taxes paid.***Cash used in investing activities***Cash used in investing activities increased from CHF 1,417 million in 2005 to CHF 4,257 million in2006, mainly due to the repurchase of 25% in Swisscom Mobile from Vodafone for a purchase price ofCHF 4.25 billion, a cash inflow of CHF 351 million in 2005 from early repayment of the vendor loansgranted to the buyer of debitel, as well as an increase in capital expenditure (see descriptionbelow). These effects were partially offset by a switch from a net cash outflow of CHF 330 millionin 2005 to a net cash inflow of CHF 1,531 million in 2006 from other current and non-currentfinancial assets and a decrease in net investments in subsidiaries and affiliated companies fromCHF 404 million in 2005 to CHF 255 million in 2006. For details, see Notes 4 and 24 to theconsolidated financial statements.Cash used in investing activities increased from CHF 1,354 million in 2004 to CHF 1,417 million in2005, mainly due to an increase in cash used for net investments in subsidiaries and affiliatedcompanies from CHF 112 million in 2004 to CHF 404 million in 2005. For details, see Notes 4 and 24to the consolidated financial statements. In addition, cash received from the sale of debiteldecreased in 2005 compared to 2004. Proceeds from the sale in 2004 amounted to CHF 485 million(representing proceeds from the sale of CHF 616 million less cash and cash equivalents of CHF 131million that remained with debitel) and cash received from early repayment of the vendor loansgranted to the buyer of debitel in 2005 amounted to CHF 351 million. For details regarding thistransaction, see Note 37 to the consolidated financial statements. These effects were partiallyoffset by a slight decrease in capital expenditure (see description below) and a decrease in thenet investment in other current and non-current financial assets from CHF 757 million in 2004 toCHF 330 million in 2005.
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***Capital Expenditure.***The following table sets forth Swisscom’s capital expenditure by category forthe periods presented:                       **Year Ended**  **Year Ended** CHF in millions (except percentages) **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Fixed-line network  457   353   360   29.5   (1.9)Mobile network  199   238   434   (16.4)  (45.2)Other intangible assets  229   189   103   21.2   83.5 Buildings and leasehold improvements  154   104   13   48.1   700.0 Other  285   203   226   40.4   (10.2)   **Total capital expenditure**  **1,324**   **1,087**   **1,136**   **21.8**   **(4.3****)**   Capital expenditure in the fixed-line network increased by 29.5% in 2006, mainly reflecting therollout of VDSL, the next generation DSL technology, a prerequisite for simultaneous transmissionof several TV channels and rich multimedia services as part of Swisscom’s triple play strategy tooffer innovative multimedia services.Capital expenditure in the fixed-line network remained relatively stable in 2005. A decrease incapital expenditures following the completion of the optimization of the voice switching platformat the end of 2004 was partially compensated by an increase in capital expenditures for theintroduction of functionalities and the expansion of capacity in the fixed-line network.After a decrease of 45.2% in 2005 due to significant expenditures in 2004 for the rollout of newmobile broadband technologies such as EDGE, UMTS and PWLAN, capital expenditure in the mobilenetwork decreased again by 16.4% in 2006, mainly reflecting a decrease in expenditures in the GSMand UMTS networks. This effect was partially offset by expenditures for the introduction of HSDPAin 2006.Capital expenditure in other intangible assets increased by 83.5% in 2005 and by 21.2% in 2006,mainly reflecting an increase in expenditures related to software and the development of newproducts and multimedia services such as TV and video on demand.Capital expenditure in buildings and leasehold improvements, mainly of Swisscom’s real-estatecompany Swisscom Immobilien AG (SIMAG), increased significantly in 2005 and again in 2006, mainlyas a result of a group-wide space optimization program as well as a project to introduce new,standardized workspaces in 2005 and the construction of new data centers primarily for Swisscom ITServices as well as leasehold improvements prior to the relocation of Swisscom Mobile and SwisscomSolutions into a new building in 2006.Swisscom expects capital expenditure in the fixed network to increase in 2007 as a result of theexpected peak in rollout of VDSL in 2007. Expenditures in the mobile network are also expected toincrease in 2007, reflecting investments to upgrade the existing core network withIP-functionality.***Cash provided by/used in financing activities***Cash provided by financing activities in 2006 amounts to CHF 641 million and reflects the bank loanof CHF 4.25 billion relating to the repurchase of 25% of Swisscom Mobile from Vodafone. This effectwas partially offset by dividend payments to Swisscom shareholders of CHF 907 million and tominority interests of CHF 297 million and the share buy-back of 8% of Swisscom’s outstanding sharesof CHF 2,348 million (including part of the withholding tax payment of CHF 136 million resultingfrom the share buy-back of 2005 which became due in 2006).Net cash used in financing activities in 2005 reflects primarily dividend payments to Swisscomshareholders of CHF 861 million and to minority interests of CHF 367 million, the share buy-back of7.75% of Swisscom’s outstanding shares of CHF 2,001 million (excluding part of the relatedwithholding tax payment of CHF 136 million which is due in 2006, but including the respectivepayment of CHF 119 million resulting from the share buy-back of 2004 which was due in 2005).Net cash used in financing activities in 2004 reflects primarily dividend payments to Swisscomshareholders of CHF 861 million and to minority interests of CHF 360 million, the share buy-back of7.13% of Swisscom’s outstanding shares of CHF 1,882 million (excluding part of the relatedwithholding tax payment of CHF 119
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million, which is due in 2005) and the repayment of a short-term credit facility of CHF 256 millionrelating to the business with loyalty cards from Billag Card Services, which was acquired inDecember 2003.***Cash provided by discontinued operations***Cash provided by discontinued operations from January 1 to June 8, 2004 of CHF 4 million, resultedfrom cash used in investing activities of CHF 19 million and financing activities of CHF 62million, partially offset by cash from operating activities of CHF 85 million.**Sources of liquidity**Swisscom expects to be able to meet its financing requirements, including the funding of itspension obligations, from cash flows from operations and bank borrowings. Financing of anyacquisition may also include bond issuances.However, Swisscom is limited in taking on additional debt by the Swiss Confederation’s strategicgoals for the period 2006 to 2009. These goals restrict the maximal permissible net debt ofSwisscom to, at most, one and a half times earnings before interest, taxes, depreciation andamortization (EBITDA). At year end 2006, net debt of CHF 4,379 million amounted to 1.15 timesEBITDA. According to an agreement with the Federal Council, however, the bank loans obtained inconnection with the repurchase of a 25% interest in Swisscom Mobile from Vodafone in December 2006is not to be included in the calculation of net debt for this purpose. Excluding these bank loans,net debt therefore only amounted to CHF 136 million, which is 0.04 times EBITDA.**Capital requirements*****Interconnection proceedings***. Since 2000, Swisscom has been involved in proceedings with regard tointerconnection prices. See Note 27 to the consolidated financial statements. Swisscom has recordeda provision relating to these proceedings based on management’s best estimate of the outcome. Aftera first ruling of the Federal Court on these proceedings in April 2006, Swisscom has made a firstpayment of CHF 101 million in 2006 and expects to incur further cash outflows related to theseproceedings of approximately CHF 259 million in 2007. As of December 31, 2006, the provisions forpotential future payments amounted to CHF 484 million for further cash outflows that Swisscomexpects to incur in 2007 and the following years.***Capital Expenditure.***Swisscom expects capital expenditure to increase to approximately CHF 1,4billion in 2007, mainly as a result of an increase in investments in the fixed network reflectingthe peak in the rollout of VDSL. For more information, see “– Cash flow – Cash used in investingactivities – Capital Expenditure” above.***Potential acquisition of Fastweb.***On April 10, 2007, Swisscom launched an all-cash friendly publictender offer for 98.26% of Fastweb’s shares for a maximum total consideration of EUR 3.7 billion.Swisscom already acquired 1.74% of Fastweb’s shares in March 2007. Swisscom will fund thetransaction (which will potentially involve refinancing Fastweb’s existing debt in the amount ofEUR 1.1 billion) via financial debt, pursuant to a facility agreement Swisscom entered into with aconsortium of international banks on March 20, 2007, and, depending on the final acceptance levelof the offer, by selling the 4.9 million treasury shares it acquired for CHF 2.2 billion in 2006through its share buyback program.***Financing activities***The key element of Swisscom’s return policy is the annual distribution of all freely availablefunds, or the so-called “Equity Free Cash Flow”. For more information on Swisscom’s return policy,see *“Item 8: Financial Information – Dividend Policy”*.
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The following table sets forth Swisscom’s equity free cash flow:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2006**  **2005**  **2004**  **2006/2005**  **2005/2004**                   (% change) Cash provided by operating activities  3,264   3,432   4,066   (4.9)  (15.6)Capital expenditure  (1,324)  (1,087)  (1,136)  21.8   (4.3)Repurchase of 25% in Swisscom Mobile  (4,258)  —   —   n.a.     Net proceeds from investments in othernon-current financialassets(1)  (1)  240   72   n.a.   233.3 Proceeds from sale of debitel  —   351   616   n.a.   (43.0)Net investments in subsidiaries  (246)  (303)  (112)  (18.8)  170.5 Net investments in affiliated companies  (9)  (101)  —   (91.1)  n.a. Repayment of financial liabilities  —   —   (256)  —   n.a. Issuance of financial liabilities  4,242   —   —   n.a.   n.a. Dividends paid to minority interests  (297)  (367)  (360)  (19.1)  1.9 Other cash flow from investing andfinancing activities, net(2)  46   38   23   21.1   65.2    **Equity free cash flow**  **1,417**   **2,203**   **2,913**   **(35.7****)**  **(23.4****)**    (1) Comprises cash flows from (i) the purchase and sale of other non-current financial assets;and (ii) loans receivable granted and repaid. (2) Comprises cash flows from (i) proceeds from the sale of fixed assets; (ii) other cash flowsfrom investing activities; and (iii) net purchase of treasury stock for share-based payment.Equity free cash flow is a non-GAAP measure. Swisscom uses equity free cash flow of afinancial year as a measure of the amount that is, according to its stated return policy, to bedistributed to shareholders in the following year in the form of dividend payments and sharebuy-backs. Equity free cash flow is not a substitute for net cash provided by operating activitiesor other measures of cash flow under IFRS. Equity free cash flow as presented by Swisscom may notbe comparable to measures with similar names presented by other companies. Swisscom believes thatpresenting this measure provides investors with useful information regarding the likely size ofSwisscom’s share buy-back program.On the basis of the equity free cash flow generated, Swisscom’s Board of Directors will propose adividend of CHF 17 per share (totaling CHF 881 million) to the Annual General Meeting, which willtake place on April 24, 2007. Depending on the acceptance level of Swisscom’s tender offer for theshares of Fastweb and following the closing of the transaction, Swisscom may review its futurepayout policy with a view to further increasing its attractiveness. See *“Item 8: FinancialInformation – Dividend Policy”.*
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***Contractual Obligations and Commercial Commitments.***The following tables show Swisscom’s totalcontractual obligations and commercial commitments as of December 31, 2006:                     **Contractual Cash Obligations** **Payments due by period in** CHF in millions     **Less than**          **more than**    **Total**  **1 year**  **1 – 3 years**  **4 – 5 years**  **5 years**    Cross-border tax lease obligations(1)  **3,603**   303   134   246   2,920    Finance lease obligations(2)  **1,677**    83   197   74   1,323    Operating leases(3)  **981**   118   222   210   431 Unconditional purchase obligations(4)  **364**   328     36   —   — Syndicated bank loan(5)  **4,594**   1,595      125   2,874      — Other current liabilities(6)  **50**     50     —   —   —    **Total contractual cash obligations**  **11,269**   **2,477**   **714**   **3,405**      **4,674**        (1) Represents total future payment commitments for the liability that is recorded on thebalance sheet as described below. Under the terms of the agreements, Swisscom incurred debtthe majority of which it defeased by making cash deposits. At December 31, 2006, the netpresent value of the lease obligations is CHF 1,459 million and the amount on deposit is CHF1,125 million. The net present value of cash outflows in the future is therefore only CHF 334million. (2) Represents total future payment commitments under finance leases. In 2001, Swisscom enteredinto two agreements for the sale of real estate and at the same time entered into agreementsto lease back part of the sold property space. A number of the leaseback agreements qualify asfinance leases. Total payments of CHF 1,508 million relating to these finance leases areincluded in the table above. Also included in the table above is a payment of CHF 169 millionrelating to one additional cross border lease transaction. No amounts were placed on depositfor these leases. (3) Represents the total future minimum lease payments resulting from operating lease contracts.