Oct. 29 (Bloomberg) -- Iliad SA founder Xavier Niel may do for France’s mobile-phone services what his Free brand did for broadband Internet access: bring down prices in one of Europe’s most expensive markets.

Iliad may be the sole contender for France’s fourth mobile-phone license, after Numericable SAS and Omer Telecom’s Virgin Mobile France dropped out last week and Egypt’s Orascom Telecom Holding SAE did the same on Oct. 12. Paris-based Iliad filed an application yesterday, a day before the deadline.

“The new entrant will have to be competitive, and if it’s Free, it would be positive because in Internet access it is very, very aggressive and is priced very, very low,” said Edouard Barreiro, a representative for consumer group UFC-Que Choisir in Paris. “Thanks to them, we have practically the best Internet offer in Europe.”

For Niel, who owns about 66 percent of Iliad, seeking a piece of the 25 billion-euro ($37.4 billion) mobile-phone market is a “natural” progression, the company said. After shaking up France’s Internet market, he will take aim at the three current mobile-phone operators, France Telecom SA’s Orange, Vivendi SA’s SFR, and Bouygues SA’s Bouygues Telecom. They are anxious about Iliad’s entry, said Andrew Hogley, an analyst at Execution Ltd. in London.

“It’s the threat to pricing in the mobile market that they’re concerned about,” he said. “If an established operator cuts its prices by 20 percent, they’re not going to make it up with more usage.”

Maverick Leader

Niel is something of a maverick in France. In a country where most top executives come from France’s Grandes Ecoles, or elite universities, Niel, 42, is a self-made billionaire, having become an entrepreneur without family money or a university education.

The executive, who is the chief strategy officer at Iliad, started by creating sex chat services and invested in sex shops. In May 2004, just months after Iliad’s initial public offering, he was investigated after one of the shops was found to be involved in prostitution. He was exonerated from the charges and paid a fine.

His company is credited with giving France among the lowest Internet-access prices of countries tracked by the Organization for Economic Cooperation and Development.

“French prices weren’t good until Free entered the market,” said Taylor Reynolds, an OECD economist. “Free essentially set the price for the entire market.”

Mobile Market

French high-speed Internet-access costs $28.50 a month, compared with $36.98 in the U.K. and $87.32 in Canada, as of September 2008, OECD numbers show. Iliad offers Internet, television, and phone packages for 29.99 euros a month.

In mobile-phone services, France remains among Europe’s most expensive markets. French consumers pay about $604 annually for high-end mobile service, compared with $282 in the U.K. and $465 in Italy, according to the OECD.

If it does win the fourth license, Iliad will start offering mobile-phone services within about two years.

“It’s a market where today we’re not present,” Chief Financial Officer Thomas Reynaud said in an interview. “Mobile is not a breakaway from our current activity. It is a natural continuation of what we do.”

France Telecom spokesman Tom Wright, SFR spokesman Nicolas Chatin and Bouygues Telecom spokeswoman Brigitte Laurent said they had no comment on the financial impact of the fourth operator.

Consumer Friendly

In France, “competition on the mobile market is not, shall we say, that fierce,” said Rosalind Craven, an analyst at Business Monitor International, a market-research firm. “Growth has stagnated, mostly thanks again to this lackluster competition and not enough downward pressure on prices.”

France is unusual among Europe’s large countries in having just three mobile phone operators. Until Deutsche Telekom AG and France Telecom agreed to merge their British operations last month, the U.K. had five, while Germany and Italy each have four.

“There’s not enough competition,” Jean-Ludovic Silicani, the president of the telecommunications regulator, Arcep, said in an interview published in Le Monde on Oct. 26. “The arrival of the fourth actor could, without endangering existing operators, be favorable for consumers.”

He dismissed the notion that there will be a price war with the emergence of the fourth operator.

“If the new entrant engages in a real price war, looking at the size of the current operators, it will be the first to disappear,” he said.

Lower Profit

Still, Orange, SFR and Bouygues will feel Iliad’s presence if it gets a license, Nicolas Didio, an analyst at Exane BNP Paribas in London, wrote in a note to investors. Assuming a 7 percent market share for Iliad by 2015, Orange’s profit may fall by 10 percent, SFR’s by 17 percent and Bouygues Telecom’s by 23 percent, he wrote.

To be sure, ramping up mobile services could be “a mammoth struggle for the first few years,” said Execution’s Hogley. “We could see them being cash-flow negative for six or seven years in the mobile venture.”

Didio estimates that it would be cash-flow negative for just two years.

“I don’t believe that Iliad’s mobile project is risky financially,” said Didio. “It is neither a diversification nor a decision to enter a new country.”

License Price

Iliad’s Reynaud said the company can easily finance its expansion into mobile services, which will require new antenna towers and other infrastructure.

“Iliad is one of the least indebted telco operators in Europe,” he said.

Meanwhile, Vivendi and Bouygues Telecommunications have lodged complaints with France’s highest administrative court, saying the price of the fourth license is too low.

The companies are protesting the 240 million-euro license price, compared with the 619 million euros current operators paid. Vivendi has also raised the issue with the European Commission, as has France Telecom.

“The entry conditions for the fourth operator are very different from those for the first three because it will have fewer frequencies and it will be entering a mature market,” Arcep’s Silicani told Le Monde.

The fourth mobile operator faces incumbent operators with “a significant client base, often with contracts of one or two years, and therefore large switching costs,” said Marc Bourreau, a professor of economics at the Ecole Nationale Superieure des Telecommunications in Paris. On the other hand, “the progress of mobile technology makes investment less costly for the new entrant,” he said.

To contact the reporter on this story: Matthew Campbell in London at mcampbell39@bloomberg.net.

Last Updated: October 28, 2009 20:01 EDT