French Telco Upstart Iliad Mulls Move into Mobile

Entrepreneur Xavier Niel has come a long way since the 1990s, when he ran a sex-chat service on Minitel, an early French online service. Niel and his Paris-based company, Iliad, have elbowed their way through a crowd of heavyweight competitors to become one of the country's leading broadband Internet providers. Now they have set their sights on even bigger prey: France's $40 billion-plus per year market for mobile phone service. Iliad (ILD:FP) is the sole applicant for France's fourth mobile operating license, which has gone unclaimed for more than a decade and could be awarded as early as this month by government regulators. That means the 10-year-old company could soon be in the ring against the country's much-bigger incumbent players: France Telecom's Orange (FTE), the SFR joint venture of Vodafone (VOD) and Vivendi (VIV:FP), and Bouygues Telecom. Can this ambitious newcomer hold its own? The industry track record isn't encouraging. In other European countries that have awarded more than three mobile licenses, fourth- and fifth-ranked players have typically struggled. Indeed, even as Iliad prepares to enter the arena, the British market is consolidating. T-Mobile UK (DT), Britain's No. 4 carrier, is sealing a tieup with No. 3 Orange to create what will become the U.K.'s biggest operator. Iliad's Free: popular and innovativeIliad, with $2.35 billion in sales last year, is a featherweight compared to its rivals. France's's No. 1 player, Orange, posted more than $43 billion in French revenues last year from mobile services, as well as fixed-line, broadband, and Internet TV. Certainly, Iliad will get a lift from the popularity of Free, its triple-play broadband, TV, and fixed-phone offering. Free has lured subscribers with lower prices and innovative services, forcing bigger rivals to follow suit. Iliad already has some 4.4 million triple-play subscribers—about a quarter of the French market. "We are now a credible actor in France. We will have synergies and a brand that exists already," says Thomas Reynaud, Iliad's chief financial officer. "That is a very good starting point." Indeed, consumers have Free to thank for giving France some of the lowest broadband rates in the world. The average monthly cost of high-speed Internet in France is $28, compared to $37 in Britain, $54 in Germany, and $62 in the U.S., according to the Organization for Economic Cooperation & Development. By contrast, French mobile-phone rates are among the world's highest. A bare-bones French subscription averages $216 a year, versus $160 in Britain and $104 in Germany—although it still costs less than the average $279 in the U.S., according to the OECD. "There is an opportunity here for Iliad," says David Strauch, an analyst with Oddo Securities in Paris. "They have shown that they can be innovative in terms of pricing, and they are quite good in terms of marketing." Three years of operating losses?Going into the mobile business won't be cheap, though. Iliad will have to spend at least $1.5 billion to build its own third-generation wireless network by 2011, when it expects to begin offering mobile services. The company, which posted a $150 million profit last year and had more than $300 million in annual cash flow, says it can easily finance construction of the network with cash flow expected over the next two years. "We are in very, very good health," Renaud says. Will Draper, a telecoms analyst with brokerage Execution Limited in London, is dubious. "It's going to put an enormous load on Iliad," he says. Draper predicts the company will post operating losses for at least 3 years, not only due to the cost of the network build-out and launch, but also because Iliad initially will have to offer rock-bottom prices to lure customers away from existing operators. For the moment, Iliad isn't talking about its strategy. But because roughly two-thirds of France's 59.6 million mobile customers are locked into subscriptions of 18 to 24 months, analysts predict that Iliad's initial target may be customers who use prepaid calling cards and can easily switch companies. Among France's three incumbent operators, the one most vulnerable to Iliad is probably No. 3 Bouygues. With roughly 20% market share, it's well behind Orange's estimated 43% and SFR's 34%. Unlike its rivals, Bouygues only recently started offering service bundles that include fixed broadband and telephony services. Orange and SFR "will probably sit tight and not react for 6 months or maybe a year," Execution's Draper predicts. But Bouygues "will have to do something."

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