Photographer: Christophe Morin/Bloomberg
business

Xavier Niel Was a French Tech Darling. Now His Customers Are Leaving.

Corrected

Xavier Niel is in demand these days. The founder of French telecommunication group Iliad SA joined technology icons including Facebook founder Mark Zuckerberg and dozens of other top executives at a meeting with President Emmanuel Macron at the Elysee Palace last week. A day earlier, Niel was thronged by admirers attending a conference at his Station F tech-startup incubator on Paris’s Left Bank.

“Everybody wants their photo with him,” said Erel Margalit, an Israeli venture capitalist who was among those lining up for selfies with Niel. “He’s created an icon of innovation.”

Xavier Niel at Station F technology campus in Paris.
Photographer: Marlene Awaad/Bloomberg

Niel earned his fame, and an estimated fortune of $6.1 billion, with a simple idea: offer below-market rates for Internet and phone service, including mobile subscriptions costing as little as 2 euros a month. Since signing up its first customers 16 years ago, Iliad has grown to a 5 billion-euro-a-year ($5.8 billion) business that’s now the No. 2 player in French broadband and mobile.

But trouble is brewing at Iliad. Earlier this month, the company reported disappointing quarterly numbers, including its first-ever loss of broadband subscribers. Shares plunged nearly 20 percent that day. Though the stock recovered a bit in subsequent days, it’s still down 27 percent this year. Niel has lost almost one-third of his wealth, which had topped $9 billion. He’s Iliad’s controlling shareholder, with a 52 percent stake.

Highly Correlated

Niel’s fortune tracks Iliad’s share price lower

Iliad’s rivals—Orange SA, Altice NV’s SFR, and Bouygues SA—are fighting back with lower-priced plans and other promotions. Orange and Bouygues each gained more than 50,000 broadband subscribers in the first quarter and SFR more than 70,000, while Iliad lost 19,000. It’s still gaining mobile customers, but at a slower pace than its competitors.

Iliad may symbolize an affliction that business-school professors call Founder’s Syndrome, in which startups cling to strategies set by their creators rather than adapting to changing market conditions.

“This was a high-growth company, but the signs of a slowdown were a long time coming,” said Erhan Gurses, a Bloomberg Intelligence telecom analyst. “The low-hanging fruit is no longer available.”

To recharge growth, the company is starting up a loyalty program for subscribers and plans a new promotional policy that will reach 100 percent of the market.

“We will target both churners and subscribers whose promotion period is ending, to take them step-by-step toward full pricing,” Chief Executive Officer Thomas Reynaud said on a May 15 conference call.

Iliad Tries Harder

Company has risen to No. 2 in France since 2002

Source: Bloomberg estimates based on company reports

Note: By number of subscribers, in millions

What could also help Iliad would be a merger trimming the number of French operators from four to three, easing the price-cutting that’s crimped profitability. Telecom regulator Arcep last week rekindled talk of a deal by dropping its longstanding opposition to consolidation. Even before that, people with knowledge of the matter said Bouygues was considering a bid with other investors for debt-laden SFR.

Iliad is taking aim at Italy’s 16 billion-euro mobile market. On Tuesday, the company announced that its monthly subscription for a package of unlimited calls and 30 gigabytes of data would cost 5.99 euros a month. Analyst Stephane Beyazian of Raymond James called it the cheapest near-unlimited price in the developed world. 

But Iliad will face rivals that play its game: Fierce competition among Italy’s three mobile operators keeps rates breathtakingly low. Telecom Italia offers unlimited calls and 15 gigabytes of data for about 13 euros a month, and Vodafone charges 7 euros a month for 20 gigabytes of data and 1,000 calling minutes. Wind Tre SpA has packages for as little as 7 euros a month. 

Average monthly revenue per subscriber in Italy was only 13.71 euros last year, nearly 40 percent less than the figure in France, according to data provided by consulting and research firm Analysys Mason. It’s also below the levels in Spain, Germany and the U.K.

Iliad says it will break even on an Ebitda basis if it can get a 10 percent share, or 1.6 billion euros, of Italy’s mobile-services market, Italy Chief Executive Officer Benedetto Levi said in Milan on May 29 after announcing the launch of its service there.

Scrambling for business marks a humbling turn for Niel, 50, who’s earned a reputation as a French Robin Hood since he and a group of friends started the company in a Paris apartment two decades ago. France had some of the highest broadband and mobile rates in Western Europe before Iliad in 2002 introduced its Freebox broadband-television-phone service, followed by mobile in 2012. Now, French tariffs are among Europe’s lowest.

Niel’s background also is atypical. In a country where elite educational credentials are highly valued, he never finished college and once ran an online sex-chat service. “He started with practically nothing and created an empire,” said Florian Herve, who has a startup called Fitnss, based at Niel’s Station F incubator, that offers an online platform to let users find nearby gyms and fitness classes. In addition to funding the incubator, Niel founded a tuition-free school to teach coding.

A quiet backer of Macron’s 2017 campaign, Niel has also advised Bernard Arnault, the head of luxury giant LVMH, on digital investment. Arnault’s daughter Delphine, a top LVMH executive, is Niel’s partner; they have one child.

Xavier Niel, center, with Delphine Arnault, left, and Bernard Arnault at Station F.
Photographer: Marlene Awaad/Bloomberg

On May 14, the day before announcing quarterly earnings, the company said deputy CEO Reynaud would become CEO, replacing Maxime Lombardini, who would become chairman. Both have been with the company for more than a decade, as has Camille Perrin, who was named chief marketing officer.

Yet Niel, who holds the title of chief strategy officer, clearly calls the shots on major decisions. And he doesn’t seem overly alarmed by the disappointing numbers.

“I’m spending almost all my time working on Iliad and that won’t change,” he said on the call with investors on May 15. “We’ve always had the best quality-price ratio by far, and we are the favorite brand of the French people in telco.”

Iliad’s early success wasn’t just based on low prices. While rivals had a dizzying array of subscription plans, Iliad’s Free offered only a few. The limits of that approach are now becoming evident. Iliad is less skilled than its rivals at managing its customer base—for example, in offering discounts to entice subscribers not to switch to another operator.

“The extreme simplicity of Iliad’s business model was once its strength,” said Nicolas Didio, an analyst at Berenberg in London. “It has now become a weakness.”

— With assistance by Samuel Dodge

(Updates with revenue figures for other countries in 14th paragraph. An earlier version corrected  the number of children for Xavier Niel and Delphine Arnault.)
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