Free Mobile: Making British Mobile Users Wish They Were French?

Mobile phone customers may be looking enviously across the Channel where an upstart French provider, Free Mobile, is shaking up the market, making the UK’s quartet of squabbling operators look decidedly shabby.

The French mobile market, with its 60 million lines, has been shared by Bouygues Telecom, France Telecom and SFR (owned by Vivendi), but early in 2012, a fourth cellular operator, Free Mobile, burst onto the scene. A subsidiary of the Iliad Group, Free has taken 3.6 million customers or nearly six percent of the market in just six months – by promising to halve the cost of mobile telecoms, and then delivering on the promise.

Free as in cheaper than the rest

Free has become a favourite brand in France, after giving the French telecoms market a series of shocks.

Iliad launched the Free brand in 1999 with a 56kbps dial-up Internet service, and then in 2002 offered ADSL broadband, swiftly following up with the Freebox set-top box in 2003.

Freebox used an ADSL router to produce the first “triple play” offering in France, combining broadband, telephone and television at a very cheap € 29.99 (£24) per month. This was an immediate commercial success, causing the disappearance of some competitors and the alignment of the three other major operators on a more reasonable price.

After two years of silence, Iliad’s founder Xavier Niel unveiled the Free Mobile offer in January 2012, in a show clearly inspired by Steve Jobs’ MacWorld keynotes. Niel promised to “liberate” an audience of screaming geeks, and then unveiled a pair of minimalist communications packages:With millions of fixed broadband customers, Free’s next target was mobile data. At the end of 2009, it acquired the last French 3G license with the promise to “halve the bill for consumers”.

• one hour of talk time and sixty texts for €2 (£1.60) per month
• a voice plan, unlimited SMS and internet for €19.99 (£16) per month.

The press was stunned, the consumers delighted, and the competitors furious. The only question was – could Niel actually deliver what he promised. The price was indeed smaller than that for comparable services – although since Free moved to a SIM-only model where there is no handset subsidy, this is difficult to show directly.

Six months later, the French telecommunications landscape is changed. While France Telecom, SFR and Bouygues Telecom issue profit warnings and make staff redundant, Free’s business is booming. The group now boasts 5.1 million fixed broadband customers and 3.6 million mobile customers, is on target for a turnover of 3 billion euros in 2012.

As if all that were not enough, the company is set to steal a march on rivals in the next generation of mobile communications. Free has acquired one of Frances 4G mobile licences in the 2.6GHz band – development which will leave UK readers particularly green, since our 4G auction has yet to take place, having been delayed by disputes amongst operators.

What is the downside?

Of course, the Free story is not as simple as we have made it so far.  It has played the game very carefully and looks to be making headway, but it has had certain advantages – and it is still making a big gamble.

It is investing heavily and hopes to break even in 2016 – if the current rate of adoption continues. If the adoption rate tails off then it will find its model hard to sustain.

Instead of building a complete network, Free bought an expensive roaming agreement with Orange for six years, so the Orange network carries its traffic in most cases. Free’s own masts are being built with wide gaps between them, so its own coverage is thin – just enough to cover 30 percent of the French population, as required by the French regulators.

It is hoping to make or raise enough money to fill in the gaps in its network, before the Orange roaming agreement runs out. It also uses its customers Wi-Fi routers as home hotspots, so customers can roam onto these when in range (similar to BT’s Fon/OpenZone in the UK).

It’s also important to note that Free  pays a flat rate to Orange, so it can offload a lot of its traffic onto the Orange network.

Free also keeps its costs down by not selling through retails shops – it has opened only a handful and does virtually all its business  online. This is an increasing mode of business, but many observers think it must ultimately take the expensive step of setting up retail space as most consumers still buy their phones on the high street.

Finally, Free got two helping hands from the French government. Firstly, in 2009, the French government decided it wanted a fourth mobile operator and sold Free its  3G license for €240 million – a low price, although the EC did clear the French government of selling it deliberately low.

Secondly, Free has been allowed an “asymmetrical” termination rate – which means it pays less to have its calls carried on other networks than those networks pay to connect calls to subscribers on the Free network. This arrangement was set up to cushion the early years, when Free’s network is much smaller than its competitors, so it will pay termination fees more often than they will.

At some point, this asymmetric agreement, too will end, at which point Free will have to start making money from its subscribers.

Internet billionaire

So there are long term issues that Free will have to face, but so far, investors are impressed: Iliad’s shares increased in value by 50 percent in 6 months, giving it a market capitalisation greater than €7 billion (£5.6bn), and making Niel the eighth richest person in France.

Niel made his first fortune in the days of Minitel, the French forerunner to the Internet. Aged 19, he made his first fortune selling a Minitel chat services company in 1986, and then in 1995 invested in the first true French Internet service provider World-Net.

The only French Internet billionaire, he has invested in media (he is a co-owner of Le Monde) as well as start-ups (through the investment fund Kima Ventures) and also in telecommunications outside France.

After failing to buy Orange Switzerland, Niel became a shareholder in Golan Telecom, the fourth cellular operator in Israel.

At the moment, the Iliad Odyssey is limited to the French market, but at 45 years old, Niel could well go on to tackle new telecoms markets in Europe.

Euro Story: each week, TechWeekEurope will publish a selected story from across  NetMEdiaEurope’s network of European sites. This week’s story by Jerome Bouteiller is from silicon.fr. It was translated and localised by Peter Judge

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