Feature Article

September 10, 2012

Free Mobile Faces Classic Disrupter Challenge

By all accounts, Illiad’s “Free Mobile” service has gotten market share very quickly in the French market by disrupting prices. In just six months, in a market dominated by Orange (France Telecom), Bouygues Telecomand SFR (Vivendi), Free Mobile managed to grab 5.4 percent market share.

Now the issue is whether Free Mobile can amass sufficient customers to reach a break-even point in about 2016. That business problem is by no means unusual.

New entrants in the application, communications and access businesses, especially those with a “price disruption” model, always find themselves racing a clock, aiming to amass customers fast enough to cover cash flow deficits, or aggregate users fast enough for a revenue model to be created.

Another way of putting matters is that disrupters have to get traction before they run out of investor cash.

Especially for new entrants in the access business, success hinges on reaching break-even as quickly as possible. For Free Mobile, that means a brisk continued rate of market share gains. There are other elements of the plan, but subscriber market share gains underpin all the others.

To keep its capital costs under control, Free Mobile leases capacity from France Telecom under a six-year deal.

To satisfy regulatory requirements, Free Mobile is building enough of its own facilities to cover 30 percent of potential French consumers. That means a relatively “thin” network with coverage gaps.

To build out the rest of the network requires continued market share gains, since those new customers will provide the cash flow to reach a break-even point, and then actual profitability.

To some extent, Free Mobile also is hoping its extensive “home Wi-Fi” users can help augment coverage. In the meantime, Wi-Fi might play a role. Free Mobile parent Illiad operates a fixed network business as well. And Illiad now has a “potential network” of about four million consumer Wi-Fi hotspots available to offload mobile data traffic.

The Wi-Fi hotspots are embedded in the “Freebox” Internet gateways of its DSL and fiber-to-the-home customers throughout France.  Up to this point, the “shared” Illiad Wi-Fi hotspot network has promised sharing of broadband access with other Illiad fixed network customers.

Now, Free Mobile customers with one of its standard plans will be able to configure their phones to automatically connect to any Wi-Fi hotspot in the Freebox community, gaining unlimited data access and VoIP calling. That could potentially help Free Mobile in the area of operating costs.

On the marketing front, Free Mobile sells only online, at least for the moment. Whether that will work so well longer term remains an unanswered question.

Growth will, of course, ultimately raise Free Mobile’s costs. French regulators presently allow Free Mobile to pay “asymmetrical” termination rates,” which means that, for a time, when Free Mobile is much smaller than all the other market leaders, Free Mobile pays other carriers less to terminate its traffic.

That advantage will disappear when Free Mobile gains market share. So much hinges on whether Free Mobile can keep growing.

In about six months, Free Mobile has garnered about 3.6 million customers, and has gotten 5.4 percent of France’s roughly 67 million mobile subscribers, in less than six months.

Free Mobile now is the fourth-largest mobile service provider in the French market, after Orange, SFR and Bouygues Telecom. To be sure, Free Mobile still is about a third the size of Bouygues Telecom, which has 11 million subscribers.

That means Free Mobile has, in six months, altered the market dynamics of a business that has been relatively stable for quite some time.

As often is the case, Free Mobile chose to attack the market using a “same service, lower price” model, offering service plans of €2 per month, or a plan with mobile data service at €20 per month, that set off a price war in the French mobile market.

Some elements of Free Mobile’s plan are insensitive to subscriber growth. Free Mobile relies on a “bring your own device” or “buy your own device at full retail price” packaging approach.

That means Free Mobile can offer lower-cost plans without contract, since it does not have to subsidize handsets.

But none of that will matter, ultimately, if Free Mobile’s growth stutters in a major way.

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Edited by Brooke Neuman

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