French mobile operator Illiad only recently came to international attention with its audacious offer to buy T-Mobile’s US operation. Xavier Niel, Illiad’s quirky founder and majority shareholder (64%), has developed a business model based on cost and price cutting. Although this model is quite common in wireless services, the surprise has been the huge impact it can still have, in this case disrupting the French mobile market.
Niel’s roots are on the Internet, not in incumbent telecommunications. He first made money from a pre-Internet business, having dropped out of university at the age of 19 to set up a company selling sex-oriented chat services on Minitel, a French fixed-line, value-added service. He soon sold it and invested the proceeds in other ventures. Today he has investments in mainly Internet start-ups in 330 companies and 32 countries.
In 1999 he set up Illiad’s own ISP, with the brandname Free, and quickly rocked the market with his pricing strategy which dramatically undercut the three existing operators (Orange, SFR and Bouygues). Free also launched France’s first triple-play, multi-services box and forced competitors to follow suit. Today Free has a 25% share of the French broadband market, and French consumers enjoy one of the world’s cheapest rates.
In 2009 Niel turned his attention to mobile and put in the only bid for the country’s fourth 3G licence, which Free was duly awarded over the loud protests of the three incumbents. The incredibly disruptive effect Free had on the French mobile market turned out to be dramatic. In less than two years Free has piled on nearly 10 million mobile customers to give it a 14% market share as of November 2014, and it is aiming for 25% within the next few years. It has forced its rivals to slash prices, cut costs, lay off staff and – thanks to government regulatory pressure – come to a network-sharing agreement with Orange. And it is still by far the fastest-growing French operator. That is what anyone would call “disruption.”
Free’s no-contract mobile offer provides unlimited texts, calls and data, plus free international calls to 40 countries, for just €19.99 a month (and considerably less for its triple-play ISP customers upgrading to quad play). Customer support via community forums, no physical stores, no subsidizing of handsets, no R&D, and mainly outsourced activities are some of the ways in which Free keeps costs down. And, as with broadband, French consumers are now enjoying some of Europe’s cheapest rates. It is not necessarily an innovative model, but it is certainly a disruptive one.
The success of Free’s low cost model (EBIDTA of €624 million for 1H, 2014 and a 12% year-on-year growth in revenues in the third quarter of the year) makes it a rare, very-successful fourth entrant in a mature market. It has been successful both because it faced a group of too-comfortable competitors and enjoyed an unusual level of government regulatory support for a new entrant.