UPDATE 3-Iliad declares war in French mobile market

* Main offer of 19.99 euros/month for unlimited calls, texts

* Cheaper than similar offers from existing operators

* France to become more competitive for big telcos

* Bouygues biggest share price decliner on CAC 40 index (Adds SFR comment, updates shares)

By Leila Abboud

PARIS, Jan 10 (Reuters) - French broadband specialist Iliad has launched its long-awaited mobile phone service with aggressively priced deals designed to shake up Europe's second-largest telecoms market.

Tuesday's launch ended a six-year quest for Iliad founder Xavier Niel, who had to apply twice and fight lobbying from existing operators who did not want the low-cost, high-tech formula Iliad honed in broadband to invade their mobile turf.

Accusing his larger rivals of charging among Europe's highest mobile prices, Niel announced one low-end and one high-end mobile offer to be marketed under the brand name Free.

Both are cheaper than similar packages from France Telecom , Vivendi and Bouygues.

"Until now telecom operators treated consumers like a cash cow to be milked," said Niel. "You now have the chance to teach your operator a lesson. You have two choices: you can sign up with 'Free' or you can call your operator and ask them to match our rates."

DEEP MARKET DISRUPTION

Iliad's main offer will cost 19.99 euros a month for unlimited calls to France and some 40 countries including most of Europe and the United States, unlimited texts and a 3-gigabyte allowance for mobile internet data. The low-end offer will cost 2 euros a month for 1 hour of calls and 60 text messages.

People who are already fixed line broadband clients will get a discount if they sign up for mobile, paying 15.99 euros per month for the main offer or nothing for the minimalist offer.

Stephane Beyazian, telecoms analyst at Raymond James, said Free's mobile prices would deeply disrupt the market.

"The other operators will have to align themselves to Free's prices in mobile, just as they had to match its prices in fixed broadband a decade ago," said Beyazian. "It may take a few years, but eventually most French people will end up paying mobile bills of around 20 euros per month.

France's second-biggest operator Vivendi's SFR is already mulling price cuts after Free's launch, said Frank Cadoret, SFR executive vice-president. "I think we will have to react and it will likely be on our 'Red' offers sold only on-line," he told Reuters, adding that the tweaks to these low-cost, no contract offers could be made in the next few weeks.

France Telecom and Bouygues could not be reached for comment on how they would respond to Iliad's mobile offers.

Despite its aggressive pricing, Iliad's success is far from certain given the firepower of its competitors and how it departs in key ways from the traditional mobile business model.

Iliad will primarily sell its services online, whereas France Telecom and SFR have hundreds of stores nationwide. Iliad will open around 10 stores this year and then decide whether it needs more, said Chief Financial Officer Thomas Reynaud.

SFR's Cadoret argues that its network of stores is a key competitive advantage that Iliad will struggle to match. "People panic when their iPhone doesn't work, and are willing to pay a few more euros a month to be able to go into a store for help."

Nor will Free subsidise mobile phones for its customers, although it will offer financing plans. As a result, Free's customers will not have one or two-year fixed contracts, which most operators require in exchange for subsidising the phones.

Iliad's 19.99 euros unlimited offer with no contract and no subsidy is comparable to France Telecom's low-cost brand Sosh, which sells unlimited calls, texts, and 2 gigabyte of mobile data for 49.90 per month and doesn't include a subsidy.

France's 21 billion-euro mobile market is mature, with few growth prospects as 63 out of 65 million residents already have mobiles.

Competition already intensified last year as operators cut mobile prices and launched all-inclusive bundles of fixed line and mobile calling, TV and broadband to blunt Free's arrival.

As a result, margins at France Telecom, Vivendi and Bouygues narrowed last year, leading to falls in their share prices, which far underperformed those of European peers.

MORE COMPETITION

Some analysts predict that France Telecom, Vivendi and Bouygues could all become structurally less profitable as Iliad takes market share in the coming years.

Goldman Sachs forecasts that Iliad's mobile entry will cause France Telecom to lose a third of its operating profits in its all-important domestic market by 2015. Vivendi and Bouygues are also exposed: Vivendi earns half of its operating profit from mobile in France, while Bouygues earns a third.

Much will depend on how quickly Free mobile can win over customers and how deeply its rivals cut prices to fight back.

Niel has said he wants Free to one day match its roughly 25 percent market share in broadband in mobile but analysts have more modest forecasts. Nomura says Iliad could gain a 1.8 percent market share by year-end, 8 percent by 2015 and 12 percent by 2020.

Reynaud said Iliad could break even on its mobile project once it had won a 4 to 5 percent market share.

Elsewhere in Europe, mobile operators such as 3 in Britain and Yoigo in Spain, which launched much later than their larger competitors, have struggled to carve out their niche. It took 3 almost nine years to establish a 10 percent market share in Britain and profitability while Yoigo took about five years to reach a 5 percent share and its first operating profit.

"Yoigo also tried a very low-cost strategy in Spain, and it hasn't paid off yet for them in terms of profit," said a Paris- based analyst. "I don't see how Free can make money with an offer at 2 euros."

Iliad's shares were up 3.5 percent at 1343 GMT, while France Telecom was up 1.5 percent and Vivendi 0.6 percent, amid a 2.9 percent rise in France's CAC 40 share index.

Bouygues, which is the smallest of the three existing operators in terms of market share, was the largest decliner in the CAC 40 index, down 1.3 percent. (Additional reporting by Gwenaelle Barzic; Editing by Greg Mahlich and Helen Massy-Beresford)