France's Iliad aims for faster mobile profit

Tue Jun 12, 2012 3:12pm EDT

PARIS (Reuters) - Iliad (ILD.PA), fresh from a successful launch of ultra-low cost mobile telephone service in France, now faces the crucial test of building out its network and figuring out how to turn rapid customer growth into profits.

Thomas Reynaud, chief financial officer of France's newest mobile operator, said much would depend on how quickly the group could put up its mobile towers and migrate subscribers to the more expensive of its two offers at 19.99 euros a month for unlimited voice, texts and 3 gigabytes of data.

"It's quite tough with only five months of track record to say definitive things about the business," Reynaud said at the Reuters Global Media and Technology Summit on Tuesday.

"Each day we get a better understanding of what is going on in the network and a better understanding of the economics."

Although Reynaud refused to say when Iliad would begin making money from mobile or give specific subscriber targets for this year, he did say that Iliad's strategy was to be a profitable player with 15 to 25 percent market share "in the medium to long term."

Iliad's impact on the French mobile market has been immediate, touching off a price war that has forced established players France Telecom FTE.PA, Vivendi's SFR (VIV.PA), and Bouygues Telecom (BOUY.PA) to spend heavily to try to retain customers.

Analysts said Iliad will eventually turn France into one of the toughest markets in Europe with operating margin percentages in the mid-20s, down from mid-to-high 30s before the arrival of the fourth player.

The company signed up 2.6 million customers to its 'Free Mobile" offers in the first quarter to take 3.7 percent of the market, a pace unprecedented among new mobile entrants in European markets.

It sells only two offers - unlimited at 19.99 euros a month and a 2 euros package of one hour of calls and 60 texts - and has a more limited range of mobiles than its competitors.

Free Mobile also established a different business model, soon copied by its competitors: its customers pay for their own mobiles and can leave whenever they want, forgoing the traditional generous mobile subsidies that operators give on smartphones with contracts for one or two years.

Iliad is now building a national network, although for the time being 90 percent of its traffic is delivered over France Telecom's network under a roaming agreement.

Reynaud said that the network buildout was on track and that it hoped to have 2,500 mobile towers by year end, despite permitting delays as long as 24 months.

The difficulty of putting up antennas has nowhere been more apparent than in Paris, where green groups have hung up negotiations between the mayor's office and operators over how to handle new mobile antennas. The company had 10 antennas in Paris, as of March, and needs 300 for good coverage.

"We would love to accelerate the rollout, but you just can't do so overnight. There is a bit of inertia that you have to overcome, such as the permits and managing subcontractors," he said.

Iliad was able to recruit so many people quickly because of the strength of its brand in France, where it is already the second-biggest broadband provider, as well as its low-cost positioning, Reynaud said.

But the CFO refused to be drawn out on when Iliad's mobile business would turn a profit, and declined to repeat his view given before launch that it could break even with less than 10 percent market share.

"We have always said that our mobile activity would be very profitable in the medium to long term, and we are sticking to that commitment," he said.

Iliad's launch has undercut the conventional wisdom in the European telecom industry that late entrants to mobile markets rarely thrive.

In contrast, Spain's fourth operator Yoigo, which is controlled by Nordic operator Teliasonera (TLSN.ST), took five years to get the 3 million clients and cash flow positive by end of 2011. In England, Hutchison's (0013.HK) 3 took nine years to gain a near 10 percent market share and to make its first profit.

"It took other European players between 5-7 years to be profitable after launch," he said. "We will try to get there more quickly."

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(Reporting by Leila Abboud, Gwenaelle Barzic; Editing by Gary Hill)

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