UPDATE 1-France's Iliad on the attack with smartphone lease deals
* Free Mobile strategy shift targets high-end customers
* Pressure mounts on Orange, SFR and Bouygues
* Rivals will be forced to respond - Espirito Santo
By Leila Abboud
PARIS, Dec 17 (Reuters) - French mobile telecoms operator Iliad will lease high-end smartphones to subscribers of its low-cost Free Mobile packages in a long-awaited attack on its larger rivals' most profitable business.
The move is a major departure from the no-frills plans that have enabled the upstart operator to grab an 11 percent market share since the Free Mobile service launched in January 2012.
Its monthly packages, starting at only 2 euros ($2.75) for the most basic deal, required customers to buy their phones while doing away with the long contracts demanded by rivals.
The deals sparked customer defections from Orange, Vivendi's SFR and Bouygues Telecom, but Iliad needed to expand its appeal to higher-margin customers used to receiving help buying smartphones.
The latest aggressively priced approach allows subscribers on its 15.99 euro and 19.99 euro plans to rent Samsung's Galaxy S4 for 12 euros a month over two years with an initial payment of 49 euros, or Apple's iPhone 5S for 12 euros a month and 99 euros up front. Customers must return the phone after two years.
Iliad's packages are different from the sales model used by its competitors, in which customers who sign two-year contracts of at least 20 euros a month receive an upfront subsidy worth 300 euros or more on a smartphone.
"The success of Free's offer will depend on whether French people take to the system of leasing a phone," said Stephan Beyazian, an analyst at Raymond James. "One thing is clear, though; on price, the packages are very attractive."
For example, Iliad's lease offer represents a discount of about 40 percent on the cost of buying an iPhone 5S and then taking out a Free Mobile monthly plan.
Analysts at Espirito Santo described Iliad's latest initiative as a "very aggressive strategy" and predicted a further degradation in its competitors' profitability.
"We believe this should represent another disruptive factor in the French telco market and force Iliad's rivals to respond in order to reduce the risk of additional market share losses," they wrote.
Iliad shares were down 0.7 percent at 169.95 euros by 1209GMT. Orange was down 0.3 percent and Bouygues down 1 percent, while Vivendi shares were up by 0.8 percent. The French blue-chip index was trading down 0.6 percent.
It has been a tumultuous few weeks in the French telecoms sector, touched off by Iliad's announcement that it would add superfast mobile speeds, known as 4G, to its offers without charging more, effectively ending rivals' attempts to boost prices after spending billions to build the new networks.
Bouygues, which has the broadest 4G coverage in the country, responded with a complete revamp of its tariffs including the addition of 4G speeds on its own low-cost contract-free B&You brand. Orange on Tuesday said that its no-frills brand, known as Sosh, would offer 4G for 24.99 euros a month.
That sparked a war of words on Twitter between Iliad's billionaire founder Xavier Niel and French Industry Minister Arnaud Montebourg, who accused the entrepreneur of destroying jobs in the telecoms sector.
Since Free Mobile joined the market less than two years ago, mobile prices in France fell by 11 percent in 2012 and are expected to drop by a further 8 to 10 percent this year.