January 13, 2012 / 1:55 PM / 8 years ago

TEXT-Fitch:Increased French mobile competition to drive revenues lower

Jan 13 - Fitch Ratings says that Iliad’s (not rated) Free Mobile price plans are more aggressive than Fitch expected. Three competitors have so far reacted, pointing to further price competition in the French mobile market. Bouygues Telecom is expected to announce the new prices for its low-cost brand B&You next week. The agency expects French mobile service revenue to see further declines over the next 18-24 months.

Fitch believes that this new pricing environment is clearly credit negative but unlikely to lead to negative rating actions for France Telecom (FT; ‘A-‘/Stable) and Vivendi (‘BBB’/Stable). Exposure to French mobile revenues remains limited for FT and Vivendi, accounting for approximately 25% of FT’s group revenues and 30% of Vivendi’s group revenues. FT’s 2G/3G roaming agreement with Free Mobile provides an initial effective hedge against Free Mobile’s arrival.

Iliad’s pricing was on average 50% cheaper than comparable products offered by other French operators before the recent round of price cuts. Its comprehensive package includes unlimited voice calls to fixed and mobile in France and 40 European countries, unlimited SMS and 3GB of data.

Free Mobile is taking advantage of the relatively high pricing of mobile services in France. Fitch estimates that prior to this week’s realignment, average mobile voice pricing in France was approximately EUR0.10/minute compared to around EUR0.07 in the UK and Germany, amongst the lowest in Europe. In addition, mobile termination rates (MTR) in France are the lowest in Europe. The material gap between relatively high retail prices and low MTRs inevitably created favourable conditions for a new entrant to come with fairly disruptive offers and force existing players to revise their pricing structures.

It remains to be seen if Free Mobile’s packages will be economically viable. Irrespective of the profitability that Iliad will achieve in this segment, Fitch believes that these mobile propositions are ultimately designed to protect Iliad’s triple-play customer base in a rapidly evolving quadruple-play market.

Mobile Virtual Network Operator (MVNO) Virgin Mobile, France Telecom’s low-cost brand Sosh and SFR quickly followed suit in an attempt to limit churn with repositioned tariffs.

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