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July 19, 2012

Illiad Takes Away Preferred Responses to Market Attack

By Gary Kim, Contributing Editor

Competition in the mobile and fixed network businesses is hard enough when new, low-cost competitors suddenly attack the prevailing price structure, forcing an across the board pricing response.

In fact, that is largely why incumbent fixed network service providers have not reacted more aggressively to new competition from IP telephony and over the top VoIP providers. There are times when the wiser course, in terms of protecting existing revenue streams, is to allow the attackers to take some market share and revenue, rather than dropping prices significantly, across the board.

That same sort of thinking was at play when digital subscriber line services first appeared in the U.S. market. Instead of being lead by the incumbent service providers, upstarts such as Covad (News - Alert), Northpoint Communications and Rhythms Netconnections were the early suppliers.

Incumbents initially were hesitant because of the feared cannibalization of T1 pricing by DSL services. So, the initial reaction was to simply let upstarts lead the market, on the assumption that protecting the T1 business was more important. Only when cable modem services began to take off did incumbents then conclude that there was more to lose by staying out of the market, than by getting in.

Recently, Iliad, which launched its “Free Mobile” service in January 2012 in France, has been wrecking havoc on its competitors France Telecom (News - Alert), SFR and Bouygues Telecom. In this case, the dominant mobile service providers decided there was no choice but to adjust their own retail pricing. The results were predictable, and instructive.

Predictably, the initial price disruption caused significant customer defections. Illiad signed up 2.6 million customers through mid-May 2012 offering no-contract service priced at two euros and another at 19.99 euros a month, significantly lower than had been offered by the other contestants.

That, in turn, took away the option of basically ignoring the threat. So the other competitors had to lower their pricing, either by creating new lower-cost offers or by lowering prices across the board. That, predictably, is slicing revenue.

Vivendi (News - Alert) SFR, for example, anticipates a 2012 earnings decline of 12 percent.

Average France Telecom revenue from each account will fall almost 10 percent in 2012.

Those declines will, of course, have ramifications. The operators will have to find ways to attack operating or capital costs, as well as do so in ways that do not harm prospects for public share prices and credit ratings.

The larger point is that there are times when a service provider can, or should, allow an attacker to take some market share. AT&T (News - Alert), for example, essentially chose to manage its long distance revenue decline, rather than fight to maintain prices or maintain sales volume and revenue.

In other cases, as with DSL, service providers decided to wait until a market opportunity was clear, and key competitors began to take share in the market.

In France, the attacker was so successful that no delaying options were seen as viable. Financial results show why an immediate “drop prices” response is not the preferable option.

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Edited by Brooke Neuman
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