A French revolution could disrupt U.S. mobile

August 13, 2014

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

U.S. mobile is at risk of a French revolution. On July 31, Xavier Niel’s Iliad emerged as a surprise bidder for 56.6 percent of T-Mobile US, the Deutsche Telekom-backed operator. The billionaire is little-known in America, and Deutsche rejected his $15 billion opening gambit. But Iliad is roughly to French telecoms what Ryanair has been to European air travel, or Aldi to retail. If it wins T-Mobile US, market share and margins at AT&T and Verizon could face the guillotine.

Iliad has thrived by being lean, inventive, and outfoxing bigger, bureaucratic rivals. It keeps things simple: customers choose from just a few bargains, like 19.99 euros a month for unlimited calls and 20 gigabytes of data. Headcount is under 7,000, versus 74,000 people at Orange France. It helps not to be a former monopoly, but the low-cost mentality runs deeper. Iliad sells mostly online, owning just 34 stores to Orange’s 579. Advertising spend is limited, bills paperless and technology built in-house using open-source software.

The American recipe will have to be different. To start, Niel needs to make an offer that works for Deutsche Telekom without ruining his own returns. And Iliad can’t duplicate one key French advantage – it was allowed to get up and running partly using Orange’s infrastructure.

Still, the United States offers huge scale, high tariffs, and fat margins, while European nations are small and the regulators there have forced down prices. No wonder Niel is keen. If he can disrupt a struggling market, think what mischief he can make in a thriving one.

Viewed like this, the $10 billion of promised “synergies” don’t look like the classic benefits of cutting overlap or browbeating suppliers. They’re more a bet that T-Mo, which already considers itself a maverick, could be far leaner and meaner.

What might success look like to the big incumbents? Pretty painful. In nine quarters Iliad has gone from nothing to 13 percent of France’s mobile market, grabbing customers from Orange, SFR and Bouygues Telecom. Excluding regulatory changes, Orange’s average revenue per user fell more than 12 percent in two years. Chop, chop.

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