New French operator promises to cut monthly bills by 50%

Following confirmation that the French telecoms regulator had awarded the country's fourth 3G licence to Free, the company immediately made clear its intentions to reshape the market by promising to halve the average monthly mobile phone bill once it starts operations at the end of 2011 or early 2012.

While Free's owner, the French ISP Iliad, has a track-record of undercutting its rivals and innovative bundling, rival operators and some analysts are sceptical about the new entrant's ability to turn a profit, given the Capex required to build a network and the need to subsidise handsets.

"Iliad is underestimating how much it [launching mobile operations] will cost and overestimating how much impact it will have," said François Godard of Enders Analysis.

The experience of new entrants such as H3G in the UK or Yoigo in Spain suggests that Free could struggle to generate enough revenue to pay for mobile infrastructure, said Godard. "One of the conditions of the licence is that its 3G network must cover 90 per cent of the French population within eight years."

If Free only builds a partial network, assuming the French regulator is lenient about time scales, as it has been with the incumbents, it could be crippled by domestic roaming charges.

However, Taylor Reynolds, a Paris-based telecoms economist at the OECD, said, "If Free can do what they do on the internet side, we should see prices fall and service get a lot better very quickly. Current operators would probably have to match what Free is doing. All operators will have to get more competitive."

In anticipation of the price war, MVNO Virgin Mobile has already slashed their prices, and Bouygues Telecom has launched the first quad play package, adding mobile to broadband internet services. It also signed a deal earlier this month with Numericable, the cable operator, to use its fibre optic network to offer super high-speed internet services, a pre-emptive attack on Free's home turf.

One analyst, Jankees Ruizeveld, with Robeco Group in Rotterdam, even speculated that current operators may use their larger size to undercut Iliad. "If, for instance, France Telecom thinks Iliad will hurt them for €3 billion, they might say, ‘we will simply take them out for anything less than that' by cutting prices," he said.

For more on this story:
Financial Times and Bloomberg

Related stories:
Iliad's campaign for French 3G licence heats up
Orange to protest pricing of new French 3G licence
Bouygues cuts costs, but readies LTE trial with Alca-Lu
New French 3G licence designed to trigger competition

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