Salanave: How French operators are adjusting to 'the new normal'

Nearly six months after Free Mobile's commercial launch, every week brings further aftershocks to the seismic shift it has triggered. The latest one occurred last week at the SFR, which lost its executive chairman  and not-yet arrived new CEO, as its parent company, Vivendi, intends to explore strategic options for the SFR unit.

This turmoil reflects both the significant impact Iliad's Free Mobile has already had and the long-term threat it represents for the market structure. Despite operational hiccups at launch, Free had secured a 4 per cent volume market at the end of March and an estimated 8 per cent at the end of May. Although its value market share is significantly lower (estimated at 2.5 per cent at the end of March), its extremely lean cost structure and disruption precedent in the DSL space (where it is currently holds a 25 per cent market share) contribute to its long-term competitive threat. In this context, other French mobile operators are adjusting to "the new normal" through various tactics.

Last fall the incumbent operators had all anticipated the Free Mobile launch by starting low-cost second brands (Sosh for Orange, Red for SFR,  B&You for Bouygues Telecom) to compete on price. These brands were based on simplified offerings combining SIM-only plans and online activation and support. However, the price plans of these offers did not match Free Mobile's aggressiveness. All of the operators revamped their low-cost offerings quickly after Free's launch with 30 per cent to 40 per cent price reductions, while not perfectly matching Free's unlimited €19.99 monthly offer.

Sosh from Orange has sought greatest differentiation from Free Mobile's offer, with two cheaper plans that include limited calls but attractive data connectivity: a €9.90 plan with unlimited Facebook and Twitter usage through a dedicated application and a €14.90 plan with a 1 GB 3G data allowance and throttled speed beyond this allowance. It has also recently added unlimited SMS from any European Union country and French overseas territories to its €24.90 unlimited plan that directly competes with Free's offer. Overall, both Bouygues Telecom and Orange have announced they were satisfied with the commercial performance of their low-cost brands, securing 330,000 and 350,000 subscribers, respectively, by the end of April.

Beyond those second-brand tactics, the established operators are also starting to make some adjustments on their main brands. Interestingly, it is the incumbent operator Orange that led the most radical adjustments by streamlining its main brand offering down to only three plans and with a 20 per cent price reduction across the board. While SFR and Bouygues were not as radical, they also started to make SIM-only offers available across their offers to compete with Free's strategy of not providing a handset subsidy.

Operators have also begun to trim down their cost structures to adjust to expected lower revenues (Bouygues anticipates a 10 per cent revenue decline this year). Both SFR and Bouygues announced significant cost-reduction plans effective this year and involving at least 5 per cent headcount reduction. Orange has not announced any cost-reduction plan but is in a more favorable position as it will generate up to €2 billion wholesale revenues during the next three years, offering nationwide roaming to Free Mobile.

Finally, the three established mobile operators have announced they will accelerate their LTE rollout plans with an explicit objective to differentiate by selling higher-quality data connectivity services at premium rates. Orange is already testing this "quality price elasticity" by offering HSPA+ access only to its highest-paying customers (via its Origami Jet+ plan). Orange will roll out LTE in five major cities by the end of 2012 to launch commercial service. Bouygues and SFR have announced similar schedules with less detailed rollout plans. Meanwhile, Free Mobile's LTE plans are sketchier. Free has secured less limited spectrum than its competitors that could be sufficient for LTE offload in high-traffic areas, but it also hopes to secure a nationwide LTE roaming agreement with Orange.

The new French mobile market landscape has not stabilized yet and the operational transitions initiated could pave the way to broader capitalistic adjustments at both Bouygues and SFR, and even at the European level (see how the Orange Deutsche Telekom merger theme has reemerged). It could also make France a fertile experimentation ground for new carrier business and operational models geared for a post-voice and commoditized-data era.

Julien Salanave is a telecoms entrepreneur and innovation enthusiast. He is the founder of Upnext Research, a mobile innovation scouting & prototyping boutique with offices in North America, Western Europe and  Asia. You can read some of his insights on emerging developments in the mobile industry and on Twitter @juliensalanave.