The revolution is not where you might think…


The French media have been abuzz since Tuesday following the press conference by Iliad's Xavier Niel on the launch of Free's Mobile offering. Mobile may not be the core topic for this blog but since I talked a lot about Free in the past and certain aspects of their business model and since I will soon be writing about their fiber fiasco, it made sense to lay the groundwork for a broader reflexion on disruptive business models while it's hot.

I won't go in any great detail on the announcement itself and Free's offers, you can find context about it in English easily if you google it up. Om Malik has a general context article (he met with Niel before the release, so it's not specific, but it's a good primer) and The Guardian has an article that describes in broad terms the offering they have launched.

What interests me is the answer to two questions, essentially:

  • how much is Iliad moving outside of its proven model with this launch?
  • how much of a revolution is this really?

The first question might sound odd, but in my opinion it's really important for two reasons. First because Iliad has made its mark in France and beyond with a very specific and counter-intuitive model that has proven it works. Second because they have shown in the past, especially with their FTTH initiative that they can fail when they move too far out of their model.

The second question is a broader reflection on the French market and how much disruption this launch is likely to generate.

A partial extension of the Free model

If I had to summarize in three bullet points the specifics of Free's offerings so far and why they were successful, I would say this:

  • simple offers with few options to maximise legibility for customers
  • aggressive prices that appeal to people on a budget or casual users
  • rich bundles with innovative services that appeal to geeks and push new usages amongst the general population

With these new offers, Iliad checks the first two marks, but completely misses out on the third, which raises an interesting question: is price sufficient to sustain the model?

I'm not convinced it is.

No doubt that Free will attract customers who are price sensitive, but if they only attract such customers, they won't get the market share they hope for (Niel mentioned a 25% market share goal, though didn't say what the business model breakeven was) and they will have attracted low-profitability customers which ultimately might not be such a bad deal for the other players in the market.

The real make-or-break question is, without any innovation in their offering, without any specific services or usage, will they attract the kinds of customers who are currently paying upwards of 50€/m to the other operators?

Of course right now everybody is up in arms, Orange, SFR and Bouygues have slashed severly in the prices of their "cheapo" brands (thus confirming the not so subliminal message Free is pushing that they were "screwing their customers" until now) and it looks like 50% of the market will subscribe to Free. When the hulubaloo dies down, many customers are just going to do what most customers always do: stay where they are because the hassle of change is just too much to deal with.

Without a cool/geeky element to the offer, Free is effectively missing out on what made their success in DSL: low price combined with innovative service components.

Fans of the offer are saying that these things will come, and maybe they will but I wonder if Free hasn't missed the best possible window to introduce disruptive usage into the mix (and by the way, in case anyone wonders, things that could have made a difference: femtocells in every box, fully integrated ott apps, 4G/LTE, 3 screen approach, etc.)

A revolution in perception, maybe

Iliad entering the market was presented as a revolution by the company itself and most of the press, but is it really? It's unlikely to be a revolution in usage unless one thinks that 3GB of data in a 20€/m plan will boost mobile data usage exponentially (both in volume and adoption). I doubt that somehow, but you never know.

If there's no usage revolution, the only revolutionary aspect left will be the bloodbath. That's extremely likely, even if Free fails to reach it's penetration targets. Within a few days of them announcing their tariffs, competitors had slashed some of their prices in half or more (with, as mentioned above, a likely lasting negative effect in perception) and that's a path that there's no coming back from. It's understandable that they would run around like headless chicken, and it's not like they had no time to anticipate, but it's probably fair to say that they did not expect such price aggressiveness.

Customers are whooping with joy and touting the virtues of competition, as well they should be. But there should be no naiveté about this launch: the blood bath will have impact on the general market value (value destruction) on investment capacity and on employment. There's nothing inherently wrong there, these are all standard free market effects. The issue will arise from the brutal change resulting from a combination of a cartel exploding in the face of a disagreeing competitor and said competitor betting on volume to make up for low margins. The impact will occur in a very short period of time and the industry and some of its employees will inevitably suffer. There was even an ironic (considering their free-market advocacy) short note in today's Challenge (Free va coûter 4 milliards à l'état) arguing that the state would likely loose €4bn in tax revenues as a consequence of the introduction of real competition in the market.

There is however one way in which Iliad's offer could be considered not revolutionary per se but driving a revolution, and that is the perception of hidden costs. Iliad has done its utmost to avoid all the hidden costs that customers tend to hate but could not avoid until now. Consumer advocacy group UFC Que Choisir published a list of all the noteworthy specifics in the terms and conditions, and while there are still a few aspects that might be considered dodgy (especially around roaming in certain countries), by and large the contract is as short, clean and understandable as they come and certainly much cleaner than anything the industry has seen so far.

That's exactly the point that Rudolf van der Berg argues in this article in Les Echos entitled Grâce à la clarté de ses forfaits, Free ouvre en grand les robinets du mobile. Basically by making their offers transparent, they are going to force transparency onto the market and forever change the perception and expectations of customers. 

I'll buy that. That is a true revolution, and will likely happen no matter how well Iliad fares…