Iliad Plans €1B FTTH Build

Always trying to stay one step ahead of rivals such as Orange (NYSE: FTE), French triple-play specialist Iliad (Euronext: ILD), best known for its Free service, has announced plans to invest €1 billion (US$1.27 billion) in fiber-to-the-home connections over the next five years. (See Iliad's Free Plans FTTH.)

Iliad has built up a near 20 percent share of the French broadband market through its service, pricing, and technology innovations in the past few years, and is heading towards having 2 million DSL customers by the end of 2006. Now it plans to make a bold leap into fiber access, aiming to hook up 4 million homes during the next five years.

It will start offering fiber access in Paris early next year and then roll out fiber connections in selected areas in other French cities. It plans to make the service available to 10 million customers, connecting to 4 million fiber access lines, by 2012, and will also make its fiber access assets available to other service providers on a wholesale basis. It has already handed Draka Holding NV (Amsterdam: DRAK.AS) the contract to provide new fiber, cables, and connectivity components in Paris for 1 million connections. (See Iliad to Wholesale FTTH and Draka Wins Iliad Deal.)

The leap was a bit too bold for its investors, though. After a few years of growth and profits, plans to fund a €1 billion build from existing funds and cashflow caused consternation among shareholders, and the company's stock dropped by 12 percent on Monday to €53, regaining some ground today by rising 6 percent to €56.40 ($71.58).

The news also caused Société Générale to downgrade the stock to Hold from Buy, as the investment bank believes the initial focus of the project will be on the upfront cost rather than any long-term benefits.

But it's an exciting offer for customers and industry observers, as Iliad plans to offer a fiber connection with access speeds of up to 50 Mbit/s, unlimited voice calls within France and to some international destinations, high-definition TV, and an optical terminal for the home, all for €29.99 ($38.08) per month, the same price as its current ADSL2+ offer.

"I'm moving to France!" says Graham Finnie, senior analyst at Heavy Reading, author of a recent report on FTTH, and clearly an Englishman who is prepared to turn his back on his homeland at the mere hint of some serious bandwidth. (See FTTH Hits Mainstream and FTTH Surge Coming.)

"This will put a lot of pressure on France Telecom, which already looks the most likely among Europe's major incumbents to jump into FTTH," notes the analyst. (See France Telecom Plans FTTH.)

Finnie points out the parallels between Europe and the U.S., in that there are different views about the best way to use fiber as an access technology. French operators are backing FTTH, while in Germany, Deutsche Telekom AG (NYSE: DT) is investing in fiber-to-the-node (FTTN). That matches the respective approaches adopted by Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T). (See SBC Sheds Light on 'Lightspeed'.)

Ovum Ltd. analyst Mark Main also likens Iliad's approach to Verizon's, in that both are starting their build-outs "with the 'low-hanging fruit' -- patches of dense broadband adoption in the more affluent areas."

And the Ovum man believes Iliad's move may have been prompted by France Telecom's developments. "Iliad has clearly been forced to respond to France Telecom's fiber trials in Paris and is as much playing the PR card as moving forward with a competing fiber access offering," he writes in a research note issued today.

He also has concerns about the financial aspects of the project. "In the early days [Iliad] will need to absorb significant cost in order to do this and in the long term must secure both its customer base and a rise in ARPU [average revenue per user] to recoup the network investment -- fiber in the access network is an expensive and risky step."

And Heavy Reading's Finnie has some doubts about the pricing: "Most FTTH projects are assessed by cost per household, with the typical cost of about $1,000 per customer. This plan implies €100 [$127] per customer. That sounds very challenging from a cost point of view."

— Ray Le Maistre, International News Editor, Light Reading

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