When Iliad invades, telecom investors quake. News the price-slashing French telco was preparing to enter Italy triggered an 11% fall in the shares of Telecom Italia on July 6. It is no wonder. At home, Iliad has caused mayhem since arriving in the mobile market four years ago. Numericable-SFR, France's second-biggest operator, is still hemorrhaging customers. Yet Italian fears may be overblown. (See Telecom Italia Tanks on Iliad Mobile Threat.)
Iliad (Euronext: ILD) is taking advantage of a merger between Wind Telecomunicazioni SpA , a subsidiary of Russia's VimpelCom Ltd. (NYSE: VIP), and 3 Italia, owned by Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY). Worried that regulators would block the deal to preserve competition, VimpelCom and Hutchison agreed to sell a bundle of their Italian assets to Iliad, ensuring Italy would remain a four-player mobile market. The European Commission (EC) waved the arrangements through this week. (See Eurobites: Hutch, VimpelCom's Italian Job Gets EC Blessing and Wind, 3 Eye Sale of Italian Assets Report.)
Unlike in France, then, the overall number of network operators will not change with Iliad's arrival, making it harder for the French upstart to have the same kind of impact. Pre-Iliad France was widely perceived to be a moribund mobile market where prices were among the highest in the European Union (EU). Data from the EC indicates French customers on contracts were each paying an average monthly bill of 44.95 ($50.14, at today's exchange rates) in 2010, against an EU average of just 24 ($26.77). Iliad was able to take a huge swing at pricing without undermining its own profitability.
Modern-day Italy is a very different affair. Its four operators have already exhausted themselves through bitter fighting on price. Market leader Telecom Italia (TIM) made just 12.10 ($13.50) per month in average revenue per user (ARPU) from Italian mobile customers last year, down from 19.70 ($21.97) in 2010. The earnings margin at its Italian business (before interest, taxation, depreciation and amortization) tumbled from 46.8% to 37.1% over the same period.
Those sharp drops contrast with a much gentler rate of decline at Orange (NYSE: FTE), France's incumbent, in the five years before Iliad's entry. Monthly ARPU fell from 34 ($37.93) in the final quarter of 2006 to 31 ($34.58) in the same period of 2011. After the carnage of the Iliad era, it is now just 22.30 ($24.87).
In Italy, Iliad also lacks the fiber broadband network that has made it so formidable in France. Throughout Europe, operators with both fixed and mobile assets are tying services together to satisfy demand for affordable and convenient all-in-one deals. Such "bundled" offers are set to become more important as consumers use content and services across a multitude of devices. For the time being, Telecom Italia has an opportunity that Iliad lacks.
None of this means Telecom Italia, Vodafone Italy and a combination of 3 and Wind can afford to be complacent, however. Iliad has lured customers away from its French rivals through more than low-cost pricing and quad-play capability. It enjoys a deserved reputation for service and technology innovation. And its executives have been shrewd negotiators in their dealings with regulatory officials and competitors. Eying a speedy route into Italy's broadband market, they might soon begin talks with energy group Enel SpA , which aims to become a wholesale alternative to Telecom Italia by investing 2.5 billion ($2.8 billion) in a fiber broadband network.
Having struggled to adapt to the realities of the digital age, Telecom Italia will undoubtedly need to sharpen up its act. But Iliad will be starting from scratch in unfamiliar territory and far tougher conditions than it faced in France. It will need all of its wiles if it is to prosper. (See Telecom Italia Not Ready to Transform, Admits Exec and Eurobites: Italy's Enel in $2.8B FTTH Plan.)
Iain Morris, , News Editor, Light Reading