European Benchmarking of Fixed Mobile Convergence offers
FRANCE – Iliad / Free Final version - July 27th
TABLE OF CONTENTS 1.
Key figures of the company
2.
Company background 2.1. 2.2.
3.
With a turnover of 578 M€, Free stands up as the growth engine of the France based Iliad, a private owned group dedicated to communication services With an innovative business model, Iliad has outperformed the French telecom sector since its IPO in early 2004
Company’s strategy 3.1. 3.2. 3.3. 3.4. 3.5. 3.6.
Free has from the start played the card of the innovation against its competitors. His break-through business model covers product features, pricing strategy as well as the servicing of the customers Free pursues an “all inclusive strategy” and differentiates itself by proposing a single 30€ offering. The player enhances its USP by proposing additional services for the same price Free has chosen to develop its own network to better handle its cost structure as well as the service delivery Line sharing customers and total unbundled customers generate slightly different gross margins However, Free’s ambition is to maintain a 20 € gross margin per sub, while handling a higher portion of full unbundled customers. The player is thus seeking additional ARPU through video services and convergent WiFi/GSM services Free is also striving the mobile pie and is currently investigating a MVNO deal
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1. Key figures of the company
COUNTRY
PLAYER
France
ILIAD GROUP - FINANCIAL DATA Y2005
Y2006[E]
Y2007[E]
491 113 23% 41 8%
724 224 31% 69 10%
4 500 989 349 35% 116 12% -355
1234 449 36% 148 12% -358
Source
Y2004
Y2005
Y2006[E]
Y2007[E]
SG Asset Research
328 65 241 22%
578 43 493 32%
829 29 757 37%
Source
MARKET CAP (Approx) TURNOVER EBITDA EBITDA MARGIN NET RESULTS NET MARGIN CAPEX
M€ M€ M€ % M€ % M€
Crédit Suisse
M€ M€ M€ % ('000) ('000) ('000) ('000) ('000)
Crédit Suisse
Unbundled customers Wholesale subscribers IPTV enabled customers IPTV subscribers French Broadband subscribers Cable subscribers DSL subscribers Incumbent DSL subscribers Full unbundled subscribers Free's commercial DSL subscribers Free's DSL Market Share Free's broadband market share
('000) ('000) ('000) ('000) ('000) ('000) % %
Crédit Suisse
€ € € €
SG Asset Research
Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse
Y2004
Crédit Suisse
FREE SA - FINANCIAL & MARKETING DATA TURNOVER of which Dial Up of which Broadband EBITDA MARGIN Free's DSL customers
ARPU Broadband VoIP TV services
SG Asset Research SG Asset Research SG Asset Research
Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse
Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse Crédit Suisse
SG Asset Research SG Asset Research SG Asset Research
1 600 1 120 480 1 100 195 9 490 574 8 916 6 089 2 827 1 600 18% 17%
12 722 703 12 019 7 770 4 249
30,9 25,7 4,7 0,5
33,7 26,4 6,3 1
15 208 828 14 380 9 062 5 318
FREE SA - OPERATIONAL NETWORK
SERVICING
More than 1500 active DSLAM as of YE2005 (to be cross checked) Very developed interconnection with the incumbent's network 17 000+ km of fiber optics for network backhaul Pure on-line model (No presence in any retail stores) Hot Line charged 0,34€/min to customers
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2. Company background 2.1. With a turnover of 578 M€, Free stands up as the growth engine of the France based Iliad, a private owned group dedicated to communication services •
Iliad was founded in 1991 by Xavier Niel. The company is listed on Euronext since January 2004. The current ownership structure is : o Founder: 68% o Management team: 6% o Float: 26%.
•
The company focuses on communications services and delivers its services mainly in France. It operates a carrier pre-select business called One.Tel, acquired in December 2001, and a prepaid phone card business called Kertel, acquired in March 2003. But the very main part of its revenues is generated by Free. The ISP started late 90’s to offer dial-up internet and concentrates now on broadband services.
2.2. With an innovative business model, Iliad has outperformed the French telecom sector since its IPO in early 2004 •
Free has a simple product range concentrated on a “Triple-play” offer for €29.99 provided through its proprietary “Freebox” modem. For this price, subscribers receive unlimited calls to fixed lines and some international destinations, a range of TV channels (as well as access to video on demand and some subscription TV services), together with a broadband DSL subscription.
•
Free is the second largest ISP in France behind Orange. At the end of 2005, Iliad had 1.6m DSL subscribers, of which 1.12m were on an unbundled service (the balance receive a wholesale DSL service provided by FT). 1.1m of the subscribers are able to receive Iliad’s TV service, of which 195k subscribers to pay TV services. Iliad’s subscriber base equates to an overall share of 17% of the DSL market in France as at the end of 2005.
•
By May 2005, the Enterprise Value of Iliad was estimated approximately 4,5 Billions of Euros by Crédit Suisse.
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3. Company’s strategy 3.1. Free has from the start played the card of the innovation against its competitors. His break-through business model covers product features, pricing strategy as well as the servicing of the customers In late 90’s Free has been the first French player to introduce free of charge dial-up Internet access. He pioneered a new model where the customer is only charged for the minutes used. The company derived its revenues from the revenue sharing with the incumbent, on the basis of minutes consumed by Free’s customers On the broadband services, Free was the first player to propose a bundled triple play offering The player has been from the start highly involved in the R&D of its connection box and has succeeded in pioneering distinctive features (triple play box, media centre, dashboard accessible through the TV set, DVB-T tuner embedded in the box, High Definition capabilities, wireless connection between the connection box and the set top box…) Another originality of the player is that he develops a pure on-line servicing model (no presence in the retail stores, subscription performed on line from end to end, no paper bill…)
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• •
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3.2. Free pursues an “all inclusive strategy” and differentiates itself by proposing a single 30€ offering. The player enhances its USP by proposing additional services for the same price •
When others main competitors propose simple play and double play options in complement of their core triple play offering, Free relies from the start on a single triple play offering available for 30 €
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This price applies whether the customer’s line is fully unbundled or shared with the incumbent’s voice services
•
The player enhances its USP by adding features and services to the 30 € purchased (increased number of international destinations for telephony, extended number of free TV channels, GSM/WiFi in the next months)
3.3. Free has chosen to develop its own network to better handle its cost structure as well as the service delivery •
The player has from the start invested in its own network. He has rolled out its DSLAM and has built several thousands of km of fiber optics to connect the traffic collected on local exchanges to the internet network
•
By doing that, the player reduces at the strict minimum its dependency to other player’s infrastructure and claims to be more innovative in terms of services
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3.4. Line sharing customers and total unbundled customers generate slightly different gross margins •
Free’s services are charged 30 € (VAT included) whatever the situation of customer’s line. If the customer line is fully unbundled, 30 € is the total cost of service for the customer. In case of the customer line is shared between incumbent and Free, the customer must add 15 € on the top for the incumbent’s rental
the the the line
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In case of shared access, the incumbent charges Free 2,90 € for the local loop. In case of full unbundling, the incumbent charges 9,30 €. These rates are regulated on a national basis ULL fees across Europe
Consequently the Free’s gross margin is about 20 € per sub, due to the mix of line sharing customers (unit gross margin 22 €) and full unbundled customers (unit gross margin 16,3 €)
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Iliad’s gross margin for full ULL (€)
3.5. However, Free’s ambition is to maintain a 20 € gross margin per sub, while handling a higher portion of full unbundled customers. The player is thus seeking additional ARPU through video services and convergent WiFi/GSM services •
Free expands regularly its international reach for unlimited telephony within package and uses this argument to capture additional customers. By expanding unbundled customer base, the player increases the termination revenues within network and also generates revenues from the traffic which is not included in unlimited package (especially towards mobile carriers and international)
•
The player has partnered with CanalPlay for its Video on Demand services and offers one of the most appealing movie catalogues to its customers
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Betting from the start on the importance of multimedia services, Free has integrated the TV set at the heart of its services. His VoD services are fully available on the TV set and the player proposes a ergonomic interface to purchase and manage the service. In particular, all the usage incurred is charged on the Free’s invoice.
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The player is also seeking differentiation through GSM/WiFi services. This is based on a single handset commuting to WiFi network when initiating a call from home and relying on regular GSM outside. Free is likely to launch such a service, which will be complaint with any MNO’s GSM service. Free argues important savings on the customer mobile bill and intends to use this service to differentiate from those ISP which are not proposing it
3.6. Free is also striving the mobile pie and is currently investigating a MVNO deal •
As of now Free has surprised the analysts by not signing any MVNO deal, when some of its main competitors have signed such a deal to increase their convergence potential (Neuf, Tele2). As a matter of fact, Free has a national Wimax license, which was for some time considered as a secret weapon to provide both fixed and mobile last mile. However, the player has recently changed its position and declares that there are on-going discussions with Orange and SFR to achieve a MVNO deal. With an ARPU in excess of 30 €, a share of mobile market would boost the player’s revenues, when improving its strength for quadruple play and convergent services.
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