France's new mobile phone operator Iliad has signed up 2.6 million customers to take 3.7% of the market since launching its ultra low-cost offers in mid-January, a pace unprecedented among new mobile entrants in Europe.
The buzz around Iliad's 'Free Mobile' offers also allowed the group to recruit 191,000 new customers to its core broadband Internet service business, its highest level ever and 50% of all the new additions in the sector in the first quarter.
"No other new mobile entrant has recruited so many customers so quickly," Iliad's Chief Financial Officer Thomas Reynaud said in an interview on Tuesday. "We are making progress on building out our mobile network and the capacity problems that we encountered in the first months of service are now behind us."
Iliad's impact on the French mobile market has been immediate, touching off a price war that has forced established mobile players France Telecom, Vivendi's SFR, and Bouygues Telecom to spend heavily to try to retain customers.
Iliad's shares were up 4% at $130.6 per share at 0915 GMT after it reported a better-than-expected 29% rise in first-quarter revenue to $834.7 million. Analysts polled by Reuters had forecast $756 million to $799 million.
The new mobile business brought in some $124 million.
Analysts said Iliad will eventually turn France into one of the toughest markets in Europe with operating margin percentages in the mid-20s, down from mid-to-high 30s before the arrival of the fourth player.
Iliad was able to recruit so many people quickly because of the strength of its brand in France, where it is already the second-biggest broadband provider, as well as its low-cost positioning, analysts said.
In comparison Spain's upstart fourth operator Yoigo, which is controlled by Nordic operator Teliasonera, took five years to get the 3 million clients it had at the end of 2011. Hutchison's 3 took nine years to gain a near 10% market share in England.
Iliad's Free Mobile launched in mid-January with a $25.4 per month offer, which includes unlimited calls, texts and mobile Internet up to 2 gigabytes. It also created a $2.5 a month package of one hour of calls and 60 texts, which it gives away for free to its broadband clients.
Beyond offering lower prices, Free Mobile also established a different business model than its larger rivals: its customers pay for their own mobiles and can leave whenever they want, foregoing the traditional generous mobile subsidies that operators give on smartphones with one or two-year contracts.
France Telecom, SFR, and Bouygues also created their own low-cost, no subsidy brands as a way to match Free's prices without cannibalizing their traditional customer base.
SFR's marketing chief Frank Cadoret said on Monday that such budget offers could one day attract 30% of mobile customers in France and that SFR planned to launch a new low-cost brand dubbed Buzz Mobile in early June.
Free Mobile has caused Vivendi's SFR to lose 620,000 mobile customers, or 3% of its total customer base in the first quarter, while France Telecom lost 615,000 customers, or 2.3%. Despite SFR's customer losses reported on Monday after market, Vivendi's shares rallied up to 5% on Tuesday as analysts said Free's impact could have been much worse.
Bouygues Telecom lost 379,000 mobile customers in the first quarter, or about 3.5% of its customer base, the company said on Tuesday.
Iliad is undertaking a massive effort to build a nationwide mobile network that it says will cost $1.2 billion. But the rollout has been hampered by the difficulty of putting up antennas in some urban areas where it can take 18 months to get permits.
Iliad said in early March that it had built 1,000 antennas but was struggling in Paris where that it only had 10 antennas and needed 300 for good coverage.
Asked for an update on the roll-out, Reynaud declined to comment aside from saying that he saw no reason the group would not hit its target of having 2,500 antennas by year end.
In comparison, SFR has some 18,000 antennas to cover the country, Bouygues 17,000 and France Telecom 19,800.
While it builds out its network, much of Free Mobile's traffic is actually going over France Telecom's network under a roaming contract that will bring in $1.2 billion to the former state-owned monopoly in the next three years.
Signing the roaming contract gives France Telecom something of a hedge against Free's success, offsetting some of the revenue lost from client defections.
Iliad's margins and how much it has spent to date to build its own mobile network won't be disclosed until second quarter results however, so it is too early to say when the mobile business could reach profitability. A key element to the business case is now being weighed in Brussels after regulators rejected a French proposal setting the rates Iliad can charge other companies for calls into its network.
Regulators generally grant new mobile companies higher termination rates in their early years as they build out their networks as a way to compensate for their higher costs and lack of scale. Brussels has appeared to be pushing for lower rates than France had proposed, which could hurt Iliad's profitability in the early years.
"We expect to have more information from Brussels about the termination rate issue in the coming weeks," said Reynaud.
(Reporting by Leila Abboud and Gwenaelle Barzic; Editing by Christian Plumb and Greg Mahlich)