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Contrasting fortunes for France’s two quad play disruptors

The French Telecoms market.

The French telecoms market is now dominated by a tussle between two groups, struggling to eat into the market share of incumbent Orange with disruptive tactics and radical new cost models. In the most recent financial quarters, the pair had different fortunes however. Altice – owner of cableco Numericable and France’s second MNO, SFR – lost subscribers and revenues in 2015, though it boosted profits with its aggressive cost cutting. Meanwhile Iliad, which owns the Free broadband and mobile providers, continues to increase its subscribers and market share.

Altice has put intense pressure on its suppliers to reduce their prices, but the downside has been damage to its reputation for service quality, and a fall in customer numbers. Its full year EBITDA rose by 17.6% to €6.67bn ($7.4bn), but revenues fell slightly (by 0.1%) to €17.5bn ($19.4bn), and sales at the dominant French unit were down by 3.5%, to €11bn ($12.2bn).

The company has very high levels of debt to fund its expansion, including deals like the purchase of SFR in 2014, and US cableco Suddenlink last year. It is also seeking regulatory approval to buy another US provider, Cablevision, for $17.7bn, but already has net debt of €35.6bn ($39.5bn) as of the end of 2015 – 5.3 times EBITDA, twice the target rate for most European operators, and up from about €24bn ($26.6bn) a year earlier.

However, some patterns are looking better for Altice. Although its total subscriber base, across cable and mobile, was down to 15.1m at the end of 2015, down from 16.2m in 2014, the final quarter of the year saw postpaid net adds of 140,000, compared to a loss of 799,000 in the year-ago period. This was the result of a flurry of advertising by Numericable-SFR, which helped offset other factors like intense competition from Iliad/Free, Orange and Bouygues, and question marks over SFR’s network quality.

The latter is assumed to be a contributory factor in a sharp rise in SFR subscriber complaints between 2014 and 2015, as reported by the French Association of Telecom Users. According to the UK’s Financial Times, Altice has put heavy pressure on its suppliers and, after buying SFR, issued an ultimatum to them, to halve their prices or lose the business. SFR suspended payments to vendors including 20 members of Syntec Numerique, which represents companies in the digital sector, says the report – “The attitude was ‘Prove that I need you’,” Mathieu Coulaud, a lawyer with Syntec Numerique, told the newspaper.

But now, Altice is swinging towards improving network quality and capacity. It increased capital expenditure on fixed and mobile networks in France by 23% last year to around €2.3bn ($2.6bn), with 4G reaching 64% of the population in December, and fiber passing 7.7m.

Over at Iliad, the company had achieved market share of 17% at the end of 2015, with 11.7m subscribers, though the market may be shaken up again if Orange’s drawn-out talks about a merger or joint venture with third-placed MNO Bouygues come to fruition.

Iliad’s full year 2015 results show mobile revenues up 13% year-on-year to €1.83bn, with service revenue up 19%. This pushed revenues for the whole group up by 6% to €4.4bn, reflecting slower progress in the fixed broadband business, which grew by only 1.3% year-on-year. Group profit in 2015 was €335m, up 20% on the previous year.

Although Free made its initial impact by undercutting rivals and initiating a mobile price war – harnessing the lower cost structure enabled by its broadband lines and WiFi offload – it is now seeing a shift towards higher value subscribers, boosting revenue. More users are now taking its €20-a-month offer, said Iliad. It has introduced a plan with 50GB of 4G data for €19.99 a month, for existing users of its Freebox fixed broadband service.

Its number of 4G subscribers grew to 3.7m by the end of 2015, up from 1.7m a year earlier. And average 4G subscriber data usage increased to 3.2GB per month from 1.8GB.

As for SFR, all this 4G uptake will increase capex burdens. Iliad said it would deploy more than 1,500 sites in 2016, targeting 4G coverage of about 75% of the French population by the end of the year. While it rolled out 3G with heavy reliance on an MVNO and roaming deal with Orange, with 4G it will be self-sufficient. It opened 3,500 4G sites in 2015, as well as 1,600 3G sites, and acquired new spectrum assets – an additional 15 MHz in the 1.8 GHz band and 10 MHz in the 700 MHz band.

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