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Has the French Telco Market derailed, again?

Let’s wind back the clock.

70’s – France’s young president elect Giscard d’Estaing comes to office and realizing that the French Telephone system is years behind those of other countries. Huge investment is ploughed into the state owned PTT. During the decade, France moved from an antiquated system to a state-of-the-art Signaling System 7 (SS7) Telephone network.

When I came to France as a boy in 1974 it took months for our family to get our first phone line installed – that was already a vast improvement over the previous decade’s standard 2-year waiting list. By our second move in 1977 it was just a few days, which seemed a bit like science fiction at the time and vastly impressed family and friends back home in the UK.

Before most people had heard of the Internet or IP, we were busy in France discovering online services with the Minitel system which saw it usage boom in the 80s and early 90s. The leading edge was taken off French Telecoms as there was then much hesitation of how to best react to the emerging Internet in the 90’s, embrace it or try to impose that national Mintel standard? By the time it became clear that the Web would replace the Minitel, other countries got to catch-up with the network savvy French and the European ISP business from the mid-90’s seemed relatively balanced although we were all trailing behind the US.

A combination of a sound regulatory approach and French business acumen the French Telco sector back on track in the second half of the 90’s.

Competition was introduced effectively without bringing the incumbent to its knees. Compared to the UK where BT was almost killed off by Thatcher or Germany where DT’s stranglehold on access networks is still to be fully broken, the French seemed to have got a pretty good balance.

So when Free, a new entrant in the ISP business built from a Mintel empire (ILIAD) aggressively launched their first triple-play offer in 2003, France Telecom was able to reciprocate and the other challengers like 9-Cegetel and Club Internet were also able to follow suite.

The French Telecoms subscribers saw the most incredible decade until about 2010 with always more services for a fixed price of about 30€. But Iliad/Free surreptitiously broke the 29,99€ rule it had forced on the industry, by removing a few standard features that became add-ons (like €1,99 for TV service). This improved ARPU and although detailed figures are hard to come by, it is no secret that ILIAD/Free make significant profit from their ADSL ISP-Business (a 40% margin is often cited).

This profit and a favourable regulatory approach (Free bought the 4th mobile 3G operator licence at a discount in 2009 paying just 240 M€ where the other 3 operators had paid 619M in 2000) meant that Free was able to launch a very aggressive mobile offering in January 2012. The success was immediate with about a million clients by the end of that month alone.

Despite being a free market economy, most French commentators agree that the 1000 layoffs competitor SFR announced in 2013 can be clearly attributed to Free’s price “dumping”. As an independent consultant based in Paris and focussed on new services, I’ve seen I’ve seen many operator projects canned this year due to innovation budgets being cut at Orange, Bouygues Telecom and SFR. French 4G is at least a 2-year behind what US operators have already deployed.


So what’s going wrong?

Too much of anything – even a good thing – can be bad. After proving that a balanced approach to (de)regulation really does work, France seems to have lost its unique touch.

The three incumbent Mobile operators were hoping that 4G would help fight off the low-cost battering from Free. But Free has entered the 4G market with a bang, announcing that 4G services would be provided at the same price as with 3G. All operators have had to follow suit ruining the basic tenet of Telco strategy, where superior services requiring significant Capex can bring in extra revenues. The only way forward seems to be lowering costs.

This situation of all-out war has led Bouygues Telecom to announce seriously low-cost ISP services to be detailed in January 2014, with as-much-as-you-can-eat triple-play offerings going for 15€ per month (compared to Free’s current 30-37€).

The price war has got out of hand to the extent that the French government has become involved in the industry-wide slanging match, although it’s not at all clear what it can actually do except maybe give the regulator some more power. If the situation keeps on escalating, subscriber glee will be short-lived in 2014 as one of the 4 operators is bound to go bust and maybe two other merge.

But if subscribers have so far only won out from this situation, shareholder prospects are less clear.

In the 2 years to December 24th 2013, Iliad’s share price rose well over 50% (red) while Orange’s (blue) dropped more than 25%

The situation is almost reversed if you look just at the last 6 months

In the 6 months to December 24th 2013, Iliad’s share price was stable, but recently dropped 12% (red) while Orange’s (blue) grew 20%

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Could France, the birthplace of mass IPTV adoption, also be its resting place?

Operators seem to all copy each other in any given market; in France it is blatant.

Since Free created the 29,99€ “as much as you can eat” price-point in 2001, adding TV in 2003 content has been one of the main messages behind most ad campaigns for triple-play bundles. At least this was true until this year.

Two years ago, Bouygues Telecom came out with one of the world’s first quad play offers priced at 44,90€ per month 2 years ago, but they still only have a small TV footprint.

After a long battle, Orange, the incumbent here, gained regulatory authorization to also launch quad-play this summer.

SFR, part owned by Vodafone, is ready to launch a quad play offer, but so far has just added a VoIP to mobile option to its existing triple play and is still waiting to see how things pan out.

It has become more and more evident that Orange is moving out of content in the big exclusive way it had been pushing since 2004. In September 2010, all of Orange's 5 exclusive cinema/series channels and its Sports channel were officially put up for sale. We still don't know the outcome.

So now, as if in unison, the 3 major operators have dropped content and TV related messages from their 2010 multi-play ad campaigns.

SFR is focusing on customer service with a free Hotline. Free has also focused on a message about getting more and more service for always the same price as well as a second message about how much more (geeky) fun Free is.

Whereas Orange used to aggressively promote its own content and interactive TV features, they now only mention TV as one of many features.

Quad play ad from France's incumbent Orange
IPTV is just one of many messages

The immediate conclusion to draw is that IPTV has become a commodity here. Most other mass-market commodities like water and electricity are delivered by monopolies despite the government’s best efforts to create a competitive environment. Could that mean that IPTV is one of those water-like “natural monopolies”?

But wondering about delivering say water or electricity to a household, are there any conceivable situations under which they are delivered at a loss? The answer is clearly no.

The land-grab rush for IPTV is now over and it seems we’re entering a cost control period. The official reason Orange’s new CEO Stéphane Richard gave for pulling out of exclusive living room cinema and sports, is that his company was loosing 150M€ a year on each.

What will a period of cost cutting do to IPTV? The future is all of a sudden looking a lot less clear for IPTV in France. Anyone who has actually built an IPTV business model knows that to make it float, a little creativity is required. Cost-cutters are not creative people!

It’s a moot point as to whether or not turning back is an option. Is it possible to pose the un-thinkable question for many in the industry: “could a triple-play provider, simply pull out of TV?”

One small reason for hope has a little sting in the tail.

French fibre rollout has been stopping and starting for almost five years. About a million homes are now passed. Yet only 10% of those homes are taking up a fibre service. It seems the culprit is a sluggish commercial approach from the operators. Indeed, I know there is fibre in my street in the west of Paris, but I have had no luck finding somewhere to subscribe. French operators are milking the DSL cash cow and more significantly, they haven’t yet figured how to sell fibre more expensively than DSL except to a few geeks.

The sting here is that instead of becoming the great USP to justify higher prices, the TV component for triple-play is now perceived as an expensive commodity operators have to provide, but haven’t been able to get any money from. Fibre was supposed to change all that with multiple full HD channels galore, but the wind seams to no longer be powering the sails of that dream.

We are in the age of OTT with devices available over-the-shelf that people can pick-up in the high street. France is still the most innovative IPTV market place. Despite the global 3D flop, which I saw coming before the summer (see here), the first-ever commercial 3D IPTV service was just announced in France by Dorcel for adult on demand content.

Clever operators will be those that stop trying to do it all themselves, recognize their weaknesses and concentrate on their strengths. This means building an ecosystem of suppliers where the end customer is no longer someone representing just ARPU or churn, but a stakeholder with a say in the ecosystem. It’s her living room everyone is fighting over, so give her a say. If she wants to add say an Apple-TV to her cable subscription, then make sure you help her do that. If she asks you for a hybrid box that has all the home networking features bar coffee-making, make sure you have a partner to provide one. If she only wants access to FTA channels, have a deal ready with the cheapest zapper box maker for your market.

It’s is not official yet, but my clear vision is that IPTV, as a walled garden service delivered by Telcos into the living room, is indeed dying a slow death here in France. But long live TV over IP in its many new forms. As it’s getting to be quite a jungle out there with the likes of Google entering the fray, an ISP, satellite operators or phone company close to home might be just the person needed to help cope in this brave new TV world.

[UPDATE March 11 2011] After a really interesting debate on this topic on LinkedIn, good news from the IP&TV World Forum organizers (Gavin Whitechurch). We have a slot to discuss this over breakfast in person at Olympia, Thursday 24th March 8AM. Hope you can make it.