Faced with the inevitable dumb pipe fate and commoditization of the telco business the last couple of years, several large telco operators started pursuing vertical and horizontal integration strategies. Horizontal, by expanding into other markets or consolidating. Vertical, by expanding either into downstream side of their value chain or into other verticals, in this way reinventing their business.
On the other hand, many newcomers often don’t fear becoming a dumb pipe as much and take slightly different pathway by optimizing their cost base, challenging established operators and this way fighting for their market shares.
France’s Iliad with their Free/Alice brands is currently the 2nd largest broadband operator and 3rd mobile operator in France challenging the old incumbent operator Orange (France Telecom). Both Iliad and Orange provide a wide range of bundled services to their customers (Triple/Quadruple Play) ranging from FTTH, VDSL, ADSL, landline and mobile telephony to TV. The other two major competitors like SFR and Bouygues also use similar bundling strategy to provide full Quadruple Play spectrum of services resulting in a lower total cost to their customers as well as increased ARPU for the operator.
Iliad’s network investment strategy has been initially focused on broadband Internet access services (ADSL and later FTTH) and their main revenues originate from Fiber/ADSL. Iliad however also provides other services primarily TV, VoD most of it bundled and free of additional charge to the subscribers. In 2012 strengthen Iliad further their market share by acquiring from a small ADSL operator from Telecom Italia – Alice and this year trying to acquire assets from CK Hutchinson and VimpelCom to become Italy’s fourth mobile operator.
The strategy that gave Iliad foothold in the telecommunication market was originally to use unbundled ADSL access from incumbent France Telecom. By doing that Iliad could achieve much higher margins than their competitors like Alice who did not have the same focus on unbundled ADSL and used much more expensive not unbundled ADSL access.
High prices and high margins on ADSL made it possible for Iliad to provide their bundled VoIP service practically for free (free local, long distance) as well as to provide hundreds free TV over ADSL channels. The only services that Iliad charged customers for in addition to ADSL were basically certain international calls, paid channels, VoD over ADSL as well as subscription VoD. Consecutively with their low cost structure Iliad was able to provide the most affordable basic ADSL-VoIP-TV bundle on the French market without compromising the performance of their ADSL. This combined with their comprehensive offer on the content side was basically what made Iliad so successful in tough French telco market.
Further when looking at Iliad’s fiber investments, by using sewers Iliad managed to bring the cost of fiber in Paris to a much lower level even comparable with ADSL. Iliad’s investment in FTTH is important for the future both to overcome the limitations of VDSL/ADSL as well as due to that the competitors have FTTH and FTTN/VDSL in their product portfolios. By doing FTTH investments at much lower cost than the competition and reusing the sewers Iliad gained a competitive advantage which neither Orange, SFR or Bouygues had. This is in a way an extension of their ADSL strategy where they also concentrated primarily on bringing the ADSL costs down and not just on achieving the economies of scope. Iliad has further used a similar strategy for expanding into the mobile market.
Summing up, by doing large infrastructure investments at lower costs than competition Iliad hopes to beat the competition on price/performance and gain larger market share. Lower cost and higher margins compared to the competition make it possible for them to bundle some basic VoIP and TV services at no additional charge. Iliad’s hope is that by doing this they can earn money later on advanced services.
Although very successful so far – Iliad’s low cost/dumb pipe strategy has also some weaknesses, e.g. lack of control over the content that might lead to their strategy falling apart in face of a strongly vertically integrated competitor. Without creating a compelling value proposition for the subscribers e.g. in form of an ecosystem and getting more control over the content Iliad is bound in long run to compete basically on price. The strategy of bundling more and more services at a lower price than the competition is a way of staying one step ahead of the competition. However it may not be sufficient without having more control over the content. On the other hand, there is a hope, since new technologies like IoT are expected to provide some new growth opportunities also for dumb pipe operators.
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