By Stephen Sale, Analysys Mason principal analyst.

Following regulatory clearance, France-based Groupe Iliad launched its Free Mobile service on Tuesday.

Iliad first acquired spectrum in January 2010 and has since been building out a 3G network to over 5,000 sites.

France’s regulator ARCEP audited its network in December 2011, confirming that it exceeded the minimum 25 percent population coverage stipulated in its license before it could offer the service commercially.

Supplementary network coverage is provided by a national 2G and 3G roaming agreement with Orange, although Iliad will be planning to reduce its reliance on the incumbent operator.

As well as continuing to build out its network (including LTE in the 2.6GHz frequency that it acquired in September 2011), Iliad will be using its strong WLAN coverage (via partitioned Freebox home gateways) to offload data traffic.

Iliad has a long history of innovation, following its impressive performance in the fixed broadband market.

Unlike many new mobile entrants, it already has a significant installed base and considerable brand cachet. At the third quarter of 2011 it had nearly 4.8 million fixed broadband subscribers and a 22 percent market share.

Its main rivals in the market, Bouygues, Orange and SFR, are all integrated operators and it can finally compete against them on an equal footing.

There are three key points to the launch that have implications for the French market:

1. The launch introduces disruptive pricing to the cosy French mobile market.

Iliad transformed the French fixed broadband market with its €29.99-per-month triple-play bundle and it promises to do much the same thing to the mobile market.

The French market has not experienced the reduction in mobile pricing that has occurred in most countries in recent years.

Iliad’s €19.99 and €2 bundles are significantly cheaper than the equivalent low-end brand offerings from Bouygues (B&YOU), Orange (Sosh) and SFR (Red) and will demand a response from the market leaders.

There is sure to be a short-term impact on churn as customers switch to Iliad, as well as a long-term decrease in pricing levels.

Without legacy mobile revenue to protect, and with MTRs set to fall to €0.008 by January 2013, Iliad is able to transfer its pricing model from the fixed market to mobile.

It is gambling on a flat-rate tariff structure that it believes to be more in tune with the consumers’ perceptions of value. It is happy to undermine the per-minute model of pricing in favour of a more data-centric connectivity model.

2. There is a clear separation between the device and service tariff.

Iliad is selling its services on a SIM-only basis with no contract lock-in periods. Alongside this, customers can opt to pay for a device such as the iPhone on a monthly basis over a specified period.

This offers customers transparency as well as a degree of flexibility that is not currently available in the market.

This pricing structure needs to be communicated clearly to French consumers used to handset subsidies and may cause some short-term confusion, but will probably be welcomed in the long term.

3. It reinforces the view that Wi-Fi is a critical element in supporting mobile data services.

The Freebox has long been the central element of Iliad’s strategy. Assuming that Iliad is successful in technically managing its launch, its installed base of Wi-Fi-enabled set-top boxes shows how to ‘build out bottom up’.

In the past few years, it has established a large footprint for mobile data – a free Wi-Fi cloud in the urban centres of France.

Iliad illustrates the view that mobile data consumption relies heavily on WLAN and will do so even more in the future.

Indeed, it is a striking example of Wi-Fi as the default supporting technology for data consumption with the macro cellular network increasingly relegated to in-fill.

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