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Morningstar | Iliad Should Benefit from Higher Pricing in Italy

Iliad is the second-largest broadband and fourth-largest wireless telecom operator in France. The broadband side has generated solid revenue growth, margins, and returns on capital as well as good name recognition. However, it is behind on moving broadband customers to fibre, which could create problems down the road.In January 2012, Iliad used its broadband base and name recognition to enter the French wireless market with very aggressive price offerings. While it was late entering the market, it did a nice job of exploiting weakness in the market and its wireless subscriber base is now almost as large as Bouygues. While the other three operators had grown complacent with high prices and margins, Iliad entered at the low price of EUR 19.99 per month or less if a broadband client. This low price caused significant churn from the other operators, particularly the more price sensitive consumers. It also attracted subscribers that had never had wireless service. Where most European countries had wireless penetration rates around 130% or higher, France was only about 100%. Since Iliad’s entrance the other three operators have all reduced prices and penetration rates are now exceeds 125%. The firm has significantly increased its capital expenditures over the past two years in order to build out its own 3G and 4G networks. While its quality has greatly improved over that period, we believe its network remains inferior, especially to Orange. That said, we expect Iliad will continue to do well on the wireless side with price conscious consumers in France. However, Iliad isn’t content to exploit its low-end positioning in France and believes it can replicate this success in Italy. In June 2018, it launched service in Italy with an initial price of EUR 5.99 per month, now increased to EUR 6.99, which is still lower than we anticipated. This has led to strong subscriber growth, reaching 1.5 million customers in August 2018. While this is helping it gain some scale quickly, it hurts its long-term revenue opportunity as it is difficult to raise prices when that is your only competitive advantage.