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Morningstar | We Continue to Worry About the Italian Operations Effect on Iliad

Iliad is the second-largest broadband and fourth-largest wireless telecom operator in France. The broadband business has generated solid revenue growth, margins, and returns on capital, enjoying good name recognition. It has also started to have success moving broadband customers to fibre, which had been a concern.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. The other three operators had grown complacent, with high prices and margins, providing Iliad the opportunity to enter 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 among more price sensitive consumers. It also attracted subscribers that had never had wireless service. Since Iliad’s entrance the other three operators have all reduced prices and the wireless penetration rate now exceeds 125%, more in line with other European countries. 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 network 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 as it has a reputation for decent quality at a low price. Iliad hasn’t been 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, which it has subsequently increased, in two steps, to EUR 7.99, a price that remains lower than we anticipated. This has led to strong subscriber growth, as the firm reached 2.8 million customers at the end of 2018. While aggressive pricing has helped it gain some scale quickly, we believe it hurts the firm’s long-term revenue opportunity, as it is difficult to raise prices when price is the primary point of competitive differentiation.