Iliad's entry into the Italian mobile market is likely to be less disruptive than its entry into the French mobile market

07 July 2016

If the European Commission approves the remedy package proposed by Hutchison and VimpelCom, Iliad will become the fourth mobile network operator in Italy. The operator may likely offer discounted prepaid offerings and 1-month rolling subscriptions to gain market share in the low-end market. However, it may struggle to replicate the fast and strong success it has had in France. 

Iliad signed an agreement with Hutchison and VimpelCom to acquire some assets from them – spectrum and mobile sites – and become a mobile operator in Italy. The deal includes a national roaming agreement for five to ten years. This constitutes the remedy package proposed by Hutchison and VimpelCom to the European Commission in the context of the Wind-Three merger review process. Both the Wind-Three merger and Iliad’s entry into the Italian mobile market are subject to the European Commission's approval, expected in September 2016.

Pyramid Research expects Iliad’s entry into the Italian mobile market to be less disruptive than its entry into the French mobile market because:  

  • The fundamentals of the Italian mobile market are different from that of the French mobile market in 2012;
  • The Italian prepaid mobile market has faced strong price deflation over the last ten years and this reduces Iliad’s chances to gain a significant subscriber market share through the launch of discounted offerings;
  • Iliad will not have in Italy the strong fixed to mobile cross-sell catalyst and the brand recognition it has enjoyed in France. 

The Italian mobile market in 2016 vs. the French mobile market in 2012

When Iliad entered the French mobile market in 2012, the market had three MNOs, high mobile service prices – the average market ARPU was €31 per month – and a significant room for migration from contract to cheaper 1-month rolling handset subscriptions. In addition, quadruple play adoption was gaining momentum in France as most leading operators had launched convergent bundles thus creating a favorable environment for bundling.   

Cross-selling discounted mobile services to its fixed broadband customer base has been a key driver of Iliad’s success in the French mobile market. Iliad had 4.9 million fixed broadband customers when it entered the mobile market in 2012 and achieved 15% mobile subscriber market share between 2012 and 2015. Iliad’s mobile revenue was €1.8 billion in 2015, out of a total of €4.4 billion fixed and mobile revenue.

The mobile Italian market has a different structure. The prepaid market accounted for 88% of the total number of mobile subscriptions, excluding M2M in 2015, and price competition has been fairly strong over the last ten years, boosted by regulatory measures and due to a tough macroeconomic environment. This has resulted in big revenue and ARPU declines; mobile ARPU was €13 per month in Italy in 2015 – one of the lowest ARPUs across Western Europe – and prepaid ARPU was €10 per month.

Iliad may offer discounted prepaid offerings to the low-end market but the magnitude of the discount can’t be as high as the one offered in France and the service will not be bundled with fixed broadband – at least in the short term – thus limiting any large-scale adoption. Iliad’s main competitor in the prepaid low-end market will be Wind/Three which can react to price competition by offering fixed-mobile bundles.

Lack of fixed-mobile convergence (FMC) and brand recognition may limit Iliad’s success

FMC take-up has been very slow in Italy because of regulatory constraints, the absence of cable operators and the lack of integration between telecoms and media services (satellite and digital terrestrial dominate the pay-TV market in Italy). The latter has only recently been addressed through commercial partnerships with Sky, Mediaset and, more recently, Netflix.

However, the merger between Wind and Three – if approved – may unlock convergent opportunities and drive fixed-mobile bundle adoption up. Quadruple play is not the only way. Fixed-mobile bundles without pay-TV have been successful in some Western Europe markets (Spain and Belgium), and may be replicated in Italy.

Iliad may sign wholesale agreements with existing fixed operators and Italy's largest power utility Enel, and develop a convergent strategy, however we believe TIM, Wind/Three and Vodafone are in a better position to exploit convergent opportunities as they have their own fixed infrastructure and established brands. TIM and Vodafone may also leverage their superior 4G network coverage as part of their broader convergent strategy. 

Establishing a successful brand in Italy will take – for Iliad – a long period and may require significant marketing and distribution efforts. 

Possible implications on Pyramid Research’s five-year telecoms forecasts

Iliad’s entry may slow the recovery of the Italian mobile market as price competition in the low-end prepaid market may increase.

However, we don’t expect Iliad’s entry to change the broader market outlook. After several years of revenue pressure, we forecast fixed, mobile and pay-TV service revenue to stabilize in 2017 and return to revenue growth from 2018 onwards as the adoption of telecoms services over next generation fixed and mobile networks moves beyond an early adopter status – thus helping operators stabilize or increase their ARPUs – and the broader telecoms regulation seems less severe than in the past. 

EXHIBIT 1: TELECOMMUNICATIONS SERVICE REVENUE, ITALY, 2012-2021

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Source: Pyramid Research

 

- Pablo Iacopino – Research Director, Europe

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