A successful dumb pipe strategy – learning from Iliad

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 its Free/Alice brands, is currently the 2nd-largest broadband operator and 3rd-largest mobile operator in France, challenging the incumbent Orange (France Telecom). Both Iliad and Orange provide a wide range of bundled services to their customers (Triple/Quadruple Play), including FTTH, VDSL, ADSL, landline, mobile telephony, and TV. The other two major competitors, such as SFR and Bouygues, also use a similar bundling strategy to offer a full Quadruple Play spectrum of services, resulting in lower total costs for their customers and increased ARPU for the operator.

Iliad’s network investment strategy has initially focused on broadband Internet access services (ADSL and later FTTH), and its main revenue originates from Fiber/ADSL. Iliad, however, also provides other services, primarily TV and VoD, most of which are bundled and free of additional charge to subscribers. In 2012, Iliad strengthened its market position by acquiring a small ADSL operator from Telecom Italia – Alice, and this year it is seeking to acquire assets from CK Hutchinson and VimpelCom to become Italy’s fourth mobile operator.

The strategy that gave Iliad a foothold in the telecommunications market was to use unbundled ADSL access from the incumbent, France Telecom. By doing that, Iliad could achieve much higher margins than its competitors, like Alice, which did not have the same focus on unbundled ADSL and relied on much more expensive, unbundled ADSL access.

High prices and high margins on ADSL made it possible for Iliad to offer its bundled VoIP service practically for free (free local and long-distance) and to provide hundreds of free TV channels over ADSL. The only services Iliad charged customers for, in addition to ADSL, were certain international calls, paid channels, VoD over ADSL, and subscription VoD. Consequently, thanks to its low-cost structure, Iliad was able to offer the most affordable basic ADSL-VoIP-TV bundle on the French market without compromising ADSL performance. This, combined with their comprehensive content offering, was what made Iliad so successful in the tough French telco market.

Further, by using sewers, Iliad managed to bring the cost of fiber in Paris to a much lower level, even comparable to ADSL. Iliad’s investment in FTTH is important for the future, both to overcome the limitations of VDSL/ADSL and because 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 that neither Orange, SFR, nor Bouygues had. This is, in a way, an extension of their ADSL strategy, where they also concentrated primarily on reducing ADSL costs rather than just achieving economies of scope. Iliad has also used a similar strategy to expand into the mobile market.

Summing up, by doing large infrastructure investments at lower costs than the competition, Iliad hopes to beat the competition on price/performance and gain a larger market share. Lower costs and higher margins than the competition allow them to bundle 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 also has some weaknesses, e.g., a lack of control over content, which could cause it to fall apart in the face of a strongly vertically integrated competitor. Without creating a compelling value proposition for subscribers, e.g., by building an ecosystem and gaining more control over content, Iliad is bound, in the long run, to compete primarily on price. The strategy of bundling more and more services at a lower price than competitors is a way to stay one step ahead. However, it may not be sufficient without having more control over the content. On the other hand, there is hope, since new technologies like IoT are expected to provide new growth opportunities for dumb pipe operators as well.