US Expansion Could Be a Dangerous Distraction for Iliad

Taking a Stake in T-Mobile USA Has Merit But the French Operator Has Unfinished Business at Home

I’ll be honest — the news last week that Iliad had bid for a majority stake in T-Mobile USA took me by complete surprise.

On the face of it, it’s a perplexing move. Why would Iliad look to acquire a much larger company in a market where it has no existing presence? Why now, when its domestic French market is undergoing signification change and the arrival of a major quad-play rival is just around the corner? Does it really expect to achieve substantial synergies given that Iliad is a multi-play provider and T-Mobile offers only mobile services?

However, closer consideration reveals more logic than initially meets the eye. There’s no denying that the US is an attractive opportunity. Competition is far less intense than the cutthroat French market and carriers aren’t subject to the tough European regulation that’s hurt many of its peers on the other side of the Atlantic. EBITDA margins in the US are among the highest in the world and, while T-Mobile may only be the fourth-placed operator, it still has over 50 million subscribers.

The most important thing is that both companies share a similar make-up. T-Mobile’s Un-carrier strategy has revolutionised the US market through a range of innovative concepts aimed at addressing the particular problems experienced by US consumers. The carrier has seen a surge in customers and record sales of smartphones since launching its new strategy last year.

Iliad’s mobile network, Free Mobile, has been similarly disruptive, turning the French market on its head with hugely discounted tariffs. Iliad clearly feels that combining two disruptive operators offers significant economies of scale and that it can share its knowledge on both sides of the Atlantic.

Until last week, Sprint had seemed the only company looking to acquire T-Mobile. Any bid will face huge scrutiny from the US regulators that blocked AT&T’s planned acquisition of the company in 2011. It’s this scrutiny that appears to have frightened off Sprint. However, it’s also where Iliad’s offer may stand a chance. Sprint was looking to consolidate, but a takeover by the French company would maintain the status quo of four leading mobile operators. This would allay fears over higher prices and diminished competition.

The US is ripe for disruption but it would require huge amounts of investment to make significant inroads into the dominance held by Verizon and AT&T. There’s no way that the leading US carriers — with enormous cash reserves, extensive distribution and established brands — would afford Iliad the time and space to have a similar effect as it has in France. Orange and SFR underestimated the company’s potential and were too slow to react, but Verizon and AT&T wouldn’t make the same mistake.

My view is that Iliad should focus on addressing unfinished business in its home market. Iliad’s rival Numericable has assumed a strong stance in offering a competing quad-play service following the deal by its parent Altice to purchase SFR. Iliad must be ready to respond. Talk in recent weeks has been rife of consolidation among Free Mobile, Orange and Bouygues. Iliad could miss out on an important opportunity if it’s distracted by a T-Mobile bid.

Free Mobile still doesn’t operate its own nationwide mobile network, having instead relied on a 2G and 3G roaming deal with Orange while rolling out its own infrastructure. The French regulator, Arcep, has mandated Free Mobile to achieve 75 percent 3G population coverage by January 2015, but the company has been cagey about its progress.

Free Mobile also came under fire from the regulator recently as it came last in a survey of mobile quality, achieving “substantially poorer results for a large number of indicators”. Now that its French rivals have finally reacted, the operator needs to invest strongly in network development and new services to support its larger customer total and continue to drive growth. Its international ambitions are laudable, but a foray into the US could mean taking its eye off the ball in its home market.

Iliad’s move is opportunistic and bold, and the company will have at least succeeded in raising its profile in North America and Europe if it achieves nothing else. However, while there are clear parallels between the two companies, I can’t see the benefits outweighing the risk. I believe it should continue to focus on delivering the disruptive strategy that’s seen huge success in its home market. It’s essential that Iliad is able to maintain impetus and is ready to counter the responses from its embattled rivals as they step up efforts to differentiate based on network and quality of service.