Free Mobile hits 8% share, wins with 'reverse quadplay'
When we published Free Mobile: A Prototype for Disruption? before MWC, we didn't yet have Free's indicators for Q4. We still don't have full financials, but we do have some subscriber and turnover information now, and our analysis of what that means is below. For further reference, Les Echos summarises the story nicely, and the press release is here.
We've also recently published Sprint-Softbank: how it will disrupt the US market, and analysis on the ongoing disruption in Europe in European Mobile: The Future's not Bright, it's Brutal. We'll be looking in further depth at disruptive digital innovation strategies in telecoms, music, video, commerce, and 'the Internet of Things' next week at the Silicon Valley Executive Brainstorm in San Francisco, and at the EMEA Brainstorm in London, June 5-6. Email email@example.com to find out more.
Another 805,000 net adds - Free's break-in phase has gone very well
Free Mobile scored another 805,000 net-adds in the fourth quarter, taking them to 5.2 million subscribers after one year in operation or 8% of the French market by subscribers. There is still substantial momentum, with 55,000 net number ports to Free in the week before the announcement compared with 26,000 to SFR and less than 17,000 for both Orange and Bouygues. The total is positive because the MVNOs have been hammered, and also because penetration has risen by 10% in 2012.
This penetration figure is to a degree understated, because there are about 6.5 million dongles and M2M devices in circulation, and Free Mobile doesn't currently compete in these sectors, so additional growth will be concentrated on what might be called the human market.
Mobile drives fixed sales, fixed cash flow finances mobile investment
This turnover in mobile was €844 million for the full year, equivalent to a monthly ARPU of €16.70. Although it is tiny compared to France Telecom-Orange's €10.7bn turnover in mobile, Free started 2012 at zero. But perhaps the most interesting feature here is that the mobile offering is driving "reverse quadplay" - all the publicity, plus the sell-through opportunity and the discount on mobile if you take fixed, is bringing in net-adds in the fixed sector, which added 107k net subscribers in Q4 (vs. 110k for Bouygues, 66k at Orange, and 35k at SFR).
For the year, that's 515k net-adds or 9% annual growth. In many markets, it's been assumed that fixed broadband is now an ex-growth sector. Clearly, this isn't necessarily true.
This is important, even critical. In H1, Free's fixed operations generated an EBITDA margin of 40% and €229 million in free cash flow, with an ARPU of €38/mo for users on the latest Freeboxes. Obviously, new signups driven by mobile will be getting the new devices.
So, mobile net-adds drive the cash-cow fixed business, and its free cash flow helps to finance the mobile roll-out.
A critical question is how much of the potential for reverse quadplay has been exploited already. There are 5.4 million fixed subscribers and 5.2 million mobile; if there were no reverse quadplay customers among the fixed base, that would be enough to almost double the mobile subscriber base. If all the mobile subscribers have already taken fixed, this source of cross-selling growth is practically exhausted. We know that the truth is somewhere between the two extremes, but Free is keeping the actual number close to its chest. Its Q4 turnover statement just says that it's "globalement equilibré", or "balanced overall".
Subscriber growth may top-out early, but profitability is nearer than you think
Looking ahead, we used a Bass diffusion model to estimate the Q4 market share number for our analysis, which predicted market share of 8.11%. Updating the model with the out-turn, we expect that mobile subscriber growth will level off in 2013 as Free Mobile approaches 10% national market share. Rather like the French paratroopers in Mali, they have successfully seized the airfield and unleashed mayhem on the enemy. But what happens next?
One of the amazing things about the Free Mobile story is that it's actually not that far from breakeven at the EBITDA level, this early in the game; it lost, or rather spent, €44 million in H1 on revenue of €320 million. In the light of our forecast for market share, we expect that having achieved their break-in to the mobile market, Free will now consolidate their position and concentrate on moving the mobile operator towards profitability by:
- Upselling fixed products to the new mobile subscriber base;
- Managing down the national roaming bill.
If our diffusion model is right about total subscribers, and "globalement equilibré" means "roughly 50/50", that means there are about 2.5 million potential candidates for upselling.
In the Free Mobile note, we mentioned that (admittedly unaudited) data on how much user time is spent on their own network shows a step-change when 900MHz spectrum became available in January. As Free Mobile's OPEX is closely linked to how much traffic is carried by Orange under national roaming, and Free has no control over Orange's roaming tariff, bringing traffic on board improves their margin, as does then offloading it to WLAN.
We therefore expect that profitability will surprise on the upside and subscriber growth on the downside. This is subject to the possibility that they will choose to hold profitability down, by bringing forward capital investment and rolling out faster, or by cutting prices again. This depends on their preference for growth vs margin, and on regulatory/political issues.
Key risk factors
The major threat to Free Mobile's success is probably self-disruption, that is to say a failure to manage the consequences of success. The fixed operator is under pressure regarding customer experience and quality of service issues, possibly because of the effort to harvest its cash for the mobile operator's CAPEX needs.
Given that Free Mobile subscribers are not tied in to a long term contract, and the French mobile market has well-functioning mobile number portability, an "Instagram event" - i.e. a misjudgment that goes viral and causes a sudden exodus of users, as when Instagram changed its terms of service and accidentally revived Flickr - could reverse a chunk of the subscriber growth rapidly. This is much more likely in the case of the mobile-only subscribers, as opposed to the quadplay subscribers, who are also more likely to be committed fans and advocates of the company. It is therefore urgent to carry out the consolidation we described above.
We do not think there is a threat of a regulatory reversal, for example, lifting the national roaming requirement. This would essentially imply killing off Free Mobile, and would certainly be held up in the courts for an indeterminate period of time if it was not struck down immediately. Further, the French regulator ARCEP's recent statements still express satisfaction with the impact on consumers, and the political level is still under more pressure to deliver consumer buying power (pouvoir d'achat) than it is to please the original three operators. ARCEP's latest decision can be summed up as "no move before 2018, and don't frighten the horses".
We have assumed a relatively simple scenario in which Free Mobile, having smashed its way into the market, has raced up the diffusion curve to arrive at an enduring share of around 10%, and then moved to consolidate the customer base by integrating them into its profitable fixed services.
Free is historically an innovator, though, and they may not be satisfied with this. It is possible that they will seek a new S-curve to ride, especially as they will soon need to look at 4G with its concomitant investments. They are already very much involved in online services in fixed, but they have wisely never been tempted to declare themselves a media company. M2M and wholesale are ruled out by the lack of a full national coverage footprint.
However, their in-house strength in software, UX design, and product management creates a lot of option-value. Many observers were expecting something disruptive in voice or unified communications, which remains a possibility. Free is also mostly a consumer/power user business. A move in the SMB space is therefore also a possibility, as is a further price disruption, perhaps in roaming.