Thursday, July 19, 2012

Illiad "Free" Illustrates Service Provider Responses to Disruptive Attacks

Iliad, which launched its “Free Mobile” service in January 2012 in France, has been wrecking havoc on its competitors France Telecom, SFR and Bouygues Telecom.

Vivendi SFR, for example, anticipates a 2012 earnings decline of 12 percent.

Average France Telecom revenue from each account will fall almost 10 percent in 2012.

The competitive responses by French competitors to Illiad illustrate the possible responses to new competition, and the instances where "better" responses are possible. In this case, service providers had no choice but to embrace the "worst" option, a dramatic drop in retail pricing, either in the form of new tiers of service, or in the form of across the board price cuts.

"Better" options often allow for the possibility of allowing attackers to take some share, but preserving the structure of pricing within the market. In this case, the attack was so serious that sustaining the existing pricing regime was untenable.

Illiad signed up 2.6 million customers through mid-May 2012 offering no-contract service priced at two euros and another at 19.99 euros a month, significantly lower than had been offered by the other contestants.

Predictably, that has caused customer defections, and caused the other competitors to lower their pricing. That, in turn, is slicing revenue. Facing certain revenue shrinkage, the affected service providers are looking to cut costs to bring earnings back into line.

Though service providers sometimes can afford to wait before responding, Illiad's attack allowed no option but the undesirable revision of pricing levels.

In some other cases, service providers have essentially been able to manage a gradual decline of an aging product, such as international long distance, or defer a major move into a new market until both the opportunity and strategic situation were clear. That largely was the case for broadband access services, for example.

But Illiad has disrupted the market pricing framework, with no time for any option other than slashing prices, generally.

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