It is not mean feat for a new competitor to muscle its way into a market dominated by three large providers, or to do so quickly. To the consternation of France’s leading mobile service providers, that is what Illiad’s “Free Mobile” service has done.
In about six months, Free Mobile has garnered about 3.6 million customers, and has gotten 5.4 percent of France’s roughly 67 million mobile subscribers, in less than six months. Even if, as expected, the rate of growth slows, that is a singular achievement.
Free Mobile now is the fourth-largest mobile service provider in the French market, after Orange, SFR and Bouygues Telecom. To be sure, Free Mobile still is about a third the size of Bouygues Telecom, which has 11 million subscribers.
Almost by definition, what Free Mobile has achieved qualifies as a market disruption: Free Mobile has, in six months, altered the market dynamics of a business that has been relatively stable for quite some time.
And make no mistake, established markets are hard to disrupt. Consider Profit Impact Market Strategy data base, which can be boiled down into the phrase “market leadership pays.”
There is no doubt that market share and return on investment are strongly related, an analysis by the Harvard Business Review found. Basically, return on investment and market share are directly related.
It isn’t hard to imagine why this is so. Rirms with larger market share also are able to leverage investments more effectively because they have achieved economies of scale in procurement, manufacturing, marketing, and other cost components.
A business with a 40 percent share of a given market is simply twice as big as one with 20 percent of the same market, and it will attain, to a much greater degree, more efficient methods of operation within a particular type of technology.
Also, there are experience curves. Over time, the total unit costs of producing and distributing a product tend to decline by a more or less constant percentage with each doubling of a company’s cumulative output.
Since, in a given time period, businesses with large market shares generally also have larger cumulative sales than their smaller competitors, they would be expected to have lower costs and correspondingly higher profits.
Also, larger firms that lead their markets have greater ability to leverage their market power in many ways. Such firms not only can source inputs more effectively, they might also be able to attract a larger share of people with higher skill sets, innovate more effectively because they have more sales data to work from, and establish pricing levels that incorporate more value based on product innovations and leadership, one might argue.
Some might criticize the framework, but one suspects most people, reflecting on what they know about markets and market share, would concur that there are lots of reasons why it is difficult to unseat a market leader, once that leadership is established. Nor, some would argue, is the relationship between market share and profitability as clear as supposed.
On the other hand, declining share late in a product life cycle is characteristic of many markets. That might suggest markets are less stable late in their growth cycles. And, obviously, market leaders, by virtue of their larger market share, can lose the most when a successful challenger arises.
Still, attacking a market leader, especially a leader that has perceived “quality” advantages, always is difficult. There’s a reason buyers have voted to buy products created by the market leader. That also explains why the mode of attack so often sis “same or similar product, lower price.”
One idealized way of describing why market share confers advantages is to say that, theoretically, an established market can have a structure where the number-one firm has share double that of the number-two provider, which in turn has share double that of the third player.
Few real-world markets exhibit precisely that idealized structure, but it illustrates the principle that a Pareto distribution occurs, in an established market. A handful of firms will represent a disproportionate share of all sales.
So what remains to be explained is situations where an attacker makes sudden gains in a market, causing a disruption. That is what Illiad’s Free Mobile has done.
As often is the case, Free Mobile chose to attack the market using a “same service, lower price” model, offering service plans of €2 per month, or a plan with mobile data service at €20 per month, that set off a price war in the French mobile market, the Wall Street Journal reports.
Free Mobile relies on a “bring your own device” (BYOD) or “buy your own device at full retail price” to offer lower-cost plans without contract, since it does not have to subsidize handsets. That approach isn’t new. Most smaller mobile mobile virtual network operators that lease capacity from other carriers also do so.
What is quite different is the dramatic and sudden market share Free Mobile has gained, essentially equalling the share held by all other French MVNOs, combined, in less than six months.
The issue, perhaps, is whether the Free Mobile approach is exportable to other mobile markets in developed countries. To be sure, Free Mobile is losing money on its mobile operation at the moment, and plans to plow effort into rapidly gaining more market share, before it turns its attention to profitability.
Wi-Fi might plahy a role. Free Mobile parent Illiad operates a fixed network business as well. And Illiad now has a “potential network” of about four million consumer Wi-Fi hotspots available to offload mobile data traffic.
The Wi-Fi hotspots are embedded in the “Freebox” Internet gateways of its DSL and fiber-to-the-home customers throughout France. Up to this point, the “shared” Illiad Wi-Fi hotspot network has promised sharing of broadband access with other Iliad customers.
Now, Free Mobile customers with one of its standard plans will be able to configure their phones to automatically connect to any Wi-Fi hotspot in the Freebox community, gaining unlimited data access and VoIP calling. That could potentially help Free Mobile in the area of operating costs.
The issue, though, is whether it is possible to replicate Free Mobile’s approach in other developed markets. In the U.S.l market, Clearwire might have done so, but didn’t succeed. Dish Network might try.
In the Spanish mobile market, where market leaders moved to a “no handset subsidy” approach, customer losses have compelled at least a momentary retreat back to the older pattern. At least so far, it appears the Free Mobile approach requires a consistent “no handset subsidies” approach, as well as a deep-rooted structuring of operating costs to compete at disruptive retail prices.
French mobile market share, late 2010
The larger point here is that established markets tend to have stable market structures. When an attacker is able to disrupt the structure, it can be an indication that the market has become, for some reason, susceptible to disruption. Defenders then have to figure out, and sometimes very rapidly, why that is the case.