By Mathieu Rosemain, Sophie Sassard and Agnieszka Flak
PARIS/LONDON/MILAN (Reuters) - French telecoms company Iliad is aiming to grab a quarter of the Italian mobile market using the same cut-throat prices and straightforward contracts that conquered France, two sources familiar with its plan told Reuters.
Iliad's launch in Italy later this year or early 2018 is its first international foray besides a failed $15 billion bid for T-Mobile US and will be a significant test for the French company's billionaire founder and majority owner Xavier Niel.
"Iliad is planning to quickly grab about 10 percent of the market in the next two to three years through very aggressive offers, with the aim to eventually reach 25 percent," one of the sources said.
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"I am not saying it will be easy but they have the capacity to do it and it will be very difficult for rivals who have very rigid cost structures to adapt fast enough," the source said.
Iliad's Free Mobile brand met with almost instant success in France thanks to prices anywhere from 50 percent to 80 percent lower than those offered by established players, companies that Niel accused publicly of ripping off consumers.
Niel reckons Italian consumers will be thirsty for change too, telling analysts in March that the country's mobile companies were the "most-hated" in Europe - a view based on an annual survey of customer perceptions by Exane BNP Paribas.
"You have everything you need to succeed. The same causes produce the same effects", said one of the sources.
The 2017 version of the Exane BNP Paribas survey showed that out of Europe's five biggest economies, Italians were the least satisfied with their mobile phone rates and their networks.
In France, Free Mobile won 18 percent of the market in four years and had 12.7 million customers by the end of 2016. Rivals cut prices to keep up, which has resulted in a 41 percent drop in overall average revenue per user (ARPU) in France over the past six years, according to estimates by GSMA Intelligence.
Free Mobile is also planning to seduce Italians with simple, transparent offers with none of the hidden costs sometimes seen in Italy, such as pre-paid monthly contracts running for 28 days instead of 30, the sources said.
"They need to make a big splash", Exane BNP Paribas analyst Agathe Martin said. "Why not offer a free-of-charge contract to start with, why not offer the first six months for free?"
Free Mobile made unlimited texts and calls the new norm in France and Berenberg analyst Nicolas Didio said they would be revolutionary in Italy.
"I am convinced Iliad will succeed," he said. "They are very good at identifying gaps in the market and they'll pounce on rivals' weaknesses, leveraging customers frustration and addressing it with high-impact marketing campaigns."
Italian mobile operators Telecom Italia , Vodafone and Wind Tre, which each control a third of the market, are getting ready for a fight.
Incumbent phone companies in Europe have long complained that EU rules prevent them from consolidating and investing in high-speed networks, and the prospect of Niel muscling in could make life harder.
However, Brussels proposed a reform last year which aims to give incumbents incentives to spend more, such as allowing them to invest together in exchange for relaxing rules that force incumbents to open up their networks.
With Niel now on the horizon, Italy's biggest phone company Telecom Italia is launching no-frills provider Kena Mobile for clients to pay "only for what they need" as it seeks to protect the premium positioning of its main TIM brand.
"We are ready ... counter-attacking with a second-brand strategy on the cost-conscious segment, while TIM is accelerating on convergence and quality," Telecom Italia Chief Executive Flavio Cattaneo has said.
Vodafone Chief Executive Vittorio Colao recently told reporters the British company took Iliad seriously and "has prepared well". The company declined to comment for this story.
"The Italian telecoms market is already among the most competitive in the world and we are used to the pressure on prices," Wind Tre CEO Maximo Ibarra said in March.
"We are not worried ... although we don't want to either underestimate nor exaggerate the impact of another competitor."
STARTING FROM SCRATCH
While Iliad has yet to take on a major developed market outside France, Niel has invested personally in telecoms firms in several countries, including Israel, Switzerland and Monaco - with varying degrees of success.
Golan Telecom won 10 percent of the Israeli market with its rock-bottom prices but regulators failed to approve a network sharing plan, the company teetered near bankruptcy and Niel was eventually forced to sell up.
Niel also acquired Orange Switzerland, rebranding it Salt, but taking on Swisscom has not proved to be easy and Niel recently said Salt would be no a "Swiss Iliad".
Iliad's doubters say the conditions in Italy won't be as benign as they were in France when Free Mobile launched in 2012.
In France, Free Mobile's arrival wiped out nearly 50 percent of its rivals free cash flow (FCF), according to Raymond James analyst Stephane Beyazian, forcing them to slash costs to adjust to lower prices as they desperately sought to retain customers.
However, prices in France were twice as high as they are in Italy now so Iliad's impact might be different, said Beyazian.
Italy is already dominated by low-margin, pre-paid contracts, whereas nearly all French mobile consumers have monthly subscriptions.
Also, unlike in France where Iliad was known for its fixed-line services, Niel will be starting from scratch in Italy.
Iliad will only start with mobile offers at first in Italy, the sources familiar with the company's plan said, with broadband products set to come later.
"It's not unreasonable to expect that Iliad will get good market share, but you don't know how long it's going to take them, or what it will cost them," said David Marcus, chief executive at U.S.-based Evermore Global Advisors, which had a 0.11 percent stake in Telecom Italia at the end of 2016.
Finally, the French company lacks a distribution network in a country where an anti-terrorism law requires SIM card owners to be identified with an ID card, creating an additional hurdle to getting new customers.
A spokeswoman for Iliad declined to comment.
Still, Iliad's profit margins are at their highest level since Free Mobile's launch, despite having invested more than 1.2 billion euros ($1.3 billion), and the company is confident it can grow fast and make profits in Italy.
Iliad said it would spend about 1 billion euros on network spectrum. Half the frequencies will come from CK Hutchison Holdings <0001.HK> and VEON , which had to sell them to get approval for merging their Italian units 3 Italia and Wind.
Iliad hopes it will be able to expand quickly without spending much initially, as its spectrum deal with Wind and 3 Italia means it will only pay if it gets clients, said Berenberg analysts.
The French firm is also factoring in the fact that many Italians have more than one SIM card, which means the average revenue per user data does not reflect the true size of the opportunities in Italy, said the second source.
But whatever the price, Iliad will have a hard time in Italy if it fails to offer a good service, some consumers say.
"I travel a lot with my job so good network coverage is more important for me than price.", said Giacomo Bianchi, a businessman in Milan. "Would I consider Free? I always look at any provider that comes in, but they would have to offer more than just cheaper fares to get me to switch again."
(Additional reporting by Gwenaelle Barzic in Paris and Julia Fioretti in Brussels; editing by Martinne Geller and David Clarke)