Nearly 6 months after Free Mobile’s commercial launch, every week brings further aftershocks to the seismic shift it has triggered. The latest one occurred last week at the second operator SFR which lost its executive chairman and not-yet arrived new CEO as its parent company Vivendi intends to explore strategic options for the SFR unit.

This turmoil reflects both the significant impact Free Mobile has already had and the long term disruptive force it represents for the market structure. Despite operational hiccups at launch, Free had secured a 4% volume market at the end of March and an estimated 8% at the end of May. Although its value market share is significantly lower (estimated at 2.5% at the end of March), its extremely lean cost structure and disruption precedent in the DSL space (where it is currently holds a 25% market share) contribute to its long term competitive threat. In this context, other French mobile operators are adjusting to the new normal through various tactics.

Last Fall, they had all anticipated the Free Mobile launch by starting low cost second brands (Sosh for Orange, Red for SFR,  B&You for Bouygues) to compete on prices.  These brands were based on simplified offerings combining SIM only plans and online activation and support.  However, the price plans of these offers did not match Free Mobile’s aggressiveness.  All operators revamped their low cost offerings with quickly after Free’s launch with 30% to 40% price reductions, while not perfectly matching Free’s unlimited €19.99 monthly offer. Sosh from Orange has sought greatest differentiation from the Free Mobile offer with two cheaper plans that include limited calls but attractive data connectivity: a €9.90 plan with unlimited Facebook and Twitter usage through a dedicated application and a €14.90 plan with 1GB 3G data allowance and throttled speed beyond this allowance. It has also recently added unlimited SMS from any EU country and French Overseas Territories to its €24.90 unlimited plan that directly competes with Free’s reference offer.  Overall, both Bouygues and Orange have announced they were satisfied with the commercial performance of their low cost brands, securing 330k and 350k subscribers respectively by the end of April.

Beyond those second brand tactics, established operators are also starting to make some adjustments on their main brands: interestingly, it is the incumbent operator Orange that led the most radical adjustments by streamlining its main brand offering down to only 3 plans and with a 20% price reduction across the board.  While SFR and Bouygues were not as radical, they also started to make SIM-only offers available across their offers to compete with Free’s no handset subsidy strategy.

Operators have also begun to trim down their cost structures to adjust to expected lower revenues (Bouygues anticipates a 10% revenue decline this year). Both SFR and Bouygues announced significant cost reduction plans effective this year and involving at least 5% headcount reduction.  Orange has not announced any cost reduction plan but is in a more favorable position as it will generate up to €2 billion wholesale revenues during the next three years, offering nationwide roaming to Free Mobile.

Finally, the three established mobile operators have announced they will accelerate their LTE rollout plans with an explicit objective to differentiate by selling higher quality data connectivity services at premium rates. Orange is already testing this “quality price elasticity” by offering HSPA+ access only to its highest paying customers (Origami Jet+ plan). Orange will roll out LTE in 5 major cities by the end of 2012 to launch commercial service. Bouygues and SFR have announced similar schedules with less detailed rollout plans. Meanwhile, Free Mobile LTE plans are sketchier: it has secured less limited spectrum than its competitors that could be sufficient for LTE offload in high traffic areas but it also hopes to secure a nationwide roaming agreement with Orange.

The new French mobile market landscape has not stabilized yet and the operational transitions initiated could pave the way to broader capitalistic adjustments at both Bouygues and SFR and even at the European level (see how the Orange Deutsche Telekom merger theme has reemerged). It could also make France a fertile experimentation ground for new carrier business and operational models geared for a post-voice and commoditized-data era.

Given the uncertainties and complexities surrounding the LTE business case, European operators are carefully assessing and fine-tuning their deployment strategies to optimize their rollout and provisioning costs for this new infrastructure. As part of this process, two types of deployment optimizations are being considered:

1. Internal optimization by reusing existing cell sites and already deployed passive or active 2G/3G network equipment  and optimizing use of their spectrum holdings (primarily through refarming)
2. External optimization by sharing with other operators cell sites, passive and/or active equipment and possibly spectrum

Reuse, repurpose.

Internal optimization will depend on parameters specific to each operator (cell site locations, types of equipment deployed, infrastructure amortization status…) but some common patterns are starting to emerge at the radio access network level:

• Initial deployments focus on LTE macro cells co-located with existing 2G/3G cell sites in ultra dense urban areas (typically the 20% of 3G cell sites which carry more than 60% of total traffic). Beyond cell-co location, some operators are leveraging more recent 3G equipment architectures and capabilities to either share power supply or base station cabinets or to activate their LTE cells through simple software upgrades on existing Node Bs (single RAN architecture)

• This initial LTE coverage density is then increased either by adding smaller micro/pico cells (as in North America), or by increasing the number of macro cell sites while mutualizing signal processing by using Remote Radio Equipment technology or more rarely Cloud RAN (as Asian operators such as NTT DoCoMo, SK Telecom and KT which leverage their existing dense fiber infrastructure to connect these equipment).

• The third phase currently under consideration is large scale densification with multiple options that may potentially be complement each other:  offloading to Wifi acess points, offloading to wireline-connected LTE femtocells, LTE cellular relays, micro/pico cell site proliferation with mutualized signal processing

These LTE radio access network deployments also require significant adjustments at the backhaul with increased capacity requirements to more than 150Mbps per cell site and an exponential growth in backhaul links (resulting from the proliferation of websites). VDSL and fiber-based solutions now become credible backhaul alternatives while point-to-point and point-to-multipoint microwave technologies need to improve in performance to remain viable. Reusing existing fiber infrastructure and mutualizing new fiber deployments to address both this backhaul opportunity and the wireline access market (primarily for enterprises) are central to future backhaul strategies.

Migration to LTE also accelerates the alignment and simplification of core networks with the emergence of evolved packet core architectures capable of handling a variety of access network technologies.

Towards netco-ops?

Infrastructure sharing with other operators will also be a major part of LTE deployment optimization, not only for coverage in less densely populated areas but also for coping with the massive cell site densification required in urban areas. Some major operators like Orange have already indicated that this will be central to their LTE strategy. In fact, several commercial arrangements on LTE infrastructure sharing have already happened such as the Net4Mobility joint venture between Tele2 and Tenor in Sweden, the Yota consortium in Russia and the joint venture between PTK Centertel and P4 in Poland.

Several more agreements should be reached soon: in the UK, Everything Everywhere and 3UK could reach an agreement for sharing to facilitate discussions with Ofcom on refarming EE’s 1.8Ghz band GSM spectrum for LTE. In Germany, 3 operators involved in LTE rural deployments (T-Mobile, O2 and Vodafone) are also exploring how to share the fiber backhaul infrastructure to their cell sites.

Unlike for 3G where European operators embraced infrastructure sharing late into their network rollouts, carriers are much more anticipative this time around. The pace of these sharing agreements may be slower in some countries where national regulators are concerned about the impact on infrastructure competition. But the longer term direction seems clear: LTE only improves the economics of infrastructure sharing and should accelerate the rise of co-owned network operations which could eventually be spun off from their service parent companies, thereby reshaping the long-standing perimeter of what makes a telecom operator.