Xavier Niel, France’s Broadband Maverick

Special Report: One afternoon during my recent trip to Paris, I found myself walking down a broad avenue in the 8th Arrondissement, a chic business district where high-fashion boutiques are interspersed with the offices of venture capital firms and powerful attorneys.

I was busy gawking at shoes and other high-end fashions rendered unaffordable by the falling U.S. dollar when I turned into a narrow alleyway. Suddenly I was standing outside of an utterly ordinary-looking building, drab like the gray Parisian skies. I peered closer to read the signs that had been rendered somewhat blurry by a glass facade: Iliad and Free.fr.

xaviertothetop.gifI had come to the right place. The modest exterior, I knew already, was misleading, for it masks what is arguably one of France’s most dynamic technology companies, one that I feel epitomizes a true, 21st century broadband service provider.

Illiad is the brainchild of 40-year-old Xavier Niel, a self-made billionaire (a rarity in the Old World). Its flagship service, Free.fr. (it also owns One.Tel and Kertel, a calling-card operation) isn’t the biggest broadband service provider in France – that honor goes to incumbent France Telecom, which has over six million of the country’s 14 million broadband subscribers — but it has taken the French telecom market by the scruff and given it a vigorous shake.

How? By offering a flat-rate, high-speed Internet connection for 30 euros ($43) a month. That gives Free.fr’s three million subscribers a connection speed of roughly 28 megabits per second over DSL, free IPTV (and a free set-top box), a free Wi-Fi hub, and unlimited voice calls to some 70 countries.

And if you think this is the end of it, think again. Don’t be surprised if French consumers get 100 Mbps to their homes within a couple of years, and a connection speed of a gigabit per second before the next French president is sworn in – all for the same price.

One Flat Rate
Every month Free.fr rolls out one new feature after another, never charging its subscribers an extra dime. Take its most recent feature – a personal TV channel. Subscribers need only plug in a video camera with a simple RCA cable into the Free.fr set-top box and within seconds, they’re France’s answer to Chris Matthews. (Unsurprisingly, this has prompted some enterprising sorts to set up for-pay, late-night entertainment channels.)

Perplexed by the panoply of features offered by his service, I asked Niel how Free.fr does it. “We are a broadband service provider,” was his matter-of-fact reply. “Everything else — from voice to IPTV to storage – is just a feature that rides on this data service.” For the rest of the telecom industry, long addicted to metered minutes and billable items, this is rebellious thinking.

“I work on a 50 percent margin, so that means 10 euros is my margin,” Niel said. He reasons that if it’s going to cost him 0.008 eurocents for a call, as long as he’s making a 50 percent gross margin a month on his data business, he’s sees no reason to charge his customers more. “Whatever I can give our customers for 20 euros, I will give them.” As long as he gets his 10 euros in gross profit.

omxavier.gifMeeting Niel, whose hair has grown too long, curling of its own accord, and whose clothes, despite his billions, have a distinctly slept-in look to them, was higher on my list of things to do in Paris than seeing either the Louvre or the Eiffel Tower. He has a colorful – some would even say checkered — past. But that only seems to add to his maverick persona; he would fit in easily at any Silicon Valley startup.

Do-It-Yourself Culture
xavierwithdslam.gifWhen he started Free.fr in 1999, the term broadband was just becoming part of the lexicon. Of course, also around that time, the telecom bubble burst, and as a result Free.fr was able to lease a lot of fiber capacity at low prices, eliminating the need to build a fiber network of its own. Flush with capacity, Niel started to think big, and by the end of 2000 he had a clear goal in mind: he wanted to deliver television over DSL.

“We would go to the big equipment suppliers in Europe and the U.S., and they would laugh at us and say come back in 20 years,” he recalled. But Free.fr was short on patience, and so it decided to do what any Silicon Valley startup would – build its own mousetrap.

“Since we had to do things cheaply, we had to do it all ourselves,” Niel said.

Having covered Silicon Valley for as long as I have, Free.fr’s startup DNA was instantly recognizable to me. The median employee age is 29. Social background and demographic details clearly take a backseat to merit. For those seeking technology challenges, Free.fr is an epicenter of creativity.

Niel gets animated when talking about Free.fr and the future of broadband; he drags me along on a tour of his operation like a man possessed. Our first stop is the call center, which, with the exception of a handful of Windows PCs, is run entirely on Ubuntu-based PCs (hey, it’s free). “Less than three minutes to respond to a call is good,” he says. “Anything more is not good.”

One floor down, he shows off his labs, where a bunch of engineers work on fine-tuning the set-top boxes for IPTV. Another dozen or so are tasked with cobbling together boards from merchant silicon that power Free.fr’s modems, set-top boxes, and even the fiber for future home access boxes.

When the backend billing systems from outside suppliers proved to be too expensive, Free.fr wrote its own system. They did the same thing for DSLAMs. “We design everything and send it to factories in China and outside of Paris,” Niel explains.

He shows off a new plastic casing his team has developed that houses the fiber that will feed Free.fr’s fiber-to-the-home network. It’s not going to win any design awards, but it will shave off a few euros worth of costs and for Niel, that is all that matters.

The last time anyone attempted such vertical integration was a century ago, when Ma Bell made everything from handsets to switches. When I mention that to Niel, he laughs, and hustles over to his network operations center. Expecting to see a wall of plasma screens like the ones I’ve encountered at the old AT&T and MCI, I’m greeted instead by four guys sitting in front of Dell machines (running Ubuntu, of course) with 24-inch screens.

One of them runs me through their network – which is the real reason Free.fr is able to offer their more-for-one-flat-monthly-rate. And I am amazed to learn that the Free.fr network — 28,000 kilometers of fiber – runs off of two Cisco CRS-1 routers. That’s it. “With the exception of CRS-1 and some DWDM gear, much of our gear is designed by us,” says Niel, with the obvious pride of a builder, and not an accumulator.

Dave Burstein, who edits the influential newsletter DSL Prime once quipped that if Niel were in Chicago or Houston, AT&T would have a problem on its hands.

Free.fr has points of presence in pretty much every part of France, and peering points in several cities around the world, including London, Amsterdam, and Washington, D.C., that allow it to exchange traffic with other carriers. Free.fr started off with a network backbone that was made up of 1 gigabit-per-second links; today those links have ballooned to 80 gigabits per second. As we run through the live network traffic stats, I also learn that during peak load hours, Free.fr accounts for nearly half the traffic on the Amsterdam Internet Exchange.

xavierinthelab.gifThe two-hour walk-through ends with a session in the Free.fr living room lab. At his point my friend Rodrigo Sepulveda Schulz, who helped facilitate the meeting, tells me that this walk-around is a rarity for journalists.

I ask Niel why his model hasn’t been replicated elsewhere. Is it because French Internet traffic was primarily “on net” due to language issues? Or because of how his network was designed, built for broadband? Niel, who started France’s first ISP back in 1993, says it’s a bit of both, though he doesn’t see why others can’t copy his model.

For now he wants to talk about his two favorite projects – Free.fr’s foray into fiber-based broadband access and his plans to build a wireless network using the 900 MHz-band. (The U.S. equivalent is the hotly contested 700 MHz slice of spectrum that is going to be auctioned off in early 2008, and is expected to fetch many billions for the U.S. Treasury.)

The Wireless & Fiber Disruption Next
Even though he has nationwide WiMAX licenses for 3.5 GHz band, Niel thinks the costs are still prohibitive. Instead he has been lobbying for the 900 MHz band, for which the French government wants him to shell out more than 600 million euros. He is happy to pay – at a rate of 35 million euros a year, as he builds out his network.

In his opinion, it’s a fair proposal, especially since the three large wireless players haven’t really paid the French Republic any monies for the 2G and 3G spectrum. Incumbents like Orange, however, are far from thrilled by it. But while he fights this battle, Niel is also busy building out his fiber-to-the-home network.

Free.fr plans to wire up the entire city of Paris with fiber. So far, 30 percent of the job is done, and the rest is progressing at a furious pace. Niel then plans to cover six other French cities with his fiber-to-the-home network, within three years. “This frees us from leasing lines from the incumbent,” he says. The cost of the build-out of such a network is huge, but Free.fr is growing. Parent company Iliad posted sales of 950 million euros for 2006, with a profit of 124 million euros. And they have another 300 million euros safely parked in the bank. Niel has also pledged a substantial portion of his own fortune to a foundation that would help bring broadband access to less-privileged areas of the country.

Before I leave the office, three hours after I arrived, I ask him: Will the French get a connection speed of a gigabit per second to their homes? But he doesn’t answer my question, just smiles. If I were to bet on what would happen first – me learning French or 1 Gbps to the homes of Paris, I would bet on the latter.

Photographs by Rodrigo Sepulveda Schulz Financial charts and financial data courtesy of boursorama.com