HERE’s an intriguing number puzzle, a challenge to rival Sudoku. Is 3, the mobile-phone company, a successful trailblazer for the wireless internet — a tantalising mix of Sky, Google and Vodafone in its glory days? Or is it a cash- consuming folly, doomed to run aground on the rocks of its own deluded ambition? Answers on a postcard, please, to Li Ka-shing, the billionaire chairman of Hutchison Whampoa, the Hong Kong-based conglomerate that owns 3 UK, along with its sister companies in Italy, Australia, Sweden and elsewhere.
The right answer is worth many billions of pounds to Li, who has invested a fortune in the promise of “third generation” mobile networks, capable of delivering all manner of video, entertainment and information to a 3G handset.
At present, the evidence can be read to support either interpretation of 3’s prospects, depending on your fancy.
Bob Fuller, 3’s chief executive, can point to a decent list of achievements since he arrived at the firm shortly after its launch in March 2003. It has recruited more than 3.5m customers, who spend an average of £34.50 a month — significantly more than the average with the older mobile networks — and turns over well in excess of £1 billion a year.
About a quarter of this is generated by “non-voice” services. Text messaging is still the biggest slice, but 3 is also making money from its 3G services — such as mobile TV, music downloads and video-calling.
In April, 3’s customers bought more than 1m songs and videos, and played a big role in making Gnarls Barkley’s Crazy the first single to top the charts on the strength of download sales alone. It claims it is the clear No 2 to Apple’s iTunes in digital music — a small but fast-growing market.
Just as promising is the popularity of See Me TV, a service that allows people to send video clips — shot using their 3G handsets — to a portal, or channel, where other customers can watch them. Customers have uploaded more than 30,000 short videos, and they have been watched a total of 6m times.
“The customers are starting to understand that you can do other things besides sending text messages and making voice calls,” said Fuller. “All the key indicators are continuing to look strong.” Though not strong enough to convince 3’s many doubters.
Hutchison Whampoa had hoped to float 3 UK this year, but shelved its plans after failing to find buyers willing to pay a full price for 3 Italia, a bigger and more profitable business. It is thought Hutchison Whampoa wanted €15 billion (£10.2 billion); it struggled to find investors willing to pay €9 billion.
It is a substantial business, but, apart from the billions spent on its 3G licence and its network, 3 has run up a bill of many hundreds of millions of pounds subsidising the cost of expensive handsets.
In figures recently filed at Companies House, 3 UK disclosed a loss for 2004 of £1.5 billion. The loss would have been £360m higher, but for two accounting changes — one relating to its treatment of handset subsidies, the other doubling the assumed life of its network.
Hutchison Whampoa does not separate out the UK business in its more recent 2005 results, but it is clear that 3 incurred another heavy loss. Internationally, the 3 business as a whole last year lost HK$26.9 billion (£1.8 billion) before interest costs.
Enders Analysis, 3’s harshest critic, contends that even these huge losses do not tell the whole story. James Barford at Enders argues that the youth of 3’s business and its rapid growth disguises the scale of “churn” — the number of people leaving the network — which he believes is running at more than 50%, a sign of dissatisfaction with call quality, customer service, or some other problem, The company denies its churn is out of line with the rest of the market. But it is certainly noticeable that the rate of headline customer acquisition has slowed markedly since 2004. Fuller said this was because 3 was now concentrating on better-quality customers. “I’ve never believed that putting on 1m, or 2m, or 3m pre-pay customers adds that much value,” he said.
“We are making money out of 3G services. We are building a business out of that. The number of customers using 3G services is increasing month after month after month.”
The company insists it is on track, and that losses are reducing as its business matures. In the UK, 3 said it made its first monthly profit last December, even after deducting customer-acquisition costs. However, this was before interest and depreciation charges, and was helped by the benefit of a network outsourcing deal.
Fuller, a no-nonsense Geordie who was paid £1.3m in 2004, said: “I am working to get this business into the best possible operating state that it can possibly be in.
“I am quite proud of what’s been achieved over the last three years, to come from nothing to where we are at the moment. Do I want to float this business? Yes, of course.”
Fuller blames the scepticism towards his company partly on a lack of communication with analysts and the financial community. As the privately owned subsidiary of a foreign company, 3 apparently feels no need to engage with the City, even though it had planned to go public this year.
This is not an entirely convincing explanation. The Italian arm did try to engage with investors, and hired Goldman Sachs, Morgan Stanley, JP Morgan, Merrill Lynch, HSBC and Lazard to help it do so.
Yet despite deploying this almost unprecedented array of investment-banking firepower, 3 Italia was met with a distinct lack of enthusiasm. Part of the problem is that the much-delayed arrival of 3G technology has left a legacy of deep-rooted cynicism. Investors and analysts can see some appeal in the new services, but nothing has repeated the runaway success of text-messaging. Per kilobit of data, none of the new services comes close to matching the profitability of text.
Moreover, like the traditional mobile companies, 3 remains a business heavily dependent on voice-call revenues. Some fear pricing will collapse under pressure from the internet and the advent of wifi-enabled phones. BT’s announcement last week on the creation of wireless cities — initially in Westminster, Birmingham, Cardiff, Edinburgh, Leeds and Liverpool — is one illustration of the threat.
The tepid enthusiasm of other operators, particularly O2, has made it harder to build the market. Vodafone, Orange and T-Mobile are now selling 3G phones but not promoting the services as aggressively as they might.
Fuller complains that the established operators are too concerned about protecting the voice and text revenues they earn from their 2G customers.
“If it wasn’t for Hutch, 3G would not be here,” said Fuller. “The other guys have displayed no interest. The market would not have moved on.
“We’re moving it on. We developed the networks, we developed the handsets, we’re developing the services. We’re at that leading edge all the time.”
Even now, despite all the problems, it is hard to believe that the promise of the mobile internet — ubiquitous access to all the information and entertainment you want, whenever you want it — will fail to find a market. The risk is that this vision will not be built on 3G, but on wifi or some other wireless technology.
Price matters
THE recent take-off of 3’s music downloading service illustrates an old truth the mobile companies too often forget: price matters.
3’s sales accelerated from the moment it dropped its price to 99p a track. When Vodafone first launched full-song downloads, it tried to charge £3 a song, or nearly four times the price from iTunes. In April, 3 sold 76% of the songs downloaded to a mobile.
Graeme Oxby, marketing director, said 3’s sales would improve further when dedicated music phones become more widely available.
Sony Ericsson is rapidly expanding its range of Walkman phones, and will shortly introduce one with a 4 Gb memory — akin to an iPod nano.
