[3GScottishUser]

From The Sunday Times (16/04/2006):

THE British arm of 3, the mobile-phone company that is part of Hong Kong’s Hutchison Whampoa, is expected to report a loss of close to £1.5 billion when it finally files its 2004 results at Companies House. The loss is one of the largest ever made by a British private company and follows a £972m loss in 2003. It will have made another large loss in 2005.

The deluge of red ink reflects the heavy costs of 3 challenging the more established network operators Vodafone, O2, Orange and T-Mobile, and puts a question mark over Hutchison’s original plans to float the company. A float of its Italian mobile- phone business, 3 Italia, was shelved earlier in the year.

The company’s problems date back to its 2003 debut, when it was hampered by a lack of handsets. It then spent heavily to acquire more than 2m customers — more than half its current total — during 2004.

Acquiring customers incurs heavy upfront costs because of handset subsidies and commissions to dealers.

The company refused to discuss the size of the loss in its 2004 results, which it is late filing with Companies House. It said that as a foreign-owned company, it had 13 months to file its results. “3 is in conversation with Companies House as to when the results will be filed,” it said.

Hutchison Whampoa recently said that the UK business made money at an underlying level for the first time last December — that is, after ignoring interest payments,various accounting charges such as depreciation, and the impact of a network-outsourcing deal.

The scale of losses at 3 — the trading name of Hutchison 3G UK — underlines the size of the challenge facing the business. A new analysis of the group last week suggested it was struggling to meet its targets, and suffering rising levels of customer churn, not just in Britain but also in its Italian sister company.

James Barford of Enders Analysis, a research firm, said recent disappointing results and “broken promises” made it less likely that Hutchison would be able to float its Italian business. Hutchison had hoped to float 3 Italia early this year, and then to follow that with a flotation of 3 UK. However, it had to shelve the Italian flotation when it became clear that investors were not prepared to accept its valuation of the business, originally well in excess of €10 billion (£6.9 billion).

Barford said 3 had failed to deliver on three “promises” that it made last August. Second-half customer numbers were lower, not higher, than in the first half of 2005 and the cost of acquiring customers increased rather than fell. And, Barford said, 3 did not achieve its aim of being profitable on an underlying month-by-month basis during the second half.

The 3 group as a whole “lost €1.1 billion (£760m) in the second half of the year, on revenues of €2.2 billion, a rather frightening minus 49% Ebitda (earnings before interest, tax, depreciation and amortisation) margin. Add in capital expenditure, and the second-half cash burn amounts to €1.8 billion. The company is clearly nowhere near profitability, on an underlying basis or otherwise.”

Barford noted that 3 UK had become less aggressive about acquiring customers in recent months, and had increased some tariffs. “It’s likely that they could go into a slow-death situation, where they plod on for months and years, with a lower cash burn but little growth.”

3 rejected the criticisms from Enders, saying the firm’s analysis was flawed.

A spokesman said 3 had not hit its targets on customer numbers because it had concentrated on attracting better-quality customers on longer-term contracts. This had consequently increased average customer-acquisition costs.

3 also rejected Barford’s estimate that underlying churn had risen above 50%. It said it was satisfied it had churn under control, and that its level of customer losses was in line with the rest of the industry — suggesting 30% to 35%.

http://www.timesonline.co.uk/article/0,,2095-2136075,00.html

[Hands0n]

A spokesman said 3 had not hit its targets on customer numbers because it had concentrated on attracting better-quality customers on longer-term contracts. This had consequently increased average customer-acquisition costs.


Eh, wha? I read that several times and it simply is not going in! This is the British industry malaise in perfect demonstration. Business is not doing so well and the answer is to increase the contract commitment of its customers while jacking up the prices on some tariffs, or at least not supplying as much for the price. Great! And they wonder (behind the corporate denial) why churn is where it is and customer acquisition costs are increasing.

For sure, the 18 month contract is here to stay across all of the mobile operators. Customers are buying into them - despite any prior unease at the length of commitment. So why not? But to start labelling Customers "better" or "worse" quality is a huge insult. Also, do 3 not realise that these "better" Customers are likely to be more discerning and demanding and less tolerant of inefficiencies? Not so easy to put off and otherwise befuddle with some of the nonsenses it has become typical and usual to experience at times when things go wrong - and that is where 3 fall down every time!

Why not look within to see why the Customers are leaving? One would not have to look much further than their Customer Services and the policies and practises employed by the section to understand why Customer frustrations occur. Then, having looked within and observed the issues why not actually do someting about it in a shorter time span than 3-1/2 years.

For example, history is repeating itself with 3's version of the Nokia 6280. The forums are buzzing with complaints about the shortcomings of the phone as supplied by 3. Problems that are eliminated by other networks collaborating with Nokia. Yet with 3 there is denial to the Customers that there is any problem, handsets are being taken in for repair even though there is no true fix (hardware faults notwithstanding) until a later version of firmware is "approved" by 3, which they haven't to date. Essentially it is the LG U8110/U8120 saga all over again. 3 are [unacceptably] allowing their own history to repeat itself - and that is simply by having never fixed their CS shortcomings. It will, inevitably, repeat in the future unless they do.

Personally, I really would like to see 3 become the success that this country needs. It is doing a lot of things very right - and in some [more?]cases winning accolades from Customers and Industry. It is living the life of a pioneer, but after three years it should be settling down to a more BAU (business as usual) situation. By now it should have turned the corner of loss making, or at least approached to within sight of it. A "slow death" or even a quick death would be bad for 3 of course, it would also be bad, I believe, for the mobile industry and its Customers in the UK.

3 does not deserve to be a success, such a notion is abhorrent in a market forces driven industry. Success in such an industry comes only through doing the hard things. Therefore, 3 does need to be brutally honest with itself and recognise where it is failing its essential lifeblood, the Customer, and remedy the faults without further ado. Otherwise the end result [corporate failure] is entirely and regrettably predictable.

[3GScottishUser]

It's ironic that as 3's UK fortunes continue to plummet exactly the reverse has been happening at Carphone Warehouse. Its the big dealers who have been the big winners in terms of Hutchison's investment in 3G in the UK.

CPW and others caluculated correctly that the new entrant's product could be used to create high levels of churn which is in their interest of course.

Why would any comany promote a product or service which it knows is poorer than others in the marketplace? Because they stand to get commission for doing so and another bite at the cherry when customers return and change networks again. Most folks wont hold anything against the retailer and will happily accept whatever juicy alternative deals are on offer when their contracts expire.

3 Uk look to be in quite a mess now. WePay is targetting the very bottom of the market with free handsets that are not really desireable. Call charges are now much higher than compeditors even taking into account the incoming call credits gimmick. At the other end of the scale they are trying to pitch the LG U880 to pre-pay customers for £185.00 on WePay...... meanwhile easyMobile sells Moto V3 Razr's for £89 in The Link..... Plot and lost springs to mind. You wont find the likes of CPW pushing any 'glued' SIM product either!

On contracts the story is similar. The range of handsets has diminished, unless you count colour varients as significant choice. More and more has been added onto the tariffs and to qualify for the best deals the monthly contract commitment has rocketed from around £25 to £35, £37.50 and £45 per month. Sure there are 1/2 price lures but they will only accelerate churn as customers look to reduce costs when the contract reverts to normal rates. Competition appears fierce now and I suspect most customers are now opting for the most flexible tariffs rather than the lowest 'headline' promotional deals. A quick look at www.mobdeal.com shows just how much moree expensive it is on 3 now when the total contract cost is shown in relation to each handset deal. For example a Nokia 6280 from e2save on 02's LeisureTiume Plus deal costs £160 in total, 3's cheapest 6280 deal listed on mobdeal is from Mobile Outlet currently and its on VTT700 costing £262.50.

One has to wonder what 3 will do in the coming months in the UK. Ofcom are in the process of removing the high termination rates on 3G networks and a new 1800Mhz block is currently being auctioned. With MVNO's on the rise and the big 4 putting more emphisis on value the market looks swamped with desireable product and customers have never had it so good. It's becoming more difficult to see just where 3 have any unique benfit to offer in terms of their UK products and services.

The above press article will prompt further speculation for sure and one thing is certain, HWL cannot continue to squander hard earned profits from their other businesses on a loss maker of that scale. Reading recent company documentation and the article above I conclude that the recent slowdown in the UK, ommission of key statistics (like churn rates) and publication of non-standard statistics justified the painful decison that NTT DoCoMo and KPN made regarding the company previously.

All things considered Li Ka Shing, Canning Fok and Bob Fuller have some very serious issues to address in the coming months.

[Ben]

It's ironic that as 3's UK fortunes continue to plummet exactly the reverse has been happening at Carphone Warehouse. Its the big dealers who have been the big winners in terms of Hutchison's investment in 3G in the UK.
Lmao, and isn't that just the truth! I somehow doubt that CPW and the other 'independents' would have had a period of such rapid growth if it wasn't for Three and their aggressive acquisition strategies. These days, of course, all the excitement is over in the Flext camp - oh how fickle business is.

I think the UK needs its fifth mobile operator and sincerely hope that the doom and gloom of the Sunday Times article doesn't spell the end of the road. Oh to be a fly on the wall of Hutchison UK.

[3GScottishUser]

Looking around all the 'usual suspects' (CPW, The Link, e2save etc etc), one can sense that they (the dealers) are no longer supporting 3 UK to the extent that they once did.

There are obviously some very good reasons for this and my guess is that:

On contracts - 3's package prices are now much higher and far more difficult to sell. VTT700 at £35 and VTT1100 at £45 a month are no longer the bargains they once were, nor are they in the comfort zone (£20-30 a month) range that most customers sign up to.

On Pre-Pay: 3's handset range is appalling. They have to give away Moto c975's and ZTE's and we all know that attracts churners. At the other end of the scale the LG U880 is priced out of the reach of most pre-pay customers. Glue and the 'WePay' proposition have also been outgunned by Fresh, EasyMobile and Tesco.

With uninspiring content, lacklustre TV and a shrinking range of decent handsets its hard to see how 3 will attract dealer support let alone customers. Its interesting to note that the amount of people discussing 3's products on all forums and newsgroups has reduced considerably. Even when there were lots of moans and groans you knew they were actually shifting product. Finding anyone discussing ZTE's or any other prominent 3 product is a real task nowadays.

Oh to be a fly on the boardroom wall in Hong Kong..... Li must be asking some very embarrasing questions about how his hard earned profits are being lost.

I think it would now take a miracle to revive 3 UK's fortunes and Ember appear to have spilled the beans on just how badly things have turned out.

[Hands0n]

3's fortunes could be revived easily enough - but it will take a very radical change to make that so. Have their boardroom got the guts to do it? I am not convinced, they are after all the people who have got 3 to where it is today.

What they have to get to grips with is why Customers are leaving 3. It has some little part to do with the tariffs for sure. It also has some little part to do with the handsets, love 'em or hate 'em. But I firmly believe that a large chunk of the Customer disaffection with 3 has to be down to its Customer Service proposition and how its policies of dealing with the failings of the likes of the LG U81xx series a while back and the Nokia 6280 at this time. These misguided policies are killing 3 by totally alienating wave after wave of Customer.

They really do need to go back to basics and work on the Customer interface proposition before trying anything more fancy.

[3GScottishUser]

You are right about the customer service of course but 3 embarked on a land grab paying scant regard to customer issues and are now reaping the rewards of that.

It was a brave gamble. A very expensive licence, expensive infrastructure, costly acquisition and marketing. All of that betrayed by lacklustre products and poor customer service. There was a window of opportunity to make inroads in the UK, Tesco and Virgin seem to have managed very nicely with a range of targetted products and services. 3 with much more at stake appear to have faired much worse than the others and there will have to come a point when HWL simply say enough is enough and settle for what they can get, leaving someone else to make something of the infrastructure.

As far as I can see the 3 brand is now mortally wounded in the UK and struggling in other countries too. I'm sure some fresh thinking at the top might make some difference but its hard to imagine how anyone else could reverse their fortunes now. Bob Fuller knows all of the inside track from his days at Orange when Hutchison built it into a massive business and if he can't replicate that now its questionable anyone can.

Its a fickle thing business. Right product, right place at the right time and all that....sadly HWL appear to have made too many errors previously and the competition are not likely to give them a second chance.

[Hands0n]

Maybe there is scope for Virgin/NTL to acquire 3's infrastructure, re-brand it and do with it what they cannot as an MVNO. Branson has the content, NTL has the infrastructure know how.

[3GScottishUser]

Indeed - or BT might like it.

Its not unthinkable that CPW could make something of it with their retail presence. Would'nt that be the irony to end them all!!

[Hands0n]

It is probably still a bit too early to be circling overhead like this :D

[3GScottishUser]

I'm not so sure...... Peter Erskine CEO of Telefonica's 02 made a prediction a while ago that there would be one major casualty in the UK in the not too distant future. T-Mobile appear too have really shaken things up now with Flext and the others won't stand back and watch their subscriber bases diminish.

It looks like 'somebody' is going to get squeezed out of the market and there are very compelling telltale signs of weakness now appearing in the papers to provide a clue or two.