3 Adds Users, But Losses Pile Up
By Carlo Longino, Thu Aug 19 19:15:00 GMT 2004

Although 3 added more than 2.5 million users in the first half of the year, it generated a billion-dollar loss for parent Hutchison Whampoa.

3 UK hit its million-user target, just eight months late, and the carrier now has 3.2 million users worldwide, and while the company is showing some other promising metrics, it still managed to lose HKD 8.9 billion (USD 1.14 billion) in the first six months of 2004, forcing parent company Hutchison Whampoa to rely on asset sales to turn a profit. The 3G unit lost HKD 3.9 billion in the same period last year.

The carrier's ARPU figures from its 7 country units look pretty good, and its average customer acquisition costs, one point of analyst concern, fell to EUR 252 from EUR 299, though they still remain high.

Hutchison bosses are quick to say that everything is going according to plan, but it looks like they are doing little to win over wary investors and analysts. Company chairman Li Ka-Shing said 3G subscriber growth will continue to accelerate through the end of the year, and Managing Director Canning Fok said he's confident 3 will EBITDA break even in 2005 and turn a net profit in 2006, but one Hong Kong investment manager told Bloomberg that Li "always says the 3G business will pick up. Don't believe it."

But perhaps the most important figure is the percentage of 3's revenues that come from non-voice services: the average figure at its country units is about 13.8%, lower than the global figures from Vodafone and Orange -- which are yet to have full-scale consumer 3G launches -- and mmO2, which hasn't launched any 3G product. Hutchison Whampoa, after all, was responsible for the hugely successful launch of Orange, which was then sold in 1999 to fund the 3G venture. It makes little sense for Hutchison to have sold off Orange, then start over from scratch to build a network that doesn't earn any more from data than previous-generation networks.

Of course, it's unrealistic to think that 3 could instantly generate a huge chunk of revenues from data, just because it's 3G. But the company's content doesn't appear to be causing much of a stir, and its most-touted functionality, video calling, is going nowhere. Chairman Li said, "At the end of next year, 3G needs to be cashflow positive. That's a very important target," which would indicate that he's not willing to fund a loss-making business forever. But for 3 to turn things around, it's got to not only keep winning subscribers, but get people interested in data.

That will require a significant change of tack for the company. It has lost some of its exclusive content rights, like for English football highlights, still doesn't offer open Internet or data-only access and has over-priced and under-compelling content. 3G will be a success, but it's going to take compelling content and a high level of service. The question remains if 3 can make it happen before Hutchison decides to pull the plug.