Profits still elusive at '3'

Elsa Lion/Ovum
03 May 2007

Hutchison's 3 Group announced much improved results for 2006, with total revenues up 35% year-on-year to HK$50,668 million ($5.3 billion). The group narrowed its losses, before tax and interest, by 45% year-on-year to HK$19,996 million ($2.1 billion).

3 had 14.7 million customers in December 2006, compared with 11.9 million in December 2005. Average 12-month rolling ARPU rose by 8% to $45.63. Its average monthly churn dropped from 3.2% to 2.6%. The Group's subscriber acquisition costs dropped to $250 in 2006 from$262 in June 2006 and $293 in 2005, despite Hutchison's increased focus on higher-value segments and its use of discounts to attract customers in those segments.

Hutchinson Whampoa continues to believe it can achieve positive EBITDA after deducting all subscriber acquisition costs in the first half of 2007.

Noticeable improvements

Hutchison 3's top-level performance is improving noticeably. The group continues to report one of the highest ARPUs among all operators worldwide, as well as one of the highest non-voice ARPUs. Moreover, its ARPU continues to grow. 3 Group's blended ARPU rose by 8% in 2006 to ‾5.63. Its customer base is also growing at the healthy rate of 30%, even though it operates in some of the most competitive markets on the planet. Factors underlying this performance include 3's attractive data offerings, such as the X-series, a stronger pricing strategy and a push for on-net offers. This has enabled the operator to lower its costs while attracting new customers.
However, while the top-line figures paint a very positive picture, below the varnish it is easy to see large cracks. 3 is still a long way from sustainable profits. The operator is doing very well in some of its smaller markets, such as Australia and Sweden, but it is unlikely that 3 will be able to sustain this growth without substantial further investment. These are mature and highly competitive markets, where call charges are dropping (3 Australia's and 3 Austria's ARPUs are down).

In any case, it is primarily the health of 3's businesses in Italy and the UK that will determine whether the operator will succeed in becoming profitable in 2007. Over 75% of 3 Group's customers are in these markets.

Italy's blended ARPU fell by 3%, even though the operator more than doubled its post-paid user base in 2006. 3's prepaid revenues in the UK and Ireland have dropped by 23% even though its prepaid customer base grew by 4%. The operator also continues to subsidize users in Italy and the UK heavily, offering two handsets for the price of one, half price line rental and large commissions to retailers. If its subscriber acquisition costs at group level are falling, it may be because 3 is not acquiring as many of these expensive customers in its core markets.

A concern for 3 is that, in these markets, a 3G network is no longer a competitive advantage. 3 competes mainly on price, as it is increasingly difficult for the 3G operator to differentiate based on its multimedia service offerings, which other operators can now match.

It will be difficult for 3 to achieve both short-term profitability and long-term growth. Growing its user and revenue base in smaller markets is a good strategy to achieve short-term growth and potentially short-term profitability. However, it cannot rely on this growth and must turn to its core business in order to improve top line results.

Elsa is a senior analyst at Ovum and contributes to the [email protected] advisory service, which provides analysis of industry and product trends, evaluations of the wireless strategy of major players and reports on the opportunities and threats in the mobile market

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