Li turns a corner, but runs into rivals

PUBLISHED : Friday, 01 April, 2005, 12:00am
UPDATED : Friday, 01 April, 2005, 12:00am

Almost two years after their launch, 3G mobile phones are finally catching on.

Yesterday, Li Ka-shing was able to boast that subscriptions to Hutchison's 3G services had climbed to eight million globally, an impressive gain from the one million customers the group had managed to pick up a year ago.

Those subscribers have come at a steep price. To persuade them to sign up, the firm has been forced to give away - or at least heavily subsidise - expensive new handsets. In the second half of last year, it paid an average Euro271 ($2,738) for each new subscriber.

Worse, customers have been less than enthusiastic about the bells and whistles 3G offers, forcing Hutchison to drop prices to compete with second-generation operators. Last year, expensive extras like video calls and football reports accounted for only about 10 per cent of revenue. The rest came from old-fashioned telephone calls and text messages.

In Italy, Hutchison's biggest market, the average subscriber generated Euro47 a month in revenues. At that rate, the firm needs to hold on to every customer for at least six months just to recoup the cost of signing him or her up - a tough task in a market where 90 per cent of subscribers prepay.

Small wonder then that Hutchison lost $37.49 billion on 3G last year.

Managing director Canning Fok Kin-ning insists the worst is over. He claimed the British business had been generating enough cash to cover its operating expenses since December and Italy would follow suit this month.

With handset prices falling and demand for expensive extras such as music downloads and reality television feeds rising, Mr Fok says operations in both countries would be earning enough to pay for their growth - the cost of signing up new subscribers - by year-end.

Then, the group should finally begin recouping some of the $170 billion it has invested in 3G so far.

A buoyant Mr Fok is already making plans to float the Italian business, followed closely by the British operation.

'We have turned the corner,' he insisted.

That is optimistic. For the past two years, Hutchison has had the 3G market to itself. Now that teething problems with the technology have been overcome and a critical mass of customers wants the service, competitors are appearing fast.

Vodafone and Orange have introduced their 3G services in the past few months, raising the prospect of a bruising price war. Worse, the British government, which led the way in auctioning 3G licences in 2000, is proposing a second auction at which licences are expected to sell for a fraction of the original ones.

That would open the door to operators such as Virgin.

It may yet prove a lot tougher to make money in 3G than Mr Fok expects.