Business Watch: Three UK closes on profit promise


As Hutchison Whampoa’s Three Group strives to hit its long-delayed profitability target, the effects can be seen most starkly at its UK business, writes Dominic White

According to the Hong Kong conglomerate’s latest results, Three UK’s revenue tumbled nine per cent in the first six months of the year.

The main reason appears to be a sharp decline in contract revenues. These fell by a socking great 11 per cent to £605 million.

Analysts have put the fall down to a war on subscriber acquisition costs as the overall seven-country group makes a push for profitability.

Shares in its parent Hutchison Whampoa, which is controlled by Asia’s richest businessman Li Ka-shing, have trailed the local market for eight years.

The reason is the $25 billion bet he has placed on 3G technology, which has so far failed to pay off.

But according to the accounts those losses are finally close to disappearing.

Losses before interest and tax were still HK$998 million in the first half, but that is still down from HK$5.45 billion six months earlier – a pretty impressive turnaround on the face of it.

The results gave Hutchison the confidence to reiterate its prediction that the Three Group will turn its first operating profit this year.

Enders Analysis is not sure about that, saying it would “require either further creative accounting or very strictly controlled spending on subscriber acquisition, at the expense of future revenue growth” for the target to be met.

Certainly the UK results showed that Three eased off in the contract segment during the first half, wary no doubt of what is a fiercely competitive market dominated by three larger players in O2, Vodafone and the newly-merged Orange/T-Mobile.

While the number of prepay users on Three UK rose by a pretty remarkable 25 per cent in the six months to June 30 to stand at 2.69 million this month, the number of Three UK subscribers fell one per cent, standing at 3.59 million at the last count.

Bear in mind that the contract market is growing at about 10 per cent in the UK at the moment, as more and more people sign up to SIM-only and smartphone plans, most notably with the iPhone.

So while Three UK’s overall users were up nine per cent, total revenues were down nine per cent to £687 million.

That’s because the company makes so much more revenue from contract customers: £605 million in the half versus just £81.6 million from prepay punters.

Likewise, average revenues per user fell 10 per cent to £24.07 – the company makes more than three times as much in revenues per month from contract customers than from prepay.

The irony, says Enders, is that the booming smartphone market ought, in theory, to be playing into Three UK’s hands in contracts due to its impressive 3G network.

“With demand for smartphones surging Hutchison Three UK is in a potentially strong position, but without a substantial marketing and SAC [subscriber acquisition] budget it cannot take advantage.”

I would note here that network quality doesn’t count for much when there’s a price war for iPhone users. The late teenagers and early-twenties types who are queuing up for iPhones want the cheapest offer available, simple as that.

Meanwhile, Enders notes that Three UK’s cost conscious approach to the contract market has helped the business in recent years. For example it only offers two-year contracts – no 18 month option – and the vast majority of its new customers are acquired directly rather than through third parties, thus cutting commissions.

But Enders’ James Barford reckons this may have backfired a bit of late.

“This approach… may have caused it some problems over the last few months as the handset market returned to strength and demand for expensive smartphones increased.”

So we’ll have to see how Three UK plays the rest of the year as its executives seek the bonuses I would imagine they will be in line for if the Three Group makes its long-awaited profit target.

It’s also worth noting that if you want to sell a company for a profit, it’s easier if the company is profitable. Not that Li Ka-shing has shown any signs of selling up.

But it would surely be tempting for him to sell the UK business to Vodafone or O2 if he could get the right price right now.