Business Watch:Three Group is finally punching its weight

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Hutchison Whampoa’s Three operation has finally posted a profit 10 years since it was founded. Dominic White looks at why it is welcome news for the company

At long, long last Three’s parent company, Hutchison Whampoa, has something to cheer about.

It’s been 10 long years since the ports-to-telecoms conglomerate made a multi-billion-dollar bet on 3G technology.

Now, billions of dollars of losses (and several broken promises) later, the seven-country Three operation has reported its first profit.

Hutchison Whampoa boss Li Ka-shing (pictured) has set Three a profitability target several times – only to have to delay it.

So, it was doubtless with great relief that the Hong Kong billionaire told his shareholders: “With the completion of the investment phase of the Three Group, and its positive results, the Group has entered a new era when the Three Group will no longer be a drag on profits and instead, make a positive contribution.”

The Three Group reported 2010 profits of £230 million before interest and tax, versus a loss of £702 billion for 2009.

The group’s registered 3G customer base rose 13 per cent during the year and now totals more than 29.6 million customers.

That includes about six million mobile broadband access customers, a rise of almost a third from the previous year.

Importantly, Li Ka-shing expects the group will stay profitable “barring any significant adverse market or regulatory developments”.

There was also cause for cheer at Three UK. It booked its first profit too, boosted by a £500 million one-off gain from its tweaked network-sharing deal with Everything Everywhere.

The business, run by chief executive Kevin Russell, finally turned profitable in the second half of 2010, more than seven years on from its launch on March 3, 2003.

The second half was when Three UK – which posted profits of £173 million before interest and tax for 2010 – finally started selling the iPhone, the last of the five network operators to do so.

Three UK has also generated significant consumer interest with its generous-looking ‘One Plan’, and had 7.2 million customers at the end of 2010, up 23 per cent.

But a huge increase in its prepay subscribers meant that contract customers now account for just 55 per cent of the customer base, down from 64 per cent a year earlier.

And despite Russell declaring it an “exciting time” for the company, average revenues per user fell 16 per cent to £22.60.

Network investment

The one-off £500 million gain was thanks to changes to the deal with Everything Everywhere, whereby Three UK got the rights to use about 3,000 cell sites, free of future acquisition and operating costs.

But that benefit was partially offset by some on-off provisions of £311 million, largely relating to the re-vamp of Three UK’s own network infrastructure.

Nevertheless, Hutchison said in its statement that: “The addition of this valuable asset will provide a significant contribution to the competitive position and cost-saving initiatives.”

Enders Analysis’s James Barford said the UK was the star of Three Group’s results, pointing out that its growth improved by eight percentage points from the first half to second.

That partly reflected the fact that the company had an awful first half in the contract market.

It lost 32,000 contract customers in that period, but managed to add 241,000 in the second half.

Barford noted that Three UK’s service revenue growth in the second half of minus-one per cent was still below UK market growth of four per cent, but that the subscribers gained at the end of the year meant its growth in the first quarter of 2011 should be about seven per cent, “a return to gaining revenue market-share”.

He also added that Three “is still challenged in growing much faster.

Its distribution is quite limited, with the company not pushing the independent retailers Carphone Warehouse and Phones 4U to minimise unit subscriber-acquisition costs, and the low contract churn-rates of the ‘big three’ – 13 per cent up to 17 per cent, compared to Three’s 23 per cent – make gaining share a painfully slow process.

Nonetheless, it is gaining share again, and its growth is likely to accelerate at least a little from this point.”

All that said, because of its size relative to the larger players, Three’s long-term future in the UK remains in doubt – not least because of uncertainty over the release of spectrum for 4G.

And just prior to the results, Russell was out on the warpath over spectrum, warning that Three UK risks being eaten up by larger rivals unless it gets access to enough of the spectrum being sold off by the Government.

He was already angry that the Government and Ofcom have allowed Three’s rivals to re-use their 2G spectrum for 3G services.

And, with the Government’s announcement on the 4G auction structure looming, he called for a cap on how much spectrum any operator could own in the sub-1GHz bands.

That’s because Three’s larger rivals O2 and Vodafone already own sub-1GHz spectrum which is similar to the 800MHz spectrum – ideal for rural networks – that will be among the spectrum on offer in the 4G auction.

Three shells out

As it turned out, Ofcom proposed an alternative solution. It wants to design the 800MHz and 2.6GHz spectrum auctions to ensure the UK mobile market remains at four players: Vodafone, O2, Everything Everywhere (combined Orange UK and T-Mobile) and Three.

But the catch is the regulator expects Three to shell out about £600 million for this spectrum.

As Enders pointed out, Three “may not want to do” that and “it is not clear what the back-up plan would then be”.

What is clear is that whatever prices are paid, the UK Government will raise less than the £22.5 billion secured by the state in the previous sell-off at the turn of the millennium.

It was arguably those high auction prices that ultimately forced the merger of Orange and T-Mobile in the UK.

And in the US, T-Mobile – owned by German former telecoms monopoly Deutsche Telekom – has also agreed to sell its operations to telco giant AT&T.

But the proposed plan to buy T-Mobile USA for £24 billion is set to face heavy scrutiny from watchdogs and opposition from rivals and consumer groups.

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