3 aims for breakeven later this year despite Italian challenges - Mobile broadband swells customer base at Hutchison-owned group

After many years of losses, Hong Kong-based conglomerate Hutchison Whampoa reported in late March that its 3 Group subsidiary is on track to breakeven later this year. During 2008, losses at the subsidiary reduced 39 percent to HKD10.9 billion (US$1.4 billion) from HKD17.9 billion in 2007. Its 3G customer base, which includes its 3G subscribers in Hong Kong, Macau and Israel that form part of its Hutchison Telecommunications International (HTIL) subsidiary, rose 17 percent to over 20 million by year-end. All markets in the 3 Group reported improved results during 2008 with the exception of 3 Italia.

One factor behind 3's improving performance has been the high uptake of mobile broadband, an area that has been a natural focus for a group specialising in high-speed mobile networks and services. 3 Group's customer base included 2.5 million mobile broadband customers by year-end, accounting for about 14 percent of its total, and a rise of 305 percent over the previous year. However, 3 attributed this rise as partly responsible for its shrinking ARPU, which declined 16 percent in 2008 to EUR33.50. Despite the growth in the customer base this meant that total revenues at the group rose just 1 percent to HKD60.37 billion.

All 3 Group's networks have been upgraded to provide HSPA mobile broadband, offering data download speeds of up to 3.6Mb/s in some markets and up to 7.2Mb/s in others. Such network upgrades were the main focus of capex in 2008. In addition, the group has actively courted potential mobile broadband customers with a range of competitively priced HSPA-enabled handsets and data cards across most of its markets.

3 Italia is the group's largest market in terms of subscribers. The subsidiary grew its customer base by 5 percent in 2008 to 8.6 million but it was the group's worst performing market as ARPU shrunk and churn rose. Italy is the only market in the 3 Group where prepaid customers outnumber postpaid customers, a factor that has left 3 Italia vulnerable to churn in a fiercely competitive market. Italy's 3 percent decline in prepaid subscribers in 2008 was the only decline across 3 Group's entire (prepaid/postpaid) customer base.

As revenues fall (declining 15 percent in local currency terms during 2008), 3 Italia is currently assessing infrastructure outsourcing and other opportunities to further reduce cost. It is a strategy that is already underway in some of 3's other markets, most notably via its network sharing deal with T-Mobile in the UK and its planned merger with Vodafone in Australia.

3 has had more success elsewhere in Europe via its strategy of focusing on higher-value, contract customers. In the UK and Ireland, for example (which 3 reports as a single entity), postpaid subscribers rose 35 percent in 2008 and now includes 1 million mobile broadband subscribers. Such markets also benefited from 3's strategy of offering exclusive - and unusual - handsets, most notably the mobile VoIP optimised 'Skypephone' and the INQ phone designed to work with Facebook. Smaller European markets such as Sweden and Denmark (also reported as a single entity) similarly benefited from a growing and highly-active postpaid customer base. The combined customer base grew 37 percent over the year to 1.23 million and revenue from non-voice services rose from 26 percent of ARPU in 2007 to 36 percent in 2008, the highest level of any of the 3 Group operators.

Meanwhile, HTIL had a combined customer base of 12.1 million at the end of the year, though this included a high proportion of second-generation subscribers in developing markets such as Indonesia, Thailand and Sri Lanka. HTIL 3G subscribers were concentrated in markets such as Hong Kong, Macau and Israel. In Vietnam, it was announced this week that HT Mobile - Hutchison's joint-venture with Hanoi Telecom - had completed its switch from CDMA to GSM technology and was re-launching itself as Vietnamobile.

Joss Gillet, Senior Analyst, GSMA Intelligence:

3 Group’s aim of achieving breakeven later this year would be a significant milestone for an operator that is typically competing as a third-tier player in most of the markets where it operates. However, the situation in Italy highlights the 3 Group’s risky strategy on focusing on customer acquisition and market share (rather than value share) in the current economic climate. Subscriber acquisition costs at the group jumped 18 percent in 2008, while churn rose and margins tightened, a situation that saw the group suffer in markets such as Italy where competitors (TIM, Vodafone Italy) have refocused their strategies around value share. On the plus side, 3 has been a pioneer in mobile broadband, which was a key driver of connections growth in 2008 (though it was also responsible for the decline in ARPU). Another success has been its focus on niche market segments via innovative initiatives such as its Skypephone, which has often seen the group successfully position its brand as an alternative to larger market incumbents.