3G Farce Stings mmO2
Despite reporting a 14 percent rise in total revenue to £4.87 billion (about US$8 billion) and a doubling in earnings before interest, tax, depreciation, and amortization (EBITDA) of £859 million ($1.4 billion), the focus on the carrier’s full-year results announcement today was fixed firmly on its pre-tax loss of £10.2 billion ($16.7 billion) due to “exceptional charges” of £9.6 billion ($15.7 billion) (see mmO2 Reports $17B Loss!).
The figures are second only to Vodafone Group plc's (NYSE: VOD) as the largest loss in British corporate history (see Gent's Golden Shower and Vodafone Turns Deep Red, Focuses on Cost Control).
Most of this loss -- £5.9 billion ($9.7 billion) -- was written off and attributed to the fall in the value of the company’s 3G licences in the U.K., Germany, and the Netherlands, all of which were purchased by former parent British Telecommunications plc (BT) (NYSE: BTY; London: BTA). The U.K. license alone cost £4 billion ($6.6 billion).
MmO2 had already taken a financial hit of £1.4 billion ($2.3 billion) last month by selling off its Dutch subsidiary, O2 Netherlands, for the knockdown price of £17 million ($28 million), and it has now also taken a charge of £2.4 billion ($3.9 billion) in goodwill (see mmO2 Sells Dutch Sub).
The carrier’s chief executive, Peter Erskine, told analysts that third-generation telephony is now worth less than half the amount paid for the licenses three years ago. “It is like saying that you paid so much for your house and kidding yourself that it’s worth twice the actual market value,” he comments. “I think there is a general understanding in the European telecoms market that we overpaid for 3G.”
The financial impact of the license costs, combined with low levels of consumer demand for current 3G services (see 3G UK Cries for Help), has also led the carrier to push back the commercial launch of its own high-speed network once again. “We had hoped to have launched 3G six to nine months ago, but it is now going to be the second half of 2004,” says Erskine. “There is a lack of evidence for mass market appeal for 3G and a limited availability of handsets.”
Analysts welcomed the carrier’s delay as an indication that the market is at last setting itself achievable targets. “It is much later than the original plan but is certainly more realistic,” comments Jeremy Green, principal wireless analyst at Ovum Ltd. “2004 is a sensible timeframe.”
According to Green, mm02’s moves may put pressure on Vodafone to announce a similar write-down when the global behemoth announces its own financial results next month. “It will be interesting to see whether other carriers follow suit,” he notes. “As Alcoholics Anonymous will tell you, the first step is to admit you have a problem, and mmO2 has at least done that. They paid a lot of money for something that will never make that money back.”
— Justin Springham, Senior Editor, Europe, Unstrung