Rumors abound as 3G launch in Europe draws nearer. Analyst doubts new entrant will start a price war

August 12, 2002

5 Min Read
Hutchison Counters Hot Air

The phones at Hutchison 3G UK Ltd.'s offices have been ringing off the hook following speculation it will start a price war on voice services when it launches its service, to be called 3, later this year (see 3 at Last, 3 at Laaast!).

A Sunday newspaper, The Business, said Hutchison will undercut its rivals by 15 percent. With little else happening in the markets, Bloomberg even suggested the rumor was directly responsible for the poor share price performances of Vodafone Group plc (NYSE: VOD) and mmO2 plc on the London Stock Exchange on Monday, as investors grew concerned that future voice revenues could be hit.

But this is the U.K. in August, when newspapers are so desperate for news that a single sneeze could trigger rumors that the bubonic plague is making a comeback.

So is Hutchison, which will offer national voice service from day one through a roaming agreement with O2 Ltd. (NYSE: OOM), planning a low blow on voice tariffs? "We have confirmed nothing about pricing," says the operator's head of corporate communications Ed Brewster. "I said the same thing to this guy [who wrote the story]. But because I didn't say 'No' to his suggestion of 15 percent, that figure was printed as fact. If he had asked me whether we were going to undercut the others by 50 percent I would have said the same thing. All I will say is that we will compete on price, simple tariff structures, services, and the quality of those services."

Competing on price does not necessarily mean undercutting, says Stephen Pentland, a partner at Spectrum Strategy Consultants. He believes Hutchison's entry to the market will be more sophisticated than a simple pricing pitch. "I would be very surprised if they discounted on voice prices -- it's not the Hutchison we know. They are hardly going to ask customers to pay for a new handset based on slightly lower voice tariffs. And I would be surprised if their commercial agreement with mmO2 would allow them much room to do that. I'd be very disappointed if that's what they came out with."

Pentland went on to note that many of the senior management were previously with Orange SA (London: OGE) and were noted for their original marketing strategies: "There's a lot of innovation within their four walls."

Two of the main factors for Hutchison, says Pentland, are that the company should have a "strong management team, which it has, and a creative services strategy, which we have seen signs of with the content deals Hutchison has struck." It is also important that the operator not encounter any serious technical hurdles after it launches: "They could do without any major surprises."

The reaction of the U.K.'s current GSM operators -- O2, Vodafone, Orange, and T-Mobile (UK) -- each of which owns a 3G license, will be a significant factor for Hutchison, says Pentland. "It's hard to know whether there will be any spoiling tactics, as the others could launch services such as MMS [multimedia messaging] as Hutchison comes to market. The commercial response of the incumbents is a major uncertainty."

Of those incumbents, O2 has the most to say about the possibility of a price war. "It's difficult to comment until they have launched; but any traffic they generate will be good news for us, as they will be roaming onto our network," says spokesman Simon Gordon. "It will be difficult for a pure 3G player to come into the market and establish a presence -- but best of luck to them! All competition is good for the market, and we would look to remain competitive on pricing, but I would say that they've got to actually launch first. The date seems to keep changing," adds Gordon cheekily.

A Vodafone spokeswoman says the company won't comment on whether it's prepared for any price wars, and that it bases its prices on market research, and "not on mooted upcoming events." So there! An Orange spokesman says the France Telecom SA-owned operator "does not comment on other operators' pricing plans," and that "we constantly review our pricing structure to ensure it remains competitive." Orange was keen to stress that price was merely one important factor, and that customers choose a service provider for its network quality, customer service, and value for money. T-Mobile's response also noted the attraction of a known and trusted operator, though its spokesman added that it wouldn't be a surprise if Hutchison entered the market with some aggressive prices.

So all eyes will be on Hutchison in October, when it moves on from its internal trials and extends itself into the public domain with its "first customers," though Brewster admits these will be "friendly customers, from partners and associates," for example, but they will be treated as "real customers." Whether they will be paying real money for their handsets and services was not disclosed, though Brewster says the company will have paying customers before the end of 2002. He also confirms that the handsets to be used will be dual-mode phones supplied by NEC Corp. (Nasdaq: NIPNY) and Motorola Inc. (NYSE: MOT).

In addition, Brewster concedes that there are still some issues regarding dropped calls as current trial users migrate from Hutchison's 3G cells onto O2's GSM network, but that this issue will be resolved early in 2003. "Anyone who didn't think there would be some technical problems with 3G was kidding themselves," he adds.

— Ray Le Maistre, European Editor, Unstrung

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