Hutch: Fab, Gear Spike?

Hutchison 3G UK Ltd.'s decision to slash the price of voice calls on its 3G network in an attempt to boost sluggish sales could see operators spending more on their infrastructures to improve voice quality -- or risk losing valuable customers to the newcomer (see 3 UK Touts Pricing).

Financial analysts argue that an increase in competition between Hutchison and the U.K.’s four major second-generation wireless carriers -- Vodafone Group plc (NYSE: VOD), mmO2 plc, Orange UK (London: OGE), and T-Mobile (UK) -- could trigger an increase in existing 2G GSM infrastructure expenditures.

GSM (Global System for Mobile Communications) is a circuit-switched, digital, cellular phone technology supporting data transfer speeds of up to 9.6 kbit/s. GSM defines the entire cellular system, not just the air interface, and has become the de facto wireless standard in Europe and most of Asia.

Hutchison is the only operator running a 3G universal mobile telecommunications standard (UMTS) network in the U.K. at the moment; the others aren't expected to launch upgardes until next year. UMTS couples a wideband CDMA air interface with an upgraded GSM core network, giving Hutch more bandwidth to offer any kind of service on its network than operators running GSM/GPRS.

Analysts predict the move may cause some operators to scramble to get their infrastructures in gear. “At the moment there is little competition in the mobile industry at the operating level,” Nomura Holdings Inc. Richard Windsor tells Unstrung. “Operators don’t want to spend any money and have allowed network quality to degrade but haven’t suffered from a loss of customers because there is nowhere interesting for them to go. With Hutchison’s aggressive entrance into the voice market, operators may lose customers and need to act. One of the options is to spend on network quality. This could translate into a spike in demand for 2G mobile infrastructure over the next few quarters.”

Windsor cites traditional GSM network vendors such as Nokia Corp. (NYSE: NOK), Siemens AG (NYSE: SI; Frankfurt: SIE), and Motorola Inc. (NYSE: MOT) as potential benefactors, with a particular emphasis on market leader LM Ericsson (Nasdaq: ERICY) in light of its "pure play" status.

Lehman Brothers takes a similar view. The company notes in a report this week that with 3G spending currently at very low levels, “operators will instead have to continue investing in new 2G capacity. The key drivers of capex include the maintenance of current network capacities.”

Some analysts, however, have expressed dismay that the carrier is focusing on low-cost voice calls rather than touting the benefits of third-generation multimedia services. They want their M-M-S!

“It is greatly disappointing that 3 have decided to join in the voice minute price war rather than focus on all the mobile services, especially video calls, that 3 offers,” says John Strand, CEO of Strand Consult. “Now one has to worry that 3 are setting the stage for a somewhat less healthy 3G market where once again the focus is on price and price alone.”

Hutchison 3G UK -- Europe’s first commercial 3G carrier -- has experienced a multitude of problems since its launch in March this year (see 3G UK Cries for Help and Hutch's Weekend Hangover). Recent reports suggest a subscriber base of only 25,000 -- a far cry from the million target that deputy chairman and co-CEO Colin Tucker is still aiming for by the end of this year.

— Justin Springham, Senior Editor, Europe, Unstrung

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