3 Sets sights on big four

After a shaky start, third-generation mobile phone operator 3 is beginning to prosper. Its recent repositioning as a media company is widely seen as being the first step towards flotation, but much will depend on its ability to show that 3G is more than just a novelty, says Robert Lester

Third-generation (3G) mobile phone operator 3 has had its fair share of problems since launching in 2003, but with 3.2 million customers now using its network, the company is finally starting to make an impression on the notoriously competitive UK market.

3, which is owned by Hutchison Whampoa, last week took what appears to be the first step towards a stock-market flotation next year, repositioning itself as a media company by launching a mobile reality television channel (MW last week). It also extended its music and other mobile TV services, and is set to become the world’s first operator to sell air-time to advertisers, following trials with brands including Apple.

While some analysts say 3 is trying to brand itself as a media company to increase its value, 3 claims convergence – the coming together of the entertainment and telecoms industries – is the way forward, and that last week’s announcements were merely an expansion of its current offering, rather than a full-scale reinvention.

Chief operating officer Gareth Jones says: “We always said we’re not a mobile phone business. We see ourselves as something broader than that. Now we’re articulating that in a clearer way.”

Filling the third-Generation gap

3’s launch in March 2003 was plagued by problems with reliability and bulky handsets. It sold only 20,000 handsets in its first three months – just 200 a day. Although still a distant fifth behind Orange, O2, T-Mobile and Vodafone, 3 had 3.1 million customers at the end of June, according to Strategy Analytics, and the company itself announced a further 100,000 subscribers soon afterwards.

3 earns about a quarter of its revenue – &£250m – from non-voice services, but refuses to say how much of this comes from text-messaging, leading some observers to believe that paid-for content is still a relatively small part of its business.

Strategy Analytics senior analyst Sara Harris says: “3 is heading in the right direction. It’s been a slow and painful process, but the problem is it’s still bringing subscribers in on cheap tariffs. A lot of its customers aren’t into these new services.”

Harris commends 3’s latest launches, but doubts whether 3G services will ever really be mass-market, rather than just a “sizeable niche company”.

The issue of advertising on mobiles has long been mooted, but 3 is the first company to announce a definitive plan. Its trial ad for Apple’s iPod earlier this year received 160,000 downloads in a week, and a similar test with a free trailer for the film It’s All Gone Pete Tong received 100,000 downloads.

3’s Jones says there is “irrefutable evidence” that advertising budgets are moving away from broadcast media, but Harris thinks ads on phones will prove an annoyance.

“There is so much user resentment built up against this sort of thing and it’s likely to be unleashed by advertising on mobiles,” she says. “It’s like spam on your phone. The idea is great but in practice it’s intrusive, so I think it’s a limited opportunity.”

3 the one to watch

3’s quirky advertising, created by WCRS, and featuring jellyfish and cherries, has attracted recognition and ridicule in equal measure. But it has certainly raised the company’s profile, particularly among younger consumers. Beattie McGuinness Bungay founding partner Andrew McGuinness, who worked on 3’s advertising account when he was chief executive of in general have matured to a level where people now understand what 3G services do.

“When we worked on 3, we wanted to sell the nation 3G and I don’t think the country or the content was ready at that point,” he says. “The key thing the company has done, which is important in a market with high churn, is to create a unique, magnetic brand personality. 3’s quirkiness cuts through what is still a fairly vanilla market.”

Jones says 3’s services are a reflection of young people’s desire to be creative. “If you’re going to be credible with young people I think you have to behave in a certain way,” he says. “I don’t think Vodafone is attractive to these people because it’s not credible. We’ve tried to create a brand people recognise as different. We have no ambition to be like Vodafone or Orange, which are staid, 1990s brands.”

Talk is cheaper

3’s average revenue per user (ARPU) is considerably higher than its rivals, but has fallen by &£10 in less than a year, according to

Strategy Analytics. At the end of last November, 3’s monthly ARPU was &£43.22, but by March this year it had dropped to &£40.33. In August, it was down to &£33.83.

At the end of June, Vodafone’s ARPU was &£24.61, O2’s &£23, Orange’s &£22.10 and T-Mobile’s &£21.97, but Strategy Analytics’ Harris thinks 3 needs to address its own decline, which results from the company’s cheap tariffs. She says: “The bulk of its additions have not been people seeking to use 3G services. They have been price- conscious consumers looking to talk and send text messages as cheaply as possible.”

Hutchison has already announced plans to float 3’s Italian division before the end of this year, but suggestions that it is hoping to value the business at more than &£8bn have raised eyebrows. 3’s business model remains largely unproven and, although it has more than 10 million customers around the world, the group makes heavy losses – it lost &£770m, before interest and taxes, in the first half of the year.

Conquering the UK

3 now has a sizeable customer base in the UK, and its high-profile advertising campaigns have helped raise awareness of the brand. An increasingly attractive handset range looks like making it a happy Christmas for the company, and last week’s new initiatives have been well received.

But whether 3G services will ever be more than just a novelty for youngsters is still a matter of debate. As the lines between telecoms and entertainment companies blur still further, 3 will be going up against leviathan rivals such as BSkyB and Google, as well as other telecoms providers. The quest to convince potential investors that 3 is a safe bet has only just begun.â¢

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