Analysis: 3 fails to keep the customer engaged

As third-generation mobile phone operator 3 launches its latest ad campaign this week, the company is sharpening its efforts to reduce the high level of customer turnover it has suffered in the first half of this year.

In truth, the company claims to be as much of a media outlet as a mobile phone business. It points out it is responsible for 10% of all UK singles sales, and has this week announced a deal with ITV to broadcast popular prime-time shows live at the same time they air on television.

While its UK television ads through agency WCRS have been startling and unusual, questions remain over the future prospects for third-generation mobile technology. UK mobile operators paid &£22.5bn for 3G licences in 2000, and have invested an estimated &£18bn building the network. But there are few signs they are making it pay, or that they have found popular ways of exploiting the services.

The wrong numbers

3, which became the first to offer 3G services when it launched in March 2003, has attracted 3.75 million customers, compared with over 16 million for the big mobile phone players. Rivals claim 3 has failed to reach a critical mass where users can, for instance, make video calls to each other. One says it is also hampered by offering few exclusive services that are attractive to customers. After a slow launch it slashed prices for voice calls, but it has attracted what it terms a “low-quality customer base” of people who spend little.

3’s owner Hutchison Whampoa last week revealed UK customers were, in the first six months of this year, deserting the brand at a much higher rate than it had expected. The company managed to reduce this churn in July – but it is still a frighteningly high 43% on an annualised basis.

Some experts believe this indicates that earlier in the year an annualised 60% of customers may have been switching out of the operator. This compares with an average 30% churn for the industry. Some think this is indicative of fundamental problems with 3’s UK business model.

The company dismisses the criticisms and points to a sharp increase in revenues in the first six months of the year, up 16% on last year’s first half, to &£700m. What is more, customer contracts cost vastly more than those of its UK rivals. Average revenue per user is over &£40 per month for 3, compared with &£23 for rival Vodafone. Spending on services apart from calls – text messages, music and video – is about &£10 a month.

Even so, 3 is working to overcome a reputation for clunky handsets, poor customer service and patchy coverage for 3G services, which cover 89% of the UK. The high price of using its video and music download services compared with computer downloads is also off-putting. The company says it is addressing the handset problem, and some observers detect an improvement in customer service and coverage.

But analyst Sara Harris of Strategy Analytics attributes the high customer turnover largely to poor customer service and slow services. That said, she thinks it will ride the problems and eventually achieve success.

Wrong signals

“It has made this huge rush to get an eclectic swathe of the market, but people have come on board and found it is not what they expected,” she says. “While 3’s marketing says it is a high-end company with cheap prices, it has attracted low-end customers.”

Meanwhile, analyst James Barford of Enders Analysis says the brand’s main platform of being a 3G provider is a disadvantage because many people do not want these services. He adds: “A survey we have done among UK mobile customers shows 3 has the worst customer loyalty, while 02 has the best.”

High customer turnover for 3 appears to be a result of making great promises but failing to deliver on service, affordability and coverage. Overcoming the mismatch between promise and delivery is seen as the main task facing providers of third-generation mobile services.

David Benady

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