May 28, 2007 10:01 pm

Hutchison’s 3 challenges UK regulator

Hutchison Whampoa’s mobile operator, 3, is challenging plans by UK regulators to force it to charge substantially less for connecting phone calls to its network because of concerns that the changes threaten its path to profitability.

Last week 3 lodged an appeal with the Competition Appeal Tribunal against a decision by Ofcom, the telecommunications watchdog, that would require the UK’s fifth largest mobile operator to cut its charges by 45 per cent.

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Kevin Russell, chief executive of 3 UK, accused Ofcom of making an “absurd” and anti-competitive decision that he said would result in it subsidising Britain’s established big four mobile operators: O2 , Vodafone, Orange and T-Mobile.

In an interview with the Financial Times, he also called on Ofcom to help consumers by improving their ability to move mobile phone numbers when switching to a new operator.

Services from 3 began in the UK in 2003 and, by revenue, the mobile operator is the largest member of the group of third-generation mobile businesses in Europe and Asia owned by Hong Kong tycoon Li Ka-shing’s Hutchison Whampoa.

The losses run up in the UK meant Hutchison Whampoa missed its guidance that the 3 businesses would break even last year at the level of earnings before interest, tax, depreciation and amortisation.

They are now supposed to break even in the first half of 2007, but Ofcom’s March decision could jeopardise 3 UK’s road to profitability.

The charges that mobile operators levy for connecting calls to their networks are known as mobile termination rates, and represent 15 per cent of their revenue in the UK market, or £2.5bn to the sector per year.

For Britain’s biggest four operators, the revenue they secure from rivals is roughly cancelled out by what they pay when their customers make calls to other mobile networks.

But Mr Russell described 3 as a “net outpayer” to the leading operators because it pays more to rivals than it receives for connecting calls to its network. In 2006, he said, 3 paid £50m to the bigger “incumbent” operators.

This could increase to more than £100m because of Ofcom’s decision to force it to cut the charge for connecting calls to its network over the next four years.

“What you end up with is this illogical and absurd situation where you have a new entrant . . . actually cross-subsidising significant amounts of money to established mobile incumbents,” he said. Those incumbents used the money to increase their competitiveness in the marketplace, to 3’s disadvantage, he added.

Mr Russell said 3 paid £50m to its rivals in 2006 principally because of what he called the UK’s “broken” regime for enabling consumers to take their phone numbers with them when switching networks. In Australia, it takes two hours for people to move their numbers to a new network, compared with five days in the UK.

This UK regime meant that 3 received a disproportionately low number of incoming calls to its network for which it could charge, and resulted in the £50m payment, he added.

Ofcom said it would “robustly defend our decision, which strikes the right balance between lowering prices for consumers while encouraging further investment in mobile networks.”

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