New 3 UK chief given tough objectives

Kevin Russell has been given the task of bringing 3 UK to profit. It is no easy matter for the mobile operator’s chief executive: in 2005, the last year for which accounts are available, 3 UK made a pre-tax loss of £1.4bn.

That loss was a little smaller than in 2004, but the scale of Mr Russell’s job is underlined by how 3 has yet to reach break-even at the level of earnings before interest, tax, depreciation and amortisation.

“My key objective is to get this business ebitda positive as soon as possible,” says Mr Russell, who became chief executive this month.

3 is the UK’s fifth-biggest mobile operator, with 3.9m customers. However, 3’s hopes of profitability could be hit by a decision by Ofcom, the telecommunications watchdog, to require a 45 per cent cut in how much it charges for connecting calls to its mobile network.

Ofcom wants to bring 3 within a price controls regime for the first time and force it to cut its charges from 10.7p a minute to 5.9p a minute by 2010-11.

Other leading UK operators such as O2, Vodafone, Orange and T-Mobile have also been told by Ofcom to cut their charges, which are known as mobile termination rates.

However, the big four can cope with the cut, partly because the revenue from their charges is roughly equivalent to what they pay out to rivals when their customers make calls to other mobile networks.

Mr Russell says 3 is a “net outpayer” to its rivals. 3 paid out £50m to the leading operators in 2006 and this figure could more than double by 2010-11 because of Ofcom’s decision.

3’s problem is rooted in how many of its customers have two mobile phones. After switching to 3, about 30 per cent of its customers retain a handset with their old operator for incoming calls. This results in 3 having a disproportionately low number of mobile calls made to its network, and hence the £50m payment to the leading operators.

Mr Russell blames the two handsets phenomenon on the UK’s “failed” regime for enabling customers to take their phone numbers with them when changing mobile operators. Before joining 3 UK, he was head of 3 Australia, where it usually takes two hours to move phone numbers from one network to another. In the UK, it takes five days.

Mr Russell is now calling for reform of the UK number portability regime as well as appealing against Ofcom’s decision to require it to cut its mobile termination rates.

However, 3 risks being seen on the wrong side of the argument because if the appeal before the Competition Appeal Tribunal is successful it would stick with its existing rates, which are much higher than those of the four leading operators.

Some operators privately admit the rates have been too high and enabled them to generate big revenues indirectly from fixed-line phone users. This is because fixed-line companies such as BT also pay the operators for connecting calls made to their mobile networks.

3, for example, received £40m from the fixed-line companies in 2006. Given that 3 paid out £50m to the mobile operators, it meant it was £10m worse off overall. But that £10m figure could increase to more than £100m by 2010-11.

Meanwhile, Mr Russell dismisses suggestions that Hutchison Whampoa, 3’s Hong Kong-based owner, has charged him with preparing the business for a sale.

Mr Russell’s optimism about the future is rooted in his belief that if 3 can raise its game, the leading operators are vulnerable. “We have a leading array of services that leverage off the 3G capability,” he says.