Case Study: 3G: A Cell Phone Too Far?

Source: M W Peng (2006)

The third generation (3G) wireless technology is promising yet risky. In addition to being a cell phone , it can take pictures, send e-mails (including the pictures just snapped), play video games, display maps (using the global positioning system), download media (both video and music), and hold videoconferences (see the person you are talking to). The problem is that there seems to be little demand for it. This is a painful conclusion reached by the European telecommunications industry that burned $150 billion bidding for 3G licenses, but wrote off plans for network roll-out. Similarly, the performance of NTTDoCoMo (http://www.nttdocomo.com) and KTF (http://www.ktf.com), which recently launched 3G in Japan and South Korea, respectively is not encouraging. However, Hutchison Whampoa (http://www.hutchisonwhampoa.com), a conglomerate controlled by Hong Kongs most influential tycoon, Li Ka-shing, begs to differ. It is charging into 3G at a breakneck speed by spending $17.5 billion to set up nine operators (through JVs and WOSs) in Australia, Austria, Denmark, Great Britain, Hong Kong, Ireland, Israel, Italy, and Sweden. As a first mover, Hutchison is betting that it can pioneer and dominate a new business. Its global brand is simply called 3. Except Hong Kong and Australia, where Hutchison has been a telecom player, 3 will be a first time entrant not only in 3G, but also in the entire telecom industry in the other seven countries. Therefore, 3 will confront the double whammy of having to overcome both the liability of foreignness as an unknown player and the liability of new technology. The countries Hutchison seeks to enter are developed markets saturated by strong local competitors. The number of cell phone users there has peaked, and 3 will have to take market share away from incumbents, an action sure to invite retaliation. Adding license fees, a 3G network costs at least 50 percent more to build than a traditional mobile network. To subscribe to 3s services, customers will also have to buy a new handset, which would cost US$960 in Britain and close to US$2,000 in Hong Kong. In comparison, the most fancy 2G cell phones hardly sell for more than US$550. In addition, to break even in Britain by 2006, 3 UK (the British subsidiary) would have to squeeze US$350 out of an average subscriber each month. Experts note that there has been no precedent for any firm to command that kind of market power from zero in saturated markets. Hutchison executives argue that 3G is a whole new ball game and that customers will have an unprecedented motive to switch. For example, they stress the excitement of being able to download a video clip of the latest sports games. The question is how much that convenience will cost. Given the sticker shock, none of the gadgets appears to be a must have. Even on the technology side, the early 3G experience from Japan and South Korea is that handsets would be gig, heavy, and short on battery life --- in addition to being expensive. With so many applications provided by hundreds of companies, nobody can guarantee whether they will work smoothly with each

other. Early customers may even find conversations cut off when crossing into an area with no 3G coverage. As a well-run global conglomerate, not a pure telecom player, Hutchison can survive a total disaster in its 3G ventures. In 2002, only 13 percent of its revenues came from telecom. Its bread and butter business are ports, infrastructure, retail, and property, which generated 46 percent of the groups profit. Nevertheless, Hutchisons shares already took a beating dropping 41 percent in 2002 primarily because of its exposure to 3G risks. The stakes clearly are high. There are many well-wishers for 3s pioneering efforts. Equipment makers such as Ericsson (http://www.ericsson.com), NEC (http://www.nec. com), and Nokia (http://www. nokia.com) desperately want 3 to succeed. Even rivals all wish 3 well. They are doing all the explaining about 3G for us, commented a strategist at Orange (http://www.web.orange. co.uk), a British competitor. Coming from a late mover, this comment is indeed not a half-hearted one.

Case Study Discussion Questions

1.

Why doesnt Hutchison Whampoa launch 3G services in its home market first, and then enter foreign countries? In other words, what are the benefits of launching in nine countries simultaneously?

2. While all European telecom players have taken a wait-and-see attitude toward 3G (even after spending billions to acquire licenses), what motivates Hutchison to strategize differently? 3. If you were a Hutchison board member, would you vote go or no go for the 3G ventures?
4.

If you were a board member at Orange, what would be your strategic advice for Orange?

Instruction to Students: Prepare your answers, in groups (the same group you work for your group report), in the Powerpoint of no more than 15 slides, and submit them to your seminar

tutor by 22nd Jan 2012 via email. Please list all your team members name on the first slide. Martina Yangas email address: m.yanga@mdx.ac.uk Yi Zhus email address: y.zhu@mdx.ac.uk