How far does 3 have to go to convince another firm to buy it?

3 UK’s introduction of free voice calls is the operator’s latest move to disrupt the business models of the incumbent mobile operators. What sets this move apart from 3’s other, equally headline-grabbing moves is that it strikes at what is still the heart of mobile operators’ business case: voice revenues.

The move is bold, though more in concept than in execution. It’s not the first time 3 has led the market with innovate and disruptive products, for which it must be applauded, but the question is: For how long can it operate as a small, niche player, hovering around the sidelines?

It could be argued that the move is an effort by the operator to force another operator to buy it for an attractive sum, enabling its owner, Hong Kong businessman Li Ka-shing, to recoup some of his investment by selling out of the firm.

Why? Because the 3 group continues to lose money. Although the company’s performance is improving, it is far from operating on a firm financial foundation. The group’s revenue rose only 1% year-on-year in 2008, to HK$60.37 billion (US$7.79 billion), though its losses before interest and tax fell 39% year-on-year, to HK$10.8 billion.

Details of free-voice offer

3 UK announced Apr. 23 that it will give all customers with a Skype-enabled handset unlimited free Skype-to-Skype calls and instant messages, starting May 1, with no data charges or top-up fees for either prepaid or postpaid customers. The operator plans to expand its offering this summer to include anyone with a 3 SIM and unlocked 3G handset, regardless of whether 3 supplied the device.

Although 3 UK’s free-voice offer will probably be taken up by only a minority of users – albeit a growing one – it undermines the concept of paying for voice calls, and that makes the proposition highly potent, because it means that users are implicitly choosing to pay for voice calls. If they wanted to, they could call other people free.

This could be especially disruptive to 3’s rivals because it means their networks will be open to 3’s free-voice-call service.

The operator says its existing Skype community uses 1.5 million minutes of Skype-to-Skype calls a day.

3’s disruptive history

Offering free voice calls is just the latest disruptive move by 3. The operator has led in offering cut-price mobile broadband services, for just £10 (US$15) a month in the UK, for instance, and €9 (US$11.95) in Austria.

So cheap are these offers that they raise the question of whether the operator can earn enough money from mobile broadband to be able to invest enough in its networks to maintain quality. “How can 3 make money from these offers?” is a question that many people in the industry have put to me over the past six months. But it is one that nobody has an answer to.

The operator also did away with voice- and SMS- roaming charges for users traveling in any of the seven European countries where it has a presence.

Who could buy 3?

The question of who would buy the operator has long been batted round the industry. Pick the name of an operator that has enough cash, and it could be the one to stop the punishment that 3 is meting out to incumbents in the markets in which it operates. China Mobile, Deutsche Telekom, Zain, Etisalat and Vodafone have long been named as possible buyers.

Although eliminating 3 as a competitor would bring some relief to rivals, the big question is: Would that relief compensate for the amount it would cost a competitor to acquire it? Similarly, would a new entrant to markets to the countries where 3 operates, such as China Mobile, be able to make a return on investment?

3’s viability has been called into question for a long time – since before it even launched services – but it just keeps going. It would be a shame to see such an innovative firm subsumed by a rival or an established major global player, but there will surely come a time when someone knocks on Li Ka-shing’s door with an offer he can’t say no to.

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