Greenfield 3G mobile operators to become profitable?

Now this is big news. And yes, I know I say that often, but this is BIIIIIIIGGGG news.

Ok, first quickly. If there is one thing, that I might know better than truly anyone else on the planet, and that all of my peers recognize, it is the 3G business case. How to succeed in making money with 3G. 3G as in third generation mobile telecoms, what the common man might think of as video-phones. The newer edition of the iPhone is a 3G phone, the original iPhone was not.

This blog posting is my "definitive" treatise on the 3G business case for now, in 2009, and it is another very detailed and long posting so please go get a cup of coffee before you start. But if you are at all interested in the financial performance of the telecoms industry, you will want to read this posting, with a lot of thought.

TECHNICALLY BEYOND ROCKET SCIENCE

The telecoms system is the largest interconnected machine man has ever built. The mobile side of telecoms is the hard part, far more complex than rocket science and built to the highest level of perfection of any machine or system in commercial production ever, with error tolerance levels far more precise than the aviation or automobile safety or pharmaceuticals etc. As our readers know, there is a mobile phone for more than half of the planet and thus mobile alone has also become the widest-spread technology ever totally dwarfing others such as the internet, PCs, televisions, etc.

For the mobile telecoms technology, the next evolution is what is commonly called 3G. First launched commerically in October 2001, so far in 2009, only about one in 6 mobile phones and subscriptions on the planet has been upgraded to 3G.

The 3G infrastructure investment requires a total replacement of the existing 2G (digital) cellular networks like GSM, CDMA, TDMA, iDEN etc. Those were the most complex interconnected giant machine humans had ever built. Now we do something far more complex to replace them. And still today, several of the world's largest mobile phone markets, like China, India, Russia etc have barely even started to deploy 3G.

3G ALSO MOST COMPLEX BUSINESS PROPOSITION

In addition to being the most complex technology, 3G is also the most difficult business proposition ever, as it merges more diverse industries than have ever been possible before. 3G combines telecoms with the internet, being inherently more complex than the internet or telecoms by themselves; but it also adds all media industries, as varied as television and radio, to printed books. 3G adds advertising. 3G adds telematics (your car mapping or the remote metering of your electricity). 3G adds finance from payments to loans to credit cards to insurance. 3G adds virtual reality. 3G adds augmented reality. 3G adds robotics. 3G merges more industries than anyone had ever imagined before, and far more than for example the internet has done so far.

On the 3G business concept, all of these converged industries need to be sustainable commercially within this hopelessly complex system. It makes your brain hurt just listing the elements that are involved.

That sounds like overhype, Tomi. Yes, it does. But think of this logically. Whichever industry it happens to be, out of all of the planet's industries, one will be the most complex. And one will be one with the biggest in reach - and yes, obviously these two are not necessarily the same. One industry on the planet will have the biggest capital investment. again not automatically the same as the above.

And it is certainly feasible that the most complex widest-reaching industry would also have biggest investment need. And as the human population keeps growing, it is almost certain, that the biggest-ever expenditure did not happen many decades ago, it is happening now.

But don't take my word on it. The Economist - a most conservative and extremely precise and flawlessly reputable weekly business paper - wrote in October 2001, that the 3G investment is the biggest gamble in the economic history of mankind.

YES I WROTE THE BOOK

And this is my playground.. Its not like some true gurus, who can point to a seminal volume they penned, and say with a straight face, "I wrote the book" and thus establish their leadership within a panel of authors who all wrote books on that industry. The one who did it first, no doubt has a particular place in that industry and a place of prominence among peers who also wrote books for that industry. "I wrote the book" is a powerful claim when there are many authors with books.

In my case, its not just that I did obviously write the business book for 3G, the biggest business gamble in history - which was obviously my second book, M-Profits in 2002. But where you would expect that thousands of other wannabe experts would have rushed out a library worth of business books on the most complex business problem ever (consider the literally hundreds of books about the internet business), to establish their credentials; astonishingly today - seven years later - my book M-Profits: Making Money from 3G Services - is literally still the ONLY published book on the 3G business.

This is that difficult, that complex, that risky as an industry; that it takes a business lifetime to get to terms with its complexities; and the foundations (most complex technologo ever) for the industry require such deep technical and business understanding, that it honestly is difficult for business experts to comprehend,. They find it far easier to go invent bizarre business concept for the "new economy" of the internet. Nobody else has attempted to add to the 3G business insights in Ahonen's book. This while literally hundreds of billions were spent on 3G investments this decade.

So was my book accepted? Yeah.. you could say so, ha-ha: the worlds' best-selling telecoms book for the month of October 2003. A certified bestseller by Wiley, the world's biggest publisher of technical and engineering books, went into a second printing. Referenced by just about every author who discussed the 3G business in their books about 3G. And consider this - created such a big following that the subsequent book of mine - 3G Marketing - shot up the sales charts so fast, that Wiley celebrated it as the fastest-selling telecoms book of all time.

If my peers felt M-Profits was a mediocre (or bad) book, they would not have rushed to snap up the next book I wrote. They would have been very cautious, thinking that the previous book was not really that good, so one better be careful, wait until the reviews come out, and only then buy the book. But if everybody loved the previous book, then the sequel will fly off the shelves.

AND I SHARED MY INSIGHTS WITH EVERYONE

I created the world's first university course on the 3G business case, for Oxford University. My 3G course or related workshops have been run on all six inhabited continents. I chaired most of the business modelling conferences for 3G early in this decade and where I wasn't chairing, usually I delivered the keynote, often doing both. Almost every other major econometric modeller of 3G referred to me, my theories and my models at the time. Banks from HSBC to RBS to BNP Paribas used me to explain the 3G business case to their investment conferences and seminars worldwide.

Obviously previously at Nokia being the Global Head of Business Consulting under 3G Strategic Marketing at HQ, I "owned" the 3G business case story for Nokia, when Nokia had become the biggest handset maker, and then when CEO Jorma Ollila suddenly stated that Nokia would focus strategically on 3G, to the point of selling off its broadband telecoms unit etc. Everybody wanted Nokia's view on 3G and I was the point-man to explain how 3G would make money.

And finally, the ultimate proof. What do operators say, they after all have to pony up the hundreds of billions of dollars to deploy those 3G networks. What do they say?  The world's largest mobile operator group by revenues, Vodafone, has said in public, that Tomi Ahonen had been assisting them with their 3G business case. Telenor, the fourth largest mobile operator group said the same thing. And so did Orange/France Telecom. Not that they had worked with consultants of mine. No, they all said in public, that they have explicitly used Tomi Ahonen for their business case development for 3G.

While not explicitly mentioning business modelling work on 3G, the world's first 2G operator - who was among the three operators to receive the world's first 3G license, Elisa of Finland, said of their work with me that I drafted the roadmap for the 3G market (roadmap for 3G market is awefully close to saying 3G business case..).. And then NTT DoCoMo of Japan, the operator who launched the first 1G network, and commerically launched the world's first 3G network, said of their work with me that I explained the dynamics of mobile money-making. (that is again pretty close to saying "business case..:")

And as the rest of this blog is about Hutchison Group and Mr Li Ka-Shing's statement and its impact, how about Hutchison? Several of their affiliates too have said in public that they have worked with Tomi Ahonen and also have said explicitly that I have assisted them in developing their 3G business case.

(Ok Tomi, we got it. Stop with the bragging. We believe you that you are the man for the 3G business case. Now, tell us what is this big story)

Not big story. BIIIIIIGGGGG story.

On Friday Mr Li Ka-shing, the billionaire Hong Kong chairman of Hutchison Whampoa, the parent of the various Three operations of 3G mobile from the UK to Sweden to Italy to Australia, made a statement to the shareholder's meeting and said that this year, 2009, the 3G telecoms business will be reporting an operating profit, before interest, depreciation, taxation and amortization. So the operational business of 3G for them is turning the corner this year, and becoming cash-flow-positive. From now on, Hutchison's 3G investment will be making money from operations annually, to be able to pay off the infrastructure investment (and license fees) so that the total investment will be able to make a return to its owners.

Sounds like financial mumbo-jumbo. Who cares, eh?

AGAIN MOBILE BUCKS THE GLOBAL ECONOMIC BAD NEWS

Let me pause here first. Note how dramatically contrasting, that news is compared to just about all other economic news. CNN just today is reporting about all the horrible troubles that the newspaper industry is in. We've seen stories of airlines reporting disasterous results (British Airways just over the weekend) and car makers going bankrupt not to mention the global banking industry in despair for almost year now.

But mobile telecoms operators (ie carriers). The more an operator is mobile-specific, the more they report profits. Vodafone the world's biggest mobile operator group by revenues reported last week, and yes, while the global economy is headed to the toilet, Vodafone reported growing revenues and reported profits. This follows the pattern of so many other mobile operators. Earlier the world's largest mobile operator group by susbcribers, China Mobile reported added revenues and reported profits. Where you may find a mobile operator reporting losses, for the most part that is with operators who have both fixed and mobile assets, just like Vodafone, who reported its least-well performing part was the European fixed telecoms side of their operations (didn't I say that a few years ago, when Vodafone bizarrely took to this path, that its utterly dumb for a mobile operator to expand in the fixed side)

So please note, its not just that the biggest handset makers like Nokia and Samsung can report growth in revenues and growth in profits even as the economy is severely hurt, even more so, the mobile operators are near-unanimously around the planet, reporting profits, inspite of the downturn.

WHEN I GROW UP, I WANT TO BECOME BIGGEST

What are we looking at with this article about 3G business? The worldwide 3G project is almost impossible to put into realistic context. Consider the Channel Tunnel (the one linking France to Britain, the longest undersea section of any tunnel and one of the modern engineering wonders). The global 3G investment just this decade alone, would get you 60 Channel Tunnels. As the tunnel is 50 kilometers long, you could argue that with 3G investment type of money, you could dig an undersea tunnel that was 3,000 km - almost 2,000 miles long. You know what? Thats the exact distance from the shores of Europe on the West Coast of Ireland, to the Easternmost edge of North America in Newfoundland of Canada.

3G investment is so huge, that it would have alternatively funded a tunnel across the Atlantic. How's that for enormous?

For an American context, consider your biggest national investment ever, the Space Shuttle. The first flight of the shuttle was in 1979 and this year makes it 30 years of shuttle flights. The current shuttle fleet is obviously nearing its end and is in the process of being retired. How does it compare to 3G? The global 3G investment so far this decade alone, would buy you two complete 30-year lifespans of the total Space Shuttle program ! Yes, for silly videocalling cellphone services, we spend so much that it would sustain now the purchase of four new shuttles and cover their flight cost and NASA's shuttle budget for the next 60 years without a penny of taxpayer dollars. That is the scale we are looking at. This 3G is a massive investment.

How about here in Asia? Well, perhaps the most ambitious construction project of all time is the Kansai international airport (KIX) for the city of Osaka in Japan. They built a man-made island, but recognize, this is into the Pacific Ocean, into incredibly deep waters in an earthquake-prone region. It won numerous awards by engineering societies worldwide and has served as the model for all subsequent smaller ocean-based artificial island airports like those of Kobe and Kitakyushu.

Could you get your own ocean-based artificial island aiport for the cost of 3G, if you were a James Bond-esque villain wanting an island jet airport in the Pacifc, or any ocean? Sure, it would get you not one, not two and not three, but 15 fully operational airports with all facilities from paved runways to radars and terminals, on such artificial islands, whatever your ocean might be, Mr Goldfinger...

Ok, maybe you're not an aircraft industry geek like me, and weren't aware of KIX as an airport, but if you've followed any international development and construction news, you know of the Palm Islands of Dubai. The biggest and most famous in the series is a man-made island that if viewed from space, look like a palm tree inside a circle - and yes, the island is visible from space. A massive development of reclaiming land from the Gulf shiting tons of sand, and all the housing, shopping, yahting etc that now exists on that man-made island in Dubai in the Middle East. What would 3G get you? If you didn't want the advanced mobile calls and video blogs of 3G, alternatively for this investment you could get 25 Palm Islands !

I could go on and on and on. 3G is BY FAR the biggest infrastructure investment ever.

But it is not a guarantee to make money. The Channel Tunnel and its operator, Eurotunnel and the Eurostar, the bullet train that operates between London and Paris (and also London and Brussels) are all making losses. A giant investment can easily become a giant loss and engineering history is full of brilliant inventions that cost massive amounts of money, that ended up being economically not feasible, from Isambard Kingdom Brunel's grandest ship, the Great Eastern, 150 years ago (once the largest man-made object) to the Concorde the supersonic airplane. Making something biggest (or fastest) on the planet is no guarantee to make you richest..

BASICS OF 3G BUSINESS CASE

As any business case, the 3G mobile telecoms business case has a revenue portion and a costs portion. The economic hope is that the revenues are bigger than costs, over time, so that the investment will make a proftt. What makes 3G so risky, is the scale of the initial investment. The mere radio network, for an average sized country like Britain or Italy or Norway, runs an billion dollars for each network operator. There are five network operators in the UK, a billion dollars each, that means five billion just to install the radio networks for those operators/carriers.

Thats not the total investment, nooooo..  Thats just the radio network (radio antenna masts, base stations etc). Where the licenses were auctioned and the industry got a bit carried away with license costs, an individual license could easily cost 7 billion dollars more - per operator/carrier - as they did in Germany and the UK. Thats just the license to do business with 3G. But not every country caused this enormous additional cost to 3G, other countries awarded their 3G licenses for free, like Finland and Japan did.

It takes typically about 12-18 months to install enough of the 3G network, to be able to commence commercial production. So even if you are lucky to be in a country of free 3G licenses, you still have to spend hundreds of millions of dollars out-of-pocket before you can even connect the first handset and start to transmit voice calls on your network, so you can start to charge for the services.

And then, you have to convince your customers to buy new handsets for 3G, because the older 2G phones are not compatible with 3G. All handsets have to be replaced. The handset market alone is worth roughly speaking 150 billion dollars every year, and the 3G mobile operators have to convince their customers to pick up the far more expensive 3G handsets, rather than older 2G handsets. Think of the Apple 3G iPhone. So in some countries the operators will subsidise the handsets, and then bind the customer into 18 month or 24 month contracts, to try to recover the extra paid for the handsets.

And yes, as of today, one in six mobile phones or devices, and also the related network susbscriptions, has been upgraded to 3G. Today, eight years after the launch of 3G in Japan, we are well along the path to migrate the whole planet to 3G.

Big costs indeed.

Against those costs, there is revenue. The basic 2G voice telecoms business today generates about 500 billion dollars. The basic 2G related data services (most of which is SMS text messaging) bring in another 100 billion or so. This industry of "basic just voice and SMS texts" mobile telecoms industry would survive happily even if 3G never succeeded.  The more advanced data services, beyond basic voice and SMS, that can take advantage of 3G, generated only about 50 billion dollars last year and if we add the basic voice calls and basic messages etc of the 3G users, the total 3G revenues were about 200 billion dollars last year.

So what we need, is that over time, the total revenues earned by this given industry will exceed the total costs incurred. Apart from the infrastructure costs of building 3G networks, there are actually far bigger costs, related to the marketing and operation of 3G networks. That phone bill which you receive at home every month, that calling centre which you call when you complain about the dropped calls, and the handset subsidy you receive when you get a "free upgrade" to your new phone are all part of the operating expenses of running a modern mobile network. Obviously the industry also has the typical marketing expenditures typical of most giant industries, from the big TV advertising campaigns to global sponsorship deals such as Vodafone sponsoring the McLaren Formula One team etc. Far bigger costs, than the network infrastructure costs, over the lifespan of a 3G license, are these, the operating expenses of doing 3G business. And the single biggest part of the operating expenses is marketing.

I could write a book about it, ha-ha, and indeed I did write one. But most of our readers are not CEO's of 2G mobile operators, currently pondering the feasibility of investing in 3G, ha-ha. So there is not really much sense in going through the detail. Anyone really interested will no doubt pick up my book M-Profits on Amazon.

PROFIT OR LOSS

So note, when my book M-Profits was released in 2002, not one company in the world had reported any financial data yet on their 3G operations and only a handful operators had even had their 3G operations commercially in production for a few months. There was no certainty to the facts, only projections and calculations.

I made my projections and forecasts, in the "worst situation" for any forecaster, when literally zero data was available. It would have been far easier to make projections in 2004, when Japanese and South Korean 3G operators would have had a couple of years of operations and reported financial data, and the first European 3G operators would have just started to report on their early data. But in 2002 when I released M-Profits, I had nothing, not one data point and yet I committed to a forecast that I published into my book.

I said in M-Profits in the chapter on the 3G business case, that the payback period for incumbent operators deploying 3G was between 4 and 7 years, and I said that the payback period for "newcomer networks, so called Greenfield operators, was between 7 and 10 years."

This was written at a time just prior to the previous economic downturn (dot-com bubble), so it could certainly be said to have been an optimistic view. It also was not widely shared. There were many highly respected forecasters and analysts, who predicted doom and gloom for 3G, the most pessimistic of them, Forrester, actually said 3G would cause the wholesale bankrutpcies of mobile telecoms operators in a very widely quoted report roughly at the same time as my book. Forrester said 3G would kill most mobile operators and force the remaining ones to consolidate into a handful; while Tomi Ahonen said 3G would on the whole bring profits to operators in a time scale of 4-10 years. What a difference..

Once the economic downturn hit, and most announced 3G commercial launches were postponed, the financial analysts were climbing all over themselves to jump on the bandwagon that 3G was a dead duck, and in particular, they repeated the theme that "excessive" 3G licenses would kill the industry. (While I re-examined the evidence and stayed firm on my forecasts for 3G)

GREENFIELD OR INCUMBENT

In the 3G deployment commercial opportunity, the incumbent had a far better economic opportunity. The incumbent had an existing customer base, already familiar with their brand, using their network and handsets, using voice and SMS text messages, and increasingly starting to use WAP mobile internet services, MMS picture messaging services, basic video clips etc, on so-called 2.5G networks such as GPRS, EDGE, CDMA2000 1x RTT etc.

The incumbent had collected years of traffic (ie usage) info on its customers, and could rather well project, which of its customers would be early heavy users of 3G type of data and services, and thus could optimize its marketing efforts and not sell expensive 3G handsets (with subsidies) to the wrong type of early customers.

And in most cases, in most markets, during this decade, the incumbent had parts of the network that were "3G ready", usually more on the side of the core network. Furthermore, on the radio network, the operator would already manage a series of typically about 10,000 sites for the radio network (a small air-conditioned room for the electronic "base station" equipment housed in typically the basement of the same building where the 3G radio antenna was installed to the roof). The costs of attempting to get permission to install new radio gear to the rooftops - and to then also get locked, air-conditioned cabinet space in the same building, every few hundred meters in a downtown area of congested cities - is very VERY expensive, for a new network operator. But if the incumbent already had the equipment room and then just upgraded some of the equipment there, the costs relating to the sites are far less for incumbents than greenfields.

So, since about the middle of this decade, we've started to hear that the incumbents are rather satisfied with the early adoption of 3G and were comfortable that they would tend to make money on it. Obviously we need not go further than the first mobile operator to launch 3G, NTT DoCoMo, for evidence.

GREENFIELD BIGGEST RISK

But the really big gamble was the Greenfield operators for 3G. The Greenfields would arrive into markets where conventional wisdom suggested the market was already "at saturation" (our regular readers know that was a myth, but it was a very widely held misconception back in 2000-2001).

So if for example the UK had a penetration rate of 80% of the total population in 2001 - this faulty saturation myth logic suggested that the 80% rate left essentially only the very young children and very elderly without a mobile phone at the time. Conventional wisdom on the saturation myth did suggest that a newcomer into the UK market, which tried to capture the market by providing advanced 3G services to those who did not have a phone, toddlers and retirees, would fail. Obviously those analysts did not understand mobile and that we were moving from one phone per person to multiple subscriptions and phones per person - so there was still enormous growth to come for 3G.

Today the UK has a penetration rate of over 130% per capita, so anyone who followed the "we are at saturation" analysts, would have missed out on additional growth of 62% in the market ha-ha. (But luckly those who read my book knew all about this and were able to capitalize..)

Regardless, in most advanced markets of 2G, where 3G would first be deployed (essentially the whole Industrialized World), most markets already had 3 or 4 incumbent mobile operator networks. They would all (or actually, almost all) launch 3G themselves, and would fight fiercely to hold onto their own existing customers, in that transition from 2G to 3G. With at least one and often two of the biggest incumbent mobile phone operators/carriers being also typically among the 10 biggest industrial corporations of any country, they would have very deep pockets to be able to fight prolonged marketing battles whether being price wars, or handset subsidy games or heavy advertising promotions or various service bundling packages.

Meanwhile the Greenfield would have to design the network without any actual knowledge of the radio environment (how dense is that skyscraper, will it block my radio signals to the callers who are on the street behind it), negotiate last for base station sites, getting usually the worst deals,  fight extra-hard to get customers to try their network, all while being a new brand, unknown, and typically having the worst network quality. And the handset makers were in no rush to bring out early 3G phones as they were very bulky and had bad battery life, were very expensive, etc. So the operators would have to get some often unknown Asian branded handset makers to provide early 3G phones just to be able to give handsets to customers.

It seemed that every possible obstacle was in the way of the 3G Greenfield operator; and this was before the previous economic downturn, when the dot-com bubble burst, and then the telecoms investment sector also dried up.

PAYBACK PERIOD FOR GREENFIELD

So, of all possible commercial "plays" into 3G, the most perilous was one that took a Greenfield approach to 3G.

Now, I had done lots of 3G business calculations with some of the very best minds of this space, on all six continents and countless times with incumbent and with Greenfield operators. I did trust my understanding and the calculations of the econometric modelling experts of my global 3G consulting department at Nokia, and was confident we had done our math properly and that there was truly sound business logic to 3G.

Those who have followed my career this decade, also know I took on many times the major press and analysts, when they made faulty claims about 3G, but also, that I concluded my own positions, saying, I personally believe 3G will be a success, but nobody can know. It will depend. And only time can tell for sure. (but that increasingly the signs were starting to be good for 3G, as time passed on)

So Li Ka-Shing, the Chairman of Hutchison Whampoa and heading the largest "all Greenfield" family of 3G mobile operators in the world, under the Three branded umbrella. He now said (last week) that he the Three operators as a group, will become cash-flow positive this year.

That does not mean they are profitable on their investment, but it mean that excluding the investment, the actual operations of their new companies, will become profitable this year, and now they can start to use some of those profits to pay off the investments.

This is very big news. VERY big news. The most "perilous" business position in 3G (ie the worst case of 3G), the Greenfield operator, is apparently becoming economically sustainable and assuming each year from now on, they continue to have a positive cash-flow position, they are likely to pay off their investment and turn an overall profit on the investment. The only question now, becomes "how fast" and that obviously depends on how much profits they can generate. So for the sake of argument, if Three in Austria earns a total profit of one Euro per year, and it cost them a billion Euros to install their network, it would take them one billion years to recover their investment (and actually more, to pay the interest..) Or obviously, if Three in Austria earned one billion Euros of profits in one year, they would pay off that same investment in one year.. 

HOCKEY STICKS

But now some freebie consulting advice from Tomi. The pattern of revenue generation and costs in mobile - my so-called "hockey sticks theory" that is universally accepted and referenced in books by other authors on 3G - means that once the greenfield operator "turns the corner" and goes from losing money, to starting to earn money, out of its new 3G mobile operations, the profits grow dramatically from year to year.

There are two reasons for this. On the costs side, the initial costs of 3G are very intense - so for the first years of a Greenfield operator (and remember, they start construction of the network at least a year before they launch commercially) there are massive infrastructure and marketing costs.

Meanwhile, the greenfield operator does not have customers. It has to start from literally zero customer base, and grow. Its early customer base is inherently of poor quality - those customers who have poor credit ratings and who are unable to afford much traffic etc who search for any good offers, are more likely to sign up with the newest network than those customers who have the mobile phone number printed on thousands of business cards shared around the world and have a long-standing trusting relationship with one operator/carrier, who often bring their families etc to the same network, etc.

Early on, the Greenfield has to do a lot of marketing just to be noticed. The total number of customers is few, they are often not as wealthy as the customers on other networks; and also with multiple subscriptions, the Greenfield operator will have a disproportionately high portion of its total customer base, of the type of customer who has two or more subscriptions - effectively dividing traffic between that Greenfield operator and at least one of the incumbent operators.

And early on, the Greenfield when it gains first customers, those customers will be calling people they know - on other networks. So most of the traffic on the Greenfield network will be across to the other networks (rivals) and this has to be paid for, in something called termination revenue. If I call in the UK from the Three network to the Orange network, then Orange terminated my call. Orange will invoice Three for the number of minutes they completed on behalf of a Three caller (me). While Three invoices me for the full call, they have to pay out part of the costs to complete that call, to a rival network. Only when the mobile phone calls are within the network, from one Three user to another (or one Orange user to another) is the total cost controlled by that one operator.

So early on, as the Greenfield operator has almost no customers, the vast majority of all traffic will go outside the network, and incur additional termination revenues, that have to be paid to the rival networks.

Over time, both problems, the heavy initial costs, and the modest initial revenues, will reverse. The Greenfield operator will have the newest network and not have to sustain parallel networks as incuments do. So the maintenance costs will be less for Greenfields than for incumbents in 3G. Similarly the customers who do come to Greenfields in 3G, will by necessity witness a 3G-only network and its inherent benefits, compared with the services on incumbent networks where part of the time the services are on 2G/2.5G parts of the network. The 3G Greenfield will be able to - and usually does - deploy far more advanced 3G services and get their usage levels to be far higher than those on incumbent networks. And as the base of its own subscribers keeps growing, the Greenfield operator will start to have ever more of its total originated traffic, also terminated within its own network to its own customers.

There is (theoretically, I argue, in the Hockey  Sticks theory, in my book) an inflection point to the business case for Greenfield Operators. If that inflection point is achieved, after that point the growth in profits will accelerate. So the downward direction of losing money, is a "gradual increase" of accumulated losses, but after the inflection point the upward direction is a "rapid increase" of accumulated profits, far more quickly paying off the total costs.

So Hutchison Whampoa says that for its 3G operations from Australia to the UK to Sweden, they are going to report an operating profit this year, for the group as a whole, that means that they have recently passed that most-critical milestone, that inflection point in the profit/loss curve.

Now the Three group of operators/carriers will rapidly recover their investments and will turn the total investment into a profit. My analysis says that if it took them only 6 years to get cash-flow positive, then they will turn the total investment into a profit in about two more years. WOW.

The MOST DIFFICULT and risky business proposition for 3G, itself the biggest gamble in the economic history of mankind, is about to turn a profit.

We can now say, with great confidence, that any 3G investment in an Industrialized World country, that has been reasonably well managed, should turn a profit. Obviously as the Three Greenfield operations are all in the Industrialized World, we cannot use this as evidence that 3G will necessarily be a commercial success also in the Developing World (although I am equally confident that will also be, but time will tell).

IF THAT IS THE GROUP

Note the news is actually "better". Li Ka-Shing said the group of their 3G mobile operators will be cash-flow positive for its 3G assets. It is almost certain, that there will be diversity within the group, so that maybe in Italy they make profits earlier and in Denmark later, or vice versa. So if the total group reports an operating profit this year, then their best affiliates will have done so at least a year earlier. And yes, also some would then wait a further year to achieve profitable operations, obviously so that the total group average will work out, mathematically.

Now, I did not, and nobody did, forecast that every 3G operator would become profitable. Obviously we saw evidence of that back in 2004, when Monet, the first US based mobile operator/carrier to launch 3G, went bankrupt. There is plenty of opportunity here for incompetent management obviously, and 3G is no guarantee against that.

But recall, that we had all that pessimism about the "enormous" 3G licenses, that helped expand the economic downturn after the dot-com bubble burst. It did not kill 3G. We had the painful delays of handset launches and early disappointing 3G handsets. It did not kill 3G. We had WiFi and the big threat of anything from Skype to IM and that did not kill 3G (arguably it was the other way around, many WiFi operators died because of 3G). We had the stupid hype around the so-called 4G, ie WiMax (which obviously is not 4G; WiMax is an ITU certified 3G technology, it cannot be simultaneously 3G and 4G). That did not kill 3G. We had the "sudden" appearance of MVNOs in many markets, that did not kill 3G. We had "saturation" which was a recurring theme this whole decade, in particular by many American pundits who really didnt' understand mobile, and that did not kill 3G.

Now we have heard that the largest group of operators to deploy Greenfield 3G networks, is becoming cash-flow positive. And I can tell you now, because of my intimate knowledge of the 3G business case, that means they have passed a critical inflection point and are headed also to overall investment profitability and probably in 2 or maybe 3 years form when they actually do achive a cash-flow positive performance (the current economic downturn is still there, it MIGHT get worse still, so we do have to wait until we get the final confirmation from Hutchison Whampoa later, about this financial year).

This was one of the most controversial projections that I have ever made, and had an enormous financial impact, crossing greenfield operators whose aggregagte investments were at least 50 billion dollars. My projection was isolated and and very very few of my fellow experts back around 2002 would agree with this time-scale, that within a 7-10 year period, a Greenfield operator in 3G could turn a profit. It now looks likely that it will happen in as little as 8 years.

If you had held a long-term investment in a mobile operator, on a 3G investment, and you still have that investment, it time to hold onto it. I can't promise it to be a profitable investment, as obviously it depends who you bought and when you bought it, but no matter which or when, compared to other rival investment opportunities in fixed landline telecoms or any other tech, odds are the 3G related mobile operator investment will be outperforming the others, if measured from the beginning of the decade to now, and significantly more, into the future.

As to me? I will have an opportunity to update another of my long-term forecasts with now confirmation, and in celebration of that, I have to dig up an old joke about 3G investments. I'll post that here for you but gotta go find it first.

Congratulations Three operators, and my very best to my friends over at Three UK, Three Global, Drei Austria and all other Three affiliates, and bizarrely too, Orange/Partner of Israel, which inspite of the Orange branding, is not part of Orange and is actually affiliated with the Hutchison group.
 

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