While almost every telecom company on the planet has postponed or shelved plans to build data-intensive, high-bandwidth mobile networks, Hutchison Whampoa is charging ahead undeterred. The company just launched pilot 3G (for third-generation) networks in England and Italy, and has aggressive plans to initiate similar services in seven other markets across the globe over the next several years. Even allies have doubts about the strategy. Hutchison's partners in the United Kingdom—Japan's NTT DoCoMo and the Netherlands' KPN Mobile—have written down the values of their portions of the business by 80% and 86%, respectively.
Does Li know something that no one else knows? Maybe not. But perspective counts. While his rivals are worrying about how investment in new network technology will impact their already-shaky bottom lines, Li is clearly taking a longer view. He can afford to. Due to Hutchison 3G's position as one company within a diversified conglomerate, it has the financial resources and management conviction to take chances when others must scale back. Furthermore, Li's strategy becomes more comprehensible when you see telecom as he does: It's not a life-or-death proposition for his company. It's an investment.
Of course, the world's telecom-investment climate is considerably more frigid than it was just a few years ago. In 2000, when wireless mania was at its apex, everyone thought consumers were dying for high-speed networks and mobile phones that could stream video calls, download movie clips and access online game networks. Caught up in the high-tech hype, mobile carriers rushed into the future, spending a now seemingly absurd $89.5 billion on 3G licenses in Europe alone.
Today, faced with having to spend billions more to upgrade their networks to handle heavy data traffic—and lacking evidence that consumers are willing to pay extra for whizzy videophones—those same companies are in a mad scramble to retrench as fast as they advanced. Saddled with debt, frightened by sinking stock prices and wary of technological delays, most carriers have postponed their 3G-investment plans and instead are settling for less costly upgrades of existing networks through technology known as 2.5G.
Pronouncements like that sound crazy after the bursting of the Internet bubble. But the pitch for 3 in the United Kingdom nevertheless emphasizes a number of flashy features, like those video calls, plus video clips of English Premier League football delivered to your phone every time your favorite team scores, and maps that move with you as they direct you to the nearest pub.
Peacock acknowledges that 3 has been beset by delays (which are reported almost gleefully in the English press). Although the company might not make its original goal of a full-scale launch by year-end, Peacock says he's confident that it won't miss by more than a few weeks. "More important than making a deadline," he adds, "is ensuring that the product delivers as promised."
That's a wise philosophy considering how high the stakes are. Being the first mover in any new technology is a huge risk, especially within an industry where consumers have come to resent being promised so much yet receiving so little (WAP, anyone?) But Hutchison has decided the potential benefits, which could be vast, outweigh the risks, no matter how daunting. As a new entrant without any legacy network to upgrade, 3 is hoping to leapfrog the competition and establish an important early foothold in the telecom standard for the future—a future in which slower rivals are stuck with outmoded networks, just when consumer demand for high-speed wireless data service starts to sizzle.
But even granting the company a relatively painless rollout, the hurdles left to overcome are legion, as skeptics are delighted to point out. This is the narrative almost every commentator has seized upon: Hutchison is entering a saturated market of entrenched incumbents with an untested product and no killer application. The primary benefit of 3G is, simply, speed. Data-transfer rates are about seven times those of 2G phones, and 3G is usually at least twice as fast as 2.5G. High bandwidth means 3G networks can handle more volume, all things being equal, so they are cheaper and more efficient to manage.
That's good for operators, but from a user's point of view, it's not clear yet why the additional horsepower is needed. "A must-have application could pop up at any time," says K.Y. Ng, a stock analyst at securities firm Nomura. "But there isn't one out there right now." Other than live videoconferencing calls, in fact, there's really nothing you can do on 3G phones that you can't do on 2.5G phones, and those have not exactly been runaway commercial successes. (Indeed, consulting firm Analysys estimates that only one-third of people with 2.5G phones actually use data services.) William Clark, a research director at technology consulting firm Gartner, acknowledges that videoconferencing is a mindblower to anyone who has seen it. But he doubts the feature will compel millions of users to migrate, especially since Hutchison handsets are expected to begin retailing for as much as $800. "Video calls make great demos, but I'm skeptical," Clark says. "Companies are looking to cut costs. And lots of consumers use mobile phones while walking or driving, not the ideal environment." Japan's NTT DoCoMo has learned that lesson all too painfully. A year after launching the world's first 3G network, only 0.3% of DoCoMo's 42.3 million subscribers have migrated to 3G services.
Considering what Hutchison 3G is up against, the company will be hard pressed to meet its target break-even date of 2005. According to estimates by Nomura, Hutchison 3G will have to capture a minimum of 6.4 million subscribers in the United Kingdom, or a 13% market share, just to start making a positive return on its investment by 2010. The forecast out of technology consultant Forrester Research is even grimmer, pushing Hutchison 3G's break-even date in the United Kingdom back to 2017.
Why is Li pushing forward at the moment of maximum pessimism? The short answer: because he is able to when no one else can. As the new entrant in a depressed sector and with the financial backing of a larger diversified company, Hutchison is rare among telecoms in that it is not really a telecom company at all. In Hutchison Whampoa's latest fiscal year, for example, telecommunications amounted to only 13% of total sales and 3% of earnings before interest and taxes. Hutchison Whampoa's management likes telecom's long-term prospects for fast growth and high returns, but only as a complement to more stable cash generators, such as ports and utilities.
Unlike Vodaphone, AT&T, Verizon and others, Hutchison Whampoa was comparatively unruffled by the bursting of the telecom bubble. The company was forced to cancel a recent bond offering and its stock is down 30% since the beginning of the year, but its cash hoard gives it plenty of room to maneuver. According to Nomura's estimates, Hutchison Whampoa has $14.5 billion in cash and liquid assets on hand, more than enough to cover the additional $10.2 billion the company will need to complete its multicountry 3G buildout. "Funny how people have been slagging off conglomerates for some time," says Nick Ingelbrecht, a technology analyst at Gartner, "but now the idea looks rather good, doesn't it?"
That's the point the skeptics miss: Unlike pure telecom companies, Hutchison Whampoa does not need its 3G business to be successful immediately. It can afford to subsidize Hutchison 3G heavily, for as long as management continues to believe 3G will ultimately pay off. Li, one of the richest men in the world (with an estimated net worth of $10 billion), is not one to throw good money after bad. He has frequently stated that not getting too attached to any investment is one of the greatest psychological edges he has. "He is very pragmatic and unsentimental," says Ingelbrecht. "He'll chop something off at the knees if he doesn't think it is going to work." Even in telecom he has demonstrated a willingness to pull the plug on failing ventures, as he did in 1994 with Rabbit, an ill-fated early phone service, after more than a year of operation. "Knowing when to quit is very important, and keep this in mind in any kind of business," he told Fortune magazine last year.
In fact, Rabbit appears to be the single misstep in a series of spectacular wins. A large portion of the money Li is using to build a 3G network comes from the successes of his 2G investments. Li and his team, led by group managing director Canning Fok, were the same folks who built Orange into a leading mobile carrier in the United Kingdom before unloading their 49% stake for a cool $21.5 billion in 1999. Soon thereafter, Hutchison Whampoa sold its 23% stake in U.S. wireless firm Voicestream to Deutsche Telekom for another $9 billion.
Given Li's record as a dealmaker and the company's solid balance sheet, many of Hutchison Whampoa's minority shareholders are giving Li the benefit of the doubt, despite the swirling pessimism. Indeed, management conviction seems to be the only thing that matters—and few expect Li to blink. "3G is a long-term investment for them," says Paolo Pescatore, an analyst at research firm IDC. At least until they get a better offer.