How can 3 survive with £2.99/month deals?

[3GScottishUser]

It's always been a minefield doing the sums to work out the prospect of whether a contract deal can make anything for a network but recent press reports have made the calculations a bit easier.

Lets look at 3's LG U-8130 talk/text 600 deal from CPW/e2save/etc.

The handset is free on a 12 month contract but costs 3 £150.

The dealer will be paid £100 net commission (after cashback deals etc are taken into account)

Cost so far £250

Customer pays £3.99 X 11 months = £43.89 + 1 month X £30 Total = £73.89

So 3 must make £176.11 to make anything from the contract.

Assuming an average customer makes 15 mins worth of calls per day.

Lets be generous and suppose that 20% of dialled calls are to 3 phones .... revenue neutral. 40% are X/Net to mobiles @ an average of 6p/min termination charge and 40% are to landlines at 1p/min.

Call costs in terms of termination charges = 36p/day for X/net, 6p/day for landline and 0p/day for 3 calls = a total of 42p/day in termination charges for dialled calls or £12.60/month.

One has to set against this incoming calls and 3's huge termination rates. Lets say the contract customer receives 10 mins of calls per day at 3's 15p/min (average) termination charge. Thats £ 1.50/day or £45/month going to 3.

Taking the revenue 3 receive from incoming calls from what they pay out you are left with £32.40.

Multiply the £32.40 X 12 and you get £388.80. Now subtract the £176.11 that they spent to get a customer and you end up with £212.69.

£212.69.... not bad eh? Even after giving away a phone, paying the dealer and giving the mobile user a cheap bundle of minutes. The sting in the tail is that those who call 3 mobiles (and they probably dont know it) are the ones who are paying the price. OK for those on fixed price deals like inclusive minutes on mobile bundles but far from good for BT/NTL/Telewest customers who are forking out more than 200% more to call 3 phones than other networks to give Hutchison a foot up.

Roll on 2007 when OFCOM will harmonise termination rates I say.

[Hypnotic]

Customers dont pay 3.99 for 11 months. They have 3 months half price line rental on a 12 month contract and 6 months on a 18 month. This IS set by 3, so if your contract is say £30 a month you pay 15 for the half price period. When it comes to the "3.99" that is via redemption and is paid out by the dealer you bought it from not the network. 3 do get all their money and it's the company such as e2save that is dishing out the money for redemption, as long as you remember to claim it at months 6 and 12 that is.

[Ben]

.... the money companies like e2save dish out via redemption is commission from the network! It doesn't just appear out of nowhere!

Cashback sucks.

[bsrjl1]

And it looks like the networks are getting fed up of it; Orange has slashed commissions to stop it (maybe they're going to look after existing customers, lol!) & Gareth Jones of 3 has made comments about it.

Of course if you're paying virtually nothing for your contract, you're more likely to churn at the end. Perhaps they should start knocking money off at a network level, and more when you get out of the minimum term (& don't upgrade)?

[3GScottishUser]

When something is so cheap it has no real worth and can be easily discarded without too much emotion. I sort of feel like that now with my Nokia 7600 deal. Keep the DD in place and just wait for the redemption date, meanwhile get something else on a decent network.

Tempting!

[gorilla]

I have to confess that the only reason I have a ‘3’ contract is for the cheapness of the contract i.e. 11 X £15 + £30 over 12 months, assuming I get cash back. Either way it’ll still be cheaper than my former o2 contract and my 6680 is far superior to the SE T630 which I had before.

Will these cash back deals prove financially harmful for the operators? I doubt it. I remember reading an interview with one of the ‘3’ execs and he was asked how come ‘3’ are able to offer such good tariffs. He replied that providing talk time was cheap compared to providing data services. This is why I suspect 3 are cheap for minutes, but have expensive content and provide no access to the internet.

3 have taken a gamble by being cheap to attract customers, which has been necessary to compete against the established operators.
I’m not sure how to classify 3, as they are not a 2g operator and they are not a 3g operator, yet. Offering video calls and video streaming does not make you a 3g operator. Sooner or later they are going to have to offer better data access.
This is what will really make or break 3. In a couple of years the other operators will have established proper 3g networks with internet access, but where will 3 customers be? I for one will not be sitting in a walled garden.

[kryten]

3 are more along the lines of 2.9g.