The Shadow Over Sunday
Mighty DoCoMo can afford 3G, but what hope for a small player in the world's toughest mobile market?
Wei Leng Tay for Asiaweek.
"So much hype over 3G you would think it's the greatest thing since the rice cooker", - Craig Ehrlich.
In a city in which businessmen often check the time courtesy of Rolex or Cartier, Hong Kong mobile-phone company boss Craig Ehrlich goes to work with an 18-year-old Mickey Mouse watch on his wrist. It's not that he can't afford something better: His last annual salary package is believed to have been $3.7 million. Rather, says Ehrlich, the memento reminds him that "I shouldn't take life or myself too seriously."
Until now, Ehrlich, 45, has had much to be cheerful about, even though his Sunday telecommunications company is the second-smallest operator in the world's most cut-throat market. Revenues increased by 41% in the past 12 months; subscribers by 43%. After four years of losses, the company finally broke even in the first quarter of 2001. Analysts speak of Sunday as a strong, youth-oriented brand. And despite the global telecom carnage and a vicious local price war, most brokers still have a "buy" on the stock.
But for how long? Today, the grim specter of third-generation, or 3G, technology looms large over Ehrlich's previously happy little world. Within months, Hong Kong's six mobile-phone companies will face a government auction for just four 3G mobile licenses. And even if Sunday ends up with one of them, the cost of adopting the new technology could be ruinous.
The world's largest mobile operator, DoCoMo, with its near-monopoly in the world's second-largest economy, can afford to push ahead with 3G, but what hope for Sunday, with less than 10% of the tiny Hong Kong market? Talk of consolidation among the Hong Kong players is rife. The first M&A deal could be cut within days. Hence the bullish outlook for Sunday's share price, which last week topped $2 on Nasdaq after being below $1.50 in April. Says Lehman Bros. analyst Peter Milliken: "The local market is at flashpoint."
Ehrlich makes no secret of his desire to put the brakes on the scary leap toward 3G. He speaks darkly of a "conspiracy" by mobile phone companies to force operators to prematurely adopt 3G when the less expensive, imminently available 2.5G technology will, for now, suffice. Says Ehrlich: "They have created so much hype over 3G you would think it's the greatest thing since the rice cooker."
It was the same, says Ehrlich, with last year's big thing, the much-vaunted but now widely derided WAP technology. Billed as "wireless Internet" at its launch, WAP has so far attracted just 7% of mobile subscribers world wide. Telcos, he adds, can't afford the same thing to happen with 3G. "It's been a frustrating experience to see how we as operators don't control our destiny," Ehrlich laments. "We've been pushed around."
Technology research consultancy Gartner estimates Asian operators will need to spend up to $300 million each in the first year of 3G operation—more than Sunday's entire 2000 revenue. But it will be a major challenge to raise that sort of money in a market spooked by the 3G-instigated telco crash in Europe. Little wonder Sunday, which raised $334 million when it listed in Hong Kong and on Nasdaq last year, abandoned plans to apply for a 3G license in Singapore.
But Ehrlich can't avoid being dragged kicking and screaming into the Hong Kong 3G auctions if Sunday is to remain a long-term player. Hong Kong is dominated by two big operators: Hutchison Telecom and Pacific Century CyberWorks. Then comes SmartTone, New World Telecom, Sunday and peoples. Analysts believe Hutchison and PCCW are certain to get licenses and that mergers among the smaller players are inevitable as they vie for the two others. Ehrlich doesn't deny he's eyeing partners. "Everyone is talking to everyone," he says.
Ehrlich, who does not expect rollout of 3G services in Hong Kong until 2004, describes 3G as a mere evolution of the revolutionary change already heralded by 2.5G phones, which also feature an always-on Internet connection and go on sale in the region later this year. "Nobody knows how to market 3G," insists Ehrlich. "It's so far in the future that to concern yourself with it from a marketing standpoint is illogical. 2.5G is the name of the game in the short to medium term." So yes, adoption of 3G is inevitable, he concedes. It just doesn't need to be this rushed.
Yet Ehrlich, an American who has lived in Asia since 1987, still insists Sunday has a future. "I don't think there's any downside to all this," he says. "We Asians will be beneficiaries of the mistakes they made in Europe." If not, he may have to take life more seriously after all.
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