Hoping for a 3G gee-up

CHARLES Dunstone winced. We were having breakfast in a swish hotel in west London. Just 24 hours earlier, he had seen the share price of his company, Carphone Warehouse, take a kicking after a profits warning. He had also been forced to admit that his company's foray into Germany had been something of a financial embarrassment.

But this wasn't what was upsetting Dunstone. What was visibly disturbing this normally calm and jolly chap? It was nothing directly to do with Carphone Warehouse's finances. It was simply that our breakfast was punctuated by the irritating trill of mobile phones from adjacent tables.

Yes, the man who has done more than any other to bring mobiles to a High Street store near you wasn't entirely happy that the folk around him felt it quite so necessary to stay in touch with family and colleagues while picking at their scrambled eggs on wholemeal toast. I looked at him and said: 'You realise you're responsible for this?' Dunstone smiled. At least, it approximated to a smile.

Mobile phones are so ubiquitous that even the man who made his fortune from them has occasional reason to grimace. Hence an easy and simple thought occurs: Carphone Warehouse made a fortune for Dunstone because he was lucky enough to be involved in a market that enjoyed explosive growth for several years. Now this explosive growth has stopped, Carphone Warehouse finds itself in a mature market. It's a retailer like any other, competing for a share of the public's purse. No wonder investors are less than thrilled. In fact, Britain is not the problem. Certainly, the number of people using mobiles cannot increase as it has over the past five years.

More than two-thirds of adults already have a mobile. Furthermore, the company has already doubled its share of the market since summer 2000 when it floated. It now accounts for about a fifth of sales. Even Dunstone admits his challenge will be to keep that share above 20% rather than aiming for an even larger slice of the cake.

But Carphone Warehouse points to three things. First, a business like this does more than sell people phones. There is scope to persuade them to upgrade from a pre-pay deal to a contract, where Carphone Warehouse takes a slice of their monthly payment. Second, the company already handles billing for Vodafone and MmO2 on contracts it has sold. It hopes to add Orange to the list.

And third, Carphone Warehouse reckons that there will be an astonishing contraction in the number of mobile phone outlets. Nokia has suggested that across Europe, the total will shrink from about 130,000 to 80,000 in about a year. If that pattern is replicated in Britain, Dunstone's target of keeping his market share above 20% shouldn't be quite so hard to achieve.

Britain isn't too much of a worry. It is mainland Europe - in particular Germany - that is causing Dunstone such headaches. The dominance of the German market by two players is, in effect, a cosy duopoly. Operators don't fight one another.

For Dunstone, this is a problem: it is competition between operators that makes money for Carphone Warehouse, as they bribe the customer, by subsidising handsets, to sign a contract.

Dunstone hopes that in Britain and elsewhere the advent of new services expected to come with the next generation of phones will spur c o m p e t i t i o n between operators from which Carphone Warehouse will benefit. Of the operators who paid so generously for their third generation ( 3G) licences, he says: 'I don't know if they will make money out of it, but I'll make money out of them.' So is all this to say that everything is hunky-dory for Dunstone and his company? Is last week's profits warning just an irritating glitch?

It is hard to see how the logjam in Germany will be broken. There are other licensees beside the big two operators, Deutsche Telekom and D2. But those also-rans don't have the financial muscle to put up a big fight, and operators' licences in Germany are virtually impossible to transfer. It is difficult to see how Dunstone will make money there. His investment may be in vain.

And there is the nasty possibility that people won't have quite the hunger for 3G services that the industry expects. The new phones are unlikely to be as over-hyped as WAP phones were 18 months ago. But nobody can be sure that they will gain the must-have status of today's more modest handset.

Of course, Dunstone's main concern is that operators will at least try their best to make us love newer, cleverer phones. He is the man selling the high-tech pickaxes as the operators try to salvage a return from their investment in the G3 goldrush. As long as they subsidise the pickaxes, he's happy.