Europe is embarking on a third-generation license auction frenzy the rest of this year, and operators are not happy about it.
Since the United Kingdom raked in a whopping $35 billion earlier this year, other countries are moving away from the traditional method of granting licenses, via beauty contests, opting for auctions and stiffer license fees.
So European operators are complaining. French media conglomerate Bouygues SA last week filed an official complaint with the EU to protest the way France, Germany the Netherlands and Belgium are granting or auctioning their 3G licenses, say published reports. It believes the amount they want for the licenses is discriminating, and it wants the EU to force the four governments to review their conditions for granting UMTS licenses.
Deutsche Telekom is believed to have complained strongly to the German government about how the U.K. auction format allowed only the largest firms to enter the bidding, thereby stopping new entrants and delaying the introduction of new services.
More official complaints with the EU may follow, experts believe, as European operators embark on pan-European strategies for the next generation of services and find the proposition too expensive via the auction process.
“Unless companies have had the good fortune of operating in a country that awards the licenses through a `beauty contest,’ we believe UMTS is going to be a very expensive business,” said Viktor Shvets, wireline and wireless communications analyst for the European market with Donaldson, Lufkin & Jenrette Securities Corp. “Going forward, European national governments are more likely to employ a U.K.-style cascading auction process, playing off incumbent operators against those consortia attempting to break into those markets, thus moving away from the beauty-parade option. Germany and Italy are good examples of countries that have changed their UMTS license fee structure as a direct consequence of the U.K. auction.”
Already, the proposed early July auction of 3G licenses in The Netherlands has seen five potential U.S. and European bidders pull out. WorldCom Inc., Global Crossing Ltd., United Pan-European Communications NV, Spain’s Telefonica SA and Telecom Italia SpA are no longer interested in the auction, which the Dutch government hopes will raise about $9.4 billion.
Other companies such as Vodafone AirTouch plc, France Telecom SA and local carriers are expected to remain in the auction via their Dutch subsidiaries.
The German government, which is expected to sell five 3G licenses this summer, is reported to be worried that it will see potential buyers walk away. Local analysts claim that companies may back out soon because they do not own an existing second-generation network and will find it prohibitively more expensive to build 3G infrastructure.
The Italian government recently set the base price for each of the five 3G licenses it plans to auction this fall at $1.97 billion, and analysts believe the final price could rise to the same level as the U.K. auctions. Italy will award the five UMTS licenses via a two-stage process, beginning with a beauty contest and moving to a competitive auction in the second phase. Bidders will be able to increase their offers, but the government has not said how many times increases will be allowed.
“The (U.K.) auction raised the price on 3G services for a long time and reduces the success of business,” Craig Farrill, Vodafone chief technology officer, recently commented at the CDMA World Congress in Hong Kong. “We want governments to reconsider forcing up bids.”
British Telecommunications plc, one of the successful bidders in the United Kingdom, has said that the heavy costs of winning 3G licenses across Europe would encourage groups to share expansion and infrastructure costs by forming innumerable commercial partnerships to defray the costs and not pass them on to consumers.
DLJ’s Shvets believes, however, that the ability to pass on the increased cost of the licenses should be hampered by competition, since there will be about four to six carriers in each market as well as a number of virtual operators that resell service.
“It will be incredibly difficult to differentiate the service from competitors, as most content and technology agreements, which are the key for differentiation, are likely to be nonexclusive,” said Shvets. “Therefore, expect competition to be characterized by the complex price wars that we see today.”Global Wireless writer Paul Rasmussen contributed to this story.
