GENEVA-The sky-high third-generation (3G) license fees generated by the United Kingdom’s May auction are having serious repercussions for European operators seeking a pan-regional presence. Governments on the mainland are rejigging their own forthcoming Universal Mobile Telecommunications System (UMTS) license allocations to take advantage of intensifying competition for 3G spectrum.
While most of Europe had been scheduled to follow the “beauty contest” allocation method favored by industry groups like the UMTS Forum and used successfully in Finland and Spain earlier this year, the lure of fat profits from a U.K.-style auction has prompted France and Italy to announce new licensing arrangements that will substantially increase the amount operators are forced to pay to secure crucial 3G spectrum.
With most of the rest of Europe set to license within the next eight months, there are now fears that other countries may follow suit, jeopardizing operators’ network rollout plans and financial viability, along with pushing up the price of service to consumers.
In Italy, Europe’s single-largest market for digital mobile services, the government of newly elected President Guilano Amato has subtly turned the planned 3G beauty contest into a form of private auction, where the financial component of each bid will be deemed the determining factor in its success. With at least seven large consortia expected to compete for Italy’s five UMTS licenses in August, proceeds from the sale are predicted at around 25 trillion lira (US$11.8 billion)-more than six times the 3 trillion to 4 trillion lira (US$1.4 billion to US$1.9 billion) forecast at the beginning of this year.
France, too, moved quickly to refashion its upcoming licensing arrangements in the wake of U.K. spectrum prices, officially retaining the concept of a beauty contest but adding a hefty “market entry fee” to bring the price each successful applicant will pay to 32.5 billion French francs (US$4.7 billion).
The decision came after energetic anti-auction lobbying by leading operators including Vivendi, owner of the second-ranked SFR network, and Bouygues, the country’s third-largest and newest mobile operator.
Vivendi chief Jean-Marie Messier, whose company earlier pulled out of the race for a German license when Berlin announced its intention to hold an auction, said the French government would be guilty of “short-term speculation” if it reversed its first decision to host a beauty contest in favor of awarding licenses to the highest bidder.
While the government’s decision was widely seen as an attempt at compromise, the allocation of the four French licenses, due early next year, will nonetheless add a total 130 billion French francs (US$18.6 billion) to the government’s coffers, well above initial estimates.
With Ireland set to host an Italian-style contest with an emphasis on price; auctions already scheduled for Austria, Germany and the Netherlands; and cash-strapped Greece unlikely to resist the lure of easy money when it makes its final decision on 3G licensing arrangements, operators seeking to establish a pan-regional base are looking nervously at their bottom lines as spiraling costs cast doubt on long-term network profitability.
Helge Schaefer, a partner with Hamburg, Germany, law firm Feddersen, said if prices in Germany’s July auction match the 22.7 billion (US$35.7 billion) total paid by U.K. winners, successful applicants will need to generate a minimum of 30 deutsche marks (US$14.4) per month from every customer to assure viability-unrealistic by today’s standards, let alone for a technology lacking a “killer app” to drive consumer uptake.
Carriers are not the only ones complaining about the spiraling cost of building 3G capability in Europe. Bernd Eylert, UMTS Forum chairman, is concerned that a move toward “biggest bidder wins” licensing could see a replay of the disastrous U.S. personal communications services (PCS) auction scenario, where unrealistic prices for spectrum prompted the financial collapse of some winners.
“If auction prices in other European markets match U.K. results, I do not believe operators will find it viable to pay that kind of fee several times over,” he said.
Eylert’s unease is shared by U.S. high-tech guru Nicolas Negroponte, director of the Massachusetts Institute of Technology Media Lab, who publicly slammed the U.K. auction at a conference in London in June. Calling the auction an “economically unsustainable” tax on new technology, Negroponte said the high license fees paid by the five U.K. winners would effectively translate into an additional cost for operators of US$1,000 per subscriber.
“It is the worst thing that could have happened to the consumer,” he said, urging other European nations not to follow the same path.
Confirming fears that inflated license fees will inevitably mean hefty prices for 3G services, a spokesman for Omnitel, Italy’s second-largest mobile operator, said 3G operators would have little choice but to offset high license fees through longer investment strategies and higher tariffs. “There’s a great part of this business that remains uncertain. With 2G GSM, it was all about voice. Now with 3G, operators will have to find new models,” he said.
With large operators pressured to secure a 3G capability, analysts speculate that the real 3G winners could be a new breed of mobile virtual network operator (MVNO) that leases spare capacity on license-holders’ networks to operate its own, branded service. The model, pioneered successfully in the United Kingdom last year by Virgin Mobile, could be a useful way for operators to generate much-needed revenue while amortizing 3G setup costs, said John Matthews, principal consultant with U.K.-based Ovum. Matthews admitted that regulators may face an uphill battle convincing those that have paid through the nose for a license to share their spectrum with competitors, but said the MVNO model could offer substantial benefits to consumers and operators.
