Europe's 3G euphoria ends with a fizzle

It began with a spring love affair - the UK's runaway 3G wireless spectrum auction, which concluded in April - but the romance has faded as investors in Europe question the huge prices being paid for spectrum there.

          It began with a spring love affair. The UK, the first country to auction off 3G (third generation) wireless spectrum, handed out licenses in April, after almost eight weeks of frenzied bidding. When the dust cleared, four companies had bid a total of more than 22 billion pounds (US$32 billion).

          Everyone wanted a piece of the action: the chance to operate UMTS (Universal Mobile Telecommunications System) networks, with high-speed data transfer enabling such futuristic applications as mobile video conferences. Governments' eyes glittered at the prospect of billions for their treasuries.

          The romance was still burning brightly by the time the spotlight swung to Germany in July. There, six successful bidders chalked up nearly 100 billion marks (US$44.8 billion) in license fees.

          But already, investors were starting to question the sky-high prices. One winner of part of a German license, Hong Kong's Hutchison Whampoa Ltd., got cold feet after the auction, abandoning its spectrum share to coalition partner KPN Mobile NV.

          Meanwhile, bidders were bickering during the Netherlands' auction in July, and one abruptly pulled out, accusing another of threatening behavior. The auction screeched to a halt at just 5.9 billion guilders (US$2.4 billion), a fraction of the 20 billion guilders the country's finance minister had predicted would flow into state coffers.

          By year's end, the bloom was off the rose. Italy's auction collapsed in political and legal squabbling in October, having netted only 26.75 trillion lire (US$12 billion). Smaller countries were having trouble getting even as many bidders as available licenses.

          Investors have pounded telecommunications companies, vexed at what some see as dangerously high debt levels. Major European wireless players have lost half or more of their market capitalization. Bond rating agencies have downgraded telecom carrier's debt. Rumors have circulated that some operators are facing trouble securing the credit they need to build their 3G networks.

          Analysts place the blame squarely on the shoulders of greedy governments. Lars Godell of Forrester Research Inc. doesn't mince words: "The governments that have chosen the auction approach have done this industry a bad disservice. It will be remembered in the future as one of the worst industrial policy mistakes of the past 10 years."

          The license fees, he points out, are only part of the story: Godell estimates that operators still face network building costs of more than 100 billion euros (US$87.6 billion) across Europe.

          Of course, not every European government succumbed to the lure of easy money. France has set a fixed fee of 32.5 billion francs (US$4.3 billion) for each of four licenses -- a total about half what the U.K. government raked in, despite the two countries' similar populations. And a few countries opted for "beauty contests" -- choosing applicants based on their business plans, and charging moderate license fees.

          Some analysts call that a winning formula.

          "Obviously, you are giving these companies the license to print money, so you can tax them afterwards, rather than beforehand, which stifles initiative," said Bernt Ostergaard of Giga Information Group Inc.

          Wireless-savvy Sweden, which is assessing an administrative fee of only 100,000 kronor (US$10,282) per applicant, but will tax UMTS revenue at a rate of 0.15 percent per year, gets kudos from Godell for its clear-sightedness.

          "It's a beautiful idea. If it flops, no one loses," he said.

          The payoff is by no means a sure thing: real-life UMTS technologies that will win customers' hearts have yet to emerge.

          "There is no killer application for 3G," said analyst Nigel Deighton of Gartner Group Inc. "If it's just voice, these guys are in trouble. Tariffs are certainly going to be far higher. If I'm only going to talk, GSM (Global System for Mobile Communications, the standard currently in operation in Europe) is enough."

          Not surprisingly, the companies themselves put a more positive spin on their spending.

          "We really believe in the services of the future with UMTS," said a spokeswoman for France Télécom SA. "In the beginning of GSM in the early '90s, not so many people believed in the growth of GSM, and now it's something really huge. We think that it will be the same for 3G, even though we still don't know exactly all the range of services that 3G will provide customers."

          After paying 4 billion pounds for a U.K. license, Deutsche Telekom AG hunkered down for an expensive spree, said spokesman Bill McAndrews.

          "DT immediately realized to take part in any of the rest of the auctions and beauty contests, we'd have to have some money. So we immediately and covertly did a bond issue," he said. "We saw what was coming with Germany, Europe's largest country and strongest economy, so we issued the largest bond ever."

          Besides, said McAndrews, the company's total of some 15 billion euros in license fees so far is a drop in the bucket. "We bought a lot of things in the last two years. With (pending U.S. acquisitions) Voicesteam (Wireless Corp.) and Powertel (Inc.) we will have paid out in acquisitions approximately 100 billion euros over 24 months."

          Vodafone Group PLC, which has so far shelled out some 13 billion pounds for licenses, is able to dilute high fees because it also operates in many cheaper markets, said Corporate Affairs Director Tim Brown. The average the company paid per POP (point of presence, a measure of the number of potential end customers), ranged from a high of 102 pounds in the U.K., to a low of 1.95 pounds in Spain.

          "I don't think we were particularly happy about the way (the U.K. auction) was done, in that it was engineered solely to make as much money as possible for the government. But having said that, we got our license, and we can make a reasonable amount of money on it," he said.

          Even some critics concede that the storm will blow over. In the long run, Ostergaard said, "There's no doubt that these companies are going to make oodles of money."

          And that, after all, is the bottom line.

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