Costs spiral as 3G battle nears climax
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Cost of 3G spectrum licenses may hurt 3G roll out in Europe - DPR
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totaltele.com
By Joanne Taaffe
17 April 2000
Europe's first third-generation mobile license auction has turned into a pricing war that
now calls into question the economic viability of operating 3G networks, according to
some analysts.
The result of huge license fees may be higher prices for 3G mobile end-users in the
United Kingdom, as operators look to re-coup their costs.
"It's the subscriber that's going to pay for the huge licensing fees.
Simultaneous multiple round [bidding] leads to higher prices, which are not in the
interest of the consumer," said Jerry van Kaathoven, head of Global Media and
Telecommunications at Rabobank International, Amsterdam.
"I'm not so sure that there's a business case," added van Kaathoven, referring to bids of
more than 2 billion for a single license in the U.K. auction.
And whereas initial calculations presumed a six- to seven-year return on investment in
3G networks and licenses in the United Kingdom, the prices reached in the licensing
auctions will now mean operators will have to wait another couple of years before they
begin making a profit, according to Till Jaspert, partner of Cluster Consulting in Paris,
which advises mobile operators on 3G business development.
What is more, analysts admit that estimates of how much customers will be willing to pay,
and for what services, is still largely speculative, with few mobile data services yet
available.
"This isn't a game for the faint hearted," said Jane Zweig, executive vice president of
Herschel Shosteck Associates Ltd., a telecoms consultancy based in Wheaton, Maryland.
The danger, according to Zweig, is that operators over-stepping the financial mark could
go the way of Nextwave, the U.S. company that in 1996 won PCS licenses in an FCC
auction. "The bidding was such a frenzy ... [Nextwave] is now bankrupt and the
spectrum is back up for auction," said Zweig.
"We think the same will hold true here [in the United Kingdom]," she added.
When Herschel Shosteck compiled an estimate of costs of full 3G deployment last
November, it calculated a combined cost for all 3G U.K. operators of $350 per capita, or
$20.6 billion in total. This works out to a cost of about $70 per capita for each operator to
provide coverage to everyone in the United Kingdom. That amount has since
"skyrocketed" following the auctions, said Zweig. The now-bankrupt Nextwave's PCS
license was just $45 per capita, she cautioned.
Nextwave's expectation was that equipment manufacturers would step in and help with
the financing of its network. "[But] they said 'we're not banks,'" said Zweig.
Would-be 3G operators are also looking for financial props from manufacturers, seeking
"more innovative funding arrangements" than they did for second-generation build, said
Alan Roderick, in charge of developing operator alliances at Cisco Systems EMEA,
London.
But Roderick argued that vendors are wary of taking too big a risk. "The cost is higher
and the business case is less sure [than with 2G]," he said.
Although there are many unknowns with the 3G business model, analysts agree that
operators which want to be full service providers cannot afford to miss out on 3G
auctions. "If I were [at U.K. cable operator] NTL, what would keep me awake at night
would be wondering what I would do if I didn't get a [3G] license of my own," said an
analyst advising one consortium.
It seems the operators agree. NTL backer France Telecom is rumored to have set no
limit on the amount it is prepared to bid. And an internal memorandum from chief
executive Bernie Ebbers to bid managers at MCI WorldCom Inc. ordered them to
"knock [Vodafone's chief executive] Chris Gent off the top."
With so many operators jostling for five U.K. licenses, it is not surprising that the auction
has created its own rules. "Because there are so many bidders - 13 in all - there's a lot of
desperation to get just any license," said Jake Saunders, London-based director of
European telecoms at wireless consultancy Strategis Inc.
Saunders has charted the frequency of individual bids against values.
He found that operators were prepared to jump from one license to another in an
attempt to get hold of a franchise, regardless of the amount of spectrum on offer. It was
clear from this, he said, that owning a franchise was more important than the price paid;
and it was hardly less important to block a competitor from getting a franchise.
"3G is an important complement to the total business. It gives them a lot of scope to say
[to subscribers], 'we can deliver all your telecoms needs through one package,'" added
Saunders.
But to provide those needs operators not only have to build the network, but also install
hardware and software infrastructure, which will be at least as expensive as the license,
according to both analysts and equipment manufacturers.
These huge initial costs may ultimately work against furthering competition, as the five
U.K. winners may not open their 3G networks to alternative service providers, say
analysts. In addition, the financial strain imposed upon the operators by the licensing
fees will give them a strong card to play against U.K. regulator Oftel.
"In some of the countries [such as Spain, Denmark, Finland, France and Portugal] that
go for beauty contests it will be easier for the regulator to impose cost-based access to
infrastructure," said Russell Whitworth, head of UMTS development for Questus, a
consultancy in Guildford, England.
"Where the operator paid a large sum of money it is very difficult for the regulator to
open the door and enable [cost-based] access to network operating facilities."
For the winning operators, the advice from Rabobank is to create a very focused
business rather than attempting to battle it out with competitors on all fronts. "Find a
niche. If you can find a spot in the value chain, then that would give banks the
confidence to lend," said van Kaathoven.
Additional reporting by David Molony. |
