WSJ -- Telefonica and Sonera Kill Deal As Europe's 3G Doubts Increase.
July 26, 2002
Telefonica and Sonera Kill Deal As Europe's 3G Doubts Increase
By ALMAR LATOUR, DAVID PRINGLE and JESSE DRUCKER
Staff Reporters of THE WALL STREET JOURNAL
European mobile-phone companies are finally starting to retreat from their
disastrous investments in third-generation, or 3G, wireless technology.
Spain's Telefonica SA and Finland's Sonera Corp. are
suspending their Group 3G joint venture to provide
3G mobile-telecommunications services in Germany,
Italy, Austria and Switzerland. Their move is the first
of what probably will be a series of capitulations by
European mobile-phone operators. After spending
more than $150 billion (€151 billion) on 3G licenses
and infrastructure, European operators have grown
much less optimistic about the potential returns from offering such services
as fast wireless access to the Internet and swapping of audio and video
clips via mobile phones. Some of those that don't have strong positions in
national markets are likely to pull out or drastically reduce development
costs to minimize their losses.
"This is the first of several such failures," said Bob House, a London
analyst at Adventis, a consulting firm. "Most vulnerable are those coming
into the 3G market without a pre-existing client pool."
With 3G looking increasingly
like a flop, Europe is losing
the wireless edge it had over
the U.S. a few years ago.
After paying billions for 3G
operating licenses in government auctions in Germany, Britain and other
European markets, mobile operators found themselves so deeply in debt
that they lost investor support to introduce the new technology at the pace
the companies initially envisioned. As a consequence, equipment makers
saw their revenue-growth prospects implode, with orders for new
infrastructure shrinking and the handset market saturated.
While European governments
mandated the use of 3G, the
U.S. has left operators to
decide which technologies to
embrace. That will allow U.S.
operators to learn from European mistakes and latch onto whichever
technologies prove most competitive.
Telefonica said Europe's 3G technology isn't yet inexpensive enough or
stable enough to be competitive with established technologies. That
indictment casts further gloom over the prospects for Finland's Nokia
Corp., Telefon AB L.M. Ericsson of Sweden, Motorola Inc. of the U.S.
and other suppliers of mobile equipment that have been counting on 3G
sales in Europe to shore up flagging revenues.
Telefonica took a charge of €4.9 billion as it agreed with Sonera to
indefinitely suspend Group 3G's fledgling operations. Investors applauded
the move; in Madrid, Telefonica shares rose 14%, or €1.18, to €9.50.
Group 3G's retreat caps a
series of setbacks for
Europe's grand plan to build
high-speed wireless
connections to the Internet
throughout the continent. Just
last month, owners of
Mobilcom AG, Germany's
sixth-largest wireless
company, decided to scale
back the company's
investments in 3G. Nokia,
which has provided loans of
€752 million to MobilCom to
pay for 3G equipment, plans
to take a charge in the third
quarter in the expectation that
it won't be repaid in full.
Although Ericsson maintains that 3G technology is ready, Jorma Ollila, the
chief executive of Nokia, conceded last week that 3G handsets and
networks from different suppliers might not be compatible until next year.
That could make life difficult for the handful of European operators, such
as Hutchison 3G U.K., controlled by Hutchison Whampoa Ltd. of Hong
Kong, which is still planning to launch 3G services this year.
At the same time, the industry is struggling to develop the new services
needed to fill the extra network capacity offered by 3G. Telefonica said that
conflicts between device makers and software suppliers have hampered the
development of such services.
Telefonica also said that delays to 3G technology have allowed the
incumbent operators to accumulate more subscribers and become further
entrenched in their markets. "It has given the new entrants a very difficult
job to do," a spokesman for the company said.
To be sure, Telefonica will still pursue 3G services in its home market,
Spain, and Sonera, which has agreed to merge with Telia AB of Sweden,
plans to continue its 3G operations in Finland, where the operator is the No.
1 player.
Group 3G's retreat is a positive sign for the largest companies in each
market, including incumbent operators and Vodafone Group PLC, which
controls the No. 1 or No. 2 position in 23 markets world-wide. For these
operators, the reduction in competition will translate into more potential
customers when 3G is finally delivered, possibly by 2005; and, with
competitive pressure reduced, the leading companies can slow down their
investments in 3G networks to cut costs.
The expected shakeout will be toughest in those markets where
competition is intense and weak start-up operations are pitted
against strong incumbent players. In Germany, Europe's largest
wireless market, there were six competitors, of which two,
Deutsche Telekom AG's T-Mobile and Vodafone, control 80%
of the market. That left four others to fight over the remaining
20% of customers even as these companies effectively face the
same development and license costs for 3G -- something that
Group 3G on Thursday deemed too expensive.
Across Europe, it is much the same: the U.K. has five
3G-wireless operators, one of which has no customers; the
Netherlands, which is about one-fifth the size of the German
market, has five 3G wireless operators; and Italy, before Group
3G's pullout, had six.
If Vodafone and other operators ease up further on 3G spending
that could spell more trouble for wireless-infrastructure
suppliers. Ericsson is forecasting that the mobile-equipment
market will decline at least 15% this year and then stabilize in
2003 as 3G gains momentum. But Stuart Jeffrey, an analyst
with Lehman Brothers in London, said the news from
Telefonica signals that equipment suppliers "shouldn't be looking for a boom from 3G." Lehman believes the
mobile-network equipment market will decline 10% next year.
In any case, Ericsson might take a direct hit from Group 3G's pullback. The Swedish company announced in
April that Telefonica had selected it as the main supplier for the initial phase of a 3G rollout in Germany and
Spain, in a €400 million deal. But Mads Madsen, a spokesman at Ericsson, said Thursday that it is too early to
say what impact Group 3G's retreat will have on his company's outlook.
Meanwhile, Nokia said last week that it has so far produced 3G equipment worth nearly €700 million, which it
is shipping to 42 operators. However, it doesn't plan to book revenue from those shipments until network
testing is complete.
Even before Telefonica's criticism of 3G technology, concerns were beginning to mount about the
competitiveness of the European version of 3G, known as wideband code division multiple access, or
WCDMA, against a rival technology called CDMA 2000 developed by Qualcomm Inc. of the U.S.
In Japan, NTT DoCoMo Inc. has launched a 3G service based on WCDMA, but demand has been very slow,
partly because the handsets are more expensive and have less battery life than standard mobile phones. At the
same time, a 3G service launched by DoCoMo's rival, KDDI Corp., using CDMA 2000 technology has been
gaining customers at a rapid pace. That is ominous for Ericsson and Nokia, who are leaders in the WCDMA
market, but trail rivals in the CDMA 2000 market.
It was only two years ago that WCDMA was considered to be a surefire hit. It was then that Group 3G first
began acquiring 3G licenses, but the venture has been put on hold before it even started what it considered its
core business: 3G services. The company's only working operations, in Germany, has met with difficulties
ever since it began operating six months ago under the brand name Quam.
With no working 3G technology and no clients at the launch six months ago, Group 3G decided to offer
existing global system for mobile communications, or GSM, services to begin building a customer base ahead
of the 3G launch. The company cut costs by teaming up with rival E-Plus, controlled by KPN NV of the
Netherlands, to share construction and usage of the network, while leasing network capacity from KPN's
GSM network in Germany. The venture signed up 200,000 customers in the past six months -- impressive,
but at too high a cost and not nearly enough to assure the company could meet its goal of breaking even in
2006.
Write to Almar Latour at almar.latour@wsj.com, David Pringle at david.pringle@wsj.com and Jesse Drucker
at jesse.drucker@wsj.com
Updated July 26, 2002
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved |
