Was 3G the Greatest Investment Disaster of All?
By Matthew Lynn
London, Aug. 12 (Bloomberg) -- Over the distance of centuries, great investment disasters become cliches. What were they hoping to do in the South Sea exactly? What was so great about tulips? Who was Charles Ponzi and what was he selling? Nobody quite recalls. Yet, though the details are forgotten, the words enter the language as shorthand for stupidity, blindness and greed.
The initials 3G may soon join them. Decades after people have forgotten what exactly the mobile Internet was meant to do, the phrase will live on as shorthand for what happens when governments stoke speculative madness.
For, as the miserable saga unfolds, it is obvious that Europe's third generation mobile phone network is set to become one of the great investment disasters. Never in financial history will so much money have been wasted for so little return. Nor will governments have so recklessly and pointlessly destroyed a whole industry.
3G is a new high-capacity mobile phone network. Two years ago European governments auctioned off the spectrum at the height of the telecommunications and Internet boom.
Man on the Moon
Led by the U.K. and Germany, they raised huge sums -- 100 billion euros ($97.3 billion) across Europe. Analysts expect as much as a further 100 billion euros may be spent building the networks so expensively acquired. Sending men to the moon was a cheap experiment in new technology by comparison. It is now clear that around 200 billion euros (roughly 570 euros for every citizen of the European Union) is being wasted.
The point of the new networks is to connect your mobile to a high-speed data network. That allows you to, er, well, that's the tricky bit. British streets right now are plastered with adverts from Deutsche Telekom AG explaining how its T-Mobile unit allows you to send a picture with a text message on your mobile.
That sounds nice, but it's a very marginal product. How much money are people actually going to spend sending picture messages or retrieving e-mail? What else does 3G offer?
This, for example, is what Vodafone Group Plc, which has spent 13 billion pounds ($19.8 billion) acquiring 3G licenses, says in its latest annual report: ``The extra capacity that 3G provides will also allow additional services to be offered such as streaming and download for video, film and other services.'' Hmmm. It doesn't really sound like something you would want to spend 13 billion pounds on before a single mast has been put up.
Into Reverse
In truth, where they can, the telecom companies are now backpedaling furiously from the commitment to build the new networks. In Germany, Telefonica SA of Spain and Sonera Oyj of Finland are giving up their license, even though it involved writedowns of 4.8 billion euros and 4.3 billion euros, respectively. Shares in both companies jumped on the news.
Last week, Orange SA, the mobile unit of France Telecom SA, asked for a delay in rolling out its Swedish 3G network. The U.K.'s MM02 Plc has asked German regulators to slow down its investment. One by one, the companies are doing everything they can to slow investment in 3G. That, surely, is final proof of what has been painfully obvious for at least a year -- 3G will never earn a decent return.
Two things should happen now. One, those telecom executives still too puffed up with pride to admit the extent of the mess they have walked into should admit defeat and cancel their plans to build any more networks. Two, they should start hollering at European governments to give them their money back. The point about 3G is that this is a disaster mostly of government making.
Fault for Fiasco
One day, 3G may or may not turn out to be useful technology. It is good that companies are experimenting. That is the market at work. What is wrong is that Europe's governments designed a system that encouraged companies to pay 100 billion euros for the licenses. Without it, the phone companies would have fiddled around with less capacity, trying out services that worked and that customers would pay for. That's how new technologies advance.
Instead, we have this disaster, for which we can thank the U.K. Chancellor Gordon Brown. Not content with the slow-burn destruction of the British economy, Brown can also take credit for the 3G fiasco.
Brown is a man who is seldom content unless he is thinking up new corporate taxes or fiddling with the free market. Brown came up with the system of auctioning of licenses in the middle of a telecom bubble that was successfully copied by Germany. Other countries imposed stiff fees for the licenses after seeing how much the British and Germans were making.
Good Governance
True, companies could have declined to bid for licenses, but that was hard when they would otherwise go to new rivals and when their shareholders were begging them to expand. The point of good government is not to fleece huge sums of money from foolish, over- optimistic companies (we have investment banks to do that.)
Good governments try to stop people or companies from acting stupidly. It is certainly not to destroy whole industries with ruinous and misconceived taxes.
Most haven't even made any real money. Take Germany. It raised 50.5 billion euros from its 3G auctions. But the value of its 43 percent stake in Deutsche Telekom AG has fallen by about 41 billion euros since the auction.
Destroying Value
The French and Dutch governments have also lost huge sums on their stakes in France Telecom AG and Royal KPN NV.
The U.K. government didn't own shares in BT Group Plc at the time of the auction. But it has still badly damaged two of the country's biggest companies -- BT and Vodafone -- and fueled the collapse in the FT-SE 100 index.
All Europe's governments have achieved is the destruction of value among what were once the continent's most-coveted stocks. They have made the stock market collapse much worse in Europe than in the U.S., damaging their own economies. Instead of just gradually dropping plans to build 3G networks, at least one telecom executive should stand up and tell them so -- and take those governments to court to get their money back. |
