Weighing costs: 3G versus fiber
The article argues that with the money that 3G costs Euroland could have fiber extended to all homes and businesses.
Weighing costs: 3G versus fiber
Emma McClune
27 November 2000
The difference in cost between deploying third generation (3G) mobile services in Europe and putting fiber to every European home is becoming an increasingly close call.
"A good friend at BT told me that with the same expense that BT has put into the 3G auctions, it could have put fiber into every home (in the United Kingdom)," said Robert Lucky, corporate vice president of applied research, Telcordia Technologies Inc., of Morristown, New Jersey. "It is an incredible thought-(to pay that amount) to get nothing but spectrum," he added.
BT paid $6.4 billion for a 10 Megahertz license in the U.K. radio auctions earlier this year.
And BT is not even the most heavily committed future 3G builder. Germany's six 3G license winners will pay an average $7.8 billion each for their right to own mobile data systems.
Fiber and 3G are not alternatives. But more analysts are making cost comparisons, as projections on 3G rollout costs emerge. And the results are making them groan.
"European operators are about to shell out billions for 3G, so there's clearly money available for infrastructure," said Joe Chester, an independent consultant based in Dublin. "Why didn't we spend that money putting fiber into the ground?"
In fact, the most recent wave of 3G wireless auctions in Italy, Austria and Switzerland have attracted much less interest from outside players as telecoms operators think again about the sums they are being asked to put up for broadband spectrum. The auctions themselves might have been abandoned according to reports.
A new report, due to be published later this month by The Strategis Group Inc., of Washington DC, estimates that the cost of 3G rollout within the top 15 European markets is around $125.5 billion. Add that to the $95 billion that operators have already committed for 3G licenses, add a conservative $5 billion cost of licenses in the 11 countries with 3G tenders yet to come, and the total comes out at $225.5 billion.
But according to fiber experts, Europe could have been fitted out with fiber to the home at round about the same figure. One recent estimate by Stockholm-based Tele1 Europe AB, which is laying fiber into and through whole districts of the city, the cost of fitting fiber to every Swedish home works out at around $1,000 per person.
On a European scale, this would be a generous estimate, said Ingvar Eriksson, director of networking for Tele1. "If you spread us around we would have kilometers (of fiber) all to ourselves," he said.
Still, projecting this estimate throughout Europe, across 250 million households, would bring the total cost of fiber to the home within the parameters of the total projected cost of 3G, said Chester. "Imagine, telephone calls all over Europe would be free - potentially. What would that do to European competitiveness?" he asked.
ASP delays
One recent report put out by Analysys Limited of Cambridge, England backs this claim. According to the report, the lack of an affordable high-speed internet connection is holding back the development of the application services provider (ASP) market - a market which might otherwise have a global worth of $82 billion by 2005. The improved information technology that ASPs offer will be vital to the participation of SMEs in e-business, but delays in local loop unbundling means that services technically possible today will not be widely available until 2003.
The widespread availability of fiber to every home and business would of course boost the ASP market, said Margaret Hopkins, researcher at Analysys and one of the report's authors. Even if fiber providers got together to launch a giant pan-European fiber to the home project, finance in the wake of the 3G licenses would be difficult to come by, she warned.
"The financial market sentiment has changed," she said. "I understand it is now quite difficult for ADSL operators to get the funding they need."
Even if funding could be found, guaranteeing a return on that investment would be difficult, particularly in the light of U.S. operators' experience.
"Look at the (competitive local exchange carriers) going belly up in the U.S." said Robert Conway, president of the GSM Association, of London, many of whose 350 members will be hoping to offer mobile data services.
And hopes are high in the U.S. that 3G wireless will be a massive new market. According to a report of the Washington DC-based Council of Economic Advisors (CEA) on the importance of 3G and spectrum to the U.S. economy, U.S. wireless operators made revenues of $238 million per MHz in 1999.
At that rate, the additional 150 MHz of spectrum which the Administration has ordered to be reallocated from services like broadcast to cellular wireless (CWI 23 October 2000, p. 1) would bring in $35.7 billion a year in new revenues.
The CEA noted that the prices paid by operators in Germany's 3G auction indicate that each of the six winners expects to earn $1 billion in after-tax profit annually.
Product superiority
But comparing 3G to fiber purely on a cost basis is a flawed proposition, as Deborah Monas, international cellular analyst at Kagan World Media Limited, of London, points out. One has the advantage of limitless capacity, the other the cachet of mobility.
Even Tele1's Eriksson - a firm fiber advocate who agrees that fiber is "unquestionably" a superior product - admits that the young generation's need to be contactable at all times has spurred the industry in its quest for 3G mobile products. But even the most adamant adherent admits that 3G telephony will almost certainly not drive the dazzling techno-revolution the industry once thought.
"What is certain, is that the capacity on 3G handsets in a normal environment is going to be dramatically lower than people expect," said Eriksson.
"Once we used to think we'll all be able to get two (megabits per second), or around 30 times the speed of your average dialup internet connection at home, but now many people say we'll get about 0.5 Mbps instead.
"This - and other questions surrounding the efficiency of 3G's deployment - has been weighing with operators, agrees Annoula Peppas, senior consultant with Schema Associates. "A lot of them are finding it difficult to make business plans based on the licensing costs," said Peppas, "And there's a strong feeling that the suppliers have not been entirely truthful about 3G's capabilities. A lot of them are getting cold feet."
They have reason, according to The Strategis Group's new report, which warns of a myriad of 3G problems ranging from the handsets overheating, unacceptable levels of microwave emission, or just lack of speed.
"Part of the problem is that no one actually knows what the 3G market is going to look like," said Jamie Moss, London-based analyst with The Strategis Group. "Even for 2.5G, data rates cannot be proven."
Skeptics also point to the advancement of digital subscriber line technology, which they say, used together with satellite may negate the need for fiber to the home.
Another objection 3G advocates make is that the return on investment for fiber to the home will be significantly lower than new generation mobile telephony, at least in the short term.
According to The Strategis Group's projections, subscriber numbers in the top 15 European markets for 3G will grow from 3 million in 2002 to 86 million users in 2007. Hutchison Whampoa has even announced that it expects its 3G operations in the U.K. to break even by 2007.
On the other hand, how many people will really want the capacity offered by fiber to the home, asked Henry Harrison, senior consultant with Schema Associates.
"I can think of more things to do if you give me more mobile capacity than if you give me more fiber broadband," he said. Virtual-reality, real-time racing with Michael Schumacher at Monte Carlo may be a teenage dream, but it's not a business plan the industry is seriously courting, Harrison said.
Despite heavy marketing Europe's Internet penetration still trails at around 15%.
"Fiber to the home was discussed and then pretty much dismissed a few years ago on the basis of cost," said Hopkins at Analysys. "Now it is becoming more viable than we once thought, but there's still the problem of digging up roads and putting down fiber when only 10% or so of the area will demand these services."
"I'm sure there will be a time when people look at each other and say, OK, if we can be sure of 30% Internet penetration, let's do it. But that's not yet," she added.
High pricing
Still, some markets are already in the process of rolling out fiber to the curb. Japan's NTT has been working on a U.S. $400 million project to put fiber to the curb of each of the country's 60 million homes by 2010, and according to local experts the government's funded project is set to meet its targets.
But subscription prices will be too high to stimulate demand, said Nobuo Ikeda, professor at the center for global communications at the International University of Japan. Prices start at $100 per month for each user sharing 10 Mbps by 32 homes.
The Swedish government has undertaken a national fiber to the home project which will allow private operators to lease dark fiber and take it to the home. In both cases, government money is funding the project.
"The fact that the industry hasn't got together to do it is through lack of leadership," said Joe Chester. "If the railroads of America had never been built, there would never be a Silicon Valley today. And if this is true, shouldn't the governments of Europe think seriously of contributing finance for this?"
Don't hold out hope for 3G refunds.
Should operators sue for the inflated cost of third generation (3G) mobile licenses?
Although it's fair to claim that operators bidding for a 3G license in Germany and the United Kingdom paid over the odds, lawyers are unsure if they can now be recompensed at this point.
One idea floating around industry circles is that the operators should attempt to demonstrate in court that the license fee is a form of illegitimate taxation.
"It's a tax on the people of the country based on the services they might receive in the future," said Kalim Aziz, analyst with ING Barings Securities in London. "This is not a genuine basis taxation and has put a huge strain on the existing operators," he said, pointing to the recent dramatic dip in the market capitalization of mobile operators since 3G tenders began.
According to Robyn Durie, partner with law firm Linklaters & Alliance, this idea has little legal mileage. Taxation is a complicated aspect of the law, and these payments don't look like taxes. A better bet for operators who want to contest the license costs is, according to Durie, to claim that the government involved fell foul of the European Union's 1997 licensing directive. The directive makes two important points; licenses should be awarded on the basis that they only cover administrative costs; and for scarce resources, such as spectrum, payment structures should encourage an efficient use of the spectrum.
U.K. mobile operators, for example, may wish to claim that since the most valuable license - the one reserved for the new entrant - was in fact sold at $2.5 billion less than the top-selling license, this demonstrates an inefficient allocation of spectrum. Furthermore, operators may want to claim that by reserving the best license for a new entrant, the government was clearly allocating spectrum on a discriminatory basis.
Operators in Spain may be able to use the directive to protest against the government's suggestion that they may hold an auction for an additional license after awarding licenses through a beauty parade allocation process, says Durie.
And in France, mobile operators may want to point to the high license fee being charged to all licensees to claim that the government is attempting to cover more than just administration costs.
But in countries where the tenders have already taken place, it may be too late for legal recourse, she warned.
Operators who may want to claim that the government forced them to participate in a 3G tender before the industry or market was ready have probably "waived their right" to protest by bidding in the tender itself, she said. |
