It was a goldrush without the gold
How the world caught third-generation fever
The bidding for 3G mobile licences marked the turning point in an investment frenzy that sucked in $4,000bn, says Dan Roberts
Published: September 5 2001 17:53GMT | Last Updated: September 5 2001 18:38GMT
One of the biggest handwritten cheques ever cashed was scribbled in a hurry in the spring of 2000 by four men who had barely seen daylight for seven weeks. The team worked for Orange, in London's West End, one of five mobile phone companies that paid a total of £22.5bn during a government auction for licences to operate "third-generation" mobile services in the UK.
It has become clear in the past few months that the frantic bidding for these and other 3G mobile licences throughout western Europe marked the turning-point in a four-year investment frenzy that ultimately sucked in $4,000bn (£2,800bn) worldwide.
To understand how an entire industry could gamble and lose such sums, picture the manifest destiny that inspired Orange's team of bidders. Their cramped office could be reached only through four separate security doors, each with sophisticated combination locks and swipe-card systems. The windows were blacked out to prevent anyone observing the bidding tactics with binoculars. During the auction, the room was regularly swept for electronic listening devices.
Orange created a back-up bidding room several miles away in Vauxhall complete with identical laptop computers and a large digital wall clock in case there was an act of sabotage, such as a fake bomb threat, by another company bent on disrupting the auction. The team practised bidding from the back of a taxi on their way between the two auction rooms, just in case they were interrupted in the middle of a round. The only snag came during the last stage of the bidding, when the computer printer ran out of paper forms and Orange's four-man team suddenly had to write out its final bid, for £4.1bn, by hand.
In retrospect, the precautions seem laughably paranoid. What took place in those rooms typified the hubris of people who were completely untroubled by the possibility that they could be making a dreadful mistake. Orange has kept its bidding room almost untouched since the end of the auction in case it is needed again. But today it resembles less a "situation room" than a mausoleum for the telecommunications industry's grand ambitions.
At the height of the boom, mobile phone operators felt they had hit upon a formula that guaranteed success. They could point to rapidly increasing usage, helped by heavy handset subsidies and design improvements. Then there was the potential of the internet to increase revenues by offering mass-market consumers media content and shopping online.
Yet almost from the moment those cheques were written, the industry has foundered. After a similar auction in Germany raised even more money a few weeks later, the whole European telecoms industry was groaning under levels of debt that made banking regulators wonder whether the financial markets could cope with the strain.
Today, the projections the mobile operators used to justify investing so much money look increasingly spurious. Technical snags mean that no manufacturer has yet demonstrated commercial equipment operating at anything close to the promised data speeds.
One of the most influential regular studies of mobile phone use, produced by A.T. Kearney management consultants and Cambridge Business School, is due to reveal tomorrow that most consumers are utterly uninterested in surfing the internet from their mobile phone. Of 2,400 mobile phone users interviewed, just 4 per cent said they thought they were ever likely to use their phone to spend money online (down from 12 per cent in the last survey, six months ago). Only 2 per cent had tried to do this with existing generations of internet-enabled phones, which have already cost the industry hundreds of millions of dollars to deploy.
This frantic and ill-judged lunge at 3G by mobile phone operators is only a small part of the billions of dollars that the entire telecoms industry has thrown at the internet in the past few years.
The attraction of the internet to traditional telecoms operators was becoming apparent in the early 1990s when it widened its appeal from scientists to the broad public. But it soon became apparent that two obstacles stood in the way of realising the internet's potential - the speed and cost of telecoms. If only data - print and images - could be moved quickly and at low cost, people would use it for all manner of things.
In technical terms, it was all about increasing bandwidth - the capacity in the cables and wires that connect homes and offices to each other and to providers of data all over the world.
The obsession with bandwidth had its roots in 1995 at a meeting in Ireland attended by Bill Gates, who gave a presentation arguing that the internet would create insatiable demand for bandwidth. Microsoft's founder electrified many of those present, including Warren Buffett, the legendary investor. Another person there, Walter Scott, a childhood friend of Mr Buffett's, was ideally placed to follow up what he heard.
Mr Scott was chairman of MFS, one of the first long-distance voice operators to challenge the might of AT&T in the US. He predicted that AT&T would be slow to respond to the bandwidth challenge, preferring to continue drawing profit from its old infrastructure and entrenched market position for as long as possible. So he sold MFS and ploughed the $3bn proceeds into a new company, called Level 3.
Still little-known outside the industry, Level 3 was to revolutionise the way Wall Street regarded telecoms operators. It raised a further $11bn to build the world's first entirely fibre-optic network based on a communications standard known as Internet Protocol. Whereas conventional telephony travels across a dedicated circuit connecting the callers, IP switches data around the network as separate packets, each of which can travel a different route before being reassembled.
In many respects, IP-based telephone networks are the internet. Without this infrastructure to connect computers to the hundreds of new websites, there would be no New Economy: just a worldwide wait.
"We rapidly came to realise [following the meeting in Ireland] that the internet was just a collection of networks and that it was IP which was the huge leap forward," says Jim Crowe, who ran Level 3 after leaving MFS.
The slide shows and investor presentations produced by Level 3 during its funding roadshow in 1998 encouraged an army of other companies to follow in its tracks. On both sides of the Atlantic, the streets began to be dug up by companies that few had ever heard of in a headlong scramble to lay as much fibre-optic capacity as possible.
This burst of enterprise enjoyed a regulatory fillip. With privatisation in Europe and the Federal Communication Commission's 1996 Telecoms Act in the US, the rich world enjoyed a sudden deregulation. Most inves tors concluded that new entrants would quickly steal the initiative from the "dinosaurs", such as AT&T, British Telecommunications, France Telecom, Deutsche Telekom and Nippon Telegraph & Telephone.
The investment stampede was made possible by an explosion in cheap debt financing not seen since the junk bond craze of the 1980s. Venture capital companies, whose coffers had swollen once the investing public saw the potential of the internet, began queueing up to pump in private equity money before taking fledgling companies public.
That might have been that, but for a twist that lifted the telecoms bubble out of the class of the investment booms that had swept through the dotcom and biotech industries. This twist was the late arrival of established companies with balance sheets and credit ratings solid enough to borrow tens of billions of dollars.
Some were manufacturing giants such as Britain's GEC, which turned itself inside out to focus on a telecoms equipment division renamed Marconi. Others such as Scottish Power, National Grid, Enron and Montana Power were utility companies that spotted an opportunity to make use of their infrastructure skills but had no experience in telecoms.
The most dangerous were the traditional telephone companies, which were trying to prove they were no longer the dull monopolies of old. Each of the three largest had a new chief executive fresh from the computing industry and anxious to spend money. Mike Armstrong jumped from International Business Machines to AT&T, Sir Peter Bonfield went from ICL to BT and Ron Sommer arrived from Sony to run a privatised Deutsche Telekom.
The combination of ambitious new executives, powerful balance sheets, weak corporate governance and myopic middle management was to have some disastrous results as all three companies fell over each other to make expensive investments at the height of the boom.
Greg Blonder, chief technology officer for AT&T until 1998, says hubris and inertia kept it from spotting the potential of the internet to change the industry until it was almost too late. A turning-point came when several board members read an article in The New York Times about Netscape, the pioneering internet browser, and realised this craze was here to stay. "They had been told about Netscape a year earlier but failed to see its significance because they regarded the internet as something run by a bunch of amateurs and kids."
Even once they did understand what was happening, these companies retained internal cultures, which meant that they were often ill-equiped to deal with the fast-paced world in which they were moving.
"AT&T managed to lose a lot of talented people who came from outside, because the immune system was so strong. These people were cowboys out from the wild west frontier of telecoms and they just didn't fit in with the bureaucratic culture," says Mr Blonder. A similar exodus of talented internet executives fled from BT.
All these companies, incumbents and start-ups alike, believed they could find additional sources of revenue to justify their investment, either then or in the future. In retrospect, this was always far-fetched. The proliferation of distinct access technologies meant a typical household or small business was being offered telephone and internet services by as many as a dozen networks all dependent on growing market share.
Mr Blonder, now with Morgenthaler, the US venture capital group, sums up the problem: "It's not clear that there are any new dollars out there to attack. If you look at the amount of disposable income that households have to spend on telecommunications, it is fairly static at around $1,000 a year. You can imagine some substitution within that - and a few new broadband services like video on demand may take spending away from other leisure activities - but ultimately there is no magic pot of gold."
It was a goldrush without the gold. |
