Down the gurgler - The Faulty Connection
Wireless: Why Europe’s telecoms stumbled and fell in the race to build third-generation services
By Rana Foroohar
NEWSWEEK
Sept. 17 issue — What a difference a little time makes. Twelve months ago, as the dot-com crash dispelled Silicon Valley smugness and sent investors into full flight from the Nasdaq, Europeans were still optimistic about technology.
AFTER ALL, THEY HAD Global System for Mobile (GSM) wireless phone networks—the world’s best and most reliable. Even better, they were well on the way to developing the “third generation” of mobile services, based on new network technologies that would transmit data at true Internet speeds, starting at about 15 times the rate of GSM. Everything seemed possible: mobile commerce, wireless videoconferencing and real-time Web gaming on a handset. The Americans could eat Europe’s dust. The only thing needed to get to what everyone now called 3G was some money.
Europe began to spend the money—at precisely the moment when demand for wireless connections was about to peak. The result: 3G has been buried by the general European telecom collapse, in which overcapacity may ultimately force the industry to write off as much as a trillion dollars in investment. Companies that invested heavily in 3G, such as France Telecom and Deutsche Telekom, are staggering under billions in debt. British Telecom is spinning off its wireless division, and the Dutch operator KPN is having a fire sale of assets. Vendors are suffering, too, as telecoms defer purchases of wireless equipment and networking gear; last week the Swedish wireless manufacturer Ericsson blamed 3G debt loads for its own sluggish sales and forecast flat to low growth well into next year. Long term, some industry experts say that the advent of third-generation services in Europe will be pushed back to 2004 or even 2005.
In hindsight, it seems that many companies made massive investments in 3G without clear business models. How, for example, do you charge for use of a 3G network? Old fixed-line pricing models based on time and distance don’t apply to 3G, which uses Internet-like “packet” technologies rather than dedicated “circuit” connections between customers. Many in the industry expect some form of charge by data speed, along with fees for special services such as restaurant locators and mobile commerce. But nobody yet knows what services consumers will want in a 3G world. Nor does anybody know how to get from here to there. Building the network infrastructure could easily cost $200 billion in Europe alone. That’s on top of the $100 billion that dozens of companies paid to European governments for licenses to use the slices of electromagnetic spectrum allocated to 3G. From an investor’s point of view, 3G is a bad bet at the moment, which is why lending to telecoms has all but stopped.
VALUE OF SPECTRUM
How did this happen? In the early 1990s, when European governments were parceling out spectrum rights for GSM, nobody knew what the spectrum was worth, so governments began doling it out at low charges through “beauty contests.” Companies with the best-sounding business plans won. But when it came time to sell licenses for 3G, the Americans had furnished an alternate model: the spectrum auction, in which companies bid for licenses. Since 1994 the U.S. government has attracted bids of $41 billion, and these sums aroused envy in Europe.
In 1997 the British government hired game theorist Ken Binmore, a London University economics professor, to help design a 3G auction. The professor’s credentials suggested a certain free-market swagger: he had once advised that public hospitals should auction bed space to the local health authorities. In his scheme, contestants submitted bids daily by fax for any one of five licenses. When the hammer came down in April 2000, the licenses had sold for a combined $33 billion—a figure that left even the buccaneering mobile industry speechless. “Everybody started shivering after the auction,” says Gert Hofsteenge, manager of business development for KPN. “Nobody expected to pay so much.”
Next came Germany. In August 2000, the government held an auction under complex rules that stoked a bidding war between Deutsche Telekom’s T-Mobil and Vodafone-Mannesmann, eventually generating $45 billion for the state treasury. Indeed, some bidders suspect DT—then 70 percent state-owned—of deliberately driving up the prices. Maximilian Ardelt, CEO of the German mobile operator VIAG, which paid $7.2 billion for one license, has called on the government to refund part of the payment.
The envy kept spreading. The Spanish government had conducted a beauty contest that March, but reconsidered after watching the British and German auctions’ riches and decided to increase a tax on contest winners. In October the Italians staged what Nigel Deighton, telecom-research director of the Gartner Group for Europe, calls a “Machia-vellian auction.” The losers in a beauty contest were allowed to bid their way back in. The pressure was too much for some bidders. A consortium involving BT fell apart, and in the end there were only as many bidders as licenses. “If sex, fear and greed are the major motivators of man, you had two out of three in the 3G auctions,” says Deighton. “The governments must have realized as the bids went past 4, 5 or 6 billion euros that the operators were paying too much.”
Sanity did prevail in Scandinavia. The Finnish government studied the fallout from the U.S. auction, where only a third of the $41 billion originally bid was ever paid, either because operators couldn’t raise the money or because they got tangled in litigation. Finland chose the beauty contest. Similarly, Sweden decided to wait, imposing a tax on the 3G revenues of the winners.
‘IT WAS THE LAST CHANCE’
What was going through the auction participants’ heads? First, they thought the winners would control the industry. “It was the last chance to step into a new world,” says KPN’s Hofsteenge. “We had to be a global player,” says Conchi Gutierrez, a 3G program manager for Spain’s Telefonica Moviles, which laid down nearly $4.5 billion for a German license. Many operators also saw 3G as a miracle cure. With the mobile-phone market near saturation in Europe and with consumers demanding falling prices, revenues from voice traffic are expected to decline after 2002. Mobile customers are fickle—40 percent dump their service for a better deal. The solution: 3G, which promises a huge jump in data traffic—including potentially lucrative services like e-mail, music downloads and videogames.
Enter handset manufacturers like Nokia, Ericsson and Motorola. To play videogames on your phone, you of course need a new handset. No one promoted 3G more aggressively than the gearmakers. As recently as last April, Nokia was insisting that skeptics were wrong: there would be no slowing the arrival of 3G. “The Viking hordes of businessmen swept across Europe a few years back, telling everyone how cool 3G would be,” says Keith Woolcock, head of technology research for Nomura International. “They convinced everyone they could boost their revenues by adding all these cool new data services with these new handsets.”
Instead, the revenues are far away, and how far is a critical question for many hard-pressed telecoms. KPN says it has only enough cash to last through next June, and the only thing not potentially on the auction block is its decidedly old-media fixed-line phone business. Banks are reluctant to lend money for wireless ventures. And equipment manufacturers are less willing to extend financing to telephone companies. “We are not a bank,” says Mads Madsen, a spokesman for Ericsson. Left on their own, mobile operators are desperate to raise money, and some may not make it. Forrester Research analyst Lars Godell predicts that only five major European mobile carriers will be left by 2008. Mergers seem likely.
Who will survive? Ironically, the company that bet the most in the auctions, Britain’s Vodafone, may weather the storm by virtue of sheer size. Other strong players, like DT’s T-Mobil, might try to team up with companies whose services complement their own in Europe. Weaker operators like KPN will be in for a bumpy ride. Alliances with companies in Japan and South Korea, both 3G technology leaders, used to be seen as a strategic advantage. Then Japanese giant NTT DoCoMo postponed its 3G launch from April to October. Thomas Fellger, a wireless expert at Berlin IT consultancy MetaDesign, says the DoCoMo delay sent shocks through the European industry: “The Japanese are so much farther along with the technology, and if they can’t make it, how are the Europeans going to?”
They might start with a business plan. A study released last month by a 3G industry consortium called the Universal Mobile Telecommunications Forum makes clear that the industry has not yet figured out how to make money from 3G services. Piping voice and data through one handset will require new partnerships between phone, Internet and other service companies, but no one has figured out how to share the work, let alone the revenue.
WHAT ARE PHONES FOR?
Still, many operators are plowing ahead, sinking money into content for 3G services that consumers may or may not want. Vodafone and French media giant Vivendi Universal are pouring more than $1 billion into Vizzavi, which will offer things like music and video clips via mobile phones. Telefonica Moviles plans to offer mobile customers news and entertainment content from companies like Reuters. Orange, an arm of France Telecom, is billing itself not as a telephone company but as a “wire-free provider of life services.” Like Vodafone, Orange is counting on the fact that people will eventually want to download multimedia-rich content via their phones. It’s a risky assumption, as studies have shown that most people simply want to use their phones to talk.
As operators struggle to pay down debt, the European Union is finally waking up to the fact that Europe’s most competitive industry is in danger of losing its edge. Erkki Liikanen, the EU’s commissioner for enterprise and the information society, is disappointed that member states couldn’t decide on a Pan-European policy before some began auctioning spectrum, market by market. “There should be a European-level decision,” he says.
In an effort to dig Europe out of the mess, the EU issued a paper last March outlining the challenges faced by the mobile industry and advising governments to come up with ways to ease the burden. Swedish companies already have a plan to share network infrastructure (as do BT Wireless and T-Mobil), and that idea is catching on for 3G operators who originally planned to build competing networks. “We do feel a certain responsibility for the operators’ high costs,” says German telecom regulator Matthias Kurth. The concern is no doubt appreciated. But it doesn’t make up for the loss of jobs and wealth left by the bursting of the other tech bubble.
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With Stefan Theil in Berlin andWilliam Underhill in London
© 2001 Newsweek, Inc. |
