Europe's 3G Fiasco: Technology Outran Governments
By Gren Manuel
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Some European governments want to help mobile operators jump-start third-generation, or 3G, services - an emblem of Europe's technological prowess that has hit the rocks.
The industry might well reply that it was government that got it into trouble in the first place.
That's the view of an increasing number of analysts and operators, who reckon interventionist governments are an overlooked culprit in the meltdown in 2001 and 2002 that helped bring Europe's telecom sector to its knees.
"If you were to divide it up, then probably more than 50% of the blame should go to governments," says Joe Nordgaard, who worked extensively on the birth of new wireless technologies while at Lucent Technologies Inc. (LU), and is now head of U.S. consulting firm Spectral Advantage LLC.
Governments, he says, "created a game where they controlled the rules, and they more or less coerced the parties to fall in line with their game plan."
Views like Nordgaard's run counter to the conventional wisdom, which puts the blame for 3G's woes at the feet of mobile operators, equipment manufacturers and financial markets that spun reams of hype about the so-called mobile Internet.
That promise is still largely unfulfilled in a Europe where the landscape is littered with unfinished 3G networks, licenses that are virtually worthless, and squabbles between operators and handset makers about who's to blame for delays that have pushed the mass rollout of 3G back to 2004 at the earliest.
The focus on governments' roles comes just as the E.U. Commission prepares to take over key areas of telecom regulation that have been the traditional preserve of national governments. The latest move toward centralized control will build on a controversial 1998 E.U. directive that restricted operators' choice of 3G technologies.
Those restrictions were just one part of a European effort during the late 1990s to give the U.S. a beating in mobile technology, one of the few areas that American companies didn't dominate.
"There was a desire to move quite rapidly to keep Europe, and Japan, ahead of the game," says Martin Fransman, professor of economics at the U.K.'s Edinburgh University, who studies innovation in the telecoms industry.
Write-offs And Broken Promises
The original promise of 3G was that starting around 2002, this new European technology would allow millions of consumers to access Internet-type services using advanced mobile technology, watching sports videos and downloading big e-mails on small but powerful color-screen phones.
The reality is that not a single commercial 3G service has been launched anywhere in Europe.
Broken promises abound. Two licenses in Germany, together costing around EUR16 billion, are unlikely to be used. In Spain, Belgium, Sweden and elsewhere, operators have been unable to meet deadlines for launching service. Earlier this month Orange SA (F.ORA), a unit of France Telecom SA (FTE), joined the long list of operators putting 3G plans on go-slow.
As debts have ballooned - France Telecom and its cross-border rival Deutsche Telekom AG (DT) each have net debt of more than EUR60 billion - the write-offs of 3G costs have soared alongside them.
Deutsche Telekom, the Netherlands' KPN NV (KPN), Japan's NTT DoCoMo (DCM), Spain's Telefonica SA (TEF), and Swedish-Finnish operator Telia-Sonera (S.TLA) have written off more than EUR17 billion on 3G investments in Europe, and analysts expect more to come.
One key issue was the decision by many European governments to run auctions for the licenses to operate 3G networks. Timed at the peak of the telecoms boom, they reaped EUR120 billion for Europe's governments and left operators financially exhausted and in no position to weather the telecoms meltdown that was looming. Prices in Germany and the U.K. were highest; together, the two countries accounted for roughly 70% of the total.
A study by Audrey Selian for the International Telecommunication Union, an agency of the United Nations, charts how and why Europe's governments got their hands dirty with 3G technology.
As consumers signed up by the tens of millions for voice-only mobile phones in the 1990s, public servants in Paris, London, Milan and elsewhere already had their eyes on the next step: 3G. They engineered the creation of a new technology known as Wideband Code Division Multiple Access, or WCDMA, with many of the patents held by Nokia Corp. (NOK), Telefon AB LM Ericsson (ERICY), and other European giants.
They'd done the same thing a decade earlier with the second-generation mobile technology known as Global System for Mobile Communications, or GSM - and found themselves with a smash hit. GSM became the world's most-used mobile phone system - available in more countries than McDonald's Corp. (MCD) restaurants - with patent revenues and many equipment orders coming to Europe.
That success called for another bold step. So in December 1998 heads of E.U. governments, with the backing of the European Parliament, bet the whole of Europe's wireless industry on one technology - WCDMA - by mandating the use of the system for Europe's advanced wireless services.
With hindsight, some observers are now questioning whether that step was the right one. What's more, they're wondering whether this kind of decision should be left to governments at all.
Europe's 3G Fiasco -2: Technology Outran Governments
For a start, Europe's 3G standard was designed in the early 1990s before the Internet revolution really took off, and, by the time of the 1998 decision, technology was moving a lot faster than when GSM was designed in the 1980s. Operators may talk today about 3G delivering the Internet on the move, but the technology is designed for long transfers of data, not the short bursts used on the Internet.
"When it was designed the world was a different place," says Andrew Gilbert, managing director of European operations at Flarion Inc., a New Jersey company that is one of many worldwide now offering newer technologies designed from the ground up to carry Internet traffic. These systems use standard Internet equipment from suppliers such as Cisco Systems Inc. (CSCO) instead of specialist telecoms gear in order to slash costs.
There's also the separate issue of whether governments should choose technologies at all. In the U.S., for instance, operators can choose their own technologies from an alphabet soup of different ways of connecting handsets and networks, including TDMA, CDMA, GSM, FDMA - and more.
In Korea, generally considered the most advanced wireless market in the world, the government has licensed both Europe's WCDMA and its U.S. rival,CDMA2000, to let them slug it out for consumers. Even operators in China are given a choice of technologies.
Harris Jones, chief executive of the U.K. arm of Deutsche Telekom AG's (DT) T-Mobile International (G.TMO), says operators need to strike a balance between innovation and standardization - and they want to make the choices themselves.
"This technology is moving so fast that a regulatory constraint on choice runs the risk of obsolescence," Jones says.
One core issue with WCDMA is that it is a step change from existing technologies. In the U.S., operators can use wireless technology pioneered by Qualcomm Inc. (QCOM) that enables both existing and advanced phones to use the same radio frequencies, allowing a gentle upgrade path. That's one reason U.S. mobile operators are generally regarded as having overtaken their European rivals in offering advanced services.
By contrast, Europe's technology needs a whole new slab of radio spectrum. That has led to a second core issue: licenses. Instead of giving or selling the new spectrum to existing operators, European leaders declared that 3G would be an entirely new service, requiring fresh licenses and guaranteeing access to new competitors.
To whip up demand for the auctions, operators who were short of spectrum were told their only route to get more was to buy a 3G license. Those with spectrum to spare were told they couldn't use it for advanced services. The only real estate on the radio waves they could use was the 3G spectrum.
Finland, Spain and a few other governments handed out their licenses on the cheap to companies with the strongest business plans, thinking this would speed the rollout of 3G. Germany, the U.K., Italy, France and other countries, however, decided on auctions.
In Germany and the U.K., where sales took place in 2000 when telecom stocks were still highly valued, the result was a frenzy. By the time the dust settled in late 2001, debt levels at telecom operators had soared, even as investors were dumping any shares that were tainted by bursting of the Internet bubble.
"Governments Were Too Greedy"
"There was no doubt that the operators were stupid," says John Strand, the Copenhagen-based head of Strand Consult, a specialist in telecom issues.
"But the auctions were more like blackmail," Strand added. "Governments, starting in the U.K., were too greedy with the licenses. They have messed up the whole industry."
French Prime Minister Jacques Chirac earlier this month called without success on European governments to help the region's mobile operators, saying the industry was "in crisis" and that governments should even consider giving cash payments to operators to help with network buildout.
Chirac's idea received support from Germany and some other countries, but was dismissed by most E.U. member states.
To be sure, Europe's 3G technology isn't dead in the water. It'll be available from at least one operator each in Italy and the U.K. by early January. Supporters note that Europe's previous mobile technology, GSM, suffered from 18 months of delay and criticism in the early 1990s yet still emerged as the world's most successful mobile technology.
But if 3G continues to stumble, Europe's governments are unlikely to be able to dodge their share of the blame.
A director for one of Europe's top mobile operators, speaking on condition of anonymity, said: "It's too early say whether (3G mobile) will be successful. We think it will. But if not, governments have to bear some responsibility."
-By Gren Manuel, Dow Jones Newswires; 44 20 7842 9279; gren.manuel@dowjones.com
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