$1000/Englishman?!: UK 3G licenses close at $35B

Date view Thread view Subject view Author view

From: Rohit Khare (rohit@uci.edu)
Date: Wed May 03 2000 - 23:20:24 PDT

[Logic, it seems, has been defied again. She's gonna be one bad-ass
mofo when she gets back home... RK]

UK wireless license auctions close at 22.48 billion pounds
By Dianne See Morrison
Redherring.com, April 28, 2000

Damned if you do. Damned if you don't.

That was the resounding message following the close of the UK
government's auctions for third-generation (3G) mobile phone spectrum
licenses. After one hundred fifty rounds and nearly eight weeks, the
five winners -- Vodafone (NYSE: VOD), British Telecommunications
(NYSE: BTY), One2One, Orange, and Telesystem International Wireless
UTMS (Nasdaq: TIWI) -- have coughed up a shocking £22.48 billion, or
$35.4 billion dollars, for wireless licenses, a number that has both
the operators and consumers concerned over just how that investment
will ever be recouped.

Britain's four incumbent mobile operators have all secured winning
bids. Vodafone, whose £5.96 billion bid was the highest in the
auction, took License B, the license that offers the most spectrum to
an existing operator. British Telecommunications, One2One and Orange,
won licenses C, D, and E, respectively. The three UK operators each
paid a little over £4 billion for their license.

Nine new entrants bid in the auction, but only TIW UTMS, a subsidiary
of Canadian mobile phone operator Telesystem International Wireless,
was able to secure a license. The Canadians bid £4.38 billion for the
license A, the license with the most spectrum -- and one specifically
reserved for a newcomer to the UK market.

But while the UK Treasury is currently the envy of every other
European government, the sky-high price tag may eventually boomerang.
At the start of the auction, there was already a sense that for the
incumbents, a license had to be won, no matter the cost. And now that
the price has reached such astronomical levels -- seven times the
government's own estimate of £3 billion -- the repercussions could
call into question the UK government's judgment to hold an auction in
the first place, or to let the bidding reach such heady heights.

How difficult will it be to recoup the cost of the licenses? Analysts
believe that it could take up to 15 years -- just five short of the
number of years the license is good for -- to see a return on
investment, especially since the companies still need to build 3G
networks. Just three months ago the cost of building the network,
estimated from £2.5 billion to £6 billion, was expected to be an
operator's largest expense.

For Vodafone, whose representatives were unavailable for comment, the
cost of the license came at premium, almost £2 billion more than what
the other operators paid for theirs. But like BT, Vodafone had to
secure a license no matter what. For the two operators, who can no
longer satisfy their existing customers on their current network,
winning a license wasn't just about securing their future, but also
securing their present survival.

For newcomer TIW UTMS, which analysts are calling the dark horse of
the auction, the road to recouping costs may take even longer --
especially if the Canadian company does not find a European partner,
which some analysts predict it will. It may also sell some of its
spectrum to virtual mobile operators to get an immediate return.

In fact, it was expected that NTL Mobile, the joint venture between
France Telecom (NYSE: FTE) and UK cable operator NTL, to win the bid
for License A. It is speculated that NTL Mobile dropped out of the
race because France Telecom has been considering a purchase of
Orange, which secured a license in the auction. NTL, meanwhile, will
most likely enter the 3G game by building the infrastructure for the

Indeed, the question still remains how popular 3G services -- such as
email, banking, e-commerce, and Internet access over mobile phones --
will prove with consumers. More urgently, the price tag from the
auctions also raises the question of how much consumers will have to
pay for it. Consumers, excluding business users, currently cough up
£20 to £30 a month for mobile services. That figure will have to
increase to at least £60 to £100 a month, if operators are to turn a
profit. And, with five operators in the market, analysts say that the
extra revenue will have to come from added services, not simply from
raising the price of monthly subscriptions.

"Clearly the operators will need to offer something special to drive
migration to 3G while justifying increased access charges," said Paul
Lewington, a consultant with Close Brothers, a financial consulting
firm. He believes that this will include a broader range of mobile
services, such as mobile portals, e-commerce sites and directories,
and unified messaging and payment solutions.

"But a consumer will only spend so much," warned Mr. Lewington. "The
question is, How much can their wallet expand, and how many services
will justify that rise?

Meanwhile, across Europe, the spiraling cost of the British auctions
has placed other European governments under pressure to follow the
UK's auction example, rather than hold a "beauty contest," which some
European governments have decided to do. Supporters of the beauty
contest say that it allows governments to pick the best operator for
the market, rather than allow the deepest pockets to win. In the case
of TIW UTMS, for example, which has little European wireless
experience, its entry into the UK mobile market would not have been
guaranteed had the UK opted for a beauty contest. Meanwhile,
supporters of the auctions say it allows the market to determine the
price of the licenses, instead of being priced by the government.

"Other European governments aren't going to want to be seen as giving
these licenses away below their market value," said Karen Huggins, a
wireless analyst at Merrill Lynch (NYSE: MER).

Indeed, Germany has already announced that it will be conducting an
auction to sell off its third-generation licenses, while Italy, which
has opted for a combination of beauty pageant and cash, is upping its
license costs. And, while the German government says it expects to
raise 10 billion marks, or just over $5 billion dollars, Merrill
Lynch expects the numbers to be closer to the UK's. This trend, says
Ms. Huggins, could be especially dangerous, as it could mean soaring
consumer costs across Europe.

Ultimately, those costs could even hinder Internet adoption in
Europe, especially considering that for Europeans, mobile phones will
be one of the first platforms from which they access the Internet,
says Ms. Huggins. In the UK, Internet penetration currently stands at
22 percent, while mobile phone penetration stands at 56 percent. In
Italy, the numbers are even more dramatic: PC penetration stands at 3
percent, while mobile penetration has reached 58 percent.

Could the growth of the Internet be seriously harmed in Europe? If
the auctions have proved anything these past eight weeks, it is that
anything can happen. As for the losers, while they don't have their
licenses, they may prove to be winners yet, especially with the
operators in as much debt as they are.

"This may be back door entry for the losers," said Scott Jacobs,
partner at Cluster Consulting in London, who noted that Telefónica
(NYSE: TEF) and MCI Worldcom (Nasdaq: WCOM) may find their way into
the UK market yet. "The bidding is over," he said, "but the
maneuvering has just begun."

Date view Thread view Subject view Author view

This archive was generated by hypermail 2b29 : Wed May 03 2000 - 23:22:04 PDT