In the risk-happy, reward-crazed wireless business, it may help to be a little of both. The stunningly expensive race to bring so-called third-generation (3G) mobile phone services to Europe is just getting under way. Other governments are ogling the U.K. Treasury’s returns–and preparing to divvy up their own airwaves. Telecom operators are determined to stay in the game, because they think people will want constant access to the Internet for everything from e-mail and trading stocks to finding a nearby restaurant or watching a video stream of the grandchildren. Never mind that they have no idea which, if any, of these services might actually prove popular. It’s important just to stake an early claim in the hot field of mobile commerce, predicted by investment bank Durlacher of London to be a $20 billion market by 2003. A third-generation license, says Tim Sheedy, telecom analyst for International Data Corp. in London, “is nearly a license to print money.”
Or at least to spend it. For that, the U.K. bidders can partly thank Ken Binmore, the game-theory guru and Monopoly aficionado who designed the just-completed auction for Britain’s Radiocommunications Agency. Binmore had companies submit bids by fax. They could bid simultaneously in each round for any of the licenses. (One, however, was restricted to new entrants to the British market.) At the end of each round, contenders were told of all offers on the table; they could then increase their bids or drop out, until only five bidders remained. The hammer fell on Thursday when NTL Mobile, backed by France Telecom, pulled out. “At some point you have to wonder if the amount of money offers a sufficient return,” says Bernard Izerable, France Telecom’s director of northern Europe.
The bidding also got too rich for the likes of Telefónica, Sonera and MCI Worldcom. Canada’s Telesystem International Wireless, backed by partner Hutchison Whampoa, snared the license reserved for outsiders. The rest were captured by the four mobile operators already in the U.K.: Vodafone, British Telecom, Orange and One2One, owned by Deutsche Telekom. “It was a little bit more expensive than we had expected,” concedes Tim Harrabin, U.K. strategy director for Vodafone Airtouch, which paid the most–£5.96 billion–and got the largest slice of capacity. But any incumbent quitting the race in Britain would have sent all the wrong signals, argues Leonard Waverman, a telecommunications expert at London Business School. “They would basically have been saying that they weren’t going to be in the broadband Internet world, and the capital markets would have judged them very harshly,” he says.
Yet winning brought harsh judgments, too. The markets are getting jittery about the billions in telecom debt that will be issued to pay for all this; London bankers Close Brothers says the average bill for base stations and other startup costs could reach £3 billion. On Friday, Standard & Poor’s put British Telecom and Deutsche Telekom on credit watch because of the huge 3G investments, after downgrading Vodafone last month. “Even for these big companies, it’s a lot of money,” warns Louis Landeman, S&P telecom analyst in Stockholm. “It’s a big gamble.”
And getting bigger. Vodafone, which snared Mannesmann after a hostile battle earlier this year, must soon divest Mannesmann-owned Orange, one of the 3G license winners. France Telecom, MCI Worldcom and other companies are angling to buy it–for a price that could hit $48 billion. For his part, Orange CEO Hans Snook expects his company to be relisted on the stock exchange in the fall and, perhaps, to be an acquirer: “My objective is to be the biggest global competitor to Vodafone they can possibly imagine,” he says.
The high-rollers hadn’t even wired their payments to the U.K. Treasury when about a dozen applicants met Friday’s deadline to register for the German auction in July. The four to six licenses on offer in Europe’s biggest market could bring as much as $50 billion. The system’s a bit different than the British one. After a one-day training course in German-language software, the companies’ designated bidders will report to an office building in Mainz to sit isolated and guarded–no mobile phones allowed–in a room with a phone and fax programmed to communicate only with their headquarters. They will bid via computer, with a round concluding every half hour. “It’s not a soundproof booth,” says one regulatory official. “It’s more like taking final exams.”
The Germans have plotted their airwave auction for some time. Other regulators on the continent, however, are said to be reevaluating their plans in light of the U.K. experience. It’s too late for Finland and Spain, which have already awarded their 3G licenses via beauty contests, in which governments review proposals and select winners, who then pay a fee. But for France, Italy and Sweden, which had also planned to go this route, it’s not. “Any European country that was thinking of staging a beauty contest will now be saying ‘No, no, no’.” argues John Matthews, analyst with telecom consultancy Ovum in London.
At least the Finns are getting a head start on figuring out what services people might want. Sonera is launching a service called Mspace this month. Pekka Keskiivari, who’s running it, explains that it’s a sort of test lab that takes the best available technology and tries to mimic the 3G world. He hopes some 10,000 customers will pay to test-drive multimedia services such as news clips and movie trailers. “There is no way to forecast the killer application in 3G,” says Keskiivari. “Let’s face it, they are guesses at best, and not even good guesses.”
But guess–and spend–the telecom giants must. Europe is on the cutting edge in the wireless world, and as the U.K. auction shows, that’s a place these companies believe they have to be. Otherwise, they risk missing the next wave in mobile communications. And that would truly be insane.
