The 3G fallout

The frenzied bidding by telecoms operators for the five UK third generation (3G) mobile phone licences was reminiscent of a punch-up between Lennox Lewis and Mike Tyson - with the crucial difference being that there were more than two prizefighters in the ring.

In the end, it was the big hitters who proved they had the staying power. The five that came out on top were Vodafone, BT(3G), Telesystem International Wireless (TIW), One 2 One and Orange.

All went through a nail-biting 150 rounds, which finally ended with the withdrawal of NTL Mobile (a joint venture between cable outfit NTL and France Telecom) and saw off competition from WorldCom Wireless (UK), Epsilon Tel.com and One.Tel Global Wireless to name just a few.

But after nine weeks of 3G auction-mania, the only winner seems to be the UK government, which has made a tidy sum of no less than £22.47bn from the final five.

According to calculations, 3G operators would have to charge each user £2579 a year to recoup their outlay. This is assuming that the UK market manages to attract the 8.5 million users by 2004 that industry researcher Ovum predicts.

Cashing in on 3G
Canada's TIW, in which Hong Kong's Hutchison Whampoa has a sizeable stake, paid £4.38bn for its so-called new entrant licence.

Vodafone battled against BT(3G) for licence B and coughed up £5.96bn, which gives it more bandwidth than the remaining three. BT(3G), which said that opting for a smaller share of bandwidth was a tactical move, paid £4.03bn for licence C. Licence D went to One 2 One for £4bn and Orange scuttled away with licence E for £4.10bn.

Stephen Byers, Secretary of State for Trade and Industry, gave support to the government's decision to put the licences up for auction.

He said the auction's outcome demonstrates the government's commitment to increasing competition in the UK mobile telecoms market, and that it would ultimately incite competition for a faster rollout of innovative services while delivering greater choice and lower prices to the user. This would make the UK the best place for ecommerce in the world, he added.

Question time
But Byers is probably smiling through gritted teeth. That's not to say that what he expects to happen won't, but the auctions have raised several questions: how quickly will revenues grow and where will they come from? How fast will these new services be taken up, and will the technology be ready on time?

Each of the five operators have paid out huge sums of cash for the licences - which are valid for 20 years and will take effect in 2002 - and now have to fund the building of UMTS (universal mobile telecommunications system) networks in time to launch services in 2002. Each winning operator claims it can do this without burdening customers with high costs for services. BT said it can plough more money into its services having paid less for its licence, while TIW will probably have enough financial clout, coming from its business partner Hutchison Whampoa, to see it through its fallow profit period.

Profits of doom
But some industry watchers are still doubtful and believe the operators may take up to 20 years to reap any profit, while others are certain customers will be footing the bill by paying increased charges.

Donald Pearce, Netcom's principal consultant, says: "The operators are the victims of this auction. They were held to ransom by the government. They sat and watched the licence prices rise and paid up."

"Over the next five years they won't be making any money, but they will be spending it. It will be hard on their shareholders and we may see some operators go to the wall or end up as an acquisition target. Look at 2G [second generation] operators, if they're not making a loss, they're barely making a profit. There's no way they can recoup the money they've spent. Essentially they'll have to get the money back from their business customers, of which there aren't that many."

Future tense
Pearce also points out that squeezing business customers for more money through higher costs may not be the answer. "Business users want roaming services and may not want to invest in 3G services straightaway, until there is a substantial 3G operator that offers it globally," he says. "They won't sustain high costs, unless they really want to. Operators may have to go cap in hand to their shareholders, but with no guarantees to offer them."

There are no guarantees either that the actual technology will be ready in time if cashflows are restricted. And as for increasing competition in the mobile market, if there is a setback to the building of infrastructures, many possible partners and mobile virtual network operators will probably sit back and think do I really need to be part of this yet? Particularly as they may be asked to bear the brunt of some of the costs incurred.

Competition between the various telcos will be fierce, and the first to get products to market will have a considerable advantage. However, it may be some time before that advantage turns to profit.