The bidding total for the UK's five new third generation (3G) mobile licences currently stands at a staggering £5bn, and it's still rising.
That means the starting price has rocketed by ten times, and in only a little more than three weeks. None of the 13 bidders has dropped out, and there is speculation that the DTI's spectrum auction may eventually part the winners from a staggering total of £10bn.
This is the first exercise of this kind in the UK and Europe, so the eventual price was always anybody's guess. But already the process is described as out of control, prompting fears that there will be a knock-on effect on eventual service prices. If this is the case, it could stifle the growth of ebusiness in the UK that ebusiness minister Patricia Hewitt hopes will be spurred by 3G licences.
In addition to licence costs, recent estimates suggest that the cost of network infrastructure to deliver the new services is in the region of £3bn for each successful bidder. If the bidding continues at its current rate, that could make the total price tag per new operator close to £6bn, just to get 3G services up and running.
Gold at the end of the rainbow
However, the potential reward for bidders is that 3G combines the two hottest technologies of the moment: mobile comms and the internet. Market analyst Datamonitor predicts that 270 million European citizens will be using mobile phones by the end of 2005 - about twice last year's figure - and about 70 per cent of them will be receiving data, rather than only voice.
On top of that, 3G's extra bandwidth and functionality will add the killer application of internet access, and in particular ecommerce. BT, which is bidding for one of the smaller 3G spectrum licences, predicts that the international mobile ecommerce market will be worth $200bn by 2004, while its own internet revenues are growing by 80 per cent each year.
Vodafone, which has already bid more than £1.3bn for a licence, says it expects 3G services, such as video-conferencing and broadband internet access, to not only halt the current decline in its average revenue per user, but to boost it by up to 25 per cent by financial year 2003/04. If this is true, the cost of the licence would be repaid in a single trading year.
However, for existing mobile operators, such as BT, Vodafone, One-2-One and Orange, the cost of a failed bid could be higher still. In the game share-traders like to play, a 3G licence is a very high-value card indeed.
Failure to attain a licence is likely to affect an operator's share price, so there's a lot to play for - even in the short term.
Equally, it's a outstanding opportunity for current non-players in the mobile world to get a slice of the action. Ambitious cable telco NTL, backed by France Telecom's money, is in there alongside a group that includes Branson's Virgin Group, EMI and even Tesco. Australian second-tier telco One.Tel, a bidder for one of the main licences, has said it is prepared to pay up to £2bn. The smell of big money has wafted all around the world, and beyond the confines of traditional national players.
But there's a balance to be struck. What's worrying those watching the licence bids go through the ceiling is that, given the pressure on fixed-wire internet access costs to fall to zero, the prospects for charging a premium to do the same thing via mobile terminals look slim.
Research company Ovum has recently published a report warning that mobile ecommerce runs the risk of being overhyped, while the public remains reluctant to buy unless the services are "genuinely unique and compelling".
It points out that well-tried alternatives already exist, so anything mobile operators offer will have to be pretty damned good.
The report's co-author, Duncan Brown, warned: "Business users, rather than the mass market, will be the first serious adopters, but even they won't pay a premium for existing services that are easier and cheaper to access using the telephone or a PC."
In a nutshell, the G3 winners will need to offer big bandwidths at low prices to succeed. To win over the buying public, quality of content is also a must. The inherent advantage for wireless telcos is that they could achieve these things more quickly and cheaply than competitors using fixed-wire systems such as DSL. Speed of deployment will always be on their side. But the escalating price of the licence is eroding the telcos' cost advantage daily. The only sure winner will be the UK Treasury.
WHO ARE THE PLAYERS PULLING UP A CHAIR AT THE 3G TABLE?
In addition to the four UK mobile incumbents - Vodafone, Orange, BT Cellnet and One2One - the bidders are:
- 3G: owned by Irish telco Eircom
- Cresent Wireless: shareholders have interest in Global Crossing
- Epsilon Tele.com: subsidiary of Japanese bank Nomura
- NTL Mobile: owned by NTL and France Telecom
- One.Tel Global Wireless: owned by Australian telco One.Tel
- SpectrumCo: includes Virgin, Nextel, Sonera, EMI and Tesco
- Telefonica UK: subsidiary of Spanish telco Telefonica
- TIW UMTS: owned by UK radio network operator Dolphin
- Worldcom Wireless: MCI Worldcom subsidiary
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