TIME EUROPE
July 24, 2000, Vol. 156 No. 4
Third Generation Gap
Lower-than-expected bidding for mobile licenses is bad news for governments but good news for consumers
By JENNIFER L. SCHENKER
Some of the biggest players in the telecommunications industry were holed up last week at the Kurhaus hotel in the Dutch resort of Scheveningen. The industry giants had gathered in the grand Victorian-style building on the North Sea to place their bids in an auction to win third-generation mobile phone service licenses in the Netherlands. But they did not have to look out the windows to see the tide turn.
After a similar open-ended auction in April earned the U.K. government a windfall $34 billion, finance ministers across Europe began rubbing their hands in delight. Mobile phone auctions for the new multifunctional devices looked like an easy way to fill national coffers without painful economic reforms. No more. Those astronomical prices are driving mobile companies to team up with each other. As the the number of bidders is reduced, so are the chances that prices for licenses will spiral out of control. Unless that process goes too far, European consumers could end up the big winners. Last week Dutch phone company KPN announced that it is partnering with Japan's NTT DoCoMo and Hong Kong's Hutchison Whampoa to bid for third-generation licenses in Germany, France and Belgium. That group, along with competing giants Vodafone AirTouch, France Té lé com and Deutsche Telekom, are emerging as the strongest contenders for mobile licenses across Europe.
Although other players still intend to bid on those prizes, the total number of contenders is diminishing, meaning much less revenue for government. In its ongoing auction, the Dutch government was originally expected to gross some $8.5 billion, which it planned to use to reduce debt. Now, the current thinking is that it will raise only between $650 million and $1.2 billion. And this month's auction in Germany — the largest telecom market in Europe — is expected to raise as little as $9.6 billion, less than a third of what the U.K. got just three months ago and far less than analysts predicted.
While this may come as bad news for treasuries, it is not bad news for consumers. If mobile operators are paying less for licenses, they are less likely to raise prices for third-generation services. The danger, though, is that governments will now start limiting the number of licenses to stimulate the bidding, leading to short-term windfalls but reducing competition and innovation in the long run.
The potential market for the new generation of mobile phones is huge: by 2004, says McKinsey & Co., about a billion people are expected to own a mobile device, which will become a more common tool to access the Internet than the PC. Europe is ahead of the U.S. on wireless, and it has a chance to take a significant chunk of the multibillion dollar global market. But part of its advantage depends on making its home market into a laboratory, where providers compete with innovative mobile technology. If those services cost too much, fewer people will use them and the industry — and ultimately the European economy — will suffer. "It is the future of the Internet in Europe that is at stake," says Rob Schuyt, a vice president in the Amsterdam office of consultancy Booz Allen & Hamilton.
The U.K.'s open-ended auctions forced mobile operators to climb what one analyst calls "a wall of fear," with prices for licenses shooting sky high. "It is a lose-lose situation for anyone in the mobile business," says Schuyt. "If you bid in an auction and you win, you lose because you pay so much money without any guarantee of recouping it. But if you decide not to bid — or bid and don't win — you lose because the stock market will punish you for not being in the game for the next generation of services."
In the U.K., mobile operators paid $600 a head for every man, woman and child in the country. Even if the entire British population used mobile phones — about 50% will by year's end — it would take 40 months at a benchmark monthly fee of $15 for those bidders to recoup just the license investment, let alone the costs of building a network and running the business, says Sam Paltridge, an Internet expert at the Paris-based Organization for Economic Cooperation and Development (OECD). "third-generation services could still be economically viable, but it will be very, very different from the kind of returns enjoyed by mobile operators of gsm services," says Schuyt. He estimates it will take seven or eight years for U.K. operators of third-generation services to break even — roughly double the time it took gsm operators to recover their investment.
The big consortiums have the war chests to pay high license fees across Europe and not raise consumer prices, insists Tim Brown, investment relations director at Vodafone AirTouch. But the size of each bidder's war chest may depend on what the rules are in its home market. Potential bidders have complained about the advantages that France Té lé com is likely to reap from its government's decision to conduct a "beauty contest" instead of an auction. In auctions, the highest bidder wins. In beauty contests, applicants generally pay lower fees and are judged by the government on more subjective criteria, allowing room for favoritism. A number of governments are still weighing whether they should use the beauty contest or auction models. The outcome of the Dutch auction could inform their decision.
The Dutch government last week shrugged off the fact that it is unlikely to gain the amounts of money the media and analysts were predicting. "Expectations rose too high because of the auction in Great Britain," says a Dutch Finance Ministry spokesman. "If we had our auction first everyone would have been happy [with the amount raised]." The amount now anticipated "is more realistic," he said.
For its part, Germany intends to stick to an auction process because it believes this method is more "transparent," according to the Economics Ministry spokeswoman. But Germany has not yet decided on how many licenses it will issue. It could be as little as four or as many as six. Only eight of the 13 original bidders remain in the running, leading analysts to fear that Germany will limit the number of licenses."Mobile operators are charging us too much already," says Paltridge of the OECD. "That is why we need more players in the market."
In the end, glee in the finance ministries isn't the best gauge of what's good for Europe's promising mobile industry. A truer measure is happy consumers, free to chat, surf and explore whatever other avenues of communication the new phones open up.
With reporting by Lauren Comiteau/Scheveningen and Charles P. Wallace/Berlin
This edition's table of contents
TIME Europe home
More stories from TIME Europe and related links
E-mail us at mail@timeatlantic.com
COPYRIGHT © 2000 TIME INC.
|
|
|
|
July 24, 2000
COVER
One Is 100
Famous and beloved for her entire adult life, the Queen Mother notches up a century on August 4 — and the celebrations are already in full swing
EUROPE
Crackdown
Moscow's powerful oligarchs feel the heat as Vladimir Putin's tax police and prosecutors continue to make life uncomfortable for Russia's big business
The Hit List
Russia's ruble rousers
Q & A
Berezovsky speaks
The Tax Break Man
By squeezing through sweeping reforms, Chancellor Gerhard Schröder has stolen a march on his critics
BUSINESS
Third Generation Gap
Lower-than-expected bidding for mobile licenses is bad news for governments but good news for consumers
Names in Waiting
The trial is over — now judgment day looms for Lloyd's and investors
HEALTH
The New Science of Alzheimer's
Racing against time — and one another — researchers close in on the aging brain's most heartbreaking disorder
SOCIETY
The French Disease
In France, a best seller exposes a nationwide problem of emotional abuse in the workplace
THE ARTS
In Praise of Flattery
How the rampant sucking up to the famous has undermined the language of private praise
You Look Marvelous!
Tips for kissing up
Irony Is Dead. Long Live Irony (on the Web)
The snide tradition of disrespecting media and movie stars is thriving on delightfully sardonic sites
DEPARTMENTS
Essay
Olympic Monitor
World Watch
|
|
