If you want to understand why the European telecom industry is throwing more than $230 billion into upgrading to 3G — shorthand for third generation — look no further than Bon's occasionally dodgy telephone. (Not that the handsets linked up to BT Cellnet or Vodafone are any better.) Though mobiles have come a long way since the days when Gordon Gekko stood on the beach talking to a brick, you still wouldn't make a call on one if a landline was available. And if voice services are skimming the edge of adequacy, that's still more than anyone could say of the "mobile Internet." Even the biggest boosters of wap-based online services compare their current offerings to such famously user-unfriendly products as dos. Telecom operators need to carry more voice and data traffic more reliably just to continue growing and to keep their promises to the stock market. But right now there's just not enough room on the airwaves.
Enter 3G, which is set to launch in most of Europe by 2003. Running on a new network standard called the Universal Mobile Telecommunications System, or UMTS, 3G devices will have more bandwidth, which will enable faster data transmission. Not only does UMTS help solve the capacity problem for voice, it will allow "always on" Internet access and, eventually, even video and color graphics through your handset. So for consumers, 3G could be seriously cool.
For the big telecom operators and their investors, on the other hand, it looks more like a financial disaster. Bon's France Telecom has increased its debt to a staggering $55 billion in large part to pay for 3G. Likewise, Deutsche Telekom now owes $50 billion, and British Telecom $43 billion. (It's not all 3G; these firms have also been on acquisition sprees.) And here's the scariest part: there's no guarantee that 3G will fly.
How did the telecom industry get itself into this mess? The birth of UMTS just happened to coincide with the peak of the speculative rage for technology investments. In March 2000, the Spanish government sold some of the first UMTS spectrum licenses to four firms for a total of about $450 million, or roughly $12 for every Spaniard. "The market capitalizations of the companies that got these [licenses] rose by more than they paid for them," says Falk Müller-Veerse, European research manager for the investment group Durlacher. "So everyone said, 'We have to get these.'" Put another way, the stock market simply demanded that wireless operators elsewhere get on board the UMTS express. Asked why he paid so much for his UMTS license, one wireless ceo shrugs and says, "Do you know what my board would have done to me if I didn't?"
The real trouble came in the U.K. and Germany where, unlike Spain, the governments sold their UMTS licenses in auctions. The wireless operators bid prices for bits of the sky up to, well, the sky. Last year the U.K. and Germany won $32 billion and $45 billion respectively, sums that amount to almost $550 per capita. In total, European governments are likely to rake in $108 billion from the sale of UMTS licenses, according to Durlacher research. In hindsight, the telecom operators overpaid, since these days some UMTS airspace is tough to give away. Last month, Belgium found only three bidders for its four licenses.
"It was one of these giant gambles," says Ken Binmore, a University College London economist who helped design the British auction. "If 3G is worth anything, it is going to be worth immense amounts, but who knows if it will be worth anything?" Binmore — who is delighted with how the auction turned out for British taxpayers — adds that the telecom operators understood this risk going in. If anything, the technological prospects for 3G were even more doubtful a year ago. The big difference between then and now isn't the technology. It's the NASDAQ.