3G Auctions: A License To Bill?

Are the current rounds of 3G Mobile auctions providing European operators with a "license to bill"?

The auction for third-generation mobile phone licenses in Germany got off to a slow start on Monday after the seven bidders ironically suffered technical problems setting up the computer equipment needed to partake in the auction. Even so, competition for licenses in Europe's largest telecoms market was fierce with industry observers predicting that the results would be closer to the UK's recent hair-raising finalè (five licenses were awarded for a total of £22.6 billion - $33.96 billion), rather than the more sedate Dutch scenario (where five licenses fetched a total of F15.9billion ($2.49 billion), considerably less than the Dutch government's goal of F120 billion.

These astronomical licencing costs relate purely to the licensees rights to deliver 3G services and do not even cover development costs of 3G networks, which are unlikely to go live until 2002. As such, there has been widespread speculation that consumers will ultimately be made to foot the bill and that manufacturers of 3G handsets will also be made to suffer from the subsequent lack of demand.

Meanwhile, in Ireland, Etain Doyle, Ireland's Telecoms Regulator and soon to be 3G referee, announced that the Irish licenses will be awarded according to merit, through a process known as a "beauty contest". Other countries to opt for this approach include Czech Republic, France, Italy, Portugal and Sweden.

So, what is it that the roll out of 3G services will deliver that makes operators confident enough to pay such a premium in the auction rooms? What will 3G mean to consumers and wireless service providers? Do 3G licenses in fact represent "a license to bill"? And, is a comparative selection procedure, such as Ireland's "beauty contest", a more economically sustainable model for the awarding of these licenses?

What will the roll out of 3G services deliver?

3G is widely heralded as the next major step in the evolution of mobile communications. Thanks to new radio spectrum frequencies, it offers connection speeds up to 200 times faster than current rates (up to 2 million bits per second), enabling mobile phones to download data at much quicker rates than is currently possible and to offer permanent and instant access to the internet. With it will evolve a range of data services that its 2G (i.e. GSM) counterpart is unable to deliver. Such servioces will include true anytime, anywhere information services, mobile video and virtual reality conferencing, entertainment services, such as downloadable multi-media games, music and video clips and a host of location specific advertising opportunities utilising push technology.

At last, the myth that has been dubbed the mobile commerce revolution will become a reality and operators who are in early with 3G licenses stand to reap the rewards.

When will 3G become available?

While the promise of 3G looms large, industry analysts do not expect carriers to upgrade directly to 3G, but to do so in a series of evolutionary steps. There are two reason for this. First: Full-blown 3G is not ready yet, and probably will not be for another couple of years, when it is expected to first be deployed in Japan, followed by Europe and then the US (rollout in the US is not expected until 2003/2004). Second: It makes little sense for carriers to spend a lot of time and money upgrading the network to provide capacity that will not be needed for years (as the technology is not yet available) when a phased approach will reduce risk and cost for operators and ensure adoption of services by end users.

This being so, some believe that 2.5G, which will deliver much of 3G's ultimate potential, is all that anyone will ever need. But, according to analysts such as Lehman Brothers, with bandwidth hungry applications such as downloadable movies, games and videos, video conferencing and ultimately virtual reality conferencing, capacity needs will be tighter than operators have originally projected, and eventually 3G will be deployed ubiquitously.

This is why operators are prepared to pay premium prices at European auctions, even though the technology will not be available to deliver 3G services for another two years, during which time no income will be generated to offset the licenses' high price tags.

Where have licenses already been awarded and how were they awarded?

Countries that have already awarded 3G licenses include Finland, Spain, UK and Netherlands. In Finland a beauty contest approach was taken, elsewhere licenses were awarded to the highest bidders at auction. In Spain the licenses were awarded in March 2000, raising E200 million ($477 million). In the UK they were awarded in April 2000,generating £ 22.6 billion ($33.96 billion), and in the Netherlands they were auctioned last month, generating F15.9billion ($2.49 billion).

Monday saw the commencement of the 3G auctions in Germany, where analysts were predicting another roller-coaster ride for contenders, closer to the UK's hair-raising event than to the Netherland's rather gentler journey.

According to Bertrand Benoit of the FT, such predictions are due in part to the fact that Germany is a less mature market than the Netherlands, and, with 80m inhabitants, is potentially the biggest market in Europe. He reports that, according to RegTP, the regulator that will be hosting the auction in the Rhineland city of Mainz, Germany had 23.5m mobile users at the end of last year, more than any other European country except Italy, and about four times the level of the Netherlands. Meanwhile, market penetration, or the percentage of mobile phone users in the population, stood at 29 per cent in the same period, roughly a third below the UK or the Netherlands, meaning very attractive potential growth rates (RegTP expects 48m users by the end of the year).

According to the telecoms team at Lehman Brothers the forecast income generated from these auctions is considerable. "While we expect the competitive position in Germany to result in total proceeds below our prudent forecast of E65bn ($61bn), we think that s it will not be much less," they report.

Indeed, early estimates of around the E65bn mark have been revised, but only to about E45bn, which is also the forecast of the Musnich-based Ifo economics institute, and would be enough to wipe out this year's federal budget deficit. Such high prices are causing widespread alarm and speculation about how operators intend to recoup the money. It is predicted that, in many cases, these costs will have to be recouped from consumers, which will in turn slow down adoption and have a catastrophic effect on 3G handset manufacturers.

It is no surprise then that Ireland's recent announcement regarding a "beauty contest" approach has led to a positive response from potential 3G license contenders there. Given the increased access speed and availability 3G promises to deliver to mobile phones, the widespread interest operators have in the Irish licenses also comes as no surprise. Ireland's domestic operators, Eircell and Esat, have both announced their definite intention to contend. Global operators with a presence in Ireland, including NTL, Princes Holdings and WorldCom have also expressed an interest. And, it is widely rumored, some of the big telecoms companies that already have 3G licenses in the UK, including Orange and Vodaphone, will also contend.

What benefits does a merit based selection procedure for 3G licenses have over an auction approach?

According to Etain Doyle, Ireland's Telecoms Regulator, a merit based selection process will guarantee competitive pricing, choice and quality: "I am convinced that the optimum competition format for selection of the license for delivery of 3G services is a s "beauty contest". I believe that the "beauty contest" will best secure a regulatory framework which can achieve objectives such as the delivery of competitive prices, choice and quality," she commented.

Ms Doyle considered both the auction and the comparative selection, or "beauty contest" methods currently used in Europe for running a competitive process for the award of licenses. She chose the "beauty contest" method, claiming its advantages to be fourfold:

1. Critical success factors, such as speedy rollout and the extent of coverage, can be assured by requesting details about each applicant's potential in these areas and marking them on a comparative basis, thus encouraging applicants to excel in crucial areas.

2. Effective competition in the market can be better guaranteed by taking into account supply side considerations, such as the ability of 3G operators to roam on 2G networks and the entitlement of third parties to access mobile networks (MVNOs, resellers, etc).

3. Performance guarantees may also be invited from bidders and scored on a comparative basis to underpin commitments.

4. The considerable experience and expertise already available in this type of competition will ensure a speedy and effective process.

But can a "beauty contest" provide for the high level of transparency in the process of awarding of licenses that an auction can?

According to Ms Doyle, it can, but more important, in Ireland's case anyway, is the fact that it can limit the potential danger of operators passing on license costs to a small consumer base: "I intend to ensure that the greatest possible transparency consistent with the effectiveness of the process and protection of commercial secrets, is provided for in Ireland's competitive process. I also acknowledge the concerns that have been raised, following the recent UK 3G auction, about the potential impact an auction procedure may have on prices. This is particularly important in the context of the Irish market, where, given its small size and population density, the per capita fixed cost of building telecommunications networks is likely to be higher than in other larger markets.

"If fees proportionate to those charged in the UK 3G licencing auction were realized in Ireland, this, together with high fixed costs, might reduce the feasibility of achieving low prices to consumers," she advised.

The decision to proceed with a beauty contest was welcomed by Ireland's domestic telecoms operators. Esat and Eircell both argued strongly against an auction in consultation documents submitted to the regulator. The Eircell submission noted the "excessive bidding" in the UK auction and claimed that one operator, BT Cellnet, a sister company of its arch rival Esat Digifone, had overbid for licenses to raise the costs for competitors.

Global operators with an interest in the Irish licenses also welcomed the announcement. According to David Hughes, chief executive officer for WorldCom Ireland, a beauty contest approach to 3G licencing represents a victory for consumerism and common sense: "Elsewhere in Europe, the long awaited 3G mobile licenses were auctioned to the highest monetary bidder. The costs paid were astronomical and have led to much speculation about how operators intend to recoup the money. In many cases these costs will have to be recouped from consumers.

"The decision to award licensees according to objective, transparent, non-discriminatory and proportionate selection criteria will facilitate the development of competition and maximize benefits for users, ensuring competitive prices, choice and quality in the Irish telecoms market. It is a victory for consumerism and common sense," he commented.

In Conclusion

At the time of going to press, the results of the German 3G auction were not known, but one thing is for sure - big bucks are riding on the European 3G rollout. The increased speed and guaranteed instant and permanent connectivity 3G's new radio spectrum will allow look set to catalyze the types of services that will take the mobile commerce evolution to its predicted dizzy heights. This is why operators are prepared to pay such phenomenal price tags for 3G licenses. However, countries still finalizing their licensing arrangements should seriously consider the merits of a beauty contest approach, as opposed to an auction, if they want to create a competitive marketplace and assure consumers and mobile service providers that they're not just franchising a "license to bill".

About the author

Nicki Hayes is WirelessDevNet.com's European correspondent. She is a freelance writer and marketing communications consultant specializing in business to business Internet issues. She has contributed editorial to a number of publications including Guardian Online, Financial Times, Banking & Financial Training, eAI Journal and Secure Computing. She also edits WorldCom Ireland's monthly newsletter, Connect Online (www.wcom.ie/connect). Nicki is based in Dublin, Ireland, and can be contacted at nicki@hayes-singh.com.