Governments eye UK mobile windfall

Date: 04/05/2000

By Tim Jones

STOP talking, switch off your mobile phone, listen hard and you will hear Europe's treasury chiefs drooling as they stare across the English Channel.

For the first time, they are looking at British Finance Minister Gordon Brown - the perennial euro-outsider - with envy rather than a combination of pity and irritation.

For it is the dour, dismissive Scot who last week collected a staggering €38 billion for his already bulging government purse just by auctioning five licences to operate Universal Mobile Telecommunications Services (UMTS) networks.

Before this auction - the first of its kind in the world - nobody would have guessed that mobile-phone companies would place such a value on borrowing chunks of radio spectrum for 20 years to operate UMTS or third-generation (3G) services. The top estimate from Brown's office was a trifling €5 billion.

Everyone knew that these increasingly global firms were desperate to get into UMTS - a standard which enables data to be transmitted at two million pulses per second compared with the 114,000 pulses permitted under the most advanced 2G technology. With such a tool, 3G phones will be able to send and receive Internet data and video images at phenomenal speeds.

The commercial opportunities for the phone operators are immense and they are prepared to pay top prices for them. In the wake of the British auction, consultants Booz, Allen & Hamilton now estimate that the cost of building a pan-European UMTS network - combining unified phone services, Internet access, mobile commerce business transactions and entertainment - could top €40 billion.

Vodafone AirTouch, the global market leader now capitalised at a gargantuan €300 billion, is set to be the first to achieve this goal. At the moment, customers on its networks - Vodafone in the UK, Mannesmann in Germany, Omnitel in Italy and Airtel in Spain - have different numbers to access e-mail, voice-mail and other services. As UMTS rolls out, the group will offer a single number and unified content for all users. This was why the firm was prepared to bid €10 billion for its UK 3G licence alone, and there is nothing a seller likes better than the appearance of desperation in a buyer.

The Finnish and Spanish governments, which handed out their licences on the basis of the strength of each company's bid based on the cost and scope of services, must be rueing the day they chose such 'beauty contests' over a UK-style auction.

It was not until the British industry ministry rang the bell after Round 134 of its uniquely transparent auction, designed by leading 'game' theorist Ken Binmore, that the real value of scarce radio spectrum to mobile operators became clear.

Finance ministries across the EU quickly recrunched their numbers. Italy's centre-left coalition, which had been planning to hand out four licences to its existing operators plus one new entrant and raise a maximum of €2 billion, has now opted for an autumn auction and pencilled in a cash cascade of €15 billion.

The biggest cash-cow of them all will be Germany's spectrum. Bidders were announced last week for Berlin's auction in July, from which Finance Minister Hans Eichel expects to rake in a 50-billion-euro windfall and use it to pay off public debt.

Last week, Mannesmann and Orange (now both owned by Vodafone AirTouch), Germany's land-line front-runner Deutsche Telekom, US giant MCI WorldCom, Finland's Sonera, Dutch-owned E-Plus, Swiss-owned Debitel, Viag Interkom and France Télécom's Mobilcom all declared themselves bidders.

Only France is holding out, fearful that auctioning its four 15-year UMTS licences would cost the existing operators - France Télécom's Itineris, SFR and Bouygues - so much that they would scale back low-return services in rural areas.

Last year, these operators paid a mere €30 million in licence fees. Paris intends to hike 'entrance fees' to the new UMTS-earmarked spectrum to take account of the value revealed by the UK auction, but keep clear of a bidding war.

The divergence in approaches to the spectrum infuriates Deutsche Telekom chairman Ron Sommer. Announcing the company's 1999 profit figures last month, he said it was "incredible that Brussels is not concerned" that some countries were offering licences "for virtually nothing" to national operators while the UK, Austria and Germany were auctioning them for "astronomical sums".

'Brussels', in the form of Enterprise Commissioner Erkki Liikanen, is concerned but not in the way that Sommer thinks he should be.

The European Commission has no powers to harmonise the way telephony licences are allocated beyond the strictures of the 1997 licensing directive, which forbids governments from charging fees beyond their administrative costs. However, there is one major exception to this rule: charges for radio spectrum can soar but only as a reflection of its scarcity and not as a revenue-raising exercise.

This is where treasuries and cash-hungry ministers will have to be very careful with their utterances. An aggrieved, 'overcharged' mobile-phone firm could sue a government for violating the directive or complain formally to the Commission.

The British, for all the talk in the press about Brown's windfall, have been scrupulously cautious. "The whole design of the auction was based on ensuring that companies which could get the most profit or value out of the spectrum got the licence," said a UK official. "Governments cannot do that. The best way is to get the companies to put their money on the table."

The Binmore-designed auction eschewed the use of sealed bids. Instead, submissions were made by fax and published immediately on the Internet. Every company was able to assess, based on the cash-sum bid, the business case made by each party for each licence.

Supporters of the 'beauty contest' approach argue that all the licence-winners went well beyond the business case for their offers, since the 3G networks will cost more than €4 billion to build and it will be 15 years before any of them start making a profit.

"There is a temptation, I think, to bid to drive out the most dangerous competition," said a French official, citing the recent auction for Turkish licences. There, Telecom Italia and Turkish bank Isbank stunned competing consortia led by Telefónica, US group SBC and Norway's Telenor by proposing €2.7 billion for a third licence when their estimates of its value could not get over €1.45 billion.

British officials dismiss French claims that the licence costs will be passed onto the 3G-technology consumer, arguing that intense competition will force companies to treat the licence as a 'sunk cost' and aim to get their networks up and running quickly.

"If 3G services are too expensive, people will stay with the 2G technology, which is becoming more advanced all the time," said a UK official. Besides, the government has already announced adjustments to tax rules to allow the winning companies to write off licence fees over its 20-year life, so saving €11.5 billion.

There are already signs that future auctions will see diminishing returns as pan-European companies wise up to the alternatives. Even before the German auction began, companies approached Debitel, the country's fourth-largest 2G service provider, and asked to piggyback on its spectrum and offer branded services. MCI WorldCom and the Virgin-led Spectrum consortium have talked about doing likewise in the UK.

France Telecom also offers alternatives to winning a licence. The company, through its 30%-owned NTL Mobile vehicle, lost out on a British licence but is now a front-runner to buy Orange, which bagged one.

The British, it seems, have secured first-in advantage.

Major feature.