Analysts To France: Cut 3G License Costs

date: 28th January 2001, source: techweb.com

France has been warned to slash the cost of its third-generation mobile-phone licenses by half -- or risk a future of expensive, non-competitive telephony.

After one of only two certain applicants for France's four licenses dropped out Wednesday, Forrester Research analyst Matthew Nordan said, "The French government risks fostering industry collusion that will keep prices high if it does not cut the costs."

The high cost of entering Europe's 3G mobile-phone market already appears likely to send operators into the red by 2007 and leave them unprofitable until 2013, Forrester said.

ST3G, a joint venture of Spain's leading carrier Telefonica and the French utility Suez Lyonnaise des Eaux, abandoned its bid, saying the $4.6 billion price tag for a UMTS license was too high.

Bouygues Telecom, an existing French mobile operator, and SFR, a unit of giant Vivendi, have said they are undecided. This leaves only France Telecom firmly committed to an application.

"The French blowout comes as no surprise in light of UMTS' grim economics," said Nordan.

The costs of the licenses are only the start of the cash drain on operators: They still have to deploy the networks, which Forrester said will cost about $4.7 billion per network -- as much again as the license fee.

And the research company believes this will cause average profits across the sector to start decreasing in 2003, turn into losses by 2007, and not return to the black until 2013.

France is planning to charge $4.6 billion for each of the licenses, which it is selling on a fixed-fee "beauty contest" basis where the quality of operators -- not the highest bids -- will determine who wins.

That equates to about $315 per head of population, higher than any of the European 3G auctions so far, except for those in the U.K. and Germany early in 2000 before the bubble burst. Italy, for example, netted only about $250 per capita.

But pessimistic mobile operators don't want to pay more than about half of the build cost in license fees, Forrester said, suggesting that the French government should slash the license cost by half to $2.3 billion, which would require a change in law.

"Otherwise," said Nordan, "industry collusion will hurt consumers. Operators like Bouygues will still find a way into the UMTS game [through alliances with successful applicants] if they fail to purchase a license.

"In the worst-case scenario, France could allocate one license to France Telecom that would be shared between all four initial applicants. Why must the French government avoid this at all costs? Competitors sharing a fixed capital investment will be loath to undercut one another on price, lest they drive their partners bankrupt," he said.

The bottom line in that situation, according to Nordan, is that customers would be faced with high costs and little price competition.

The high cost of entry as well as the failure, so far, of mobile Internet -- a key element of the 3G vision -- to entice consumers is depressing telecom stocks, said Phoebe Leet, an industry analyst at Dataquest.

"Due to the negativity surrounding WAP today as well as the high cost of many 3G licenses, investors have become jittery with regard to mobile-telecom stocks," she said.

Telecom companies interested in the French licenses must make their applications by Jan. 31. Winners will be announced in June.

top