LONDON -- Oh, what a tangled web we weave.
By forming alliances, the mobile-phone operators may have defeated the best efforts of European governments to obtain as much money from them as possible through the auctions for licenses to operate third-generation mobile-phone services. However, they have left themselves with the monumental headache of making these alliances work. (For a primer on the wireless world, check out this recent
It's fair to say that the U.K. government, by being one of the first countries to auction off these licenses, took full advantage of the inexperience of the telecommunications companies. (The licenses will allow operators to offer third-generation mobile services such as data and video.) There were 13 telcos initially going for the five licenses on offer and they bid the total up to $35 billion.
To lose $35 billion once might be regarded as misfortune; to lose that amount a second time would look like carelessness.
Fearing rightly that investors would not take kindly to such large amounts of money being thrown into the hands of other governments, the mobile operators are striking up
myriad partnerships to offset the cost of these licenses, and indeed the considerable amount to build the infrastructure needed for 3G.
A somewhat fortuitous result of these alliances has been that the number of bidders in each auction is being reduced to such a degree that in some cases there may only be one consortium bidding for each license, rendering the auction process largely redundant.
Together We Stand...
In the auction for the six German licenses, for example, the field has been narrowed to only seven bidders after Dutch telco
unit announced they were forming an alliance with
. This partnership is also having an effect on Holland's auction, where there are now only six bidders left for five licenses.
All this will undoubtedly bring down the costs of the licenses, but the sheer number and complexity of the alliances being struck up is likely to cause problems for the mobile operators later on.
"Well, Vodafone did have to pay out a shedload of cash for the U.K. license and there were fears it would have to do the same in Germany," says one private banker, who declined to be named but is long
. "But there may be problems down the road with these alliances. I guess it's a case of damned if you do, damned if you don't."
To avoid the considerable investment both in terms of manpower and money needed to run a successful alliance, a simplistic solution might be to just split up the spectrum between the partners. However, this is not feasible as it would contravene the regulations governing many of the auctions. And technologically, the operators will need most of the bandwidth allocated in a license to offer the whole range of 3G services.
The upshot is that the mobile operators have made their beds and now they must lie in them.
Divided We Fall
Alas, the history of alliances between telcos isn't encouraging. The
fell apart spectacularly last year when Deutsche Telekom bid for
without informing its partners. (
took a closer look at a possible Sprint-Deutsche Telekom deal in a recent
And there were reports this week that the
is foundering as the partners have their hands full with difficulties at home.
Although it could be argued that there are big differences between alliances of long-distance network operators and those of mobile operators, the latter are likely to have their own set of problems.
In their rush to jump into bed with each other, these telcos have managed to gain partners in one country, but will be competing against those same partners in others.
For example, British Telecom has an alliance with Germany's
in Germany, yet is bidding against a Veba/Viag consortium in Switzerland. In France,
will bid against France Telecom for a license, but in Spain,
, which is owned by France Telecom, has formed an alliance with Vivendi.
Yet the telcos can do a number of things to mitigate the problems, which investors should be on the lookout for.
Fredrik Johnsson, a consultant with Barcelona-based
, which has carried out work with a number of the telcos involved, believes there are two key elements that an alliance must incorporate to be successful.
"I think for me it's clear that each partner must have a role within the alliance," says Johnsson. By this he means that the technical partner must be allowed to take control of the technical aspect of the alliance and the financial partner must be in charge of the finances.
An example where this could be applied is the recent alliance between KPN, DoCoMo and Hutchison. DoCoMo could bring its expertise in the technical department that it has gained from the success of its domestic iMode service, which Johnsson describes as "2.5G" technology. Hutchison clearly has both the financial clout as well as experience in offering mobile services in many countries around the world.
Second, Johnsson argues that the number of people working within the venture and their level of responsibility must reflect the equity structure of the consortium -- otherwise the employees may take the venture in a direction that the board does not necessarily agree with, leading to conflict and stalemate.
Of course, carrying out the above does not guarantee success. As a result, investors should be mindful that these alliances are likely to be restructured many times, with partners joining and leaving, and the attendant impact on share prices that such occurrences will have.