LONDON -- Nobody likes giving the government money. Telecommunications companies, which have found themselves in the unenviable position of laying out billions for third-generation (3G) mobile-phone licenses, may have found a way to defeat the best efforts of European governments' gouging of bidders.
The $35 billion the U.K. government recently raked in for five licenses for 3G mobile-phone services -- which will deliver a whole range of voice and data services -- caused much hand-wringing in the market, and telcos have consequently suffered.
To tackle the high costs of offering such 3G services, the telcos are jumping into bed with each other like never before. Yet these alliances may end up having a more profound effect than just sharing the cost of the licenses: It also could greatly reduce the actual cost of the licenses themselves. By reducing the number of bidders in each auction to a point where there is only one bidder per license, the telcos will have to offer just the minimum reserve price.
Come Together, Right Now
The likelihood of this scenario increased this week with the announcement that Holland's
will join up with the Hong Kong-based
to avoid competing in Europe for the licenses.
One of the first repercussions of the new troika could be that KPN's German wireless unit
will pull out of the upcoming German auction to bid jointly with Hutchinson's
. KPN and DoCoMo also are expected to take a stake in Hutchinson's U.K. wireless unit, which garnered an expensive U.K. license this spring.
With companies such as
pulling out altogether and the formation of alliances such as KPN and Hutchinson, as well as Germany's
, out of an original field of 12 bidders only seven remain. Consider that there were 13 original bidders in the U.K. auction.
That has led to speculation that the German government will offer fewer than the expected six licenses to make sure the auction earns near the $50 billion that analysts have been predicting. The German telecom regulator has denied the number of licenses will be cut, but because the authorities have always said they could auction between four and six, they may be now more inclined to sell four or five.
KPN said it still would bid separately in The Netherlands' auction, which begins Thursday. Some analysts believe, however, that Hutchinson and KPN would find it difficult to cooperate elsewhere in Europe if they remain competitors in Holland. If they do decide to cooperate and
carries out its threat to pull out of the auction, bidders may walk off with the licenses near the government's minimum price.
"The U.K. auction hurt telco operators and even eventually fed through to the equipment makers' shares," says Stephen Chamberlain, a fund manager for
Invesco Asset Management
in London, who is long a number of the mobile operators. But "the new reliance on alliance strategies has reduced the number of potential bidders
and it's looking increasingly likely it won't be nearly that bad" for telecom stocks.
Well, perhaps. The trouble is that once the dust around these auctions finally settles, the phone companies will have alliances to run and history has not been kind to many of these.
I'm a Lover, Not a Fighter
Alliances historically have been popular in Europe, as they have allowed companies to move across borders without having to deal with troublesome governments and regulators.
, for example, formed many alliances with foreign telcos in the 1990s for the simple reason that it couldn't buy the companies outright.
Many companies, however, have found that the marriage of a merger is always going to be more permanent than a love affair like an alliance; running a company that you own is obviously easier than managing an alliance with all of its competing interests.
One need look no further than last year's spectacular and acrimonious collapse of
, the erstwhile alliance between
, France Telecom and
The beginning of the end of this affair was caused by Deutsche Telekom's decision to barge in on
battle for control of
without first informing France Telecom. In retaliation, France Telecom called off its partnership with the German telco and the feud was brought to an end only in May, when the two agreed to unwind their cross-shareholdings, and France Telecom took control of the Global One venture.
Paul Mount, an analyst at
, says that in the past, some of these grand alliances between the large telcos have been undermined because there is so much at stake in the telecom market, and the overlap in the partners' businesses means the benefits from any alliance never can be fully realized.
"The alliance between BT and
has been successful maybe because they are far apart and there is no overlap in their businesses," Mount says.
For the mobile operators bidding together for licenses, Mount believes it may be easier to keep the alliance alive if the parties agree just to split up the spectrum that comes with the license and operate at a more superficial level.
This approach would follow the idea that one way to keep a relationship going is to see as little as possible of the partner.