The Anglo File: Next-Generation Mobile Licenses Are on the Block

With none of the bidders dropping out, the money raised by the government may be more than predicted.
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LONDON -- Going, going, but far from gone.

The total bids for the Universal Mobile Telecommunication System, or UMTS, mobile-phone licenses currently being auctioned off in the U.K. rose above 5 billion pounds ($8 billion) on Monday. And with none of the 13 bidders yet dropping out, it looks as though the amount of money that will find its way into the government's coffers will be considerably more than initially predicted.

The government is auctioning five UMTS licenses, which will allow the winning operators to create and operate third-generation mobile phone networks and services. License A is reserved for a newcomer, while the other four can be bid for by any of the bidders, including the existing operators

Vodafone AirTouch

(VOD) - Get Report

,

British Telecom's

(BTY)

BT Cellnet

,

Orange

(ORNGY)

and

Deutsche Telekom's

(DT) - Get Report

One2One

.

The auction process began on March 6 and is now in its 70th round. It consists of two rounds each day, when the companies competing in the auction place bids in multiples of 100,000 pounds. The process is open-ended and will continue until there are no fresh bids placed for each of the licenses.

The most powerful license is license A, followed by license B. The other three licenses are of the same size and are expected to command roughly the same prices. Yet what the final prices will be is anybody's guess with the total looking set to exceed the initial expectations of 5 billion pounds.

You Take Me Higher and Higher

In a traditional auction, bidders have what they call the maximum commission bid, the price they will not exceed, which is normally based on the estimate listed in the catalog. However, what the UMTS bidders are basing their maximum commission bids on is altogether more nebulous.

Third-generation mobile telephony "is a revolutionary product and there is no experience to go on, but there are indications from Japan and from fixed Internet access," says Juan Antonio Gil of

Cluster Consultancy

, a Barcelona-based telecom consultancy.

For example, Japan's

NTT

(NTT)

has found that the narrowband I-Mode service provided by its subsidiary

DoCoMo

is adding between 25% to 30% to average revenue per user, or ARPU. This is important, because ARPU from simple voice telephony is falling. The U.K.'s telecom watchdog, for example, found that the cost of mobile telephone services fell by 17% during 1999.

Fearful of becoming pure infrastructure suppliers, like today's Internet service providers, the mobile operators will try to position themselves to participate in transaction revenue and billing. Many of the operators have already either developed or are developing mobile portals and are striking deals with content providers. They may, ultimately, use their high valuations to acquire a bank.

The investment and research firm

Durlacher

believes that the European market for m-commerce will increase from 323 million euros in 1998 to 23.6 billion by 2003, while British Telecom believes that the worldwide mobile e-commerce market will be worth $200 billion in four years when there will be about 14 billion transactions a year.

While many believe that the wireless Internet will likely involve less surfing and more transacting, there remains the billion-dollar question of whether the new opportunities opened up by UMTS will be enough to offset the decline in revenues from traditional access services.

A Bid Too Far

The higher returns envisaged for wireless data over voice are, to a large degree, dependent on the assumption that the spectrum and wireless network capacity will be limited in relation to demand. As long as capacity constraints apply, access to wireless data services will be demand-based as opposed to cost-based, providing operators with high margins and high returns on capital employed.

Yet, while these capacity constraints are certain to exist over the medium-term, wireless broadband access will, like its fixed counterpart, eventually become a commodity.

There is also the worry that what is driving the bids ever higher is less a case of sound economics than the more elemental fear of missing out. And with the sums of money reaching the billions of pounds and the bidding increments of a mere 100,000 pounds, it may be all too tempting for the bidders to keep inching up their maximum commission bids.

A combination of fear and uncertainty undoubtedly makes for fascinating viewing. It will also ensure that the bidding has some way to go before we hear the final hammer.