The 3G waiting game; most operators may have written down the stinging cost of their UMTS licence, but there are still hard decisions to make

Telecommunications International, Feb, 2004 by Ouida Taaffe

In the summer of 2000, when six German UMTS licences were auctioned for DM98.8 bn ([euro]50.5 bn), there was a collective sharp intake of breath in the telecom industry. six interested parties and one actual bidder had fallen by the way-side, but not everyone was sure these were the losers.

The question that exercises the four companies that still intend to launch UMTS services in Germany and, indeed, those active in UMTS across Europe, is not how to recoup their licence costs. With the notable exception of Vodafone, most have already written those costs down. Their problem now is how to make a business out of 3G without cannibalising what they already have.

As the eye-watering bids made clear, the incumbents placed a great deal of value on getting UMTS spectrum. Not only was a bottleneck expected in GSM capacity, data services were viewed as an enormous money-spinner. In Germany, for example, when debitel withdrew from the race, leaving six bidders chasing six licences of two spectrum blocks each, Deutsche Telekom and Mannesmann Mobilfunk (now owned by Vodafone) continued to bid for three spectrum blocks rather than two. Unfortunately for them, however, their competitors refused to be intimidated. The upshot of this was that the German fiscus received an additional [euro]20 bn while the division of spectrum remained the same.

Demanding customers

"At the end of the day, without sufficient customers the licence is useless and no longer justifies such a high investment," Peter Wagner, the chairman of the board of debitel said at the time of his decision to withdraw from the German bid. "Our strength is in being close to the market ... We will help the licence holders solve their customer problem. This is a more economically interesting strategy for us," he added.

The question that begs, of course, is whether the licence winners actually have the customer base--and the customer services--to warrant launching 3G services. Quam--which was backed by Telefonica and Sonera--and Mobilcom--the France Telecom vehicle--both decided in the end that, in Germany, they did not. Mobilcom recently returned its licence with the stated intent of becoming a 3G MVNO. Telefonica could be required to return its German UMTS licence as no network has been built, but a decision on this is still outstanding. Telefonica itself has indicated that it would like to recoup some of its investment and that it considers an examination of coverage justified only when the technology is fully developed.

There are currently around two million UMTS users around the world, according to the latest figures from the UMTS Forum. However, these figures include Japan where uptake of data services has been comparatively strong.

In Germany, as things stand, both Vodafone and T-Mobile have around 20 million subscribers. The total population is around 80 million and the current ARPU at T-Mobile, the market leader, is around [euro]24. Neither Vodafone nor T-Mobile is in a hurry to launch UMTS services in Germany. Both are expected to begin their wide-scale consumer UMTS offer in the second half of 2004, a timescale that represents several delays and reschedules, particularly as the German licence conditions foresaw coverage of 25 per cent of the population by the end of 2003. The conditions did not stipulate full commercial services by that time, but this was, initially, the implication.

"It's pretty clear that [the delay] is really to do with the stability of the service and the handset range and capabilities," says Declan Lonergan, director of wireless research for EMEA at Yankee Group. "In the background, you do have uncertainty about some high-end services," he adds. Lonergan believes that the operators are right to take their time and make sure that the services function as they should. "There is every possibility that a full commercial service, through all distribution channels, could be further delayed," says Lonergan.

There is, however, another take on why existing GSM operators are not rushing into offering UMTS services. (Incidentally, none of the operators approached were willing to discuss their strategy in any detail.) "I think they will just drift into it. The more they push, the more it helps '3'['3' is the brand name of Hutchison 3G UK]. I don't think you'll see a real 3G business until late 2005, or the start of 2006. The [2G operators] are sitting on a cash cow and they will want to keep on milking it," says Brian Marshall, telecom business development director at the consultancy AMS, in Europe.

Financial analysts are not overly awed by 3's UK performance so far. ""I don't think that any of the UK operators have yet felt pressure to make a competitive response to 3. We suspect they would need to start taking significant market share (5 per cent or more) before that happens," says Chris Alliott, an analyst with Nomura Bank in London.

"We expect the structure of pricing to change with UMTS, with subscriptions increasing but the amount of inclusive calls rising by proportionately more. For the operators, revenue per minute is likely to fall but the companies will hope to encourage enough extra calling to more than offset that. The tariff plans will be structured accordingly," argues Simon Weeden, an analyst with Goldman Sachs in London.