3G debt threatens future of telecommunications

European telecommunications companies are facing a new crisis that threatens to bring them to their knees within two years, stifling the development of next-generation wireless innovations and even stalling the economy, experts warned Wednesday.

The threat has emerged from just one source, the unprecedented sums paid by telcos for licences to UMTS, the technology that is expected to revolutionise communications with cheap, high-bandwidth wireless connections.

The amount companies such as BT, Vodafone and Deutsche Telekom have now committed to pay as much to get UMTS (or 3G) up and running is now equal to the value of the entire European telecommunications industry today, according to analyst group Bear Stearns.

That figure includes the funds telcos around Europe have spent on 3G licenses, as well as what they are projected to have to pay to set up infrastructure and to fund 3G operations until they make a profit.

UMTS auctions across Europe, but particularly in Britain and Germany, have resulted in an unexpected windfall of billions of pounds for national governments, but have depleted telcos' coffers and locked them into expensive loans.

And there are more expenses to come, as companies rush to build UMTS infrastructure and then struggle to make 3G pay back the costs -- expenses which amount to even more than has already been spent on licences.

These debts have now mounted to such a level that the success or failure of 3G may not even matter. "It's not a matter of whether or not [3G] makes money once it is rolled out, it's a matter of the providers surviving through the startup phase," said John Allen, chairman of ARC Associates.

Allen was speaking in London at Convergence 2000, a day-long forum organised by the Global Communications Society.

3G licences are seen by telcos as a necessary investment, affording them control over a technology that could become as important and ubiquitous as today's wired telephones. This enthusiasm led to massive expenditures on 3G spectrum auctions earlier this year.

The surprise costs could not have come at a worse time for the industry, with the bottom falling out of "new economy" shares in April. Forty percent of the market value of the European telecommunications sector has been destroyed since March, according to Bear Stearns. "Telcos have spent too much money on UMTS... they have come up to funding walls, their access to funding has become limited, their balance sheets have become restricted," said Michael Phair, global co-head of telecoms for Bear Stearns.

3G is not expected to start making money until 2006 at the earliest, but the crisis could come much sooner than that, Phair said. "This is being funded on the back of three-year loans. So in two years' time, or even less, if it seems like this market isn't as attractive as it could be, you can just imagine what could happen," he said.

One scenario: if the market completely loses faith in UMTS, companies who have bought licences could be forced to offload them to competitors such as AT&T or WorldCom for a fraction of their original price. "It isn't the person who buys a licence the first time who makes a lot of money, it's the person who buys it the second or third time," said ARC's Allen.

Set against this gloom is the genuine opportunity for communications technology to achieve amazing growth in the next few years, and to drive the global economy forward by eliminating international barriers.

Based on present trends, experts say it is not unreasonable to expect global communications traffic in 15 years' time to be 2,000 to 3,000 times what it is today, while costs of units to be 1/1000 those of today. Transatlantic communications capacity is roughly doubling every 18 months, making it possible for the first time to carry out business on a worldwide level without incurring steep communications costs.

"The world is becoming one huge market," said David Cleevely, founder and managing director of consultancy Analysys Group. But even an admitted techno-optimist such as Cleevely said 3G and the uncertain rollout of broadband could throw a wrench in the works.

"It is the rate of innovation that drives economies," he said. "My worry in the long term is that the stock markets overreact and there's not enough money flowing around to encourage that innovation."

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