Sky high price fear for German 3G auction confirmed

As the German auction for third generation mobile spectrum tops £22bn, experts debate the wisdom of the auction system. It fills government coffers, but is it the best way forward for the burgeoning 3G market?

The high price being paid for spectrum to power the 3G mobile revolution means operators are finding their bank balances decidedly empty after winning them. In the UK, the auction raised £22.5bn for government, leaving analysts wondering how operators would finance rollout.

Nigel Deighton, analyst with research firm GartnerGroup believes bidders in the European auctions are playing a dangerous version of Russian roulette. "Players were climbing a war of fear, worried about losing out," he says. "But the truth is even if they did get a licence, many will lose out. The chance of making money after paying out for licences is remote."

This view is shared by Joe Barrett, the head of 3G marketing at handset manufacturer Nokia. He favours the "beauty contest" system where spectrum is allocated to operators. "Someone has got to pay somewhere," he says. He believes the system in Finland, where 3G licences were given away, will help sustain the Nordic region as the mobile leader.

"In Finland licences were given away which is why there is 70 percent penetration and call charges are low," he says. Norway has also decided to favour the beauty contest system when it distributes its 3G licences.

Analyst with Bloor Research Mat Hanrahan does not subscribe to the view that crippling licence fees will restrict services. He points to the deals Japanese firm NTT (Nippon Telegraph and Telephone) has done with UK license holders TIW, Orange and Vodafone and also the recently announced deal between Orange and ntl to prove that licence holders have a way of winning friends and influencing people that will justify the huge fees they paid out for spectrum and please the City.

"Basically everyone wants a piece of the wireless market and doing deals with licence holders allows other firms to come through the back door," he says. "Wireless services have massive potential and everyone is bidding on that potential."

Barrett agrees that the sums will add up once services start becoming available. "Mobile will drive the Internet to focus more on mobile users. There will be thousands more services which will generate revenue for operators. Then the licence fee won't make that much difference."

There are twelve remaining contestants in the German 3G auction, including MobilCom, Hutchison, Mannesmann and T-Mobil.

Look out for the 3G Special coming to ZDNet soon

What do you think? Tell the Mailroom. And read what others have said.