UK faces 3G failure

One of Britain's five 3G licence holders will fail unless the government renegotiates the contract, say analysts

At least one of the UK's five forthcoming 3G networks is doomed to failure, unless the government is willing to renegotiate the conditions of the licences that it auctioned for £22.5bn last year.

This is the conclusion of Northstream, an analyst firm which has just published the results of an investigation into the business case for 3G -- the mobile phone technology that will offer a constant high-speed connection to the Internet and should roll out across Europe over the next three years.

Northstream found that an operator who tries to set up a 3G network in a country where it does not already operate a mobile phone network -- known as a "green field" operator -- will struggle to succeed. It also calculated that the high licence fees paid in some countries -- such as the UK -- will have a detrimental effect on users as it will make it significantly harder for operators to break even.

The implication is that at least one of the five companies who successfully bid between £4bn and £6bn for a 3G licence in the UK could fail. "I doubt that all five companies will be successful, given the high licence fees. It will be particularly difficult for Hutchinson, the green field operator," said Johan Ragnevad, strategic advisor at Northstream. Ragnevad thinks that the UK has a high enough population density to support four rival 3G networks, though.

In last April's auction, the most valuable 3G licence was reserved for a new player. It was won by Hutchinson-Whampoa of Hong Kong, which backed a £4.38bn bid from Canadian company TIW. The other successful bidders were Vodafone, BT, One2One and Orange, who all currently operate mobile networks in the UK.

The government rejects suggestions that it made a mistake by auctioning off the 3G spectrum to the highest bidders, rather than holding a "beauty contest" that would have awarded licences to the companies it believed would make the best use of a licence. It believes that the licences fees will act as an incentive to roll out 3G networks and services quickly.

The government also denies that the costs of a licence will be passed on to the consumer. A DTI spokeswoman said: "The mobile phone operators, seeking to maximise revenue, are likely to set the cost for 3G services at a level which encourages consumer take-up, whatever the cost of the licences. If companies set prices too high, both demand and revenue -- and hence profit or return on investment -- will fall."

However, Northstream appears to have the facts to back up its claims. "Our calculations show that, to achieve profitability, an operator who did not have to pay a licence fee will only need an Average Revenue Per User (ARPU) of less than 70 percent compared to that required by a typical licence-paying operator," said Bengt Nordstrom, president of Northstream.

With commercial 3G networks not expected to roll out before 2004 in Europe, Northstream believes there is time for the British government to make amends, a though its options are limited.

"They can't give back the money, because there would be an outcry from the unsuccessful bidders and they can't really make it easier for the operators to run the networks, because the UK licences already have relatively loose conditions of coverage and service levels," said Ragnevad. He suggested that the British government could instead consider giving more 3G spectrum to the operators.

However, the government claims that this isn't possible. "There is no more spectrum currently available for 3G. At the time of the auction all the spectrum identified for 3G was made available apart from a small amount designated by a Common European frequency plan to be reserved for unlicensed use," insisted the DTI spokeswoman.

The World Radiocommunication Conference which operates under the auspices of the International Telecommunication Union, has identified extra 3G spectrum which, it says, could be available for allocation by 2005, but the government hasn't made any decisions over its use.

"Part of the broader issue of growth of the 3G market is whether there will be a need to 'refarm' spectrum currently identified for 2G use to 3G. The Government cannot yet make any commitments to the existing or potential operators on when and how refarming would be implemented in the UK," explained the spokeswoman.

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