- The Guardian,
- Friday December 22 2000
It is a $300bn gamble. The stakes are so high even hardened financial regulators who have watched countries go to the brink and beyond are starting to feel twitchy. The big rating agencies have added their voices to a chorus of caution. Indeed there are now so many people saying, "there is no need to panic but ...", it is hard not to feel worried.
The cause of this angst? The extent to which the banks have backed the European telecommunications industry's rush into the world of third generation mobile telephone networks.
These promise to provide "always on", high speed internet connections enabling mobile phones to transmit video images and run computer games across the web.
Between the cost of government auctions for the digital wireless licence and the price of setting up a new network, the bill will top $300bn (£204bn).
Little wonder, then, that there are those who wonder if 3G threatens to become a black hole into which even the most solid balance sheets might disappear.
Regulators are worried about the banks' exposure. Investors who dream of a wireless world generating a quality stream of earnings may find it turning into a nightmare of overspending and underperformance. So far only taxpayers in countries such as the UK and Germany - which milked every penny and pfennig from the auctioning of licences - are laughing.
In theory 3G looks like a steal. Traditional wireless technologies are circuit switched, 3G is built so it can handle packet switched data. The difference is enormous - in terms of traffic it is rather like driving from a country road onto a 10, even a 20 lane highway.
While the old networks are fine for voice traffic, the new generation will be able to do much more. If the networks work the same way as roads, where the more capacity you build the more traffic is attracted, then nobody in the industry will worry about that.
Nor are the numbers as scary as they look. On the basis of by no means unrealistic projections for the numbers of Europeans who will have a mobile phone over the next few years, some analysts think those firms which have splashed out on 3G need only generate around €2 per subscriber a month over the period of the licence to get their money back.
But not everybody agrees. At the beginning of the year telecoms was the place to be. Investors were clamouring to fill their portfolios with stock. Vodafone's daring bid for Mannesmann of Germany showed what could be achieved - although the deal meant Vodafone had to sell on Mannesmann's Orange business, there was never going to be a shortage of takers.
Then the world changed. Britain's 3G auction - which raised $35bn - showed how much might have to be spent. Germany managed even more - $46bn. Even with the love affair with technology ending, governments have wrung $120bn out of mobile phone companies.
Suddenly investors began to worry about what the cost would do to balance sheets. The gloom enveloped those who missed out in the auctions. This week shares in Telia, the Swedish state-owned company, plunged because it did not win a 3G licence at home.
Pekka Sivonen, chairman of leading Finnish wireless software firm Digia, says that makes Telia a target for hostile takeovers. "I think it could now be an acquisition target for somebody since they are not even on strong ground on their own territory," Mr Sivonen told the Guardian. "I really believe the decision is not beneficial for the mobile industry in Scandinavia. I've always been a strong supporter of a free market economy and old companies being challenged by new ones, but this is not good."
At the same time many experts wonder what a successful 3G launch would do to revenues from the fixed line business owned by former state-owned monopolies such as BT, France Telecom, Deutsche Telekom and Telefonica. Speculation that the industry will not be able to support all the current players is growing.
Events in the wider world have conspired to add to the woes. Investors have taken fright at the glut of bad news coming from the hi-tech sector. This week AT&T announced an 80% cut in its fourth quarter dividend. Lucent yesterday announced larger than expected losses in the current quarter.
There are those who suggest that rolling out the networks could prove more expensive than the operators may have imagined. As demand on a network base station grows, the area it can serve shrinks - so operators who reckon they can use the same number of base stations for 3G as for existing networks could find holes in their coverage.
Nor can the operators simply pull back the old and roll out the new. Many customers will want to stay with their existing phones, however outmoded, so operators will have to maintain existing coverage alongside the 3G networks. New entrants face no such hazards - but they do not have the existing customer base.
But the advice is not to panic - equipment providers reckon they can lick the technical problems. New equipment can be installed alongside the old.
Existing operators may choose to hedge their bets by opening their networks to new entrants. BT Cellnet is already considering that option, and while those who live in rural areas may have to wait for the brave new world of 3G technology, subscribers in urban areas will find themselves at the front of the queue once the roll-out is under way.
Lloyd Carney is a man with a lot riding on the way the 3G business develops. He is president of Nortel Networks' wireless internet solutions business. Nortel is a leading player in the 3G network market. It has won more than $2bn of infrastructure business in Europe with contracts from BT Cellnet, Xfera and Airtel in Spain and T-Mobile in Germany. Yet despite the doubters, Mr Carney is relaxed, even bullish about the outlook - not least about Europe where, unlike the US, the industry has addopted a single standard.
Even so he admits that some things will have to change. The future will belong to those who provide "value added" services, companies with a multimedia focus. "Voice [calls]," he says, slightly dismissively, "is the cost of entry. You have to be doing more to succeed".
The higher margins, say Nortel, will be found in the additional services third generation nets can provide. Although Mr Carney points to the business market as an important area, he reckons the retail market will provide lots of opportunities.
Think of the music business, of consumers being able to download the latest from their favourite artists from the internet. Music companies are spared the expense of making and distributing the physical product while consumers are much more likely to buy on impulse.
The far east has been a test bed for 3G services. In Japan, the phenomenal success of "i-mode" has driven the growth of web-style mobile phone services.
With more than 9m users, i-mode provides teenage must-haves such as horoscopes, ticket booking and chart news, with new downloadable melodies.
The service is so popular that its operator, NTT DoCoMo, had to halt sales and advertising temporarily last month because demand kept crashing its system.
The way in which services are delivered and billed will have to change, too. Mr Carney thinks the idea of billing by the minute will have to go. Consumers will have to be offered different levels of service depending on functions offered.
The equipment to which such services will be delivered will also have to change. Mr Carney believes future devices will look more like consumer electronic devices than today's conventional handsets.
If Mr Carney is correct, that could have serious implications for mobile phone makers lacking the experience of consumer electronics that is second nature to some Asian equipment makers.
"This whole 3G thing is different - different services, different business model."
• Additional reporting by Andrew Osborn
