The Mad Grab For A Piece Of Britain's Air Waves

Mobile-phone players are bidding billions in Europe's first big sale of next-generation spectrum

In a room at Britain's Radio Communications Agency in London's Dockland are rows of tables. Each has a sign with names such as Vodafone AirTouch and Orange PLC and a fax machine connected to the companies' bid teams located elsewhere. A few times a day, the faxes stir into life and disgorge a message, which an attendant then posts on a board.

The faxes are multibillion-dollar bids in one of the priciest high-stakes auctions of all times. The British government is selling five licenses to operate new, ultrasophisticated third-generation mobile-telephone systems. So-called 3G will allow customers to locate choice hotels or restaurants or do their daily banking chores by wireless. Experts expect the handsets to quickly evolve into devices with high-definition color screens, sound that is far superior to today's phones, and voice-recognition software that will do away with keypads.

TREASURY WINDFALL. No company with an aspiration to make it big in European mobile telephony can afford to ignore this sweepstakes. Bidders in the British auction range from Spain's Telefonica to MCI WorldCom Inc. of the U.S. What's more, the four existing license holders--Vodafone, British Telecommunications, Deutsche Telekom's One-2-One, and Orange--must stay in the race or risk having their existing businesses devoured by operators with access to better technology down the road.

The British auction may just be the start of the frenzy: The final prices paid in London could set the standard for other auctions on the Continent. And the prices are rapidly reaching the stratosphere. After more than a month and over a 100 rounds, the leading bids for the five licenses--dubbed A through E--add up to more than $20 billion. That's a windfall for the British Treasury and a model for other governments.

Rich? Of course, but the so-called m-commerce market in Europe is expected to grow from about $320 million last year to more than $20 billion in 2003, according to a study by Britain's high-tech bank, Durlacher Corp. "I believe we are in the silent-movie stage of the broadband era," says John F. Gregg, chief financial officer of NTL Inc. "There is enormous potential for applications on both fixed and wireless networks," he adds. The British-American cable operator and its 25% owner, France Telecom, have already bid more than $4 billion for a license.

Don't tell these guys they may be overpaying: They just point to earlier- generation wireless licenses that paid off. "What was true in the past is that whatever you paid for a license was a good deal," says Michel Bon, CEO of France Telecom.

Some of the hottest competition is between British Telecommunications and archrival Vodafone. They have driven the price of license B--the most attractive available to incumbents--close to $4.5 billion. Both companies feel that they will be weakened and their images dented if they don't grab the best span of spectrum being put on the block.

Yet these enormous bids already exceed what most observers expected--several times over. So it's no surprise that analysts, investors, and industry executives not caught up in the bidding war are starting to feel uneasy. They remember that some operators who overpaid for U.S. mobile licenses in the mid-1990s wound up going bankrupt. They also worry that so much is likely to be paid out on the licenses that companies' ability to invest in actual services will be crimped. Some even think that the costs are so high and the markets so unproven that 3G will never be built. "You have huge R&D and huge physical investments," says Serge Tchuruk, chairman and CEO of French telecom equipment maker Alcatel. "Who is going to justify it as a business?" Indeed, Sonera Group, the Finnish operator, dropped out on Apr. 4, suggesting that things were getting out of hand.

DELAYED PAYOFF. Winning a British license is just one hurdle in the race. Actually building the new system, which involves setting up towers for base stations and radio processors across the country, could add $6 billion to $10 billion more, figures John Hughes, president of Lucent Technologies Inc.'s mobile division. And the same exercise is likely to be repeated in each of the European markets. Germany, which plans to auction licenses for up to six providers later this year, may prove even more pricey because it has more potential users--80 million to Britain's 58 million. A company such as Vodafone could wind up spending up to $100 billion in Europe.

That can only mean that telecom companies, already the leading consumers of capital, are going to get even hungrier. It seems likely that European and other investors are going to be deluged with tens of billions of dollars in high-yield telecom issues and new equity offerings. Some of these may be a tough sell, especially if the pressure continues on existing technology issues.

Although telecom gurus paint visions of a brave new world where almost everybody lives through their telephones, the payoff from 3G could be a long time in coming. Futuristic Wireless Access Protocol phones are already available from companies such as Ericsson and Nokia, and they offer some Internet services. But they have been slow to catch on. It's far from clear what services will work on the mobile Web and how much they will bring telecom companies. "We have no idea how much we're going to charge for these services," says a senior executive at a Spanish phone company.

NEW CONTENDERS. To date, it's also far from clear who will prevail in this auction of dreams. One or more of the four 2G licensees in Britain could lose out to some of the serious new contenders with deep pockets. Besides NTL and France Telecom, they include Telefonica and MCI Worldcom. License A is reserved for a company or group not currently providing wireless service in Britain.

These players are still in the race, though five consortia--including a bidder linked to Global Crossing Ltd. of the U.S.; the private equity wing of Japan's Nomura Securities; and One.Tel, an Australian group linked to Rupert Murdoch--dropped out in early April. At these prices, it looks tough for new players to make money. The incremental investment in moving to 3G will be much less for existing players with billing networks, customers, and existing radio towers than for outfits starting from scratch.

But even the winners may face more rivals than they are counting on. Virgin Group's Richard Branson, who was bidding with Sonera, now plans to buy time from an existing operator and set up a "virtual network." He recently entered the British industry by lining up a similar arrangement with One-2-One for second-generation cell phones. Smart move: 3G is mighty attractive, but for those paying top dollar, mighty risky.

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