Commentary: Europe's Wireless Auctions: Give The Money Back

The huge amounts required for winning bids could cripple small players

Mobile spectrum. These are the airwaves reserved for cell-phone signals, and for a few months last year in Europe, spectrum for the so-called Third Generation wireless networks was as popular as the fabled Dutch tulip bulbs. Europe's phone companies dug deep into debt to win auctions in Britain and Germany.

But now they're running the other way. In late January, a ballyhooed spectrum sale in France fell flat. Policymakers should seize on the debacle in Paris as a chance to reevaluate the auction process. Otherwise, Europe's superiority in cell-phone technology could collapse under the weight of billions in added costs.

The French sale was supposed to be a revenue-raising triumph for the government. Last year, Germany and Britain raked in a combined $83 billion by selling 3G licenses. Paris calculated that by fixing the price at what appeared to be a reasonable rate--$4.6 billion each for four licenses--the government could mine some spectrum gold, but without crippling the competitors. But in today's downbeat market, the price is far too high: Only two companies, government-controlled France Telecom and a Vivendi-Universal-led consortium, stepped up with the money. That leaves the other two licenses begging.

IN THE RED. This is bad news for the French public, which faces a likely price-gouging duopoly unless the government hustles up another player or two on the cheap. But at current prices, it's a tough sale. After all, the victors face a heavier debt and an obligation to build a hugely expensive new phone network, all to compete in a market where the payoffs are both distant and hypothetical. A costly bet? That barely begins to describe it. According to a Forrester Research Inc. study, building 3G will be so expensive that mobile operators' earnings will nose downward in 2003, go negative in 2007, and stay in the red through 2013.

The 3G license auctions are turning out to be one of Europe's biggest public policy blunders. It's clear now that the British and German governments erred by using the auctions as an up-front tax on a nascent industry. The phone companies had to bid, since to renounce those key markets was to die. That left the telcos only one choice: Risk drowning in debt to survive. Now the entire industry is staggering under an extra $125 billion in debt, draining capital markets from New York to Frankfurt.

Something has to happen--something radical. Here's a suggestion. Even though most of the licenses have been granted, Europe's governments should grant the telcos huge refunds on them, giving back much of the license fees to finance the network investments. In exchange, the telcos would agree to honor tougher provisions for future service, perhaps agreeing to sell excess capacity to industry newcomers. And then, once the networks are in place, the governments can make back the money by taxing profits. These are bound to be larger in a vibrant industry.

Politically, no doubt, granting refunds would be a nightmare. For the left, it means taking back money already earmarked for pensions and health care and, in effect, giving it to some of European industry's fattest cats--companies like Vodafone, Deutsche Telekom, and British Telecommunications. For conservatives, it means forsaking the results of an auction, surely the most impartial system, and giving billion-dollar decisions back to politicians.

Yet the stakes in the 3G buildout are far too high to soldier on with a failed policy. Without a fix, Europe's mobile Net runs the risk of falling flat. Worse, the combined costs of license fees and buildouts would cripple most of the players in the European telecom industry and lay the groundwork for a market domination that could exploit consumers.

The problem is competition. Market leader Vodafone Group PLC can afford the overpriced licenses, even if its stock sinks and its debt rating risks a downgrade. But the smaller fry in each market will be hard-pressed to survive. Take the Sonera-Telefonica-led consortium in Germany. It faces $7.7 billion in license payments and a $6.7 billion network investment. This is all to grab 13% of Germany's 3G market.

Smothering competition by overcharging for licenses could cost Europe dearly. The Europeans lost out on the first round of the Internet but can catch up and even leapfrog America with the mobile Web. Indeed, Europe is ahead in the mobile race precisely because of its successful industrial policy in the early 1990s. While the U.S. left its mobile system to the forces of markets and wound up with a fractured system, Europe settled on one technology standard, charged little for licenses, and raced ahead. The mobile Web is Europe's chance to extend its phone lead into cyberspace. That's not likely to happen, though, if government ineptness hobbles the entire field at the gate.

Before it's here, it's on the Bloomberg Terminal.