Commentary: Why France May Hit the Wireless Jackpot

By Andy Reinhardt

The law of unintended consequences is alive and well and living in Paris. Early this year, when the French government proffered four 15-year licenses for third-generation mobile-phone services, only two takers stepped up for the $4.5 billion slots. Critics howled that France blew the licensing process. While the Germans collected $45 billion and the British $33 billion last year in licensing fees, the French waited so long that most telcos were too broke from the earlier auctions to bid. Worse, critics said that by botching the deal, France risked being left behind in the latest whizzy technology--wireless networks that should deliver voice, Internet, and even video starting in 2003.

But France's inability then to pawn off all its 3G licenses has precipitated a beneficial turn of events. Finance Minister Laurent Fabius announced on Oct. 16 that the cost of each of the four slots would be slashed to $560 million, plus a 1% to 2% tax on 3G service revenues over 20 years. The about-face came after license-holder SFR, a venture including Vivendi Universal (V ), British Telecommunications (BTY ), and Vodafone Group PLC (VODPF ), threatened Sept. 30 to withhold its first fee payment to protest the price tag.

LEAPFROG. Vivendi Universal CEO Jean-Marie Messier proclaimed the government's entrenchment "courageous." No wonder: Operators are thrilled at the lower price and prospects for better cash flow. But consumers may benefit as well as CEOs. Thanks to the change, France could leapfrog from laggard to leader in next-generation wireless data services. Among Europe's three largest mobile markets, "it's now in the best position," says Lars Godell, a Forrester Research Inc. analyst in Amsterdam.

The reversal also may prompt other countries to reassess their 3G policies. It's too late for Germany and Britain to return license fees, which have been paid in full. But with the European Union's encouragement, Germany has agreed to let 3G operators share facilities--saving them up to 35% in construction costs. Britain is standing firm, but may have to allow tax breaks or network sharing if telcos face continued financial distress.

The simple reason is money. Operators in Germany paid $550 per capita for their licenses. In Britain, the fee topped $567. They'll have to generate hundreds of dollars per year in incremental revenues per mobile subscriber to pay for the licenses and the billions it'll cost to build 3G systems. Staggering debt levels and weak credit ratings mean operators are low on the capital needed for 3G. In the end, customers in Germany and Britain stand to see slow deployment, spotty service, and high prices for years.

By contrast, French 3G operators will be paying just $9 per capita. That leaves them with more money to deploy 3G networks sooner. And with less outlay to recover, operators may be able to charge lower rates. A big success with 3G would be a welcome change for France, where mobile-phone penetration lags 10 percentage points behind the 65% European average. Home Internet access, at 20%, is about half of Britain's.

France's improved prospects are more a result of chance than of wise statecraft. Policymakers were desperate to recruit two more licensees. Without them, the country faced a troubling lack of competition for 3G services. Now, with the price of entry so low, the government is almost certain to sell off its two remaining licenses after bids reopen on Dec. 15. One likely contender is Bouygues Telecom, possibly in partnership with Japan's DoCoMo. The fourth slot is up in the air, but analysts speculate Spain's Telefonica may make an offer.

To be sure, lower French 3G fees won't cure all the industry's ills. France Telecom, Deutsche Telekom, and British Telecom spent heavily on licenses outside their home countries and confront staggering costs to launch services across Europe. Worse, some experts now question whether 3G will ever pan out, and advise telcos to invest in far cheaper upgrades to today's second-generation networks. Such technology will significantly improve mobile Net services. The result will not be as flashy as 3G but still serviceable.

French operators have agreed to an upgrade in exchange for the fee cut. So whether 3G flies or not, French consumers stand a better chance than many Europeans of getting good, cost-effective mobile data services soon. Other telcos may follow suit. For France, the old adage holds true: Smart is good, lucky is better.

Reinhardt covers technology from Paris.

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