3G Licensing Mess Continues
By Steve Wallage, Wed Nov 07 00:00:00 GMT 2001

The debacle of the European 3G licensing will continue to haunt the industry. We can now look forward to a period of compromise bedevilled by uncertainty and legal challenges.

Much has been written about the sorry state of European 3G licensing. With hindsight, perhaps it can be compared to stock prices in the dotcom boom. Mobile operators in confident mood, urged on by financiers who could still make 3G look a sure-fire investment even when they thought every European country would have a competitive auction.

Yet, this picture is only half-true. Only seven European countries actually held auctions, and of the license monies raised nearly 75% filled the pockets of the UK and German governments. Its worth remembering that in the UK and Germany, the license costs totalled more than Eur600 per inhabitant! At least the dotcom phenomenon was a 'free market' while the license costs were a tax on the industry, with the UK government even appointing 'bid simulation' experts to maximize the amount raised.

Of course, the market looks very different now, as indeed does the behavior of the players. The mobile operators were fierce competitors in the early auctions - for example, in the UK the price was driven far higher by NTL's reluctance to withdraw from the bidding. Now, these same mobile operators are looking at ways to co-operate.

The European governments are now realizing that their role in 3G is more than that of tax-collectors, yet are plagued by uncertainty as to what to do. The same is true of the European Commission. They initially had the bright idea that, "it is the responsibility of each member state to determine the mechanism for spectrum licensing and to define the licensing conditions applicable on its territory." Since then they have tried to get involved - for example, meeting in March with member states to discuss legal treatment of delays and network sharing - but most of their initiatives have either sunk without trace or been ignored.

Now, as so often happens in Europe, individual countries are trying to steer a course of making the best of their situation to develop 3G. The future treatment of 3G licenses will vary widely by country, and although there is a growing sense of pragmatism and compromise this can be easily challenged by the lawyers.

The governments' view

European governments are caught in a difficult position with the 3G licenses. They have to be fair to the winning bids, and yet run the risk of alienating losing bidders if they do not conform to the original license conditions. Unfortunately, the national regulators and government departments involved in these decisions are often under-staffed and under-qualified.

Most are trying to take a pragmatic if somewhat vague view. For example, the Dutch government has stated that a decision on network sharing would depend on whether competition was reduced. The German regulator has offered some encouragement for network sharing on the twin provisos that, "both individual network control and the competitive independence of the telcos should be guaranteed".

Some countries have tried to reduce the costs for operators. In France, partly in response to operator bullying, the cost of a license is now Eur619m plus 1-2% of revenues from 2004 (with little in the way of a concrete definition of a '3G revenue'). In Spain, a spectrum tax has been reduced from Eur163m to Eur35.2m a year.

Other countries have already lessened deployment targets. In Spain, the original target was all cities of more than 250,000 inhabitants by August 2001. This is now reduced to demonstrating a 3G voice call between two cities by June 2002.

Each country had different population deployment targets. Most are easier to reach than they appear, as often the population is concentrated in major cities. This is likely to mean there will be large parts of European countries which take years to get 3G, with the exception of some more forward-thinking countries such as Sweden which made geographic deployment part of the license assessment criteria.

Depending on the exact circumstances, its likely that national regulators will be lenient with operators who miss deployment targets.

Network sharing - the way forward?

Network sharing has been seen as a good solution as both operators and governments can see clear advantages. For operators, it has been suggested that they can save up to 40% of deployment costs. This seems high, but they are also sharing risk and ideas.

For governments, the clear advantages are quicker and more certain deployment, and it is a way of showing some support and encouragement for operators. There are three other issues for governments.

First, they are becoming more positive about MVNOs. If network sharing reduces competition, they want to ensure that virtual operators can provide a strong alternative.

Second, there is a growing acceptance that you do not need more than three networks to enjoy strong competition. Everybody's favorite mobile role model - Japan - seems to manage very well with three operators.

Third, network sharing means fewer masts. Mobile health issues and mast location are growing areas of concern for European governments. There was an unsuccessful Green Party-initiated hearing in the European Parliament in July to ban the construction of antennae on school grounds. In Italy, the government ruled that a single antenna must restrict its radiation emission to just one sixth of the recommended European rate.

Thus, network sharing will generally continued to be encouraged by governments. In Sweden, there may only be two networks built (3GIS and Svenska UMTS) and in other countries the figure is unlikely to top four.

The change in policy of national regulators can also be illustrated in Sweden. In the original license conditions, it was stated that promised coverage, "must at the time of the application be based on the development of its [the operator's] own radio infrastructure".

Can you hand back a license?

This issue didn't seem too high on the regulators' list, as the prospect seemed so unlikely when licenses were issued. After spending all that time and money in getting a license, who would return it?

Well, the list is growing. Sonera has handed back its Norwegian license, and stated it will not spend any further monies on Group 3G in Germany. In Spain, Xfera has put its operation in 'hibernation' until 2003, and has reduced its workforce by 70%. This will mean it cannot meet the June 2002 deployment target of the license. Yet, none of these actions has apparently caused any penalties or fines from national regulators or governments.

The answer seems to be that you can hand back the license, but it could vary by country. One of the other winning bidders could take legal action to suggest that this was unfair treatment.

The future uncertainties

It can be guaranteed that there will be future problems and legal challenges among the 3G licensees. Any retrospective change to the rules opens up a legal challenge, while the vague statements by regulators and governments are certain to cause large smiles to cross the faces of the legal community.

One challenge that is predictable is the effect of mergers and acquisitions. There is no doubt that over the next 2-3 years there will be significant consolidation among European (and global) operators.

What will happen if one mobile operator then owns two licenses in a country? Some regulatory authorities had foreseen this event, and have indicated what would happen in such circumstances (usually the handing back of one of the licenses). However, even if such conditions are in force, would they be actually enforced? Again, it will vary by country.

Get it right next time

Someone at the European Commission was quoted earlier this year as saying lessons had been learnt from 3G, and the procedure for 4G licensing would be much smoother. Ignoring the fact that these licenses are likely to be free, unfortunately one still cannot have too much confidence in the European Commission or indeed national governments really learning from the 3G debacle.

Steve Wallage works and writes for the451. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.

Most recently, he was a principal analyst at Gartner Group tracking the voice, data and IP service markets for the carrier, vendor and financial community. He predicted how these markets are likely to grow, and helped develop the business plans of leading vendors while analyzing key trends in the market.