The U.K. auction brought in a resounding 22.5 billion (US$35.45 billion), far exceeding predictions prior to the auction’s start. The question now is whether these prices are based on a sound business case or the most optimistic scenarios for the development of the 3G market.
The strategic value to the second-generation (2G) operators is gaining access to additional spectrum to further develop their market positions and services. For new entrants, the value is in developing their positions as European mobile operators.
How will the high license prices likely impact the U.K. 3G market?
A possible outcome for incumbents is that rollout of 3G will be limited to major population areas, where operators can maximize revenues and minimize capital expenditures. There will be no commercial incentive to provide coverage for rural areas, where incumbents can still provide data services using enhanced technologies like General Packet Radio Service (GPRS).
New entrants need to ensure they can compete with the incumbents on equal terms. They have two options. Either they roll out a 3G network to an equivalent percentage of the U.K. population as incumbent operators-90 percent to 95 percent-or use roaming agreements to provide the additional coverage.
Operators must launch new services they are confident will be profitable. This could lead to U.K. carriers following trends rather than trialing new products and services before they are proven in other European countries.
It will be critical for operators to assess their strategies during the early years, when considering the level of capital expenditure involved. Each operator paid more than 4 billion (US$6.3 billion) for its license. Even if operators opt to pay 50 percent of the license fee initially, with the remaining amount paid in installments between years six and 10, the highest level of investment in network rollout (about one-third) will be in years two and three. Each carrier’s investment in network rollout could be between 1.5 billion and 3 billion (US$2.4 billion-US$4.7 billion).
In comparison to the U.K. auction, the award of 3G licenses in Spain through a selective tender required lower levels of capital expenditure, and therefore, the range of services and speed of rollout could be significantly better.
There are other issues, such as handset subsidies, marketing products and services, and content investment. If revenue predictions, demand for enhanced data services and market share fall short of expectations within the first few years, the number of 3G operators will be reduced from five, and there will be only one or two networks that provide national 3G coverage.
And what about the longer term? We are already seeing the move toward pan-European mobile operators. That is expected to continue with 3G licenses, and we will see further mergers and alliances. The major players in the future will take advantage of economies of scale and provide the benefits of larger and more attractive portals, increasing the number of users and potential for revenues. And maybe to maximize investments, operators will give network access to virtual network operators.
Sounds like the predictions for 2G, doesn’t it?
Val Jervis is the principle consultant with Netcom Consultants in Reading, UK; vj@netcomconsult.co.uk.
