DUBLIN, Ireland-Having paid so much for their licenses, prospective third-generation (3G) mobile operators in Germany, as in other European countries, have been working hard to convince the financial markets and the rest of the industry that they will make a decent return on their investments. Opinion is divided as to whether Deutsche Telekom in particular could be handicapped by its massive investments in both its home market and the United Kingdom through subsidiary One 2 One.
Last year, one argument in favor of a consistent approach to 3G licensing in Europe, either by auction or technical competition, was that the average cost per subscriber or person would be broadly similar from country to country. However, some countries auctioned their licenses, while others offered them through competitions for relatively small amounts, leading to massive disparities in cost.
For example, the costs per person for the German and U.K. licenses were e619 (US$564) and e654 (US$596) respectively. In contrast, the cost per person in Italy was e239 (US$217), and at the bottom end of the scale, the Spanish license winners paid only e13 (US$12) per head of population.
While Deutsche Telekom has paid heavily for its German and U.K. licenses, it has also won licenses in the cheaper markets of the Netherlands, Poland and Austria. But its lack of presence in Italy and Spain, where the license costs are considered a relative bargain, appears to be a disadvantage compared with its international rivals Vodafone Group and France Telecom, which both have a presence in those less-expensive countries of Italy and Spain.
The theory that the German incumbent will suffer by not being able to spread its average spend per subscriber over less-expensive countries gained credence from a report issued last December by Hamburg, Germany-based management consultant Andreas Hoffmann.
He suggested that rivals such as France Telecom and Vodafone could spread their total 3G costs across countries where licenses were cheaper, such as Spain and Italy, and thereby gain an advantage over Deutsche Telekom. Both Vodafone, through Mannesmann Mobilfunk, and France Telecom, through MobilCom, have also secured German Universal Mobile Telecommunications System (UMTS) licenses.
Unfortunately, no one from Deutsche Telekom was willing to comment on whether the company feels that its 3G investment will eventually prove to be money well spent. The company is in a quiet period ahead of its proposed takeover of U.S. carrier VoiceStream.
But at least one industry observer said the disadvantages of a lack of a geographical spread are not insurmountable. “Deutsche Telekom has paid a lot for its licenses in the U.K. and Germany, and there is a consensus that it paid over the odds,” said Enda Hardimann, an independent telecommunications consultant based in Dublin, Ireland. “But companies such as Deutsche Telekom and BT (British Telecommunications) will treat these license charges as sunk costs on their balance sheets.”
He pointed to the massive potential market in Germany as further reason for optimism and added that Deutsche Telekom could make a more rapid return on its investment than other operators because of its established presence in Germany.
“There are approximately 80 million people in Germany, which is roughly equal to the population of the U.K. plus Belgium, the Netherlands and Sweden,” Hardimann added. “Germany is also the largest and strongest economy in Europe, which further mitigates the incumbent operator’s lack of geographical spread in licenses.”
Deutsche Telekom also has strong cash flows, and Germany has one of the highest average revenues per mobile customer figures in Europe. After securing the license, Deutsche Telekom chief executive Ron Sommer said he expected the group’s mobile unit to make profits with UMTS mobile services in Germany right from their launch in 2003.
WLL feels the pressure
In common with most of their European counterparts, German wireless local loop (WLL) operators are under pressure to start generating revenues, while facing restrictions on their access to new funds from nervous financial markets. But despite a generally enlightened government attitude to liberalizing the local loop, the outlook for WLL technology in Germany is possibly bleaker than anywhere else in Europe.
Germany was the first country to award WLL licenses in August 1999, but initial optimism has given way to a more pragmatic view. For example, Firstmark has scaled back its pan-European plans to focus on Germany, France and Spain, while Callino is behind schedule with its network build. There are rumors that the national regulatory authority will start to take back spectrum from license winners unless they can justify their lack of activity.
Operators have claimed that problems negotiating interconnect with Deutsche Telekom have been their main difficulty, but Datamonitor analyst Dan Grundy points the blame instead at operators’ business models. “Their difficulties are caused more by the massive overestimation of the potential market made by analysts and potential market entrants,” Grundy said. “Firstly, not enough thought was given to the likely cost of rolling out WLL across Germany.”
Germany’s urban population profile is a significant negative factor for the new operators. Many of the country’s 80 million people live in large cities where there is plenty of high-quality copper wire installed, which makes the business case for rival technology digital subscriber line (DSL) much stronger.
There has also been customer resistance to installing equipment on their premises, which is necessary to access WLL services. Because WLL operators have been strapped for cash, they have been unable to invest heavily in sales and marketing, which has made it difficult to raise interest in the technology among potential users.
Finally, the success of integrated services digital network (ISDN) has reduced the potential market. “Germany has more ISDN lines than any other European country, and users have been reluctant to switch from an established, tested technology to a new platform when the benefits in bandwidth and cost are not yet obvious,” added Grundy.
German WLL operators could generate some revenues by carrying backbone network traffic for other operators, but Nicholas Blades, an analyst with London-based research firm Schema said the value of this market will be limited. “German WLL operators are allowed to carry traffic from other telcos, but this is not their core market,” said Blades. “This technology was devised as a means of accessing the `last mile’ from local exchange to customer, not an alternative to fiber or copper-based networks.”
