In a surprise ending, six groups walked away with Universal Mobile Telecommunications System licenses in Germany at a total cost of $45.85 billion, the largest amount raised yet in a third-generation spectrum auction, hitting the ceiling of most analyst predictions.
Each of the winners-Deutsche Telekom AG’s T-Mobil, Vodafone Group plc’s Mannesmann Mobilfunk, E-Plus-Hutchison, British Telecommunications plc-backed Viag Interkom, France Telecom-backed MobilCom and the long-shot Group 3G consortium-will get 2 by 10 megahertz of spectrum. Each group won two of the 12 available 2 by 5 megahertz blocks of spectrum auctioned.
Participants had to win at least two spectrum blocks, but not more than three sets of frequencies, to receive a license. Many analysts expected a few incumbents to win three blocks, which would have reduced the number of 3G operators.
Based on the outcome, some incumbent operators could find themselves with capacity constraints down the line because they did not secure three frequency blocks. “The issue going forward is really when will spectrum become available again for the existing operators,” said Fanos Hira, Bear Stearns managing director of cellular research in London. “If they get constrained in any way, it’s better for new entrants.”
The auction, which began on July 31, ended after 173 rounds and 14 days.
Following the 12-block auction, the German government auctioned five more blocks of 5-megahertz unpaired frequencies. Viag Interkom pulled out of the bidding, and each of the remaining five 3G winners picked up a block of unpaired spectrum at a total additional price of $260 million.
The original paired spectrum chunks sold at prices ranging from $3.78 billion to $3.87 billion, translating into a cost of about $7.6 billion per carrier. Mannesmann Mobilfunk paid the most for one of the frequency sets, and Group 3G paid the least for one of the blocks.
Comparatively, Vodafone spent the most in the U.K. auction held earlier this year for a $9.4 billion license. The least paid in the United Kingdom for a 3G license was $6.3 billion each by British Telecom and One 2 One, owned by Deutsche Telekom.
The U.K. auction brought in a total of $34.4 billion, about 76 percent of the German final figure. However, given the differences in gross domestic product and population between the two countries, German license winners actually received a discount compared with their U.K. counterparts, said Hira.
Germany has one of the lowest wireless penetration rates in Europe, lending itself to high future growth potential.
Even so, the price was too steep for Hong Kong-based Hutchison Whampoa, which was part of the E-Plus-Hutchison consortium with Dutch operator KPN Mobile. Following the consortium’s license win, Huthison said KPN Mobile will obtain its interest in the consortium, giving KPN 100-percent ownership. KPN Mobile will carry 77.5 percent of the license fee, with the balance picked up by U.S.-based BellSouth Corp., KPN’s partner in E-Plus.
“We do understand Hutchison’s considerations with regard to the license costs, because it makes a difference if you start as new entrant or have already built up a position in the market as KPN Mobile did via E-Plus,” said Diederik Karsten, KPN Mobile chief executive officer. “Moreover, the partnership aimed at acquiring a 15-megahertz license and shares the vision that 10 megahertz now is seen as too tight for two operators.”
The seventh auction participant, Debitel, owned 74 percent by Swisscom, withdrew from the German third-generation auction on Aug. 11, leaving just six bidders in the race.
Debitel and Swisscom “now intend to substantially increase debitel’s market share by the time UMTS is launched through huge investment in customer growth in order to position debitel as an alternative and innovative provider of UMTS services together with partners whose bids were successful,” the companies said in a statement.
Along with Group 3G, held 57 percent by Telefonica and 43 percent by Sonera, debitel was seen as an underdog in the bidding because of its lack of an established wireless presence in Germany.
The license makes Telefonica and Sonera formidable 3G forces on the Continent, said Hira. The Spanish and Finnish carriers each have strong Internet businesses, Telefonica with its Terra Networks Internet arm and Sonera with its zed wireless Internet portal, which will benefit them in the 3G arena, said Hira.
“You have the creation of a very strong European force, especially if you integrate their Internet pedigree,” said Hira.
Telefonica said it plans to begin operating in Germany in 2002 and to win 2 million users in the first two years of operation. The Spanish operator said Germany has a large amount of roaming potential with Spain because of the large number of tourists who travel between the two countries.
The win was especially important for Telefonica and Sonera because neither carrier won a license in the important British market. Analysts note that 3G success will be based on having a pan-European presence, with the United Kingdom, Germany, France, Italy and Spain seen as the most important markets.
Vodafone and France Telecom have secured licenses in the three markets that have already awarded 3G licenses-Spain, the United Kingdom and Germany. Deutsche Telekom, Telefonica, Sonera, and British Telecom all have a presence in two of those three countries, either through subsidiaries or stakes.
“You’ve got to be a big player, just in terms of delivering the purchasing power, the interconnect rates and establishing roaming agreements,” said London-based Declan Lonergan, director, wireless/mobile for The Yankee Group Europe. “Unless you are aggressive internationally, you are being penalized by the financial community. They expect these operators to have clear international plans.”
To that end, British Telecom announced before the end of the German auction it reached an agreement to take control of Viag Interkom, the German mobile operator, UMTS winner and fixed-line operator.
BT will buy E.on’s 45-percent stake in Viag Interkom through a call option for about $6 billion payable in the middle of next year. British Telecom already owned 45 percent of the German operator, and Norway’s Telenor owns the remaining 10 percent.
“With the recent increase in our ownership to 100 percent in the Dutch operator Telfor and our position alongside Telenor in Esat in Ireland, together without other interests, we are clearly demonstrating that Europe is BT’s home market,” said Sir Peter Bonfield, BT’s chief executive.
BT has been criticized in the past for taking only minority stakes in European operators, and the U.K. company has increased its holdings in several European assets this year. The operator now may be forced to sell some of its subsidiaries-including its mobile-phone assets-to pay for its large debt burden, according to press reports.
“Our strategy has seen early local investments grow significantly and rapidly, creating considerable value,” said Bonfield. “Taking opportunities to buy up where the terms are right not only creates shareholder value, but also adds to BT’s flexibility.”
Italy is the next European country set to award 3G licenses. It is implementing a hybrid process combining a selective tender and private auction, although the financial component of each bid will be a determining factor. Formal offers for UMTS licenses in Italy are due by Aug. 24, with the awards expected in September.
France officially retained the concept of a “beauty contest” but added a hefty “market entry fee” of $4.7 billion for each successful applicant. It plans to award licenses early next year.
As the UMTS license game continues, the operator with the most coverage certainly wins.
“Having global platforms and branding-that’s really where the end game is gong to be,” said Lonergan.
