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3G dials havoc for mobile giants

LONDON, England (CNN) -- The huge cost of providing the third generation of mobile phone services is causing havoc among telecommunications companies around the globe.

The turbulence is highlighted by announcements made by five major players in the market that could make Tuesday April 24 a 3G watershed day.

This is the day Deutsche Telekom announced a net loss of $350 million in the first three months of the year -- citing the billions spent on 3G licences as the major cause of the damage to its bottom line.

This is the day shares in NTT Docomo, Japan's biggest company by market value, plunged five per cent after postponing the launch of its 3G service from May until October.

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This is the day that U.S. electronics giant Motorola confirmed plans to close its Bathgate plant in Scotland where more than 3,000 workers make mobile phones.

It is also the day that two giants in the electronics industry confirmed that they are joining forces in a mobile phone joint venture.

Sweden's Ericsson and Japan's Sony are linking to form a new company called Sony Ericsson Mobile Communications.

That deal could point the way forward for the mobile phone industry. Mergers and consolidation may be the only way the operators will be able to afford the costs involved in setting up 3G systems.

One such deal industry analysts had been speculating on was a tie up between Motorola and Japan's Mitsubishi Electric.

But last week Mitsubishi denied a report that it was in talks with Motorola to strike a next-generation mobile phone deal.

The third generation of mobile phones is expected to give mobile phone users high speed access to the Internet and enables games, music and video to be downloaded.

It will enable, say, a user in Hong Kong to watch a Manchester United soccer match live from Old Trafford.

It will mean a man in Kiev can place a bet on the Kentucky Derby before watching the race on his handset.

The trouble facing the 3G operators stems from the fact that many nations put their mobile phone licences up for auction early last year, when new technology fever was at its height.

In Britain the auction was expected to raise just £4 billion ($6 bn) for government coffers. Instead it raised £23 billion - more than five times the predicted amount.

Deutsche Telecom went on a $60 billion spending spree in acquiring the 3G licences in Germany, Britain, Austria and The Netherlands.

Like many of its competitors around the region, that left it severely strapped for cash. It launched a major sale of strategic assets to offset its debts.

But the costs do not end with just acquiring the licences. The companies now have to shell out billions more to build 3G networks, everything from new transmission towers to new handsets. And then billions more on marketing to convince people to pay for 3G services.

Both DT and British Telecom have come under threat of receiving a ratings downgrade from credit agency Moody's, which would mean they have to pay higher rates of interest on their massive debts.

Martin Evans of Credit Lyonnais told CNN's Business International: "They all go caught up in a frenzy, almost a euphoria, in terms of being the first to invest in what at the time was seen to be very exciting areas of growth.

"There is now obviously a because the net indebtedness of some of these big telecom companies has gone through the roof."

Many telecoms companies were planning their business on the basis that mobile users were going to upgrade their phones frequently. But delays in the rollout of the 3G devices have slowed down the uptake.

Consumers are unwilling to trade up until new multimedia services become available. Analysts have questioned how some carriers will make money given the amount of money they have spent to obtain 3G spectrum.

Some observers question how much demand there is for 3G services. Compounding the matter are the delays in 3G network implementations.

Only last month the president of Palm Canada was casting long term doubts as to the future of 3G services.

Michael Moskowitz said: "3G is a little bit over-hyped. The reality is that the Internet is not friendly to mobile devices. But over time, the Internet will bend."

The crisis is such that the 3G equipment makers like Ericsson and Nokia are providing "vendor financing" to the telecom operators to assist them in financing their networks.

Orange is reported to be one such beneficiary, It persuaded Ericsson, Nokia and Alcatel to lend it some 3.4. billion euros. That is 150 percent more than the contracts to supply infrastructure in the UK, France, and Germany are worth.

There are even those who doubt that the 3G is really needed, as other technologies are already around that, when combined, can deliver even more than what 3G promises. These include Bluetooth, Wireless LAN, and Digital Audio Broadcast.

A report last month by investment bank Nomura posed the question: "Does the world really need 3G services?"



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