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DECEMBER 1 , 2000 VOL. 26 NO. 47 | SEARCH ASIAWEEK

What Price Glory
Asia can learn from Europe's 3G mistakes
By LEE HSIEN YANG

ALSO:
DoCoMo
Japan's leading mobile phone company is taking its popular i-mode technology global
• Bandwidth Boom: With new undersea cables criss-crossing the region, ain't seen nothing yet in Asia
• China: A turf war among major telecom players is looming in the world's second-largest mobile market

The proverbial "license to print money" is any business leader's dream. So how much would you pay for one? This is precisely the dilemma faced around the world by communications companies and governments as so-called "third-generation" (3G) mobile telephone licenses are put up for auction.

Touted as the future of mobile communications, 3G mobile phone networks represent a significant technological leap. They can transmit at speeds of up to 200 times faster than conventional systems, meaning lots of information, including video, can become available on mobile devices. 3G is seen as the platform that will underpin mobile carriers' business success in the coming decade.

But, at this early stage, no one really knows how quickly and extensively 3G will spread, how much consumers will be prepared to pay for these services, and therefore how much operators will earn from them. After all, 3G to date has not much to show for itself. There are no handsets or services currently available. And historically, forecasts of the potential of innovations have sometimes been wildly inaccurate.

Governments are accommodating the impending shift to high-speed mobile communications by awarding portions of the radio spectrum for 3G services to companies. Some governments directly select carriers in a process called a beauty contest. Others are selling the airwaves to the highest bidders. In Europe, 3G license auctions have earned large windfalls for some governments. The United Kingdom reaped about $32 billion ($540 per "pop," or potential cellular customer) while Germany raised $44 billion ($535 per pop). These governments are laughing their way to the central bank.

In Asia, Hong Kong will adopt a hybrid of the beauty contest and auction methods, with the proviso that winners allow other operators access to their new networks. Singapore will hold an auction of four 3G licenses in early 2001. The Singapore government has publicly stated it did not choose an auction with the principal aim of raising revenue as it enjoys healthy fiscal surpluses. Rather, regulators defend auctions as an efficient, fair and transparent means of allocating 3G spectrum. Competitive bidding, they say, ensures that prices reflect the value operators place on owning 3G licenses — thus allowing the operators to implement their plans based on their business vision, as opposed to one set by the regulators. The higher the price, the more incentive for the operator to push out 3G services as quickly and creatively as possible, in order to grow the market and recover the original investment.

In practice, however, auctions create much uncertainty. Prices can be highly volatile as bidders may feel forced to engage in a "win at all cost" mentality. A few years back, U.S. operators bid generous amounts for bandwidth. Some winning bidders could not raise the necessary funds from the financial markets. This led to a re-auction and delay in the service rollout. Today the U.S. lags the rest of the world in terms of mobile telephony penetration rates. It is perhaps noteworthy that the highest use of mobile phones is in the Nordic countries, which continue to favour giving out licenses and encouraging competition to promote a vibrant industry.

The return on 3G investment is devilishly hard to determine at this point. It can be all too easy to bid high for a license now and worry about meeting the business case later — too easy to project a slightly higher industry growth rate and a slightly lower cost structure in order to justify raising the bid and staying in the game.

An overpowering need to be a player in the 3G market, whatever the cost, probably drove the astronomical sums of money involved in the U.K. and Germany auctions. After the initial euphoria from the auctions died down, more sobering assessments of the likely financial returns from 3G started to prevail. The resulting backlash from the financial community was quick and harsh. Credit ratings of some telcos with winning 3G bids were downgraded. Banks are thinking twice whether to approve enormous loans required to finance 3G license bids. In both the U.K. and Germany, there is now fear that consumers will ultimately bear the operators' high entry costs in higher prices for 3G services, which in turn will discourage demand and slow 3G market growth — creating a vicious cycle for the operators.

Already, there are signs from Europe that the short phase of 3G bidding mania may be over. Smaller amounts have been raised recently in Italy and the Netherlands as operators have lowered their value projections. The Swiss auction has been postponed.

Most Asian countries have yet to announce their 3G licensing framework. But this should not stop them from learning the lessons drawn from Europe. Seeking to maximize revenue from 3G auctions might seem a clever short-term move, but it should be balanced against the longer-term economic benefits that will result from rapid uptake of 3G services. 3G is new technology that has the potential to take the mobile communications revolution to new heights. It should not be seen as a license to print money - either by operators or governments.

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