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Wireless Carriers' Next Moves

Germany's third-generation (3G) wireless spectrum auction concluded last week, with six groups of wireless carriers paying a total of $46 billion for the coveted licenses. Now, the winners -- or survivors -- of that auction must spend billions more to upgrade their networks, putting them further in the hole. These additional expenditures, while great for wireless infrastructure companies, will make it harder for wireless carriers to earn a sufficient return on their investments.

By Chris Rugaber (TMF RFK)
August 23, 2000

As the dust settles from Germany's wireless spectrum auction, the companies with the much-coveted licenses are now facing the challenge of justifying their huge expenditures. While it's anyone's guess whether they will be able to do so, Japan's NTT DoCoMo provides a business model that most European wireless carriers would love to mimic. First, however, they will have to upgrade their networks.

No rest for the weary
Despite the grumbling from many quarters about the cost of the licenses, the winning companies will now spend even more to upgrade their networks in order to provide the high-speed data and Internet services that 3G wireless promises. Yesterday, Germany's leading mobile phone carrier, Mannesman -- a subsidiary of European wireless monster Vodafone Airtouch (NYSE: VOD) -- announced that it would spend $4.6 billion on wireless equipment, on top of the $7.36 billion it paid for its German license.

Other new license holders made similar announcements. Dutch telecom company Royal KPN (NYSE: KPN) committed yesterday to spending about $3.14 billion to upgrade its network, and France Telecom (NYSE: FTE) unveiled plans to sell a chunk of its wireless unit by the fourth quarter in order to raise cash for infrastructure upgrades (and future spectrum auctions). All in all, Motorola (NYSE: MOT) has estimated that the price tag for 3G wireless system upgrades in Europe will reach $200 billion.

This is certainly good news for the wireless infrastructure companies, such as Ericsson (Nasdaq: ERICY) and Nokia (Nasdaq: NOK), both of which traded up yesterday. It's easy to see why many investors prefer the equipment makers over the service providers, whose stocks have been declining and whose credit ratings are being cut as their multibillion-dollar expenses mount.

It's also not surprising that all this spending simply adds to the ongoing debate over whether the wireless providers are paying too much.

i-mode rules, Euro telcos drool
Certainly, the new licensees are putting on brave faces and predicting profitability in a few years. An executive at Mobilcom, a German wireless carrier, said that the company would break even on its license payments by 2005, about two to three years after the planned rollout of 3G networks. KPN said yesterday that it expects to recoup the costs of its licenses within seven years.

One way the carriers envision doing this is by replicating the success Japan's largest wireless carrier, NTT DoCoMo, has had with its i-mode service. i-mode is DoCoMo's proprietary technology that provides users with always-on access to a large, but select, group of websites and Internet services, many of them built specifically for i-mode. As described in a New York Times article from this Saturday, i-mode's rapidly growing customer base happily pays for information and services from various websites, partly because they can simply add the charges to their phone bill (rather than use a credit card) and because the sites were approved by DoCoMo in advance. As a result, DoCoMo not only earns greater fees from its customers' extended Internet use, but also receives a cut of their e-commerce and subscription spending.

KPN, for one, already has a partnership with DoCoMo. Nevertheless, plenty of observers wonder if the European wireless carriers will be able to duplicate the company's success. Other players, ranging from Internet portals to online brokerages to other content and service providers -- which are more established in Europe than they were in Japan -- will want to play a greater role in wireless services. "Mobile commerce will not be the killer application for the operators," a Forrester Research analyst told The Wall Street Journal last week. "Companies like Vodafone and Deutsche Telekom (NYSE: DT) are too optimistic."

Who knows? Since Europe will probably see widespread 3G implementation before the United States, how this plays out is certainly relevant to American wireless carriers.

Your Turn:
Do you think European wireless providers will be able to justify their huge payments for 3G licenses? Fools are already discussing this issue on the Wireless World discussion board.

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