High rollers: UMTS prices skyrocket in Germany, may force wireless consolidation

Like gamblers at the craps table, Europe's wireless kingpins this month pressed tightly around the German universal mobile telecommunications system spectrum table and bet heavily on the "Come" that is third generation wireless technology.

As usual, the house won big - the German government's coffers will be bolstered with more than $45 billion, more than double the amount of revenue budgeted. But it will take years - and billions more dollars - before the wireless players learn whether they hit the jackpot or overspent to get a piece of the action.

After last month's disappointing UMTS auction in the Netherlands, some analysts called this spring's $35 billion U.K. auction an aberration. The German auction quickly dispelled that myth in the first week for a simple reason, said Eric Kintz, an analyst for Roland Berger & Partners.

"If you want to be a player in Europe, you have to be in Germany," Kintz said.

This reality resulted in 173 rounds of bidding, with each of the six winning bidders committing to pay more than $7.6 billion for 10 MHz of spectrum. It also reinforced the notion that bidding for UMTS licenses - as with high-stakes gaming - is best left to the richest and most determined.

Indeed, the winners read like a Who's Who's in wireless: BT, Deutsche Telekom, France Telecom, Vodafone AirTouch, a consortium of KPN and NTT DoCoMo, and a consortium of Telefonica and Sonera.

Because such high prices require deep pockets, many analysts predict UMTS license fees will accelerate consolidation of wireless players in Europe. Indeed, during the auction BT doubled its investment in Viag Interkom to gain 90% control of the German firm.

Consolidation may be a necessity in the German market, which cannot support six competitors, said Rob Norcross, an analyst for Mercer Management Consulting.

"According to our numbers... in a four-carrier market, people make money; in a five-carrier market, it's a mix - the leader does OK, but No. 5 really struggles," Norcross said. "But a six-carrier market does not have long-term viability.... There's too much competition."

Deregulation of the wireless industry in Europe will parallel the continent's deregulation of the airline industry, with the dominant players being based in Britain, Germany and France, Kintz said. BT, DT and France Telecom should be among the four or five operators - Netherlands-based KPN Mobile and Telecom Italia being the other prime candidates - to emerge among in the European wireless game of survival, Kintz said.

But surviving is much different than thriving, and many question wireless operators' ability to recoup their UMTS investments.

"That's the million-dollar - or billion-dollar - question," Kintz said.

Carriers are feeling pressure from investors, who are skeptical of operators paying billions of dollars for spectrum and billions more to establish 3G networks. In fact, doubts about the carriers' ability to generate enough revenue contributed to ending the auction after 14 days of bidding, Kintz said.

"[Germany's auction prices] went so high, and all the stocks were going down for the wireless operators," he said. "Everyone was saying, `These guys are insane.'"

This sentiment is not the sole property of pundits; even bidders seemed to doubt themselves near the auction's end.

T-Mobil and Mannesmann both indicated their desires to secure three blocks of spectrum throughout the auction - to ensure quality signals and to limit the number of wireless competitors in Germany to five, Kintz said. However, both finally determined the prices were too high, instead settling for two blocks.

"Clearly, we would have preferred an outcome with five licenses being awarded, but it got to the point where it did not make economic sense to go for three blocks because of the price," said Nils Paellmann, vice president of investor relations for DT in New York.

The price also was too high for Hong Kong's Hutchison Whampos, which participated in the auction as part of a consortium with Dutch operator KPN Mobile and Japan wireless giant NTT DoCoMo. When the auction concluded, Hutchison pulled out of the consortium, leaving its stake to KPN.

Hutchison's decision to pull out of the consortium rested with its well-respected chief Li Ka-Shing, the man credited with investing Hutchison's resources in Orange and VoiceStream Wireless before each were bought - by France Telecom and DT, respectively - in high-dollar purchases, Kintz said.

"He has a very financial-driven strategy," he said. "He has lots of resources, and he would rather put them in areas where he would get a better return on investment."

Apparently, so would other investors. Virtually all the winning bidders were not well received by the investment community, particularly KPN (see story on page 28).

One company applauded for winning a license was Finland's Sonera, which was part of the Group 3G consortium with Telefonica. Ironically, most analysts believed the consortium was the weakest of the final six bidders and expected it to yield to the efforts of T-Mobil and Mannesmann to gain third blocks of spectrum.

In winning the prime German spectrum, Sonera may be following the footsteps of Orange, which parlayed a U.K. license to create a bidding war that ended in a $37.4 billion sale to France Telecom.