Rethinking Spectrum Mania - Government Activity

Spooked by astronomical bids in European auctions, wireless carriers look to alternative strategies.

IN THIS SUMMER'S WIRELESS SPECTRUM auctions in Europe, more than $79 billion has been bid in a frenzy of speculation. Telecom companies are throwing billions of Euros into wireless broadband networks, driving the prices for government-issued licenses out of sight.

Now, it seems, some are being priced out of the market.

European countries are auctioning licenses to build the wireless connections of the future: so-called third-generation, or 3G, networks that will speed data at a once-unimaginable 2Mbps.

The mood has been contagious, says Andrew Cole, head of wireless practices at London consultants Renaissance Strategy, who was on hand in April when one of the companies in the British wireless spectrum license auction placed its bid. "It was incredibly exciting," Cole recalls. "Some of these folks had been up for 10 days straight." In all, bidders put up $35.5 billion dollars in the U.K. auctions.

That sent a chill through the market, causing some observers to wonder whether carriers could ever recoup their costs. A few bidders dropped out of July's auction in the Netherlands (which brought in a relatively paltry $2.5 billion). But the fever returned in last week's German auction, which hit a new high of $42 billion by midweek.

Those prices are causing wireless companies to rethink their strategies.

"Seeing these astronomical prices, if you're not a major mobile player, you'd want to step back and say, 'What kind of capacity do we really need?'" says analyst Amanda McCarthy, of Forrester Research. "I mean, how many people really are going to want videoconferencing on their phone or to buy a house on their phone?"

The situation in the United States, where the Federal Communications Commission has raised over $20 billion in two dozen spectrum auctions, has been further complicated by the reluctance of UHF television broadcasters to vacate the coveted 700-megahertz spectrum they currently occupy. Companies like Paxson Communications, owner of the largest group of U.S. TV stations, are demanding billions to give up their slices of spectrum. The delays have forced the FCC to postpone its auction of the 700-megahertz spectrum for the third time. The auction is now set for March of next year.

U.S. carriers such as WorldCom, which so far has been shut out of the European auctions, are looking at partnering with other companies to share the costs of obtaining licenses. Another possibility: renting airtime instead of buying spectrum.

Some companies may decide to become "virtual mobile operators" -- leasing airtime instead of owning networks themselves. This approach has been successfully pioneered in the U.K. by Virgin, which last year joined with One2One to form Virgin Mobile, now boasting more than 300,000 subscribers.

Cole says Renaissance is consulting with another European carrier planning a similar maneuver. "Our client will get nationwide access, and building the portal, retail engine and applications will cost them $1 billion. [German telecom giant Deutsche Telekom], on the other hand, has borrowed billions in the hope of future subscribers."

The outlook in the U.S. remains murky. If the FCC fails to free up the UHF band, some bidders may shy away. Another complication: The 700-megahertz band, considered prime territory by U.S. carriers, is not part of the spectrum designated by the International Telecommunications Union for 3G networks. That could render it useless for companies serving international travelers.

Instead of bidding billions of dollars on bandwidth, companies might be better off tending to the basics. "Carriers should be focusing on quality of service and better coverage, instead of capacity," says Forrester's McCarthy. "That's what's really needed in the market right now."

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