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Thursday, 29 June, 2000, 17:00 GMT 18:00 UK
Warning hits telecoms shares
ericsson phone close up
Investors are worried about the prospects for the sector
Shares in Europe's mobile phone makers and operators have fallen sharply on the back of comments by Ericsson president Kurt Hellstrom.

Growth on the mobile market risks slowing as a consequence of the high charges

Ericsson president Kurt Hellstrom
The head of the world's third largest mobile phone maker heightened analysts' fears by saying that growth in the industry could be hit by the high cost of third-generation (3G) network licences.

In an interview with Swedish business newspaper Dagens Industri, Mr Hellstrom warned that the spiralling cost of 3G licence fees could slow growth for both mobile suppliers and operators.

"It's clear that growth on the mobile market risks slowing as a consequence of the high charges. It's like petrol. It's clear that we consume less petrol with the current high petrol prices," he said.

In the UK, the government recenty raised 22.4bn through the sale of new mobile phone licenses, and other European countries are planning to do the same.

Future still bright

However, Mr Hellstrom said that although licence costs could slow growth, there was no serious long-term challenge to the expansion of third generation systems.

"The risk is there. But I don't think it will go so far as that the building of the 3G network will stop," he said.

Despite this, his remarks hit shares in the sector across the continent.

By early afternoon, the world's leading mobile phone maker, Finland's Nokia, was down 7%, while Ericsson had fallen almost 5%.

Negative sentiment also spread to rival telecoms equipment makers and mobile phone operators.

Shares in the world's largest mobile phone operator, Vodafone Airtouch fell 5.7%, while French telecoms equipment maker Alcatel dropped 4.8%.

BT fell 2.7%, while Cable & Wireless dropped 5.7%.

Ericsson later moved to reassure investors that it had no plans to change its forecast of fast growth in the wireless industry.

Nothing new

Market traders said there was nothing new in the comments and that Nokia had said something similar a few weeks ago.

But investors remain uneasy about the prospects for the industry.

Analysts and some industry representatives are worried that the high cost of licences could force operators to scale down investments in building 3G networks and pass on the costs to consumers.

Last week, Schroder Salomon Smith Barney cut its rating on telecoms to underweight for the third quarter on concerns about the large amounts of money being paid for licences.

On Monday, Lehman Brothers downgraded world number two handset maker Motorola to "outperform" from "buy" due to concerns about future profitability.

German auction

Matthew Lewis, technology analyst at Daiwa SBMC Europe, said the full impact of licence costs could not be assessed until the German 3G auction, due to begin on 31 July, was completed.

Four to six licences will be sold to the highest bidders. Analysts expect the licences to cost about 10 billion euros (6.26bn) each.

"There are obviously fears about the high cost of 3G licences, but once the German auction is carried through we'll be in a position to assess the cost of 3G licences in Europe," Mr Lewis said.

3G, or Universal Mobile Telecommunications System (UMTS), is a mobile telephony standard that will enable operators to provide video and fast internet services to mobiles and other wireless devices.

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