Gambling on mobile licences

Consumers may bear the brunt of new licence costs

When the UK raised over £20bn from the sale of its third generation mobile licences in April, hearts sank in boardrooms across Europe.

The UK auction paved the way for a string of similar high-profile auctions across Europe, which have already eaten heavily into telecom company revenues.

The battle for Italian mobile licences kicked off on Thursday, raising fresh fears as to whether companies can afford to pay for these licences and if they are worth the cost.

With the next four months due to see mobile licences awarded in Italy, Sweden, Belgium and Switzerland, there is little sign of an end to spending for telecoms firms.

BT pays the price

BT appears to have been the first to pay the price for its £9bn purchase of licences in Germany and the UK. Its debt levels have doubled to £30bn, hurt by the cost of licences and the doubling of its stake in Germany's Viag Interkom.

These new high levels prompted influential US credit rating agency Standard & Poor's to cut its rating of the company's creditworthiness from AA plus to A.

This effectively raises the interest rate BT pays on its debt.

Even worse for BT is that the agency had previously warned the BT rating could fall even lower. The comments prompted the company to postpone the launch of its $10bn bond issue.

Licence gamble

The logic for holding auctions is that telecom companies know the value of the licences best.

Sceptics point out that it is in everyone's interests for the licence fees to be high. National governments get to boost their coffers, while the winners of the licences hopefully recoup the licence fee through increased revenues in years to come.

The losers are at least comforted by the fact they have landed their competitors with a large bill.

Analysts, however, wonder whether telecoms firms will have a tough time generating a return on their investments.

It could take companies many years to recoup the cost of the licence and network investments.

"It is very difficult to make the business case [for the spending]," said Doug Hawkins, telecoms analyst at Japanese bank Nomura.

"The very high prices [paid for new mobile licences] will encumber the balance sheets, force up the cost of capital and bear down on share prices," he said.

Spectrum Strategy Consultants estimated that operators would need to spend about $45bn to improve network quality and security if new services were to be successfully introduced.

Shoddy networks

At present, many European networks are inadequate even for voice communications.

Spain's Telefonica - which controls German licence holder Group 3G - said it would spend $6.1bn on equipment and hope to break even in 2006, four years after operations were due to begin.

BT would be spending about $9.1bn on its new German mobile network, Spectrum said.

Mr Hawkins said the amounts of debt would become "untenable" for many companies, as growing competition means they are also forced to cut prices.

Some analysts said fresh competition in the market would keep prices low and new 'exotic' services would soon proliferate offering consumers more choice.

But consumer groups sounded a note of warning, saying the high cost of the licences would inevitably be passed on to consumers.