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Thursday, 25 January, 2001, 15:21 GMT
French mobile race stalls on licence cost
Man on phone
Suez Lyonnaise and Telefonica turn their backs on the French contest
The exit of a Franco-Spanish telecoms consortium from France's third-generation mobile phone contest has heightened hopes of a cut in the cost of the licences.

Suez Lyonnaise des Eaux of France and Spain's Telefonica pulled out of the race for four third-generation licences on Wednesday, just ahead of the 31 January deadline.

The French government is holding a beauty contest for four 15-year licences, each priced at 4.6bn euros ($4.2bn; 2.9bn). Winners are due to be announced in June.

The companies said on Wednesday that "the existing licences' fee does not reflect the situation of the market".


I don't think France will drop the prices

Daniel Torras
EIU

Gerard Mestrallet, the head of Suez Lyonnaise, also told Le Figaro newspaper on Thursday that the French utilities group had decided to pull out because of the excessive costs for third-generation technology.

Matthew Nordan, research director at Forrester Research, projects that that the total costs of deploying third-generation licences will cause average operating profit for mobile operators in Europe to decrease in 2003, turn negative in 2007, and not recover until 2013.

"France must cut licence costs by half," added Mr Nordan.

A spokesman for the French telecom regulator, ART, said any decision to cut the licence fee would come from the government.

Cutting the price tag would require passing a new law in parliament, forcing a delay in the allocation of licences, according to Mr Nordan.

The French contest

The French contest differs from auctions held in some other European countries, such as the UK, because the price of the licences has already been set.

Remaining 3G contenders
France Telecom and Orange
Vivendi's SFR unit
Bouygues Telecom

Any potential winners would have to fulfil certain criteria set by the government.

The decision by the two companies to pull out leaves just three contenders in the race - France Telecom and its subsidiary Orange, Vivendi's SFR unit and Bouygues' mobile phone arm, Bouygues Telecom.

On Thursday morning, shares in Bouygues, Vivendi and France Telecom were all up on hopes the French government may be forced to reduce the 4.6bn euros licence fee.

There is also speculation that Bouygues might withdraw from the contest as well over the prices of the licences.

Only France Telecom has made a firm commitment to remain in the contest.

An under-saturated market

But not everyone shares the optimism about a licence fee cut.

"I don't think France will drop the prices," said Daniel Torras, a manager for Europe at the Economist Intelligence Unit.

In fact, he does not believe that France's contest will be unduly affected by the departure of Suez Lyonnaise and Telefonica.

"There will be another player that will step in... There are a plethora of other foreign companies ready to jump on the bandwagon."

The French mobile phone market is seen as particularly attractive because it is relatively under-saturated compared with other European countries.

At the end of 2000, only 44% of the market had been penetrated, compared to 67% in the UK.

Alternatively, Mr Torras speculated that Suez Lyonnaise might return to the contest with another partner. "There is still time for negotiations," he said.

Suez Lyonnaise and Telefonica formed its mobile phone consortium, called ST3G, last April to bid for a French licence.

Suez Lyonnaise holds a 60% stake, while Telefonica owns 40%.

Widespread alarm

The news of ST3G's exit follows widespread alarm over the cost to telecom companies of purchasing licences across Europe and building third-generation networks.

Europe's 3G mobile phone proceeds
Germany: $46.1bn
UK: $35.4bn
Holland: $2.5bn
Italy: $10.2bn

On Tuesday, Deutsche Telekom partly attributed a fourth-quarter loss of 1.06bn euros to debt taken out to finance the purchase of third-generation licenses.

Auctions in the UK and Germany earlier this year, where companies bid to purchase licences, raised many billions of pounds and euros.

Feeling blu

However, auctions in Austria, Italy and Switzerland were disappointing and failed to raise as much money as the governments had expected.

On Wednesday, an Italian court rejected a request by telecoms group Blu for damages against the government following its attempt to seize an auction deposit from Blu.

But the court also upheld Blu's appeal against the government's demand to keep the 2.1bn euros deposit paid to take part in the auction last October.

Blu pulled out of the Italian auction after a disagreement on strategy between its major shareholders, Autostrade and British Telecom.

As a result of Blu's retreat, the remaining bidders in Italy picked up licences for a bargain 211 euros per head of the Italian population.

The licence winners in the UK paid an average of 630 euros per inhabitant, while in Germany they paid 611 euros.

At 4.6bn euros a licence, France hopes to pull in 335 euros per inhabitant.

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