Feature Article

December 19, 2012

Are European Mobile Service Providers About to Make a Big Mistake, Again?

Sometimes, the only worse thing than losing a major spectrum auction, designed to enable the next generation of mobile networks, is to win it.

For some observers, the Long Term Evolution spectrum auctions just beginning in Europe are starting to look like the disastrous 3G auctions of the 2000 period, when mobile operators spent too much on spectrum rights, causing financial distress that threatened some of the leading firms with bankruptcy.

It looks like the same thing could be happening again, and the upcoming United Kingdom auctions might confirm the possibilities. The precursor in this case was the Netherlands auction, which cost mobile service providers more than anybody really had expected. 

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Though it is too early to evaluate the outcome, investors were showing some signs of concern. The first day of stock trading after the completion of the Netherlands spectrum auction, shares of winning bidders fell, across the board.

KPN fell nearly 15 percent, the steepest drop in more than a decade. Shares of Vodafone were down 1.7 percent by the close of the day. Deutsche Telekom fell 0.3 percent in Frankfurt, and shares of Tele2 declined one percent in Stockholm.

Up next are similar spectrum auctions in the United Kingdom market, which more than a decade ago witnessed a huge overbidding problem.

Vodafone shares fell 2.8 percent, and KPN said it wouldn't be able pay its promised end-of-year dividend. Those are two examples of how "success" in the Netherlands 4G spectrum auction is having financial effects on the auction "winners."

KPN bid €1.35 billion for 120 MHz of 4G spectrum covering the Netherlands, The Register reports.

That doesn't necessarily mean Netherlands service providers have spent too much to acquire 4G spectrum. That can only be assessed over time. But there is recent precedent for the entire European mobile industry overspending for 3G spectrum, and some might say the industry is heading for that same mistake again.

On April 27, 2000, the United Kingdom auctioned off five licenses for 3G wireless spectrum, raising $35 billion. Over the next year, a half-dozen other European countries held their own auctions, raising a combined $100 billion in a frenzy of overbidding.

Ever since then, some have worried about the potential downside of "winning" a major spectrum auction.

As you might expect, most of the new 4G spectrum that recently was won in the Netherlands spectrum auction  went to the biggest mobile service providers in the Netherlands. That happened despite restrictions on how much new spectrum the leading mobile service providers could acquire.

The 3.8 billion Euros ($4.97 billion) proceeds were much higher than observers anticipated, far surpassing the EUR400-500 million the government had expected.

European mobile phone companies spent $129 billion six years ago to buy 3G licenses that were expected to trigger new revenue-generating services. As recently as 2006, though, that had not proven to be the case.

The U.K.’s 3G auction raised £22.5 billion ($35.7 billion) in 2000, amounts that nearly bankrupted most of the firms that won the bids.

Some might worry that, despite knowing what happened during the 3G auctions, mobile service providers are about to make the same mistake again.

Edited by Brooke Neuman

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