Rocketing UK mobile auction just the start

Other countries may enviously eye the Treasury's £22bn (so far) windfall, but the highest-bidder-takes-all approach has its risks

Gordon Brown's £22bn-plus windfall from the third-generation mobile phone licence auction may bolster government finances, but it is equally certain to strain the balance sheets of the winning companies.

That's before each winner, on top of paying £4bn or more for one of the five licences, spends about £2bn over three years to develop the network to run universal mobile telephony services (UMTS).

Those sums proved too much yesterday for Spain's Telefonica, which withdrew in the auction's 132nd round. Telefonica was a spirited bidder for licences A and D, but decided that the price tag to develop a British business had become excessive.

Stephen Pentland, partner at research firm Spectrum, said: "Telefonica had no business in the UK market and there was no synergy for them to bid for this licence. I think [their withdrawal] was a natural and inevitable conclusion for them."

Now just six bidders are in the hunt for the five licences. Yesterday, at the end of round 133, Vodafone was in pole position for licence B with an offer of £5.66bn after a frantic session in which the lead for the biggest licence on offer to an existing operator changed hands three times.

British Telecom, after challenging for licence B, shifted to licence E, which offers the least frequency capacity, with a leading bid of £3.74bn. Jo Oliver, telecoms analyst at Lehman Brothers, said: "I think BT has been playing a fairly canny bidding game so far, but it does take on lot of risk if it really is keen to get on a bid for licence B."

Bidding for the three other licences saw Telesystem International Wireless stay ahead for licence A, reserved for a new operator, with a bid of £4.38bn. NTL Mobile, backed by France Telecom, seemingly abandoned the chase for licence A, which with licence B offers the biggest piece of spectrum, by shifting attention to licence C, where it led with a bid of £3.76bn.

Among other existing operators, One2One continued its pursuit of licence D with the high bid of £3.68bn. Orange has been chasing licence E but bowed to BT in late bidding yesterday.

To the relief of mobile operators, not every country in Europe plans a ruthless highest-bidder-take-all approach to the allocation of UMTS frequencies. The European Commission body responsible for telecoms regulation has set no specific rules for awarding licences, other than that every country must establish its plans in the current year and award its licences by 2002.

What is constant is that each country in Europe will be awarding 60MHz of UMTS spectrum. As most countries are aiming to increase competition in the mobile sector, the allocations have been designed to ensure that new entrants can win a licence.

Germany's award of licences is expected to follow closely the auction process in Britain. The unexpectedly large sums bid here - eight times higher than the Treasury expected - have led analysts to raise their estimates for the German auction to £30bn.

What is different about the German auction, due to get under way late in June, is that 12 equal blocks of 5MHz spectrum will be available. Companies must bid for either two or three blocks, although just one block is sufficient for national coverage. Oddly, the German model makes it possible for the four incumbent operators to outbid newcomers, so perpetuating the current levels of competition.

Elsewhere in Europe, governments have mostly opted for what industry insiders call the "beauty parade" approach, a process where mobile operators are selected on the quality and suitability of their plans. That was the approach used by Finland, the first country in the world to award UMTS licences. The spiritual home of the mobile phone - and actual home of Nokia - Finland awarded licences according to timeliness of network roll-out and service development plans. This approach is being followed in Spain and France.

Although the vast sums to be collected by the Treasury from Britain's auction are certain to make government mouths water across the Channel, the "beauty parade" approach is not without merit. In Spain, for example, winners of the four UMTS licences awarded last month have just one year to develop networks extending to the country's 35 cities with populations of more than 250,000. In contrast, British UMTS licence winners will have five years to build networks covering 80 per cent of the population.

Detractors of the auction approach argue that the sums paid to governments will inevitably be passed on to consumers via higher prices. Others question whether the logic for the auction - a scarcity of spectrum - still applies, as Brussels is likely to release additional frequencies in the future.

The Labour government has defended the auction, arguing that mobile companies are the best judges of what the licences are worth. Most industry watchers believe that data services - the prime reason for developing UMTS networks - will eventually surpass voice services as the main revenue source for mobile companies. One such service was unveiled yesterday when BT signed a partnership with internet bank Egg to offer banking services over internetcapable mobile handsets.

Elsewhere, notably in the US, auctioning licences has proved problematic. With different standards in use in different regions, mobile operators have been hampered by the lack of a clear network migration pattern from an existing protocol to new higher band-width protocols. Moreover, auctions in the late 1990s raised about $10bn (£6.3bn), but at the cost of some aggressive bidders defaulting on their payments or going bankrupt.