Three generations and sinking

Mobile phone operators will need to recoup the billions they spent on acquiring 3G licences if the system is ever going to take...

Mobile phone operators will need to recoup the billions they spent on acquiring 3G licences if the system is ever going to take off properly, says Karl Cushing

At the peak of last year's dotcom and mobile phone love-in, Vodafone, Orange, BT, TIW and One2One paid the Government £22.5bn for 3G licences - an amount that is increasingly being viewed as too much. It would appear that the operators are already starting to fret about their ability to recoup the huge sums they paid for the licences in last year's auction and are seeking changes to their licence agreements.
Rumours abound of the troubled operators demanding clandestine meetings with the Department of Trade & Industry, industry regulator Oftel and e-minister Patricia Hewitt in a bid to improve their lot. The latest rumour is of a government-financed cashback package where money will be loaned to help the operators fund their networks.
But while this potential funding is being worked out in Whitehall, some industry watchers have expressed concern that users and the business community may have to shoulder the burden of repayment.
However, a spokeswoman for Oftel says it is unlikely that operators will attempt to pass on the costs, adding that she expects the operators to write off the expense as "sunk costs". It remains to be seen whether the operators themselves will prove so altruistic. But if they do attempt to pass on the costs through services such as m-commerce, it could prove expensive in the long run and effectively amount to shooting themselves in the foot.
Tim Sheedy, research manager for European wireless and mobile communication at IDC, also believes that that this is unlikely - albeit for different reasons. "If it costs too much people won't use it," he adds.
As Sheedy points out, although m-commerce is new, consumers are aware of the cost of e-commerce and know what their mobile phone charges are. "Any price hikes will be noticed," he says.
Instead, Sheedy feels that operators will aggressively court alternative revenue streams such as advertising to recoup their costs. And although he does not see hidden costs as a factor, a big obstacle will be the users' perception of security, which was also a big stumbling block in the uptake of e-commerce.
Mike Herman, chairman of the Global Mobile Commerce Forum, insists that operators always intended to pass on their costs to consumers. For him, this forms the whole premise behind the concept of providing value added services.
"I believe they justified the costs of 3G through the belief that they will be being able to provide a suite of services they can get money back from," says Herman.

"They'll recoup whatever they can from customers but that was always the design."
According to Herman, to get it right, the operators will have to do three things successfully, that is: "offer the right proposition, at the right price at the right time".
Rather than creating a potential for consumers to get a raw deal, Herman sees the high price of 3G licences as a threat to innovation.
"Other countries can try more things and make more mistakes but ultimately be more successful," he says, emphasising the importance of trial and error in deploying the new technology and services.
"The risk of getting it wrong in the UK is greater. There is less room for error and this might create barriers for innovation."
Not surprisingly, he would like to see the Government ploughing some of that £22.5bn back into the marketplace through subsidies and investment, although this is "unlikely".
Herman believes that the first real m-commerce money-spinners will be high value transactions involving non-reputable items - like gambling, gaming and share trading. On these services, people will pay for the convenience and will not mind doing so.
But it will not necessarily be the customer who picks up the costs for services like m-commerce, says Herman - banks and retailers will also shoulder some of the burden. Why should the customer or the operator have to pay for something that benefits the retailer?
Retailers should be confident that investing in m-commerce will drive customers to them, says Andrew Fisher, European managing director of communications infrastructure firm InfoSpace.
He believes that it is essential that operators add retailer-funded services such as m-commerce, to consumer-funded services like e-mail, to be profitable. "This," says Fisher, "will begin the process of transferring any costs from the end-user to the retailer."
Getting users to pay a flat subscription fee for services like m-commerce is the most important factor in pricing, says Tim Wise, chairman of the mobile special interest group at the Communications Management Association.
This is the lesson learnt from the success of i-Mode in Japan, which runs on a subscription-based system, rather than Wap in the UK, which has, up to now, been regarded as a failure. "Why reinvent the wheel?" Wise asks. "The Japanese system works."
He insists that the UK situation should not be viewed in isolation. "The operators didn't just buy licences in the UK," Wise points out. "You need to look at the overall picture. Most of the five operators have pan-European coverage." Costs can then be spread further afield.
Although Wise is confident that m-commerce will flourish in the long run, he does not expect the networks in the UK to be operational until 2005.
Like Herman, Wise says that the operators cannot afford to make mistakes in the UK so the pioneering work will happen elsewhere in Europe in countries such as The Netherlands or Belgium.

"We'll regret how much we paid - we'll be followers rather that leaders," he says.

Who paid what?

TIW bid £4.38bn for licence A, the widest spectrum licence, reserved for a new entrant. The real prize goes to TIW backer Hutchinson-Whampoa, which will own 90% of the joint venture set up to utilise the licence Vodafone paid £5.96bn for licence B, the widest spectrum available to an existing operator BT spent £4.03bn for licence C, a more limited capacity for customers than licence B but nearly £2bn cheaper One2One bid £4bn and won licence D which has the same capacity as licence C
Orange won licence E which also has the same capacity as licence C, but it paid £4.1bn.

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