3G - will it be another damp squib?

As the latest auction round for third generation (3G) mobile licences gets under way, this time in Italy, investors are beginning to reconsider the costs involved

Ian Mitchell

City briefing

As the latest auction round for third generation (3G) mobile licences gets under way, this time in Italy, investors are beginning to reconsider the costs involved and wonder if the potential uptake of mobile services will justify the prices being paid.

As a consensus begins to grow that wireless application protocol will be a damp squib (although SMS is doing rather nicely, thank you) the worry begins that 3G will fail to meet expectations too - and if it does it will drag the telecoms firms with it.

The network operators paid a total of £22.5bn in the UK and £30bn in Germany for spectrum bands that enable them to offer high speed mobile services. To put that in perspective, it represents more than £400 for every person in the UK. On top of this they must build networks which will cost somewhere between £1bn and £4bn per operator before they even begin to see any return on their capital.

In the meantime, they have to fund this investment through more debt, which is already running at levels that make your head spin.

To add to their woes, some operators, including BT, have had their credit ratings reduced, which pushes up the cost of servicing that debt. And no one is sure how profitable mobile networks will be.

Oh, and the full potential of two megabits per second 3G won't be realised until 2005/6 (don't believe the hype of those who claim earlier dates) and with 110 kbps only available by the end of 2003, they'll be paying these debts for many years to come.

On the upside, it is clear that the demand for mobile services will be strong, especially from large corporates with large sales forces or field engineers on the road, and logistics and distribution companies. Obviously, the network operators have estimated the revenues and are comfortable with the investments they are making. Investors, however, are becoming increasingly concerned, as can be seen by the slide in BT's share price, that the returns will not justify the investment.

But there is another option for investors who believe the potential of 3G but have concerns about the returns that will flow to network operators.

As 3G arrives we will increasingly see new applications for the technology that will drive its acceptance and the birth of new companies that will take these applications from the drawing board to reality.

For example, we will see billing solutions providers, including convergent building, mobile customer relationship management applications, wireless application service and middleware providers to enable different protocols to interact, mobile device manufacturers, technology providers who will smooth the connection process and any number of others who will emerge over the next few years.

Some investors will remain wary because of the hype that has surrounded Wap, which hasn't been able to overcome the limitations of the technology and the input and display capabilities of the devices to be a hit with users.

But 3G will be another story, and the early stage players we see beginning to emerge now have a huge opportunity in what will be an enormous market.

Ian Mitchell is an IT analyst at stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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