Telecoms tycoons are betting billions on mobile future

There is room for only a few global communications behemoths in the costly race for third-generation licences
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The multi-billion pound battle for third-generation mobile phone licences in Europe marks the beginning of a bigger struggle to determine which telecoms groups will ultimately succeed in assembling global network reach and brands.

The multi-billion pound battle for third-generation mobile phone licences in Europe marks the beginning of a bigger struggle to determine which telecoms groups will ultimately succeed in assembling global network reach and brands.

With nearly £50bn already committed to licence bids for the next generation of high bandwidth networks in only the UK and Germany, analysts believe the total cost of acquiring global universal mobile telecoms service, or UMTS, licences will top £100bn, with the further cost of £100bn or more to build as many as 70 new broadband networks in the next decade.

These sums make it likely that only a handful of mobile groups will have the capital and management resources needed to assemble and operate global businesses. Although the race is just beginning, the average £5bn fee for each UMTS licence in Germany and Britain is already dividing mobile operators into a top tier, led by Vodafone, and a second tier that will be absorbed into one of a half-dozen or so emerging global groups.

Paul Brilliant, cellular analyst with Morgan Stanley Dean Witter, says: "These are businesses with huge capital requirements. Therefore you have to be part of a global group. That's it in a nutshell."

The hundreds of billions being wagered on UMTS licence spectrum and networks is really a bet that business executives and eventually consumers will use their handsets for far more than voice communication. Hans Snook, chief executive of Orange and an early mobile evangelist, envisages his global mobile brand offering a wide range of interactive entertainment and information services. Many of these services are decidedly in the realm of science fiction, although the technology to enable, say, smart homes or interactive automobiles is largely developed.

Its deployment, however, promises to be complicated and expensive. WAP, up and running with, at best, mixed results, offers headline news, share prices, weather and entertainment listings. Yet the real money for next-generation mobile service is expected to come from transaction charges for using the handset as a debit card and videophone and as an entertainment device for downloading music and video clips.

The brute financial reality of globalisation in the mobile industry is already determining winners and also-rans. The most recent admission to the latter group is Finland's Sonera. Despite its record of innovation in mobile-mad Finland, the government is taking buyout offers for its controlling stake, no doubt reasoning that in the drive to get bigger, Sonera is no match forVodafone or Deutsche Telekom. Consequently, Sonera, with a market capitalisation of £18bn, is likely to be absorbed by one of a growing list of possible suitors, thought to include Spain's Telefonica as well as Orange and British Telecom.

As consolidation gathers pace some familiar names are likely to disappear into bigger groups. If France Telecom seems a likely long-term winner after its £32bn purchase of Orange, it is far from clear that BT, say, will enjoy such longevity. Although BT was among the first to invest in mobile networks across Europe, acquiring minority holdings in Germany, France, Spain and elsewhere, only in the Netherlands does it exercise control. BT's future, however, would seem secure, most likely in an eventual merger with its existing partner AT&T.

Among the newest candidates for a global position is Hutchison Telecom, a division of Li Ka-shing's Asian conglomerate Hutchison Whampoa. Having netted £15bn from last year's sale of Orange to Mannesmann, which was then absorbed for £85bn into Vodafone, Hutchison has recommitted itself to building a global mobile group, this time in third generation UMTS.

After winning Licence A in Britain's UMTS auction via its discreet financial backing of TIW, the Canadian-based mobile company, Hutchison has joined forces with KPN of the Netherlands and Japan's NTT DoCoMo. Their ambitious goal is not only to secure a UMTS licence in Germany and in other European markets, but also to make DoCoMo's i-mode data transmission system the standard for future mobile handsets.

When Hutchison Whampoa managing director Canning Fok unveiled the pact with DoCoMo and KPN he underlined why companies are willing to spend billions for a piece of the third-generation mobile market. "3G is the next level of telephony," Mr Fok said, while projecting that profits would be made within five years. "It will form a cornerstone for us to do other things in Europe."

Others are less sure. Lars Godell, telecoms analyst at Forrester Research, believes that the mobile companies are overly optimistic. He forecasts that only 30 per cent of Europeans, somewhat less than half of total mobile subscribers, will use wireless internet service by 2005 and that mobile transactions will be dwarfed by retail sales taking place online via PCs and digital television.

That could allow US carriers such as AT&T and Bell Atlantic, both of which control pan-American cellular and major fixed-line networks, to stage a comeback fight for a top seat in the global mobile industry. For the moment, however, companies in the fragmented US mobile sector are more likely to be among the hunted than the hunters.

Christian Kern, analyst with Salomon Smith Barney, believes mergers and acquisitions in the mobile sector have some way to run. "You can clearly see a consolidation trend in the industry," Mr Kern says. "European companies are going to buy US companies. Deutsche Telekom buying Voicestream Wireless is one example."

Others warn that 3G networks are a work in progress and early adopters will meet teething troubles, such as the glitches that accompanied the launch of WAP. In Japan, DoCoMo has experienced dozens of interruptions for its i-mode service since it launched 18 months ago.

But i-mode has attracted 10.4 million subscribers who pay incremental fees starting at a few pounds per month for a range of services on top of monthly voice communications bill.

Conversely, i-mode's success - its user base dwarfs the total WAP users in Europe - means that mobile internet and the expensive 3G networks behind it may, after all, have a lucrative commercial future.

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