Bidders make call on telecoms' future

News Analysis: The battle for a new generation of mobile phone licences could make or break present operators
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The Independent Online
THE TELECOMS industry is famous for spawning acronyms. Hardly a week seems to go by without some emerging technology or new service being awarded its own cluster of capital letters. Mostly, the acronyms are innocuous. But every now and then they signal a momentous shift in the industry - in the case of UMTS, the latest bit of jargon to buzz around the telecoms sector. Those four letters describe a technology which is likely to transform the telecoms industry in the UK - and probably the rest of the world - over the next decade.

UMTS has been cropping up with increasing regularity, linked to the names of the largest telecom and media companies in the UK and the rest of the world. That's because, over the next six months, a complex auction will take place which will help determine the winners and losers in the brave new media world that is set to emerge early in the next century.

UMTS, which stands for Universal Mobile Telecommunications System, heralds the next generation of mobile phones, which promise to be a vast improvement on the handsets available today. Existing mobile phone networks can transmit data at 9,600 bits of data per second - almost six times slower than a standard modem can manage over a normal telephone line. Under UMTS these transmission speeds rise to as much as 384,000 bits when mobile and a huge 2 million bits when stationary.

With UMTS, crackly lines and calls that end mid-conversation will be a thing of the past. More importantly, UMTS will make it possible for mobile phones to perform a whole range of functions that they cannot handle today. Suddenly, it will be possible to access the Internet at high speeds from your laptop computer, watch live video clips and conduct all kinds of electronic commerce from your mobile phone.

If all goes to plan, Britain will be the first country in the world to introduce UMTS - ahead of Finland and Japan. Although the service is not expected to go live until 2002, the licences will be auctioned in summer. What's more, a bitter debate is raging between existing mobile phone operators and other companies about how the auction should be best structured.

A clutch of important companies are lining for the auction. These are not just existing mobile phone operators such as Vodafone and Orange, but also fixed telecom groups like British Telecom and Energis. Foreign telecom giants such as France Telecom and Bell Atlantic are also showing an interest.

Meanwhile, a clutch of media firms is trying to work out what UMTS means for them. Reuters, the financial-information provider, and television group Carlton have been attending seminars on the subject. Lord Hollick's United News & Media has hired Don Cruickshank, the former telecoms regulator, to advise it on the impact of the new technology. Officially, the Government is still deciding how to auction the radio spectrum which has been made available. But it is likely that it will award four licences to operate a national network.

However, the Government has conflicting aims. On the one hand, it wants to raise as much money as possible for the Treasury - hence the decision to auction the licences rather than awarding them to the companies with the best ideas for offering new services. Paul Sharma, a telecoms analyst at stockbrokers Henderson Crosthwaite, reckons the auction will raise more than pounds 1bn, lifting the price of each licence over pounds 250m. Given that actually building each network will cost at least pounds 2bn, the total investment involved is huge.

That said, the market is also substantial. Henderson Crosthwaite reckons the market for UMTS services will be worth pounds 3.6bn a year by 2012. If correct, companies that win a licence should see a return on their investment within 10 years.

However, the Government is also keen to encourage new entrants into the market in order to stimulate competition. It is particularly concerned that the four licences will simply be snapped by the four existing mobile phone operators - Vodafone, Orange, One2One and Cellnet.

But the prospects for new competitors entering the market are looking increasingly slim. This is because a new entrant would be at a major disadvantage to an existing mobile operator when it comes to setting up a network.

That's because the established operators can use their existing networks to fill in the geographical gaps while they are building out their UMTS networks, allowing them to launch services earlier.

One idea to encourage new entrants was to force the existing mobile phone operators to open up their old networks to any successful bidders in the UMTS auction. However, a consultation paper issued by the Government on Tuesday appears to reject this idea.

According to Sean Gardner, sales and marketing director for Martin Dawes, a large provider of mobile phone services, this reduces the chance that new companies will bid for a licence.

"It's another nail in the coffin for attracting new entrants. It does look as if the Government is just hoping to maximise revenues," he says.

Other companies are more sanguine. They argue that while the existing mobile operators are likely to win the licences, they will not be able to offer the full range of services UMTS will make possible and will have to open the networks up to third parties in order to make the most of them.

Either way, the next six months are likely to see an increasing flurry of activity as the final auction approaches. Although it will be several years before telephone users will be able to benefit from UMTS, the telecom industry will be thinking of little else.