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I think the EU is shooting itself in the foot by allowing this crazy bidding for 3G licenses. I am afraid that they risk more than discouraging the introduction of new technologies. I am afraid that they are putting the future profitability of 3G service providers at risk with these exorbitant license fees.

Based on the recent German 3G auction, I did a quick calculation of the cost per subscriber of the 3G license fees in Germany.

Assuming that
1. penetration rates remain the same in Germany as a result of saturation, and
2. 100% of cellular customers switch to 3G contracts,
then the cost per subscriber is over USD 1,000.

If we assume that the average the average subscriber pays USD50/month for service and other fees, then the pay back for the license fee alone is 20 months. This does not consider any amortization of infrastructure expenses, operating costs, or overhead. If we assume that these costs are USD500 per subscriber, then the break even point could be 30 months or longer. Thus, these companies will need to keep a the average customer for between 2 and 3 years to begin showing a profit.

With the churn rate topping 20% in many countries, it is already a problem for cellular service providers to hold onto a customer long enough to be profitable. Service providers seem intent on adding new customers rather than keeping their existing customers. Offering incentives to keep customers, may further depress revenues. This would extend the number of months to the break even point.

With the massive infrastructure investment that 3G will require, it would appear to me that 3G in Europe is a risky investment. In fact, unless the regulators in the US and Asia take notice of this and keep licensing fee cost per subscriber much lower than they are in the UK and Germany, I believe that the outlook for 3G could be very bleak.
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No. of Recommendations: 4
Hi bhhurd

Without wishing in any way to be disrespectful or provocative, I really must ask if yours is a typical American point of view.

America...... land of the free, survival of the fittest (in buisiness at least), minimum government involvement, winner takes all, etc. etc.

In the two examples you quote of the UK and Germany there was indeed a free and open, no holds barred, pay what you think it is worth auction. And who do you think is the better qualified to determine the true market value of these spectrum licences........the governments or the service providers? You call the prices exhorbitant.......but I suspect no matter how well informed your figures are, the bidders are better.

If you place so little store in the ability of these providers to decide for themselves the future economies of their buisness then you should, of course, stay well away from any "risky" investment in them. I don't know what these licences are really worth, and clearly the respective governments do not know either, because certainly in the case of the UK they where expecting much lower amounts.

You refer to the number of "months" to break even, but do remember that the licences in the UK run for 20 years and who can really tell what opportunities their will be for wringing revenue out of these licences over that period. These governments might not be as stupid as you think.

If I understand you point correctly, you are maybe not too concerned with mess that us poor Europeans have got ouselves into, but more with the hope that the US government doesn't do the same

Truly not wishing to be sarcastic, but it will be very interesting to see how the US deals with the same problem. As far as I can see, when the spectrum finally goes on sale over there after numerous delays, the prospective buyers may have to effectively bid for a "pig in a poke". Unless the government does something soon to regulate the situation, the service providers could face the prospect of bidding for spectrum that they have very little idea of when will be available for their use.

I can sympathise to some extent with your position, but in the final analysis my vote is ..........let the market decide.

Regards and good luck

applefoot








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Hi Bhhurd, and thanks for your post.

Many observers have questioned the way the auctions have gone, but I agree somewhat with the previous poster that the companies in question seem to be more than willing to absorb these costs, and there must be a reason.

Some of those reasons are:

First, they expect penetration rates to get much higher, not stay the same as you suggest. In Germany, if I recall correctly, the numbers of cell phone users are relatively low right now.

Secondly, with always-on wireless connections to the Internet, which is what 3G promises, and billing potentially based on packet size, rather than length of time connected, carriers are expecting to get larger monthly fees, and indications are that they probably will -- users of DoCoMo's i-mode have higher bills than their voice-only counterparts.

Finally, they expect to get money from more than just connection time. Whether they're right or not is up in the air, but a lot of these companies expect to get a cut of mobile commerce and other services.

I do agree with you though, that, it would be risky to invest in the carriers right now, simply because they've laid all this money out while people are still figuring out how to make money from wireless services. That's (partly) why stocks for companies such as Deutsche Telekom and other European telcos have been hit pretty hard recently.

Incidentally, I believe a lot of the European countries got the idea from US auctions of spectrum in the early '90s, for what it's worth :-).

Fool on,

Chris
TMF RFK
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Thanks for the reply.

The life of the license means very little when the churn rate is so high. The typical customer will never stay with one provider long enough to cover the license fee, let alone infrastructure, marketing, R&D costs and so on.

That is the reason I was mentioning the pay back time.

As to faith in the free market - yes I have faith in it. But most governments place limits on market freedom, or was I mistaken about the recent Microsoft trail?

One pundit pointed out that in both the UK and German auctions there were participants bidding who only wanted to bid up the price. They did not intend to get licenses, but they wanted to make it damned expensive for those companies who had to have 3G licenses in their own countries.

If you really want totally free markets, then you must accept infinite consolidation to the point that there is one supplier for each good and service. That is the end result of survival of the fittest. Perhaps you know some dinosaurs that survived.

I am afraid that the suicidial bidding will mean one of two things:
1. There will be consolidation whereby the "winners" in this bidding war are so cash strapped that they are taken over (with their licenses) for a fraction of their value today. OR
2. The very governments that are so gleefully filling their coffers with license fees may have to bail out their bancrupt 3G providers.

I do not think that either of these scenarios benefits the consumer, the governments, nor the 3G license holders.

It appears that Asia will probably award licenses on technical merit.

Those are my thoughts.

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Thanks for the reply Chris,

Let's consider what license fees really are. They are taxes! Unlike income taxes which are based on profit, the payment these taxes is based on hope that 3G will be as rosy as you predict. I hope so too.

I am not so optimistic about the ability of the the 3G licensees to increase the average revenue per subscriber. This figure has been dropping dramatically over the last few years as competition increased. I base this on my own reading of telecom annual reports (I own their stock.)

How much will people pay each month for their cell phone service? USD 50, USD 75, USD 100, or higher?

And how much will competition trim the revenue per subcriber? Each of my family members now has their own phone and my total bill is lower now than it was for one phone and 1/5 or the airtime 4 years ago. When will this trend stop?

The same trend is happening in Korea and Taiwan where I also have cellular service.

Their is a saturation point for cell phone pentration. I do not know what it is, but Finland is 66% now. Will it go higher? I can not predict how many children under 10 will have cell phones in the future. Taiwan and Hongkong are between 57 and 58%. There is no question that China, India, Indonesia, and SE Asia will increase dramatically. These countries have low penetration.

Those are my thought on the issue.



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> users of DoCoMo's i-mode have higher
> bills than their voice-only counterparts.

Yes you are right - two ways: DoCoMo finds that:
(1) imode users of course have additional charges for (packet switched, per-packet billed) imode use, but
(2) in addition they also use more (circuit switched, connection-time billed) voice calls than non-imode subscribers. You can find more information about imode in the "imode-FAQ":
http://www.eurotechnology.com/imode/faq.html

Best regards,

foolishlysimple
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Hi bhhurd

You make some interesting points some of which I am not qualified to argue with, namely the costs of rolling out 3G services. Again I have to leave that to you and Service Providers who have won the bidding.

One pundit pointed out that in both the UK and German auctions there were participants bidding who only wanted to bid up the price. They did not intend to get licenses, but they wanted to make it damned expensive for those companies who had to have 3G licenses in their own countries.

IF this was true,(and I rather doubt it), then like in any auction situation it was a very risky tactic to persue. If these shills were bidding just to get competitors to reach too far and therefore go bust and subsequently come in and pick up their competitor on the cheap, then it could still be argued that market forces still work. The new guys can buy cheap and lower the prices to the consumer and just like in any business the pioneers have taken the greatest risk.

It appears that Asia will probably award licenses on technical merit.

God forbid that any government should decide on, and enforce the technical merit of a freemarket activity. I don't say that they might not try, I just shudder at the thought. Their function is to ensure a level playing field where appropiate and put a stop to illegal practices.(Microsoft?)

Probably the only alternative to an open auction is what has been descibed as a "beauty contest". In countries that have vast tracts of land dotted with sparse populations outside of the cities, then a case can be made for fixing a lower price and then selecting a service provider on its proposed plan for the whole of the country and not just the most profitable bits.

This situation would not apply in the cases of UK and Germany, but maybe in say places like Sweden, Norway and even the USA?

Time will tell of course, but in the case of the UK, I guess I am content for the government to have a rather unexpected 30 billion dollar bonus to tuck away for spending on things like the National Health Service.

A form of "tax" it may be, but we all know that in life there are only two things that we can be sure of ............;o)

Regards

applefoot.

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Thanks for the reply,

<IF this was true,(and I rather doubt it), then like in any auction situation it was a very risky tactic to pursue.>

I will see if I can find the information that I referenced.

<<It appears that Asia will probably award licenses on technical merit. >>
<Probably the only alternative to an open auction is what has been described as a "beauty contest".>

I meant "beauty contest". Sorry about the confusion. However, a primary criterion of a beauty contest is technical merit.

<God forbid that any government should decide on, and enforce the technical merit of a free market activity. I don't say that they might not try, I just shudder at the thought. Their function is to ensure a level playing field where appropriate and put a stop to illegal practices. (Microsoft?)>

Let's not get into this. MS's competitors brought this issue up. If the DOJ prevails, the competitors win not consumers. However, there are other examples of antitrust abuse. I agree with you and George Soros that the free market must be constrained to some degree to prevent abuses.

However, I do not agree that charging fees (i.e. taxes) for use of portions of the radio spectrum is reasonable. The governments do not own the airwaves.

If you really want free market forces, then let the governments simply allocate portions of the spectrum for each type of use. Then let market forces prevail.

License fees, particularly the exorbitant fees charged in the UK and Germany, distort the market. The big company with the old stodgy board is better able to pay the fee than the start up with the true killer application.

The license fees themselves prevent many smaller players from entering the market.

Consider this: Would we have an Apple Computer today if Jobs and Wozniak had been forced to pay a huge license fee to enter the computer market? Would Michael Dell have been able to form a company in his dorm room at the University of Texas had he faced such a licensing requirement?

All the licensing fees do is pre-select the most cash rich companies. The consumer decides in a truly free market. With such high fees, I am afraid that the consumer will be denied many choices that they might have had.
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Here is the Richard Thomson article talking about bidders raising the cost in the German 3G auction.

http://biz.yahoo.com/wi/000818/10905.html
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