Spectrum bargains mean little

Third-generation cellphone technology will not be cheap, says ANNA FIFIELD in London.

Telecommunications companies may be feeling smug about the discounted prices they paid for chunks of New Zealand's radio frequency spectrum.

But if the European example is anything to go by, they have not even started to shell out for the real cost of wireless phone technology.

When the Government's drawn-out auction of the high-tech radio frequency spectrum ended last month, bids for second and third-generation frequencies totalled $133 million - significantly less than the $600 million some analysts initially expected it to raise.

At stake in the auction, which began over the internet on July 10, were management rights to 45 megahertz of 3G radio spectrum that provides a platform for high-speed wireless data, video and voice applications.

The less-prized 2G spectrum, which has a lower capacity, was also up for grabs.

Telecom, Clear Communications, Vodafone and TelstraSaturn all bought chunks of 2G and 3G spectrum, and Communications Minister Paul Swain said the low prices paid would ultimately benefit consumers.

New Zealanders have rapidly adopted mobile telephony, with cellular connections passing the 1 million mark in September.

Forty-one per cent of New Zealanders are now estimated to have cellphones.

But as telecommunications companies in Britain and Europe are discovering, buying a chunk of spectrum is just the first cost on the pricey road to the adoption of 3G technology.

The British Government's spectrum auction ended last April and raised much more than expected - at £22.5 billion ($74.5 billion), total bids were almost seven times as high as original estimates.

In Europe, spectrum auctions fetched a total of more than €100 billion ($210.7 billion).

The auction may be over, but British and European mobile operators are now reeling at the impending cost of developing the extra network capacity needed to provide high bandwidth services.

To reap the returns from their 3G investments, telcos will have to fill their networks with traffic as soon as possible.

But using the expensive high-tech networks for increasingly cheaper voice transmissions will not be profitable - operators will have to provide the higher-value data services that the technology makes possible.

Market analysts at c-quential, part of global management consultants Arthur D. Little, expect data to account for 60 per cent of 3G revenue by 2010.

But data services will be costly to establish - they will require almost double the present number of mobile phone base stations in Europe, as well as the installation of new software. Analysts forecast that the capital expenditure involved in building this infrastructure in Europe could exceed the €100 billion spent on 3G licences.

Schroder Salomon Smith Barney analyst Christian Kern thought the figure could be as high as €175 billion.

He calculated that operators building Universal Mobile Telecommunications System networks from scratch would have to invest €100 for every person in each country they enter.

European operators are desperate not to be left behind in the race to reach the 3G market and the depressed investment market - telecommunications share prices have fallen as part of a natural downturn following a boom early last year - will be expected to fund the next round of spending.

But investors are hardly queuing up to provide more funding for the industry, and it remains unclear where the development money will come from.

British-listed operator Vodafone - which has one of the strongest cash positions in the industry - plans to pay for its 3G rollout from existing funds.

But most British operators will have to raise finance to meet new network costs.

Large former state operators - such as British Telecom, the parent company of New Zealand's Clear - are weighed down by low-margin, fixed-line businesses.

New Zealand telcos can be expected to encounter similar problems.

Telecom is also encumbered with a fixed-line business and has to foot the bill for its Kiwi Share agreement with the Government, which requires it to provide the same level of service - at the same price - to rural customers as to urban phone users.

At the same time, Telecom is trying to expand services in Australia through its subsidiary AAPT.

In line with the weaker global telco investment market, Telecom's share price has plummeted from a high of $9.80 last April to about the $5.50 mark.

But despite the global downturn, Vodafone Airtouch intends to list 20 per cent of its Asia-Pacific subsidiary, Vodafone Pacific, after postponing a float in May.

TelstraSaturn is part-owned by Australia's Telstra, the partly privatised former monopoly that still accounts for more than 70 per cent of the Australian telecommunications market.

But it is uncertain whether Clear will be able to rely on its parent, BT, which is facing debts of about £30 billion and last quarter announced it would cull many of its global assets outside Western Europe and Japan.

With New Zealand phone users demanding increasingly higher-tech services and shareholders wanting better returns on their investments, local telcos will be watching to see how their British and European counterparts proceed.

* Anna Fifield is in London on an HSBC/UK Link Foundation Business Journalism Fellowship.