TELECOM REGULATORS, LEADERS SEE 3G COMING, BUT SLOWER THAN THOUGHT

The 3G auctions in the U.K. and Germany, which together brought in close to $100 billion from operators seeking next- generation licenses, don’t necessarily mean spectrum allocation auctions aren’t useful, said Matthias Kurth, pres., Germany’s Regulatory Authority for Posts & Telecommunications. Even as U.K. and German 3G auctions were bringing in billions, he said auctions held around that time in the Netherlands and Austria were notable for their disappointing results. “The main reason [for high prices] was the timing and not the principle of an auction,” he said. Kurth and others said the high-flying auction prices were influenced largely by what were then inflated telecom and Internet company valuations.

Kurth said that in the case of spectrum auction, it was hard to manage policy outcomes because of the speculative nature of the process. In the case of Germany’s auction for 3G licenses, it had been expected to generate 100 million Euros and instead brought in close to 40 billion. “It’s very difficult to combine the principals of an auction with other principals, Kurth said: “You couldn’t limit an auction.” For so-called “beauty contests,” in which spectrum applicants are chosen in a merit-based process that doesn’t involve bidding, he said a problem was that critics raised concerns that incumbents would be favored. Regulators face pressure to bring spectrum to the market as quickly as possible, further challenging the timing of auctions, he said.

Unlike the U.S., where some PCS bidders went bankrupt, no German carriers entered bankruptcy following the costly 3G auctions, Kurth said. “I think the 3G rollout will happen. Maybe in many countries it will happen a year later than expected,” he said in a late Mon. panel discussion: “But that’s not a problem. We have to keep in mind we gave these 3G licenses for 20 years.” He cited the example of the GSM market, where handset availability and other factors slowed the GSM market, where early expectations had forecast fast growth. He predicted a “slow curve growth” from 2004 to 2007, but much more development starting in 2007. It’s clear from the new technology on display on the Telecom exhibit floor that “the handsets are already there,” Kurth said.

Aside from the timing of the auctions around when a major downturn hit industry, said Craig Ehrlich, chmn. of the GSM Assn.’s board, another problem was that operators weren’t speaking with “a single voice.” One crucial area that carriers need to be heard on is timing, he said. “We need to have operators make the decisions on when these new services are introduced,” he said. “In some of these auctions, some of the operators were forced to meet certain timing [deadlines] as to when they would roll out. Not only did we have to pay a huge tax to the government, but then we were told when to build.” He called for policymakers to look at such timing issues in a “much more liberalized way.” He also said operators hadn’t done a good job of initially managing expectations over 3G. “We didn’t manage the media hype,” Ehrlich said. “We have to be careful. We are going to continue to see lots of media hype. Now we are going to hear about 4G.”

Several companies have made 3G equipment announcements at the show so far this week, although Wi-Fi and voice-over- IP have drawn as much buzz. Many wireless executives have been projecting substantial increases in data revenue. Orange said it expected 25% of its revenue by 2005 would come from nonvoice customers. The carrier said customers on average accessed the Internet 5 times per day from its SPV E200 smart phone, which has Bluetooth capabilities.

Ehrlich said a dozen 3G GSM wireless systems were in operation and 40 more were expected by the end of the year. Those figures are based on public announcements, he said, and he suspected a dozen more operations were set to come online. “Handsets will be here early next year in very large numbers, so that is very reassuring,” he said. Nuraizah Abdul Hamid, chmn. of Malaysia’s Communications & Multimedia Commission, said that in a 3G process that resulted in new spectrum assignments in April, her govt. wasn’t motivated by the income an auction could generate but by the technology that could be rolled out. The process involved an application information package for participants seeking spectrum assignments that set up criteria including service rollout, infrastructure arrangements and financial resources, Hamid said. To make sure applicants didn’t “overcommit” to timelines, each bidder could make its own proposals, she said. Three blocks of spectrum were made available, with the govt. setting their value at $13.2 million each, payable in 5 years in equal installments.

NTT DoCoMo Pres. Keiji Tachikawa told reporters they should temper their expectations on 4G. Asked when 4th- generation wireless services would come online, he suggested that journalists “for the time being forget about 4G.” He said 3G service had been in development since the 1980s. Japan reached the 1 million mark for 3G subscribers at the end of last month, he said. To obtain 4G services, data transport speeds of triple the rate of current 3G systems will be needed, he said. While tempering 4G expectations, he still said DoCoMo was completing outdoor field tests in that area. Based on the time it took to develop 3G technology, he said the current state of development of 4G was equivalent to where 3G efforts were in the mid-1990s. “This implies another 10 years or so until the commercial service of 4G,” Tachikawa said. -- Mary Greczyn

Telecom 2003 Notebook…

One early theme that’s emerged here this week is the role regulators play in a down economic environment for telecom, with several participants saying today’s situation was more complicated than at the height of the dot-com boom, when many companies sought to minimize govt. intervention. David Currie, chmn. of the new U.K. regulatory body Ofcom, said early expectations of when privatization would begin in the telecom sector were that the need for regulations would erode gradually, with a “withering away of state-specific regulation,” and competition that took the fore as the market stabilized. In the 1980s, Oftel, the predecessor agency to Ofcom, generated a small number of directives and consultations, Currie said. “In 2002, Oftel generated 100 such documents,” he said. “We have some way to go before the withering away of regulation.” Among the regulatory issues with which Ofcom is grappling, he said, are infrastructure versus service-based competition, and (2) how public policy objectives intersect with a desire to allow competitive markets to operate. In the case of incumbent British Telecom, Currie said the company had responded well to the U.K. govt.’s commitment to develop broadband. After a slow start, BT has rolled out DSL to large parts of the country, he said. “The latest numbers suggest they could reach up to 80%, which considering the problem of access in the rural areas is quite an achievement,” Currie said: “But it has opened BT up to accusations that it’s seeking to dominate the broadband market.” Competitors argue that there may be long- term detriment to the competitive market, he said. Ofcom, which merged 5 different regulators, will come together formally next month, he said. The new agency will operate with a “bias against intervention,” he said: “If we don’t have to intervene, we won’t.” To do that, Currie said, the agency will need to step up efforts to make sure its decisions are “evidence-based. We need to be the best informed in town.”