German 3G Auction in Final Rounds

After 13 days and 150 rounds of bidding, five companies are left competing for potentially four German 3G wireless spectrum licenses. The auction will raise a minimum of $39 billion for the German government, which says it will use the proceeds to pay down its budget deficit. The losers may end up being the consumers of 3G services, as the companies are going to have to price their services aggressively to recoup these huge expenses, which come prior to any build-out of a network.

By Bill Mann (TMF Otter)
August 16, 2000

The German government is entering the last rounds today as five remaining mobile communications groups bid on four licenses for the UMTS frequency blocks allocated to provide third-generation (3G) services in Germany. The participants have now been through 13 days and 150 rounds of bidding, with the total take for the government exceeding 43.79 billion euros ($39.9 billion). This supplants the record-breaking 3G license auction in the U.K., in which the total amount of money bid was $35.4 billion. The German government has announced that it would use the proceeds to reduce its budget deficit, but whatever they decide to use it on, this process will yield quite a windfall for federal coffers.

This record level was reached in spite of the withdrawal of Debitel, which was backed by Swisscom (NYSE: SCM), when the license price surpassed Debitel's Schmerzgrenze, or threshold for pain. After watching in horror as the British licenses got bid sky-high, many companies chose to enter into partnerships to bid on and utilize the licenses in Germany and other countries. The remaining bidders in Germany include:

Bidder Name         Underlying Companies
Deutsche Telekom    Deutsche Telekom (NYSE: DT)
  Mobilfunk         Vodafone (NYSE: VOD)
                    Mannesmann

E-Plus              Hutchison Whampoa
                   KPN (NYSE: KPN)

Viag Interkom       Telenor
                    British Telecom (NYSE: BTY)
                    E.On

MobilCom            MobilCom
                    France Telecom (NYSE: FTE)

Group 3G            Sonera (Nasdaq: SNRA)
                    Telefonica (NYSE: TEF)

A curious bidding process
The bidding is a bit convoluted; until it is complete, we will not know how many licenses will be granted. To achieve national coverage in Germany a company must purchase three of the twelve frequency blocks. But a "small license" is also possible should companies purchase only two blocks. So with five bidders and one of the five, Viag, having already chosen to only pursue a two-block license due to the stupendous costs involved, only two more companies need to drop from three to two for the bidding to be complete. In other words, none of the five companies who are currently bidding these frequency blocks into the stratosphere need drop out, they must only ratchet back their market coverage assumptions. The weak link in this scenario is the phrase "must only." These spectrum blocks are costing on average $3.3 billion, or $6.6 billion for the two blocks needed to constitute a license, and even at that level, it would not be sufficient to achieve complete coverage of Germany.

This auction bears close watching. Companies are having to make enormous capital commitments for services that have not yet been released, and these same companies are going to need to aggressively recoup these investments. The pressure to recoup these investments could price 3G services significantly higher than earlier anticipated, conceivably reducing the initial market breadth. Meanwhile, Italy, Belgium, and Switzerland prepare for their own upcoming auctions, providing chances for their governments to hit the jackpot as companies bid on "must-have" pieces of frequency.

Your Turn:
These auctions are pitting potential service providers against one another in auctions with "worst-case scenario" attributes: limited supply, unmotivated sellers, and buyers with absolute necessity to purchase. Several countries, including France, Portugal and Hong Kong, have elected to use "beauty contests" instead of auctions, weighing the granting of licenses heavily toward companies already active in their markets. Is this a better method? Give us your thoughts on the Telecommunications or Wireless World discussion boards.

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