3G cost billions: Will it ever live up to its hype?

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BERLIN European mobile phone companies spent $129 billion six years ago to buy licenses for "third-generation" networks that were supposed to give people the freedom to virtually live from their cellphones, reading e-mail, browsing the Internet, placing video calls, enjoying music and movies, buying products and services, making reservations, monitoring health - all from the beach, the bus, the dentist's waiting room, wherever they were.
But today, most people use their cellphones just as they did in 2000 - to make calls - and the modest gains 3G has made do not begin to justify the massive costs of the technology, which has strapped some mobile operators financially, bankrupted entrepreneurs, spurred multibillion-euro lawsuits against governments and phone companies, and sapped research spending.
Over the long term, 3G runs the risk of becoming the Edsel of the mobile phone industry - an expensive, unwanted albatross rejected by consumers and bypassed by other, less costly technologies, some experts say.
"There are currently a lot of competing delivery methods for high-speed data services such as video," said Pete Hulbert, a research engineer at Roke Manor Research, a division of Siemens in Romsey, England, that researches mobile technology for the British telecommunications regulator. "There is a lot of competition for delivering these services from digital mobile broadcasting and even WiMax. There isn't one compelling argument to say it's definitely going to be 3G."
Even Vodafone, the biggest network operator in Europe, which since 2000 has spent $34 billion buying 3G licenses and building 3G networks, made just 3.8 percent of sales in the quarter ended March 31 from 3G's supposed "killer application" - high-speed wireless data.
For many, that is not enough to justify 3G's costs. On July 20, Vodafone said it was scrapping its 3G network in the Czech Republic, citing the technology's excessive costs. Vodafone's Czech subsidiary spent $87.7 million on a 3G license in February 2005.
Across the continent, 3G take-up has been underwhelming. Of nearly 720 million cellphone connections in Eastern and Western Europe at the end of June, 38.6 million, or 5.4 percent, were 3G, according to Wireless Intelligence, a joint venture of the GSM Association and the market researcher Ovum in London.
"Telecom companies misjudged the value of 3G licenses and paid way too much. Governments holding the auctions were only too happy to oblige, basically blackmailing the industry," said Joachim Dreyer, the former chief executive of Debitel, a phone service reseller that unsuccessfully bid for a German 3G license in 2000. "There was a failure from the top on down."
The most recent signs are not encouraging.
The 3G technology has been so unpopular that operators in Finland - home of Nokia, a leader in 3G network equipment - persuaded lawmakers last year to let them subsidize the sales of 3G cellphones, a practice not allowed for ordinary GSM mobile phones.
"Operators basically had to give away the handsets because nobody was buying them," said John Strand, an industry consultant in Copenhagen.
Some European investors - who once sought out the stocks of 3G licenseholders - now view the licenses as financial liabilities because they commit operators to building out national networks that do not make sense commercially.
In the United States, Verizon Wireless, Sprint and Cingular have spent a combined $10 billion establishing their 3G networks, while Deutsche Telekom's T-Mobile plans to start offering an American 3G service in 2007.
As in Europe, U.S. consumers have been lukewarm, with many perceiving 3G service to be expensive and the handsets difficult to use. Through February, industry analysts estimated that five million 3G phones were in use in the United States, less than 3 percent of the market. U.S. operators have not disclosed data on 3G use so far.
"Generally, we consider a 3G license to be a liability, not a plus," said Torsten Krumm, a partner at Apax Partners, a venture capital firm with €18 billion, or $22.9 billion, under management. "I don't think 3G has met its promise. The high license fees and capital expenditures for the operators have been very substantial, with very little in return."
Unsuccessful bidders for 3G licenses in 2000 and 2001 like Debitel of Germany now claim to be the winners, because they avoided billions in extra costs. Meanwhile, KPN of the Netherlands is still paying interest on the loans it took out to buy its German 3G license, which KPN said lost most of its value within two years of the auction.
Industry executives concede that the benefits of 3G had been overstated and that few correctly had anticipated how much the time would be needed to make the technology work. But most point out that sales of 3G data, at 3 percent to 7 percent of operator revenue, are growing fast, a sign the technology is taking off.
"It was overhyped at the beginning, and we foundered for a few years, but we are now seeing light at the end of the tunnel," said Vivek Badinrath, chief technology officer for Orange, the France Télécom wireless unit. "We spent a lot of money, but now the enablers are falling into place."
Time will tell. They also said the future was bright in 2000. Emboldened by a decade of fast growth, many industry executives then saw no end to the cellphone's ascent. With stock market values swollen at the peak of the Internet bubble, Vodafone and its competitors splurged on 3G licenses, spurred on in part by the buzz of the meteoric rise of i-mode mobile phone services in Japan.
An auction in Britain, which lasted 150 rounds over seven weeks in March and April 2000, raised £22.5 billion, worth $35.4 billion at the time. In August 2000, a German auction ran 170 rounds over 14 days and netted the equivalent of $45.8 billion.
Over the 18 months through September 2001, 20 auctions and so-called beauty contest selections in Europe, Asia, Australia and New Zealand raised $129 billion in licenses fees, according to 3G.co.uk, an industry organization that is based in Cardiff, Wales.
Telecommunications executives told shareholders that the costs were worth it. In May 2000, Vodafone's chief executive, Sir Chris Gent, predicted that 3G cellphones would let consumers do mobile banking, make electronic payments and even find the nearest café.
"The terminal is really going to become an indispensable part of people's lives, for more than just voice communications," Gent said during an interview reprinted in Vodafone's 2000 annual report. Six years later, through March 31, just 4.5 percent of Vodafone customers owned 3G-enabled handsets.
Alan Harper, director of strategy at Vodafone, based in Newbury, England, defended the investments.
"Yes, 3G was worth it," Harper said. "You need to look beyond those headline numbers. Clearly what that investment is doing is part of a broader technology evolution. 3G is the technology platform of the future."
Operators say the challenge now is developing 3G services that consumers are willing to buy. The current offerings - streaming video, video telephony, music downloads and mobile Internet - are expensive and impractical, said Jens Tiemann, an engineer who tests 3G handsets at the Fraunhofer Institute in Berlin. "I see no reason for consumers to embrace this yet," he said.
Carriers other than Vodafone are pruning their 3G ambitions. Orange pulled out of Sweden, a country that gave away 3G licenses for free, after deciding it was not worth it to fulfill a requirement to build networks serving 78 percent of Swedes by 2005.
"There wasn't enough serious analysis of the price wars that emerged or that voice would still be the dominant application," said Erik Bohlin, an associate professor of industrial management at Chalmers University in Gothenburg. "3G has still not found a reason to be."
Vodafone has spent £18 billion, or $33 million, on 3G licenses and network construction since 2000, according to its financial reports. In the quarter that ended March 31, Vodafone had sales of £277 million from 3G data. Applying Vodafone's after-tax profit margin for that period of 15.2 percent, those sales made £42 million profit. At that rate, Vodafone would need 107 years to recoup the total cost of its 3G investment.
Hutchison Whampoa, a shipping and telecommunications group based in Hong Kong, spent 194.2 billion Hong Kong dollars, or $25.2 billion, on 3G licenses and construction, according to financial records. From 2003 through 2005, Hutchison posted total losses of $11 billion on its 3G operations, including $3.5 billion last year.
T-Mobile of Germany has spent €15.8 billion on 3G licenses and construction, according to annual reports. From 2000 through 2004, parent Deutsche Telekom took write-downs of €5.4 billion, which it said reflected the revised value of its 3G licenses.
KPN is still looking for its first annual profit at E-Plus, which operates a German 3G network. In 2002, KPN took a €5.4 billion write-down, acknowledging in effect that its 3G license, which had cost €8.4 billion two years earlier, was worth only €3 billion.
"The investments in 3G clearly hamstrung KPN and have brought it to the point where it is no longer capable of determining its own destiny," said Pieter Lakeman, chairman of a KPN investors' group called SOBI that is suing the company over its E-Plus investment.
The cost of the 3G licenses, executives complain, sapped operators' resources and their ability to develop commercial services. Because the auctions coincided with the collapse of the Internet stock market bubble, tracing 3G's effect on individual stock prices is not possible, executives say.
But according to Paul Stodden, chief executive of Debitel, the German mobile service reseller that tried but failed to buy a 3G license, the effects were substantial. "Not getting that 3G license was a stroke of luck and the best thing that could have ever happened for us," Stodden said. "Not only was the technology bought for way too much money, the operators still don't really know what to do with it."
Tracing 3G's impact on government finances is just as difficult. Most of the money disappeared into general government budgets. All of the £22.5 billion raised in Britain went to pay down government debt, said Nick Stevenson, a spokesman for the British Treasury. According to Treasury figures, British public-sector debt fell to £307.5 billion in 2001 from £342.6 billion in 2000.
In Germany, 95 percent of the fees went to retire federal debt. The rest paid for public works projects, said Jörg Tauss, a member of the Bundestag. In Germany, 3G revenue only slowed the rise in government borrowing. While 3G raised €51 billion, federal debt fell by only €18.5 billion after the auction, according to the Finance Ministry, leaving it at €697.l3 billion in 2001.
Executives say governments took advantage of the industry to open new sources of revenue. "The government auctions bled industry dry," said Brian Copsey, a former British government radio frequency expert who is a consultant in Edgecott, England.
But nobody forced the operators to bid as high as they did, one auction architect said.
"The reason for the failure of 3G has nothing to do with the auctions," said Paul Klemperer, an Oxford University professor hired by the British government to design its auction. "Fundamentally, they believed these things were worth what they paid for them."
In Germany, six competitors bid up license fees to €8.4 billion, even after Debitel dropped out at €5 billion. Vodafone's Mannesmann tried to signal to others to stop raising the ante by entering bids ending in the numeral 6, said Frank Riedel, an economist at Humboldt University in Berlin who advised Mannesmann at the auction.
"Before the auctions, we had always expected that international companies would act rationally," Riedel said. "That clearly wasn't the case."
Some operators later had a sobering awakening. Spain's Telefónica, which had spent €8.4 billion on a license for a German network it never built, is suing the German government to get its money back. Rudolf Boll, a spokesman for the German regulator Bundesnetzagentur, said the case would not be heard until 2007 at the earliest. Telefónica is also suing Swiss authorities to recoup its license costs there.
Five mobile operators in Britain- Vodafone, Orange, T-Mobile, 3 and O2 - are suing the British government to recover £3.35 billion they claim were value-added taxes included in the license fees. A hearing was held at the European Court of Justice in February and a decision, which could set a precedent for operators across Europe, is expected later this year, Boll said.
Despite 3G's slow start and high costs, operators say the technology, which can handle a greater volume of voice traffic than GSM networks, is here to stay. That is largely the case already, with most GSM networks being refitted to 3G standards to carry the bulk of the voice traffic.
By the end of this year, the number of people using 3G networks will nearly double to 111.1 million from 62.8 million at the end of March, according to the GSM Association. It says 105 operators in 40 countries are running or building 3G networks.
"If I had the chance to do it over again, I would still get a 3G license," said René Obermann, chief executive of T-Mobile International, based in Bonn, with 3G networks in six countries.
Even the E-Plus chief executive, Thorsten Dirks, whose company has yet to turn an annual profit from 3G, is optimistic. From 1992 to 1997, Dirks said, GSM phones reached 10 percent of Germany's population. From 1997 to 2002, penetration leapt to 80 percent. 3G's development, he said, will be similar.
"That is how this business works," Dirks said.


BERLIN European mobile phone companies spent $129 billion six years ago to buy licenses for "third-generation" networks that were supposed to give people the freedom to virtually live from their cellphones, reading e-mail, browsing the Internet, placing video calls, enjoying music and movies, buying products and services, making reservations, monitoring health - all from the beach, the bus, the dentist's waiting room, wherever they were.
But today, most people use their cellphones just as they did in 2000 - to make calls - and the modest gains 3G has made do not begin to justify the massive costs of the technology, which has strapped some mobile operators financially, bankrupted entrepreneurs, spurred multibillion-euro lawsuits against governments and phone companies, and sapped research spending.
Over the long term, 3G runs the risk of becoming the Edsel of the mobile phone industry - an expensive, unwanted albatross rejected by consumers and bypassed by other, less costly technologies, some experts say.
"There are currently a lot of competing delivery methods for high-speed data services such as video," said Pete Hulbert, a research engineer at Roke Manor Research, a division of Siemens in Romsey, England, that researches mobile technology for the British telecommunications regulator. "There is a lot of competition for delivering these services from digital mobile broadcasting and even WiMax. There isn't one compelling argument to say it's definitely going to be 3G."
Even Vodafone, the biggest network operator in Europe, which since 2000 has spent $34 billion buying 3G licenses and building 3G networks, made just 3.8 percent of sales in the quarter ended March 31 from 3G's supposed "killer application" - high-speed wireless data.
For many, that is not enough to justify 3G's costs. On July 20, Vodafone said it was scrapping its 3G network in the Czech Republic, citing the technology's excessive costs. Vodafone's Czech subsidiary spent $87.7 million on a 3G license in February 2005.
Across the continent, 3G take-up has been underwhelming. Of nearly 720 million cellphone connections in Eastern and Western Europe at the end of June, 38.6 million, or 5.4 percent, were 3G, according to Wireless Intelligence, a joint venture of the GSM Association and the market researcher Ovum in London.
"Telecom companies misjudged the value of 3G licenses and paid way too much. Governments holding the auctions were only too happy to oblige, basically blackmailing the industry," said Joachim Dreyer, the former chief executive of Debitel, a phone service reseller that unsuccessfully bid for a German 3G license in 2000. "There was a failure from the top on down."
The most recent signs are not encouraging.
The 3G technology has been so unpopular that operators in Finland - home of Nokia, a leader in 3G network equipment - persuaded lawmakers last year to let them subsidize the sales of 3G cellphones, a practice not allowed for ordinary GSM mobile phones.
"Operators basically had to give away the handsets because nobody was buying them," said John Strand, an industry consultant in Copenhagen.
Some European investors - who once sought out the stocks of 3G licenseholders - now view the licenses as financial liabilities because they commit operators to building out national networks that do not make sense commercially.
In the United States, Verizon Wireless, Sprint and Cingular have spent a combined $10 billion establishing their 3G networks, while Deutsche Telekom's T-Mobile plans to start offering an American 3G service in 2007.
As in Europe, U.S. consumers have been lukewarm, with many perceiving 3G service to be expensive and the handsets difficult to use. Through February, industry analysts estimated that five million 3G phones were in use in the United States, less than 3 percent of the market. U.S. operators have not disclosed data on 3G use so far.
"Generally, we consider a 3G license to be a liability, not a plus," said Torsten Krumm, a partner at Apax Partners, a venture capital firm with €18 billion, or $22.9 billion, under management. "I don't think 3G has met its promise. The high license fees and capital expenditures for the operators have been very substantial, with very little in return."
Unsuccessful bidders for 3G licenses in 2000 and 2001 like Debitel of Germany now claim to be the winners, because they avoided billions in extra costs. Meanwhile, KPN of the Netherlands is still paying interest on the loans it took out to buy its German 3G license, which KPN said lost most of its value within two years of the auction.
Industry executives concede that the benefits of 3G had been overstated and that few correctly had anticipated how much the time would be needed to make the technology work. But most point out that sales of 3G data, at 3 percent to 7 percent of operator revenue, are growing fast, a sign the technology is taking off.
"It was overhyped at the beginning, and we foundered for a few years, but we are now seeing light at the end of the tunnel," said Vivek Badinrath, chief technology officer for Orange, the France Télécom wireless unit. "We spent a lot of money, but now the enablers are falling into place."
Time will tell. They also said the future was bright in 2000. Emboldened by a decade of fast growth, many industry executives then saw no end to the cellphone's ascent. With stock market values swollen at the peak of the Internet bubble, Vodafone and its competitors splurged on 3G licenses, spurred on in part by the buzz of the meteoric rise of i-mode mobile phone services in Japan.
An auction in Britain, which lasted 150 rounds over seven weeks in March and April 2000, raised £22.5 billion, worth $35.4 billion at the time. In August 2000, a German auction ran 170 rounds over 14 days and netted the equivalent of $45.8 billion.
Over the 18 months through September 2001, 20 auctions and so-called beauty contest selections in Europe, Asia, Australia and New Zealand raised $129 billion in licenses fees, according to 3G.co.uk, an industry organization that is based in Cardiff, Wales.
Telecommunications executives told shareholders that the costs were worth it. In May 2000, Vodafone's chief executive, Sir Chris Gent, predicted that 3G cellphones would let consumers do mobile banking, make electronic payments and even find the nearest café.
"The terminal is really going to become an indispensable part of people's lives, for more than just voice communications," Gent said during an interview reprinted in Vodafone's 2000 annual report. Six years later, through March 31, just 4.5 percent of Vodafone customers owned 3G-enabled handsets.
Alan Harper, director of strategy at Vodafone, based in Newbury, England, defended the investments.
"Yes, 3G was worth it," Harper said. "You need to look beyond those headline numbers. Clearly what that investment is doing is part of a broader technology evolution. 3G is the technology platform of the future."
Operators say the challenge now is developing 3G services that consumers are willing to buy. The current offerings - streaming video, video telephony, music downloads and mobile Internet - are expensive and impractical, said Jens Tiemann, an engineer who tests 3G handsets at the Fraunhofer Institute in Berlin. "I see no reason for consumers to embrace this yet," he said.
Carriers other than Vodafone are pruning their 3G ambitions. Orange pulled out of Sweden, a country that gave away 3G licenses for free, after deciding it was not worth it to fulfill a requirement to build networks serving 78 percent of Swedes by 2005.
"There wasn't enough serious analysis of the price wars that emerged or that voice would still be the dominant application," said Erik Bohlin, an associate professor of industrial management at Chalmers University in Gothenburg. "3G has still not found a reason to be."
Vodafone has spent £18 billion, or $33 million, on 3G licenses and network construction since 2000, according to its financial reports. In the quarter that ended March 31, Vodafone had sales of £277 million from 3G data. Applying Vodafone's after-tax profit margin for that period of 15.2 percent, those sales made £42 million profit. At that rate, Vodafone would need 107 years to recoup the total cost of its 3G investment.
Hutchison Whampoa, a shipping and telecommunications group based in Hong Kong, spent 194.2 billion Hong Kong dollars, or $25.2 billion, on 3G licenses and construction, according to financial records. From 2003 through 2005, Hutchison posted total losses of $11 billion on its 3G operations, including $3.5 billion last year.
T-Mobile of Germany has spent €15.8 billion on 3G licenses and construction, according to annual reports. From 2000 through 2004, parent Deutsche Telekom took write-downs of €5.4 billion, which it said reflected the revised value of its 3G licenses.
KPN is still looking for its first annual profit at E-Plus, which operates a German 3G network. In 2002, KPN took a €5.4 billion write-down, acknowledging in effect that its 3G license, which had cost €8.4 billion two years earlier, was worth only €3 billion.
"The investments in 3G clearly hamstrung KPN and have brought it to the point where it is no longer capable of determining its own destiny," said Pieter Lakeman, chairman of a KPN investors' group called SOBI that is suing the company over its E-Plus investment.
The cost of the 3G licenses, executives complain, sapped operators' resources and their ability to develop commercial services. Because the auctions coincided with the collapse of the Internet stock market bubble, tracing 3G's effect on individual stock prices is not possible, executives say.
But according to Paul Stodden, chief executive of Debitel, the German mobile service reseller that tried but failed to buy a 3G license, the effects were substantial. "Not getting that 3G license was a stroke of luck and the best thing that could have ever happened for us," Stodden said. "Not only was the technology bought for way too much money, the operators still don't really know what to do with it."
Tracing 3G's impact on government finances is just as difficult. Most of the money disappeared into general government budgets. All of the £22.5 billion raised in Britain went to pay down government debt, said Nick Stevenson, a spokesman for the British Treasury. According to Treasury figures, British public-sector debt fell to £307.5 billion in 2001 from £342.6 billion in 2000.
In Germany, 95 percent of the fees went to retire federal debt. The rest paid for public works projects, said Jörg Tauss, a member of the Bundestag. In Germany, 3G revenue only slowed the rise in government borrowing. While 3G raised €51 billion, federal debt fell by only €18.5 billion after the auction, according to the Finance Ministry, leaving it at €697.l3 billion in 2001.
Executives say governments took advantage of the industry to open new sources of revenue. "The government auctions bled industry dry," said Brian Copsey, a former British government radio frequency expert who is a consultant in Edgecott, England.
But nobody forced the operators to bid as high as they did, one auction architect said.
"The reason for the failure of 3G has nothing to do with the auctions," said Paul Klemperer, an Oxford University professor hired by the British government to design its auction. "Fundamentally, they believed these things were worth what they paid for them."
In Germany, six competitors bid up license fees to €8.4 billion, even after Debitel dropped out at €5 billion. Vodafone's Mannesmann tried to signal to others to stop raising the ante by entering bids ending in the numeral 6, said Frank Riedel, an economist at Humboldt University in Berlin who advised Mannesmann at the auction.
"Before the auctions, we had always expected that international companies would act rationally," Riedel said. "That clearly wasn't the case."
Some operators later had a sobering awakening. Spain's Telefónica, which had spent €8.4 billion on a license for a German network it never built, is suing the German government to get its money back. Rudolf Boll, a spokesman for the German regulator Bundesnetzagentur, said the case would not be heard until 2007 at the earliest. Telefónica is also suing Swiss authorities to recoup its license costs there.
Five mobile operators in Britain- Vodafone, Orange, T-Mobile, 3 and O2 - are suing the British government to recover £3.35 billion they claim were value-added taxes included in the license fees. A hearing was held at the European Court of Justice in February and a decision, which could set a precedent for operators across Europe, is expected later this year, Boll said.
Despite 3G's slow start and high costs, operators say the technology, which can handle a greater volume of voice traffic than GSM networks, is here to stay. That is largely the case already, with most GSM networks being refitted to 3G standards to carry the bulk of the voice traffic.
By the end of this year, the number of people using 3G networks will nearly double to 111.1 million from 62.8 million at the end of March, according to the GSM Association. It says 105 operators in 40 countries are running or building 3G networks.
"If I had the chance to do it over again, I would still get a 3G license," said René Obermann, chief executive of T-Mobile International, based in Bonn, with 3G networks in six countries.
Even the E-Plus chief executive, Thorsten Dirks, whose company has yet to turn an annual profit from 3G, is optimistic. From 1992 to 1997, Dirks said, GSM phones reached 10 percent of Germany's population. From 1997 to 2002, penetration leapt to 80 percent. 3G's development, he said, will be similar.
"That is how this business works," Dirks said.