Europe's UMTS lottery

The Italian government is refusing to give money back. The Spanish government is complaining it didn't get enough money. The Swiss government is holding out for more money. Meanwhile Germany and the UK are sitting pretty, smugly surveying the disarray that has descended upon one of the most controversial technology issues of the year - the allocation of European UMTS licences.

Money is the motivator for governments and operators alike - not technology or services. Governments want lots of it and the telcos understandably want to give up as little of it as possible. But what's gone wrong?

Analysts and industry observers agree that the technological advancements of third-generation mobile - known as UMTS in Europe - will be worth all the current jostling, but wonder if there isn't a less messy way to obtain the planned results.

As Nigel Deighton, research director at Gartner Group, explained, the distribution of UMTS licences divides countries into the good, the bad and the ugly.

"There are the good, like the Netherlands and Sweden, but then there are also the bad, like France, which has fixed a steep fee of $18bn for its beauty contest. This is 'a middle of the road' option that controls some of the risk connected with auctioning," he said.

And the ugly? Deighton believes the prices paid for licences in the UK and Germany are "exorbitantly high", with some companies now looking at ways of recouping monies paid or covering their expenditure through sell-offs or partial flotations. However, worse still are the "really bad losers" - in Deighton's opinion, Spain, Italy and Switzerland.

Sweden has done well though. It is taking enough to cover administration costs and then 0.15 per cent of all revenues made from 3G. The idea is for nobody to lose out - if the operators succeed then so does the government.

Italian government officials can currently be found in the courts of Rome doing battle with existing 2G operator Blu over its decision to pull out of the UMTS auction. Its withdrawal brought an abrupt end to the process there when bidding was only at E12bn (£7.3bn). The Italian government had stated it was hoping to raise E21bn (£12.6bn), and it should be noted governments have typically given out predictions on the low side of expert expectations.

Blu shareholder BT had proposed to meet 21 per cent of the eventual 3G licence fee but other shareholders in the venture wanted the UK telco to raise its investment to 50 per cent. BT said it was unable to pay the amount its fellow shareholders demanded, as the cost of continuing the bidding was so high.

Now the Italian government has refused to return Blu's E2bn UMTS deposit claiming the company should forfeit the money because of irregularities. Even the court overseeing the wrangling has warned that may bankrupt Blu.

Again - it's about money, not technology, as experts have pointed out.

Patrick Clarke, associate at law firm Taylor Joynson Garrett, said: "Having auctions for these licences is a politically good idea as everyone is now seeing pound signs flashing. In the UK, the price of licences went way over the top but the four incumbent players awarded the licences couldn't afford to not be in the race."

Greed may be having an effect on European governments. At the recent UMTS2000 Forum in Barcelona, Andile Ngcaba, director of South Africa's Department of Communications, spoke out against lucrative government auctions of radio spectrum.

"Licensing shouldn't take money out of the sector. Funds should be used for R&D, spectrum management and second-to third-generation migration. By sucking money out of the sector you kill it."

Industry analysts have been slightly less critical, perhaps recognising there is no perfect solution.

Bernt Ostergaard, analyst at Giga Information Group, said: "Operators were caught off guard in the UK. It set other governments off to make lots of money and the only place the money will be recouped is from the customer. This is just another form of taxation and European governments have been too greedy."

On the other hand, cheaper beauty contests rely on a selection board choosing winners based on qualitative criteria, commitments and forecasts, which don't always guard against assessors' subjective views creeping in.

However, whatever the method, there are those who believe the resultant technological mobile advancements will be worth all the current effort, even if services take a while to develop and return on investment for operators takes more than four years.

Giga's Ostergaard added: "When operators move to 3G the pricing model will move towards paying for the services you buy rather than the time you use them for. For example, mobile operators will be able to take a percentage of every mobile internet transaction. Maybe in four to six years these fracas will even themselves out and it will all be worth it."

Hideo Okinada, general manager Technology Strategy at Japan's KDDI, agrees, pointing out just how far 3G networks will change the mobile landscape. He recently claimed that whatever the technology, it is essential it reduces the cost per bit of IP-based mobile services.

This ensures charges to end users can be attractive and, among other things, operators have a chance to pay back debt accrued from successful licence fee bids.

But whatever way you look at the equation, users will still ultimately pay for the licences, say the analysts.