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Two of Europe's leading telecoms bowed to what appears to be the bleak reality of 3G as Spain's Telefonica and Finland's Sonera wrote off their UMTS assets.
In their financial results released earlier in the week, the two companies took a total write-down of around EUR9.2 billion against many of their European 3G operations. Sonera and Telefonica Moviles said they would stop funding Quam, a small German mobile phone operator, which accounts for the bulk of the write-off. Moreover, Telefonica said it will halt 3G operations in Italy, Austria and Switzerland while Sonera is writing down its stake in Italy's IPSE.
Quam is a brand of Group 3G, the joint venture in Germany between the two firms that operates as an MVNO (mobile virtual network operator), but was planning to launch its own 3G network after its parents spent over EUR8 billion on a 3G licence in 2000. Group 3G said that it will continue to operate but many of its 900 workers will be laid off and operations would be seriously curtailed.
With greater frequency in recent months, industry watchers and analysts have questioned the value of 3G in relation to the fees network operators paid for licences and the extraordinary cost of building the networks. GPRS, which was set to bridge the gap between 2G and 3G, has been a disappointment thus far, further calling into question the prospects for 3G.
Telefonica's total write-down on its UMTS assets amounts to EUR4.9bn. In a statement the company spelled out its thinking behind the decision: "The estimates of the demand for 3G services has been reversed downwards as a result of the actual data services demand and the ongoing delays in the availability of a stable and competitive UMTS technology."
Telefonica said that 3G services remain a possibility for operators but only in a "scenario of a reduced number of players per country." There are currently 6 third-generation licence holders in Germany.
Meanwhile, Sonera, which is in the midst of a merger with Telia, said it would write down EUR4.3bn for its 3G assets in Germany and Italy. "I would like to point out that Sonera considers its UMTS investments with the conservatism of a financial investor, without regard to the value that the licences may have through frequency trading or other changes in the regulatory environment," Harri Koponen, chief executive officer of Sonera said in a statement.
Immediately the question arises about the potential for other European telecoms to follow the path of Quam. But a report released by research company Datamonitor shortly after the news broke said such moves are unlikely. Datamonitor points out that Quam was particularly weak, with a mere 200,000 customers. "Mobile data services should still be a moneymaking opportunity for groups that have the resources to create and market them, and existing customers they can up-sell to," Datamonitor said. "Unlike Quam, the major pan-European telecoms groups have these factors in their favour."
Still, the repercussions of the announcement go much further than Quam and the bottom lines of Telefonica and Sonera. For example KPN Mobile will now be forced to roll-out its German 3G network on its own, instead of sharing the cost with Telefonica -- and saving EUR750 million -- as was previously announced.
Ericsson and Nortel will be forced to deal with the news as well, after signing a EUR600 million contract in April to build Quam's network.
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