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Telecoms bow to the reality of 3G
Friday, July 26 2002
by Matthew Clark


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.