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'Net Insider:

Pouring money into a hole

By Scott Bradner
Network World, 11/27/00

Spending a few days in Europe, as I've just done, sure makes the insanity of some of the telecommunications world clear. The Financial Times put the absurd amounts of money being spent on radio frequency auctions in the proper light when it depicted a parade of telecom executives with wheelbarrows and briefcases full of money dumping it into a hole in the ground.

Telephone carriers in Europe and the U.S. have spent about $100 billion to buy licenses to be able to offer so-called third-generation wireless phone and Internet services. In two countries, England and Germany, this amounted to more than $1,500 per potential customer, where the assumption is that 60% of the population are potential customers for such services.

And this is without counting any of the money that will be required to build the support infrastructure.

At the current per-customer rate of profit, it would take more than a decade to pay off just the licenses. Who in their right mind thinks that any technology these days will be important for a decade?

In fact, fourth-generation wireless standards are already under development. The carriers better get going and develop some very persuasive new services.

For the Internet part of the telecommunications world, pay-per-experience virtual reality sex may be a savior, but just how much can you do with a cell phone? Some contests you cannot afford to win.

Not all carriers have been quite so enthusiastic. The recent auction in Italy was a great disappointment in that it returned less than $10 billion instead of the more than $20 billion that had been expected. And just a few days ago as I write this, the Swiss frequency auction looks like it may only return $50 million per license because there are only four bidders for four licenses.

One person I talked to said a friend of his who worked at one of the carriers that had bid vast sums for licenses and won them felt the carriers had no choice. The thinking was that if the carriers did not bid, their investment money would dry up because they would be seen as having no future. If the carriers bid and won, they would be bankrupt within a few years. One way was a quick death and the other a slow one. But with the slow death, some magic might come along to save them.

If it weren't for the revenue that these frequency auctions are generating for governments, we probably wouldn't be selling frequency allocations anyway. Experience in the unlicensed area has shown that spread-spectrum techniques can let lots of providers share the same part of the radio real estate as long as there is some regulation to limit the maximum transmitter power.

While this column is a lament for sanity, I am not optimistic.

Disclaimer: Since the Harvard Psychology Department does not have a clinical program and thus does not deal with sanity, the above are my observations.

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