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Poring money into a hole

By Scott Bradner

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 may have put the absurd amounts of money being spent on radio frequency auctions in the proper light when they showed a parade of telcomms 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 (3G) 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 this type of service. 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 can not afford to win.

Not all carriers have been quite so enthusiastic the recent auction in Italy was a great disappointment in that it only returned less than $10 billion instead of the more than $20 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 4 bidders for 4 licenses.

One person I talked to said that a friend of his who worked at one of the carriers which had bid vast sums for licenses and won them felt that the carriers had no choice -- if they did not bid then their investment money would dry up because the carrier would be seen as having no future and if they 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 were not for the revenue that these frequency auctions are generating for governments we probably would not 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 but I am not optimistic.

disclaimer: Harvard