UMTS: ART'S POINT OF VIEW
31 May 2001
As ART publishes the summary and results of the allocation procedure for 3rd generation mobile metropolitan licenses held in application of article L.36-7 of the Post and Telecommunications Code, we felt it necessary to present our appreciation of the applications and the resulting proposals, and to give an overview of the process of introducing the 3rd generation in France and in Europe.
It is in this spirit that we review the elements that were essential to the arrival of the measure leading to the adoption of conditions on the basis of which two applications were submitted on 31 January 2001. We will then analyse the factors affecting the development of the economic and financial context and operational prospects of the implementation of the 3rd generation, which have been significantly modified with respect to the data which were previously available and to the hypotheses which predominated until last autumn. Finally, in light of this review and analysis, we hope to assist in defining the conditions under which, following the allocation of the first two licenses, an additional application process will be launched in order to give competition a chance in this sector which is crucial in promoting the information society and the future of the telecommunications industry.
I - THE ORIGIN OF THE 3RD GENERATION APPLICATION PROCEDURE
While discussions on the stakes of UMTS technology (Universal Mobile Telecommunications System) had already begun in France in January 1998, at the Commission consultative des radiocommunications (CCR), the process was officially launched at the Community level by the decision dated 14 December 1998 of the European Parliament and Council, regarding the coordinated introduction in the Community of a 3rd generation mobile wireless communication system.
This decision showed up the potential contributions and issues raised by UMTS. It also established a timetable under which the Member States were to prepare their authorisation methods for 1st January 2000, in order to prepare for the effective and simultaneous introduction of 3rd generation services on 1st January 2002.
The Community decision allowed each Member State to determine the way in which it would allocate the spectrum of frequencies concerned and to define the conditions under which it would grant authorisations on its territory, as long as it respected the essential principles appearing in Community telecommunications legislation, which require that these licenses be allocated by open, non-discriminatory and transparent procedures, on the basis of objective selection criteria defined in advance.
The ambition displayed at the Community level was based on the prior success of GSM, on the real technological advance it offered European industry—both to equipment manufacturers and operators—and on the prospects offered by UMTS in terms of Internet access on mobile networks.
However, it was also influenced at the time by a powerful lobby led by certain institutional and industrial players who probably saw in UMTS a technology which would make up for the natural slowdown in the 2nd generation mobile market.
Since the Member States were unable to agree on either the need for, nor the form of, harmonisation on a subject as crucial as the allocation of frequencies, the initial Community debate and the ambitious timetable resulted in the use of two main methods, depending on the country: auctions and the "beauty contest". Their effects and practical consequences differed greatly from the expectations arising from preparatory discussions.
On the national level, ART sought to foster an intense dialogue process which lasted close to 18 months.
In February 1999, it launched a public consultation on the introduction of 3rd generation mobile in France, and prepared a summary in September 1999. The CCR, at meetings attended by ART and the Ministry of the Economy, Finance and Industry (DiGITIP), made a major contribution to the works which were completed in February 2000.
On 7 March 2000, ART submitted its proposal to the government for the selection of four operators, prior to its official publication. It suggested a representative level of payments, over fifteen years, of FRF 15 billion for four operators.
The application process was based on the "beauty contest" method. On the one hand, this choice was in line with prior discussions in which almost all participants, of all profiles, expressed their preference for the "beauty contest", and rejected the auction procedure.
Moreover, it did not appear desirable to allow candidates to decide, and solely on the financial criterion, the result of a process with such a major potential impact and uncertainty, especially with respect to the emergence of new services. In this regard, the choice of the "beauty contest" would make it possible to take into consideration all public requirements, whether in the interest of the consumer, of the future of an industry playing a determining role in the economic competitiveness of the country and the progress of the information society, the State's financial interests and imperatives regarding the equality of all citizens and regions with respect to access to new technologies.
ART's proposal, sent prior to the start of the British auctions, was never published.
The surprising result of these auctions caused an intense debate, across Europe and in France, to which ART actively contributed, in an informal way through the regular contacts it maintains with the government on this issue associating their respective competencies, but also via a press conference held by its Chairman on 11 May 2000. ART explained the reasons which had led it to maintain its choice of the "beauty contest", while questioning the economic rationality of expectations which had set the results at 3 to 4 times greater than maximum amount that certain competitors seemed initially prepared to accept as a ceiling, and which would lead to doubling the cost of establishing networks.
It also wondered about the repercussions of this charge, putting forward the risk that passing on the cost to consumers might compromise the very success of the 3rd generation. It worried that the prospect of numerous individual decisions similar to the British auctions within the European Union might benefit solely a few financially powerful players, who would be capable of obtaining licenses in several countries, thereby hurting competition.
Regarding the number of operators, despite the UK's decision to grant five licenses, ART did not doubt its decision to choose four operators in France. On the one hand, prior discussions had shown that from a technical point of view, only 40 MHz could be allocated by 2002, with the rest of the frequencies, which are currently reserved for other uses, being made available only later and progressively. Five players would not have been able to share this quantity since the frequencies have to be allocated in bands of 5 MHz. Moreover, given expected prospects for the market, the number of operators chosen in the United Kingdom and announced in Germany seemed high at the time.
The events which followed and hindsight have confirmed these considerations. In some countries, calls for lower license prices and discussions on the sharing of infrastructures reflect this.
After analysing what was learned from the British auctions, the Minister of the Economy, Finance and Industry presented the government's position to the National Assembly on 6 June 2000. The Minister took note of the choice of the "beauty contest" and the number of operators. As for the financial amount of the licenses, the government set the payment at FRF 32.5 billion per operator over fifteen years, half of which was to be paid within the first two years and the balance over the next thirteen years.
Given the economic situation and the attitude of financial markets at the time, ART considered the amount of FRF 130 billion as high, but reasonable.
And so, it was in this context, that ART decided on 28 July 2000 to propose to the Minister of Telecommunications the means and conditions of allocating licenses, with full knowledge of the financial measures communicated by the Government and which were to appear in the annex of the application process. On 18 August 2000, the Minister published the application process notice.
Two applications were submitted on 31 January 2001, from France Telecom Mobiles and SFR.
II – RECENT CHANGES TO THE CONTEXT OF THE INTRODUCTION OF UMTS
With preparations for the application process in France almost complete, the auctions in Germany marked the peak in a period of euphoria before a downward slide which was to have a spectacular impact in coming months.
The process was beginning to show the difficulties the operators would have to face; the number, obligations and financial weight of these difficulties would make it impossible to meet them all. However, it also highlighted the effects of the pan-European financing system for UMTS, with large incumbent operator candidates in many countries having difficulties bearing the direct or indirect financial load—whether immediate or in the long term—of the considerable amounts of the British and German auctions. Their levels of indebtedness are proof of this.
Indeed, the end of 2000 was marked by a complete turnaround which not only made the licensing procedure in all other European countries unsuccessful, problematic or disappointing, but also weakened many license holders and showed up the largely artificial character of the "success" of these auctions.
The evidence of this turnaround is well known today:
- sharp decline in the market price of most European telecommunications operators
- decline in the notations for these operators by financial analysts, resulting in a higher cost of credit
- the last-minute resignation of two of the four groups which had intended to participate in the application process in France
The causes of this highly disruptive change on the introduction of UMTS must be sought in part in the general economic context, and in part in the way in which the process was initiated in Europe.
As for the economic environment, we cannot ignore the slowdown in growth prospects which occurred in Europe in mid-2000 in the wake of a downturn begun in the United States. This slowdown hit the information technologies sector particularly hard, with firms—especially American Internet firms—seeing their share prices fall on the NASDAQ in the first half of 2000. At the same time, European operators maintained in their acquisitions a valuation level of mobile subscribers that proved to be very high, leading them to go deeper in debt and at a higher cost.
With all other things being equal, this change made the UMTS process more fragile by casting a shadow over its prospects for development and by making financial markets more demanding and nervous, and threatening the 2nd generation market both in its equipment manufacturers and its operators.
In this respect, while the decline in the situation of equipment manufacturers was seen and publicly discussed only in the first quarter 2001, it aggravates the failure in the introduction process for UMTS, if only in that it brings into question the limitless, systematic development of supplier credit.
However, beyond this decline, we must not forget the causes due to the UMTS process itself.
The ambitious timetable set in late 1998 at the Community level was too restrictive for a sector engaged in the process of deregulation. The technology was still very far from the operational development stage and a fortiori from the marketing stage, and followed a previous generation which had not yet reached full maturity. Moreover, the timetable encouraged simultaneous implementation across Europe which was probably incompatible with both the production capacity of its telecommunications industry and the absorption capacity of its financial markets.
It is also important to note that certain equipment manufacturers demonstrated a lack of responsibility by making presumptuous announcements on the availability of network and terminal equipment. The euphoria and irrationality during 2000 were surely behind these announcements and operators' silence with respect to actual availability and to the types of services which were to meet consumer expectations. For some GSM operators in Europe, this silence was of a tactical nature in that, in applying for UMTS, these operators were probably motivated by the prospect of obtaining more frequencies that they needed in order continue growing the 2nd generation market.
As for Member States, the use of the auction selection process appears to have been inspired by budgetary concerns, which relegated to the background crucial issues affecting the future of the European industry and the development of access of the majority to high-tech services offered by 3rd generation. This choice could have serious repercussions on competitiveness and on European telecommunications firms, especially since their Japanese competitors were able to develop intermediate activities in a protected market and to obtain 3rd generation licenses at no charge.
The communication of the European Commission dated 20 March 2001 offers a pertinent analysis of this situation, in order to offer solutions to some of the current problems.
III – THE NECESSARY REBOUND
In this context, ART received just two applications by 31 January 2001, the deadline for application submission.
On the same day, it explained why it planned to continue the procedure by examining these two applications under the conditions it had set previously and which had been published by the Minister on 18 August 2000. Indeed, from a legal point of view, the existence of two applications for four licenses had no impact on the procedure.
But at the same time, it highlighted the need to hold another application procedure at a later date in order to reach its goal of granting four authorisations. Indeed, a market structured around just two operators could not be allowed to last, since it does not meet the goals for the development of competition which are the basis of all European and French texts in the telecommunications field.
ART highlighted that this additional application procedure would also follow the "beauty contest" principle and would include the requirement for equitable conditions—especially financial—among the players. It added that the new procedure would be held under methods and with deadlines which would guarantee a competitive situation upon the effective opening of the 3rd generation market.
In order to shed light on the best way of preparing this new phase in the procedure, and as it examined the two applications, ART held an intensive informal consultation between March and May 2001 of some fifty concerned and competent institutions and persons (operators, equipment manufacturers, financial analysts, bankers, service providers, experts, etc.).
These varied contacts provided largely similar information which allowed ART to readjust, on a basis which better conforms to market realities, its forecasts on prospects and the European UMTS timetable.
First of all, it now seems clear that the expected timetable was overly optimistic on every link in the chain from the creation of the communication standard to the creation and development of a true market.
The network equipment manufacturers have not yet completely overcome the unavoidable development problems linked to the 3rd generation, either in Japan—according to information collected during a recent visit by an ART delegation—or in Europe.
The same is true for terminal manufacturers, which have to deal with the double complexity of moving to potentially multimedia terminals and the implementation of a bi-mode functionality made necessary by the existence of an overlapping period between the 2nd and 3rd generations and by the progressive geographic deployment of networks.
The excessive anticipation also affected the operational character of services other than voice, such as high-speed data transport, and especially evolved multimedia services including image transfer. While the operators are actively working to create such services in cooperation with many specialised content partners, it looks like this process is still in its initial stages and will require a great deal more work before truly new and attractive services can be offered to more than just a select and restricted clientele.
In the mean time, the candidate operators in various European countries agree that they expect voice services to maintain a major position in revenues, even after the commercial rollout of 3G.
Rollout is no longer expected for 2002, although a few limited rollout operations (Isle of Man and Monaco) had been planned for the Spring of 2001 and have both been postponed. These first openings correspond to networks with limited scope and innovation. Everything leads us to believe today that a life-sized market cannot be put in place until at least late 2003 or early 2004.
In the meantime, GPRS could be deployed on the commercial level starting late 2001 or early 2002, once manufacturers and operators have resolved the final remaining technical implementation problems.
It would thus play a useful role which is now considered indispensable in the transition between the 2nd and the 3rd generation, by acting as a technical "test bench" but also by helping "business" and "general public" clients get used to the pairing of mobility and certain services other than voice.
This includes, in particular, data transfer at speeds that, while well below those permitted by the 3rd generation, will be 3 to 4 times greater than GSM.
This progressive transition from 2G to 3G, in which GPRS will have to cohabit with 3G for a few years following its own commercial launch, supposes that GPRS is a true success. It will remove any doubts regarding the rollout of the WAP protocol, and will provide the technical, commercial and economic credibility which UMTS will need.
Until then, it is important that the French market be given all the chances it needs to develop. In the eyes of the operators we have consulted, it remains attractive given its size and its situation. However, this market can be allowed to exist only if it is truly competitive and is not reduced to a duopoly.
On the one hand, European bodies could not allow the installation of UMTS in France on such a basis, given their well-established jurisprudence on competition.
Moreover, the interest of consumers requires that there be a greater number of operators, in order to stimulate creativity in new services, where much remains to be done, and to offer more attractive prices.
In this spirit, ART confirms that an additional application process must be launched quickly, in order to allow the "second string" companies to catch up to the "first string" when the UMTS market effectively open, i.e. as of late 2003.
However, two major elements must be taken into consideration when holding an additional application process: the procedure timescale which requires at least 9 months following publication of the call (4 to 5 months to allow candidates to prepare their applications, 4 months for ART to examine them and one month for the Ministry's decision), and the investment phase, especially for a new entrant, estimated at one year, for a total of close to two years.
This means that the additional application process must be held during the first half of 2002 at the latest. As is its prerogative, ART will make its proposal at the appropriate time in view of the market situation. This process must ensure that the market is opened under equitable conditions for both series of candidates. Indeed, the more time that passes between the two calls for tenders, the more delicate, or even dangerous, it will be to determine how non-discriminatory treatment can be guaranteed between the two groups of candidates in the selection procedure.
Naturally, it is important to ensure that all conditions are met for this application process to be successful. This cannot be done unless we learn from the events of the past year and the messages that the market has sent.
Therefore, the success of such a method requires certain changes to the way in which licenses are granted in France.
The examination of the possible adjustments lead ART to make the following comments:
- it is not desirable to modify the coverage commitments, which are both reasonable (the first 2 candidates have exceeded them greatly) and indispensable to ensure equal access to the information society
- the sharing of infrastructures, a particularly popular topic in recent weeks, may decrease investments, but only within certain limits.
Certainly, it is desirable to encourage the sharing of sites—or even the antennae themselves—as was already shown in the application process, in order to protect the environment. But the savings to be expected from such sharing are modest.
Going further would require striking a technological balance which would ensure that each operator controls its own network, allows its clients to identify its service by its content and quality, and which guarantees the effective maintenance of competition between the partners. Indeed, network configuration does affect the types of services that the operator can offer, so total mutualisation could thus prevent the diversification of service offers, and ultimately, hurt the consumer.
It is possible that studies in progress may reveal new prospects, but they are not expected to change the fact that major operators do not intend to share their networks in dense areas and would agree to do so only in lightly populated areas. Any other approach would mean in effect merging the two networks, and therefore the two operators.
- Extending the duration of the licenses is a possibility, but would not solve financing problems for the first years
- The financial load borne by license holders is clearly an essential element, because it is almost certain that if no changes are made on this point, any additional call for tenders would not receive any applicants in the current state of the market. This would perpetuate an unsatisfactory structure of the 3G market while depriving public finances of significant income earned from the four licenses.
If the government decides to maintain the global amount of the license announced in June 2000, ART considers it indispensable that the payment timetable for this sum be reconsidered. It considers that this is an essential parameter in that the same amount expressed as a nominal value can have a very different impact depending on the payment schedule.
The payment schedule which requires that one half of the amount be paid during the two first years of the license while the revenues associated with the effective development of the market will come later, is frankly dissuasive for operators and for those financing it. In the new context described above, the first commercial revenues would not be expected until 2004, or two years later than initially anticipated. Such a degree of license pre-financing, added to the financing needed to develop the networks, could dissuade certain operators who might otherwise be interested by the prospects of the French UMTS market.
In order to reconcile the many constraints of the adjustment process which is required today, ART suggests exploring a formula which could have the following basic form.
It would first involve maintaining the first annuity corresponding to one quarter of the license price, or FRF 8.125 billion, which is stipulated by the finance law for 2001 and which should also be in the law for 2002 for the "second string" operators, in the name of equal treatment.
It would then involve lowering the second year's payment and those of the next four years to a level close to that paid by telecommunications operators for the use of GSM frequencies.
This modification of the payment schedule for all chosen operators would be applied to the first two operators only if the additional application process is successful. It would take into account the existence of a period of about 5 years during which the UMTS projects would simply produce gross revenues and would record negative net cash flow. The balance of the amount of the license could be paid over the years following this period, i.e. the years during which the projects should start generating a positive cash flow.
This type of formula should improve the economic balance of the program given the new market conditions, while providing equal treatment of the operators in the two phases of the selection procedure and guaranteeing that the State receives the revenues it was counting on for 2001 and 2002.
ART is willing to discuss these hypotheses in coming months with the government, to which it must suggest financial conditions. It wants to contribute to this second phase of a process whose success is necessary given its industrial, economic and social stakes.
It will do so, respectful of the decisions made by Parliament that it is bound to apply, committed to safeguarding the coherence of the lines of thought which were its own during the initial phases of preparation of the application process, but also to fostering the emergence of an expected and necessary harmonisation in Europe.
It is essential that our country play an important role in this new phase which will mark the Community process with, depending on the case, the inflexion or consolidation of national programs. ART is convinced that by adopting an active and lucid attitude with respect to the continuation of its own national UMTS introduction process, without waiting for any adjustment decisions which might be introduced by our neighbours and partners, France will be able to play such a role.
ART has faith in this new mobile telecommunications system which has the three characteristics of tomorrow's communications: mobility, interactivity and interoperability. We expect, without a doubt, that it will meet the expectations and needs of consumers, although it is important to remember that the market always maintains a certain degree of liberty: the rate of its development. This is its right and its strength, since in the end, the market holds the answer to these essential questions which still must be answered: which services for which consumers and at what price?
Not to adopt this new mode of communication, or to delay in adopting it, would marginalize our country with respect to our neighbours, partners and competitors. The information society depends on all technological innovations and represents a major stake for future generations, economically, socially and culturally.