Mobiles in line for break-up

VODAFONE GROUP and its three mobile phone service competitors may be forced to allow new rivals to use their networks once the Government has auctioned off as many as five new mobile phone licences next year.

The radio communications agency has yet to decide all the details of the licences, which are expected to raise as much as pounds 1bn for the government. One issue to be decided is whether new mobile phone operators should build nationwide networks from scratch or whether they can piggy-back, at least partially, on the existing networks.

Britain is expected to be the first country to license frequencies for the new mobile technology, known as Universal Mobile Telecommunications Services (UMTS), which will allow companies to send high-speed services, including video games, television and fast internet access, to a new generation of digital mobile phones. The auction of between three and five licences will take place in summer 1999 and the service will start in 2002.

The Government's plan promises to reshape the power base in the mobile phone sector, which is still 80 per cent controlled by Vodafone and Cellnet, a joint venture between British Telecommunications and Securicor. Orange and One-2-One - a joint venture between US West Media Group and Cable & Wireless - are the other two mobile phone operators.

"This is going to be the next big move in the world of mobile communications, and we plan to bid," said Terry Barwick, a spokesman for Vodafone.

While Vodafone, BT, Energis and others all said they would bid for the licences, they will face fierce competition from a list of new entrants. The newcomers are expected to include Airtouch Communications and AT&T of the US.

UMTS could take the penetration of mobile phones up to as much as 60 per cent of the UK population, compared with around 15 per cent now, according to ABN Amro. As a result the service is attracting considerable interest from a number of large telephone companies, some of which do not, as yet, possess any mobile phone capacity at all.

The auction is expected to intensify the competition not only among mobile phone service companies in the UK, but also among other communications businesses. These would include internet companies and British Sky Broadcasting Group along with other broadcasters. A number of consumer electronics manufacturers are also expected to be in the final running.

"For the first time, a spectrum auction should be of interest to a much wider audience than just telecommunications companies," said James Vaux, an analyst at NM Rothschild.

BT's chief executive, Sir Peter Bonfield, said BT would definitely bid for a UMTS licence, although it is not certain yet whether to bid in conjunction with Cellnet or on its own. The UMTS frequencies will have a 15-to 25-year life span.

The Radio Communications Agency and NM Rothschild & Sons, which is acting as adviser on UMTS, are still working on details of the licences - whether, for example, the government will charge an up-front premium for the frequencies or a royalty over their lifespan. It may also allow the new operators to transmit calls over the existing mobile phone networks, paying the incumbents fees for doing so.

In the US, the government has already collected $12bn (pounds 7bn) for the US Treasury from wireless communications auctions using present-day technology. A further $10bn has been allocated to the US Treasury from mobile phone licences, although disputes over the licences mean that the money has yet to be collected.

Until now UK companies which use radio frequencies only pay the government fees to cover administrative costs. In other countries, including the US and Australia, radio frequencies have been auctioned to the highest bidder.

Separate to the auction, the Government plans to introduce a levy on all companies that use mobile communications frequencies, including paging and taxi radio companies, as well as those who sell mobile phone services, in a move that is expected to raise as much as pounds 1bn over a 10-year period.

Vodafone, meanwhile, will report its 1997 earnings on Tuesday. It is expected to achieve a 20.5 per cent rise in earnings per share to 13.3p, compared with 11p a year earlier, according to analysts' estimates. Pre- tax profits should rise 16 per cent to pounds 628.5m, compared with pounds 539m a year earlier. It will take a pounds 19m charge for reorganising its UK distribution, which will be partially offset by a pounds 10m gain on the sale of its stake in Pacific Link, a mobile phone company based in Hong Kong.

In the UK, the biggest area of growth is in digital telephone services rather than in the older analog technology. Average revenue per customer is falling.

Vodafone said its overseas operations would be increasingly important sources of profits. Controlled competition has only recently been introduced in these markets. It has stakes in networks in Australia, Fiji, France, Germany, Greece, Hong Kong, Malta, the Netherlands, South Africa, Sweden and Uganda.

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