10/30/2000

An interesting contrast in wireless strategy is taking place in Britain and Sweden.
Last spring, Britain decided to auction off its wireless spectrum to the highest bidder.
The results were breathtaking, with Britain raising $35.4 billion for the government
coffers. This fall, Sweden will also assign its wireless spectrum to telecom companies
eager to offer next-generation (or 3G) wireless services, but instead of emulating
Britain’s budget-maximizing strategy, it opted for a seemingly wasteful beauty pageant, granting hugely valuable spectrum at no cost to whichever telecom companies they judged to have the best proposals.

The contrast couldn’t be clearer. After assigning its spectrum, the British government
is $35.4 billion ahead of Sweden–and its wireless industry is $35.4 billion behind.

Britain has, in effect, imposed a tax on next-generation wireless services, paid in full
before (long before) the first penny of 3G revenue is earned. This in turn means that
$35.4 billion over and above the cost of actually building those 3G services must be
extracted from British consumers, in order for the new owners of that spectrum to remain viable businesses.

For the auction’s alleged winners, the UK sale couldn’t have taken place at a worse time. Wireless hype was at a head, and the markets were desperately looking for the Next Big Thing after the early April meltdown. In addition, WAP euphoria still reigned supreme, bringing with it visions of “m-commerce” and the massive B-to-C revenues that had been so elusive in ecommerce. In this environment, wireless spectrum looked like a license to print money, and was priced accordingly.

The air has been leaking steadily out of that balloon. First came the beginnings of the
“WAPlash” and the disillusionment of designers and engineers with the difficulty of
offering content or services over WAP (not only is WML difficult to program relative to HTML, but different handsets display any given WAP site differently). Next came the disillusionment of the users, who found waiting for a new download every time they changed menus to be intolerable.

Then there was the loss of customer lock-in. When British Telecom was forced to abandon its plans to lock their users into its own gateway, it destroyed the illusion that telcos would ever be able to act as the sole gatekeeper (and tollbooth) for all of their users’ wireless data.

Lastly, the competition arrived. NTT DoCoMo’s iMode and RIM’s Blackberry have both demonstrated that it’s possible to make functional and popular wireless devices based on open standards–iMode uses HTML; Blackberry handles email.

We’ve been here before. Between 1994 and 1996, when the Web was young, many companies tried to offer both telecommunications and media services, providing both dial-up access and walled gardens of content: Prodigy, CompuServe, and even AOL before it embraced the Web. These models failed when users expressed a strong preference for paying different companies for access and commercial transactions. At that point, we settled down to the Web we have today: ISPs and telcos on one side, media and commerce on the other.

As in the States, many British telecom companies disastrously flirted with the idea of
transforming themselves into Internet media businesses. And as in the States, they
ended up making most of their money by providing bandwidth. The wireless industry in Britain would be poised for a similar arrangement, but for one sticky wicket–having forked over $35.4 billion, a split between access providers and content and commerce providers would be the death knell for the auction’s winners.

In fact, the wireless carriers are going to be forced to behave like media companies
whether they want to or not, because any money they could make selling access to their newly acquired spectrum has already been taxed away in advance. Furthermore, startups that want to build new businesses on top of that spectrum represent a threat rather than an opportunity, because anything–anything–that suggests the auction winners will capture less than 100 percent of the revenue from their customers would illustrate how badly they overpaid.

In effect, the British government has issued this decree to the winners of the wireless
auction:

“Hear Ye, Hear Ye, You are enjoined from passing savings on to users, offering spectrum access to startups, or rolling out low-margin services no matter how innovative or popular they may be, until such time as the first $35.4 billion of profit has been extracted from the populace.”

And Sweden? Sweden is laughing.

In Sweden, any wireless service that will generate a krona’s worth of revenue for a
krona’s worth of investment is worth trying. The beauty pageant will create a system
where experimentation with new services, even moderately profitable ones, can be
undertaken by the new owners of the spectrum.

Seen in this light, Sweden’s beauty contest doesn’t look so wasteful. Britain’s auction
may have generated a huge sum, but at the cost of sandbagging the industry. So keep an eye on the Swedes–their “forgo the revenue” strategy will have paid off if, by refusing to tax the industry in advance, they earn an additional $35.4 billion in taxes from the growth created by their dynamic and innovative wireless industry.