Iliad (Euronext: ILD) still hopes to win the fourth and last remaining 3G license in France after the regulator rejected its bid today on grounds that the operator's application did not meet the financial criteria.

With no apparent takers for the fourth 3G license, French regulator Arcep 's plans for spectrum refarming early next year (which would allow 3G operators to reuse 900 MHz spectrum for 3G services) could be affected until the government resolves how to allocate the fourth 3G license. (See Arcep Approves 900MHz 3G, 3 Group Seeks Spectrum Compensation, and Spectrum up for Grabs in Europe.)

Iliad remains intent on adding mobile services to its triple play bundles, but not at the government's asking price. In a press release, Iliad said it is still interested in the 3G license and urged the government to "create the conditions necessary to the establishment of a fourth mobile operator in France." In other words, Iliad wants the government to lower the price and change the payment terms. (See EuroBites: Le DSL.)

For this license, the government requires a one-time, upfront payment of €619 million ($876 million) when the license is awarded, plus 1 percent of 3G revenues. This is the same price that the other three French mobile operators -- Bouygues Telecom , Orange France , and SFR -- had to pay for their 3G licenses back in 2001.

But for Iliad, the price is too high. (See Iliad Updates on FTTH, 3G and Iliad Eyes Mobile License.)

Iliad, through its wholly owned subsidiary Free Mobile, was the only applicant for the license. In its application, Free Mobile did not address how it would pay the €619 million fee and so, by the letter of the law, ARCEP could only reject the bid, according to an industry source. (See Iliad Applies for License.)

"[Iliad] was not willing to pay the upfront payment," says Frederic Pujol, head of mobile services practice at French consultancy Idate . "Iliad was hoping that there would be political pressure on ARCEP. But ARCEP just followed the [legal] procedure."

French Finance Minister Christine Lagarde has reportedly issued a statement indicating that all options were open for the remaining 3G license.

It is understood that ARCEP wanted to settle the ownership of the last 3G license before it drafted the rules for spectrum refarming for the 900 MHz frequency. Spectrum refarming offers 3G operators cost savings and better coverage, particularly indoors.

Like Ofcom in the U.K., ARCEP will redistribute some of the 900 MHz spectrum currently owned by 2G operators so that it can be used by the licensed 3G operators for their services. ARCEP wants to know whether the 900 MHz spectrum will be divided into three parts or four. (See Ofcom Tackles Spectrum Usage and What Ofcom Giveth....)

"I don't expect ARCEP to go ahead with refarming right now with three operators," says Pujol.

Pujol believes there is room in the French market for a fourth mobile operator, but he doubts Iliad's commitment even though the operator says it is still interested.

"I'm not sure Iliad is really interested in this license," says Pujol. "It will be a difficult business to be the fourth mobile operator in France. It's still very expensive to build a network... and attract customers."

The analyst team at Dresdner Kleinwort reckons Iliad is more likely to be a mobile virtual network operator (MVNO).

"Iliad is still lobbying for a mobile license and there may be some form of appeal but we think that it is most likely to end up with an MVNO rather than a genuine mobile network," writes the Dresdner team in a research note.

Iliad also has a national WiMax license at 3.5 GHz. But the terms of the license do not allow for mobility and the regulator does not plan to change this. The operator has plans for a pilot 802.16e network by the end of this year and has been evaluating equipment from Motorola Inc. (NYSE: MOT), Nokia Networks , and Samsung Corp. . (See French JV Pushes on With WiMax, WiMax Blooms in Paris, Euro Altnets Step Up M&A, and Iliad to Buy Altitude Telecom.)

— Michelle Donegan, European Editor, Light Reading