Scandinavian carrier Telia Company says dramatic reductions in the cost of mobile network infrastructure and handsets are allowing it to make a bold leap into the Spanish 3G mobile market with a €1 billion (US$1.26 billion) investment in a new network. (See TeliaSonera Goes to Spain.)

The carrier believes that's the cost to invest in networks, service platforms, spectrum fees, and startup costs during the next five years, and that its Spanish operation will be cashflow positive at the end of that period. A spokeswoman for the operator says Ericsson AB (Nasdaq: ERIC) has already been chosen to provide 3G base-station equipment for 450 sites in Spain.

While the operator's decision came as a surprise to analysts and investors, this isn't a snap decision made on a whim. TeliaSonera has held a minority stake in a Spanish 3G license since 2000, when it was part of a consortium called Xfera Moviles that paid $111 million for the right to build and run a next-generation mobile network. But the company was mothballed as the telecom bubble burst and carriers reined back their investments.

Now, though, TeliaSonera has paid €71 million ($90 million) to increase its stake in Xfera to 80 percent and will take on the combined might of Telefónica Móviles SA , Vodafone España S.A. , and Amena by building a new 3G network and targeting an already saturated Spanish mobile market, where GSM penetration stands at 99 percent.

To be successful, the operator will need to win over GSM customers from the other players that have already launched their 3G services. Telefónica Móviles has 20.3 million subscribers, of which 360,000 are 3G customers; Vodafone Spain has 13.5 million users, of which 900,000 are 3G customers; and Amena, part of Orange (NYSE: FTE), has 10.5 million subscribers, of which 123,000 are 3G users. (See FT Takes on Telefónica.)

But TeliaSonera CEO Anders Igel told a press conference this morning that "the conditions in Spain give room for another player," and that the business plan has been made possible because "3G [infrastructure] prices have fallen significantly recently."

He added that his company now also has experience building 3G networks. "We know how to optimize a 3G network technically and in terms of business strategy," noted Igel. TeliaSonera operates 3G networks across Scandinavia and the Baltic States.

Another factor, noted the CEO, is that it's now possible to source a range of good 3G devices with a decent battery life at affordable prices. Device costs and problems hampered Europe's pioneering 3G operators in their early days. (See 3G Handset Supply Sorted!)

Put together, those factors give Xfera a massive cost plan reduction compared to its 2001 business strategy, when it was planning to invest €7.8 million ($9.84 billion) in a 3G network rollout. Its new plan is 87 percent cheaper.

Igel says that his company already has a roaming agreement in place with an unnamed GSM operator in Spain to provide voice coverage while it builds out its network, and that Xfera plans to launch its initial service in November. Xfera had previously engaged in roaming talks with Amena. He declined to provide any strategy details or customer acquisition targets.

The news wasn't well received by analysts and investors, as TeliaSonera's share price fell 2.5 percent to 40 Swedish Kroner ($5.45) on the Stockholm exchange in morning trading.

Analysts at Lehman Brothers see the spending plan as a "negative development" for TeliaSonera, Telefónica, France Telecom, and Vodafone. In a research note issued this morning they said the investment will depress TeliaSonera's cash flows over several years and result in increased competition for the three other operators.

"Our forecasts for Spanish mobile already incorporate a deteriorating competitive environment with the entry of MVNO [mobile virtual network operator] operators from the second half of 2006," wrote the Lehman analysts. "In our view the entry of Xfera into the market will further exacerbate these effects."

TeliaSonera said its business plan accounts for the expected launch of MVNOs in Spain within the next year. And CEO Igel noted on the conference call that if Xfera had not been resuscitated now, just before its license deadline, it would have cost TeliaSonera about €100 million ($126 million) to liquidate the company.

— Ray Le Maistre, International News Editor, Light Reading