German Fallout Hits Vendors

Ericsson and Nortel face revenue uncertainty as Group 3G puts its infrastructure plans on ice in Germany

July 25, 2002

5 Min Read
German Fallout Hits Vendors

Ericsson AB (Nasdaq: ERICY) and Nortel Networks Corp. (NYSE/Toronto: NT) look set to be the major vendor casualties of Group 3G's crash in Germany. Both companies are calculating the damage to their expected revenues after the mobile operators that jointly own German UMTS license-holder Group 3G (also known by its brand name, Quam) choked on the cost and shut down the business, vowing to invest no further funds in the venture (see German 3G Player Folds).

Not all the effects are negative, however. The share prices of both Group 3G shareholders, Telefònica (parent of Telefónica Móviles SA, which holds 57.2 percent) and Sonera Corp. (42.8 percent), rose following the news that they had halted their investments in the German mobile sector, despite the losses that associated writedowns brought about (see Sonera Posts Interim Report).

The equipment guys are playing it cool, of course. Ericsson had announced a three-year 3G equipment deal worth €400 million in April with Telefónica Móviles. That contract was for the initial UMTS network rollout in Spain and Germany, but Ericsson did not specify how much of the deal was for each country.

And it still won't. "I can't give you a split on the value," says Ericsson spokesman Mads Madsen. "The overall picture at this point is that we don't know what the plans are for Quam -- we are waiting for clarification." In Germany, Ericsson was to have been providing "a turn-key project including acquisition, installation and commissioning," according to the April release.

Ericsson has already helped Moviles reach its initial UMTS base station rollout targets in Spain, so that part of the contract appears safe for the Swedes.

Nortel, meanwhile, announced in March it was to provide Group 3G with "a full turnkey UTRAN (radio access) solution in Germany encompassing site acquisition, installation, commissioning, engineering and provisioning for more than 1,000 base stations." Again, the value of this deal was incorporated in a larger contract with Moviles, worth $250 million, of which $230 million was in the form of financing from Nortel.

Attempts to pry any response or details from Nortel were unsuccessful. Pascal Debon, president of Nortel's wireless networks division, is the man with his finger on the throbbing pulse at the Canadian vendor, but he was unavailable as Unstrung went to press.

It looks anything but good for the vendors, though. Sonera has washed its hands completely of the German venture. "We will make no further investment in Germany and have completely written off the investment on our books," says a company spokesman. "Group 3G's board made the decision to halt the GSM and GPRS business. Service will be maintained but no more customers added. There are several ways to do that, and all the different options will be considered. Telefónica is the main partner in the company and they are in the driving seat. It's up to them."

The Spanish partner is of the same mind regarding investments but insists the license will be retained and not handed back. "We will keep the license but not invest until we see that UMTS is commercially available," says a spokesman, referring to Telefónica's gripe that conditions conducive to a commercial 3G launch do not currently exist. Has any work been done on the Group 3G UMTS network so far? "If anything has been done it is insignificant," he says.

So what happens now? "We have started talks today with all parties -- operators, regulators, manufacturers, everyone." So you're talking to Ericsson and Nortel about their contracts? "We are talking to everyone, but I can't tell you what is being said."A license condition to cover 25 percent of the population (about 2 percent of the geographical area) by the end of 2003 with its own infrastructure, but an unwillingness to spend any money, leaves the Group 3G executives with some hard negotiating to do with the German regulator, Die Regulierungsbehörde für Telekommunikation und Post informiert (RegTP), in particular.

The regulator's office told Unstrung that it does not expect the license to be returned and reiterated its condition that although certain edge network infrastructure sharing was allowed, core networks could not be shared by license holders (see the UMTS/IMT-2000 conditions at the RegTP Website). If Group 3G is to retain its license, therefore, it will have to invest in core network infrastructure. What a dilemma!

Although spectrum trading is currently verboten, MVNOs (mobile virtual network operators) can use the network, should it be built out. If the license is returned, the "market will be consulted before any decision is made," says a RegTP official. The frequencies would be returned to the market, though, as the regulator does not want to see the spectrum (2x10 MHz) go unused.

Unusually, the official adds that RegTP does not expect market consolidation to bring the number of 3G network operators as low as two or three. Well, we're down to five...

So it's all rather messy. An insider at Quam tells Unstrung that staffing levels are set to be cut to a core team, but that work had already started on the UMTS network, which could herald some hard negotiation between Group 3G's owners and the large systems vendors that expected to be involved physically and financially in the complete rollout. The current situation is a high-profile media story in Germany, so Quam can expect to lose quite a few of its existing 197,000 GSM customers, and with the positive market reaction to Moviles and Sonera's decision to cease investment, it's hard to see them jumping back in at any time, particularly Sonera, which is about to tie the knot with neighboring telco Telia AB.

When the German 3G licenses were awarded in August 2000, DM16.446 billion (US$8.36 billion) looked like a lot to pay for the right to use some spectrum. Maybe the technologists at Moviles and Sonera will work at jointly developing a time machine instead, just in case that's the only way they can recoup the investment.

— Ray Le Maistre, European Editor, Unstrung, with additional reporting by Ouida Taaffe

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