Wireless Auction Follies 
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.