June 07, 2002

Europe's 3G Telecommunications Mess

Business Week Online:Tale of a Bubble

Europe's phone giants--after spending half a trillion dollars on licenses, acquisitions, and networks--are treading madly to stay afloat in a sea of debt. Chairman Ron Sommer of Deutsche Telekom (DT ) is sitting on $60 billion in liabilities... And the mobile Internet? Oh that. In fact, the high-speed project known as 3G is plowing ahead, though on a smaller scale than anticipated and a year or two behind schedule... as early as next year... shuttle data at the speed of a broadband connection

In its origin, the European plan to auction off licenses for "3G" wireless phone service seemed an obvious win. Make sure that bandwidth gets in the hands of those who value it most--rather than the older custom of distributing it for free to the politically powerful who may or may not know what to do with it--by giving it to the high bidder, and in the process earn a little revenue for the government by making the auction prices transfer some wealth from information-economy entrepreneurs to the general public. But the licenses were auctioned off at the very peak of the information-economy bubble. Very few telecommunications executives were smart enough to think that if they stayed out of the auction they could buy up one of their competitors who had stayed in for a song later. And so now the European telecommunications industry finds itself cash-strapped: they need to roll out their 3G systems--and find something that consumers will want to use them for--if they are ever to justify the fortune they paid for their licenses. But the don't have the cash for the large-scale investment projects that are needed. And their previous bad judgment has made it very hard for them to raise capital from financial markets without giving away the entire store.

Posted by DeLong at June 7, 2002 10:51 PM

Comments

At least this was a private sector mistake. When Senator Lieberman proposes that the U.S. government take responsibility for getting broadband rolled out, I have visions of taxpayer bailouts paying for mistakes like this.

Posted by: Arnold Kling on June 8, 2002 09:30 AM

The government would seem to have enough large-scale commitments at the moment given our current taxes, wouldn't it?

Unlike you, I'm eager to spend money on things that produce national and global public goods. But it is very hard to figure out what they are...

Posted by: Brad DeLong on June 13, 2002 08:30 PM
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