Germany's UMTS Market Seen Facing Shake-Out

T-Mobile and Vodafone, the two leaders on Germany's mobile-phone market, are readying for sector consolidation.

People close to the companies told Handelsblatt that they expect at least one of the country's six UMTS, or third-generation, license holders to drop out.

Neither T-Mobile's parent, Deutsche Telekom AG, nor Vodafone was willing to comment publicly, but industry observers said that the companies are intent on preventing a newcomer from taking advantage of the current industry crisis by acquiring a UMTS license for a symbolic price.

A year and a half ago, UMTS licenses were sold for around 8.4 billion euro each.

"Any kind of competitive distortion must be stopped," the people close to the groups said.

Analysts see newcomer Quam, a joint venture between Spanish giant Telefonica and Finland's Sonera, as the most likely candidate to drop out.

But other smaller competitors such as Viag Interkom, E-Plus and Mobilcom are also in difficult financial situations.

T-Mobile and Vodafone between them have more than 40 million customers, accounting for around 80% of the German market.

If one of the smaller companies decides to return its UMTS license to the state, Vodafone and Telekom intend to argue in favor of a new auction among the remaining license holders.

It is not yet clear whether a returned license would be made subject to a new auction and what kind of conditions would apply.

Telecoms regulator RTP said that it had not yet been necessary to take a decision on this issue.

Telekom's and Vodafone's concerns have to be viewed against the backdrop of the strict conditions attached to UMTS licenses in Germany.

The licenses cannot be traded. If a company becomes insolvent, its license has to be returned to the state.

A single company is also not allowed to hold two operating licenses, so if two license holders merge, one license has to be returned to the state without compensation.

The burden this would put on a company is seen to be hindering consolidation in the sector.

The high costs of UMTS licenses have caused problems in particular for Viag Interkom and E-Plus and their respective parents, MMO2 of the U.K. and KPN of the Netherlands.

While KPN is battling with its debt mountain it has stressed continues to hold on to E-Plus.

But MMO2's support for Viag Interkom is seen as less firm.

If Viag Interkom fails to enter profit, MMO2 is expected either to close or to sell the unit.

Spain's Telefonica is seen as a likely candidate to take over Viag Interkom but it already holds a stake in Quam, though Quam's troubled launch has fuelled speculation that Telefonica may jump ship anyway.

If it invested in Viag Interkom, Telefonica would have to give up one of the UMTS licenses and write off the costs.

Considering the high losses to which such a move would give rise, analysts have been arguing in favor of changing the current rules.

"Something has to happen to lower the burden of UMTS license costs," said Nigel Deighton at Gartner. If no action was taken, companies would continue to "sink" more large sums of money into unpromising projects, he argued.

So far, the telecoms regulator and the Economics Ministry have been strongly opposed to any changes to the UMTS license rules. They argue that any reform now would trigger a series of legal challenges.