Baltics embark on perilous race for UMTS

Estonia and Latvia say they are close to auctioning licenses to operate the next generation (3G) of mobile phone networks, but critics argue the Baltics should be cautious about jumping on the Universal Mobile Telecommunica-tion System bandwagon.

Latvia's Ministry of Transport last week hired the U.K.-based National Economic Research Associates to attract bids for three UMTS licenses, two of which are expected to be bought by the operators of the current GSM service, Tele 2 and LMT. The government hopes the third GSM license will go to a new player.

Latvia is talking about a sale this summer and Estonia is not far behind.

National Economic Research Associates stands to take a 1.92 percent cut of earnings from the Latvian auctions, according to Didzis Jonovs, adviser to Transport Minister Anatolijs Gorbunovs.

Meanwhile in Estonia, "the main principles for this process have been determined, and only some preliminary work remains to be done," Kuldar Vaarsi, a spokesman for Estonia's Ministry of Transport and Communications, recently told the journal Baltic IT&T Review.

The government's main goal is "not to pad out its budget," insisted Vaarsi.

"The important factor here is that people will be able to access high-quality services that are based on modern technologies."

But telecommunication consultant Peteris Avisans doubts the wisdom of buying into the kind of tricks UMTS is capable of - such as sending and receiving audio files and film clips and holding video conferences – at a time when only Japan has succeeded in launching a commercially operational UMTS network.

"A third operator will not come to Latvia until it can be made profitable to run a UMTS network elsewhere in Europe," said Avisans.

"There are very few services which can only be supported by UMTS and the (Latvian) market is too small. In a country of less than 2.5 million people with 30 percent mobile penetration it will not be profitable to have a 3G network."

The public, particularly young people who are UMTS' target audience, can ill afford the new handsets the system will require, Avisans cautioned.

LMT President Juris Binde estimates that, having obtained a license, a staggering 600 million lats ($952.38 million) will be needed to set up the necessary UMTS infrastructure, which is expected to build on the existing GSM network.

Hence LMT will be scrutinizing the fine print of any purchase agreement the Latvian government puts before it, he said.

"If the costs of making the third generation network system are high, it makes it difficult to lower costs for GSM clients, but prices for them should not be increased," said Binde.

In places such as Switzerland, Italy and Spain, operators have recently collaborated to avoid paying the mickey mouse prices commanded at the first auctions in Britain and Germany, meaning the Baltic governments are rethinking hopes of big windfalls.

Initial hopes that the Latvian government could receive between 85 million euros ($74.41 million) and 100 million euros have been abandoned in place of more modest expectations of between 10 million lats and 15 million lats, said Jonovs.

But Avisons doubts even these expectations can be met. A UMTS network is unlikely to be operating outside Riga any time soon, he adds.

"It is clear to me (the Latvian government) won't get this kind of money, they won't sell any UMTS license and there will be no third operator here - this is a very expensive service for which we are not ready," said Avisons.

If such warnings were correct Lithuania's recent postponement of auction plans until next year would appear wise.

Under a conceptual document drawn up by officials at the Ministry of Transport and Communications Lithuania will auction licenses for just a small initial payment, with the operator then paying an annual fee related to its income.

The ministry believes the optimal number of UMTS licenses in the country could be four, and the auction for those licenses should be announced in 2003.

A KPMG study in Great Britain shows that only 15 percent of all mobile telephone users currently have equipment with Internet capabilities. Of all users, 78 percent are not even thinking about getting a mobile phone which would support Internet functions, and about half of these people said a firm "no" to the idea of a UMTS phone.

In Finland, Sonera, the biggest player, has announced it will launch commercial operation of its UMTS network on Sept. 26 to coincide with Finnish giant Nokia releasing its third generation mobile phone.