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French sell-off tripped up
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January 31, 2001: 3:23 p.m. ET
Round two ordered after only two firms bid for next-generation mobile licenses
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LONDON (CNN) - France was forced into a new tender for two mobile phone licenses on Wednesday, after it drew only two bids in a sale of four slots.
Finance Minister Laurent Fabius told the French legislature he will hold a second round after only two bidders -- France Telecom and Vivendi -- met the Wednesday deadline for applications for four next-generation licenses.
Over the past week, expected bidders Bouygues Telecom (PEN) and an alliance of Suez-Lyonnaise des Eaux (PLY) and Spain's Telefonica said they wouldn't bid because the sale terms were unfavorable.
France had hoped for a windfall through the sale of four Universal Mobile Telecommunications System licenses, which were set to be sold for $4.6 billion apiece.
The French woes are the latest in an array of troubled UMTS license auctions in Europe. Similar sales in Italy, Poland and Austria did not go according to plan, either.
'Beauty contest' turns ugly
Unlike auctions elsewhere, the French sale was built on the so-called "beauty contest" model, by which contestants agree to pay a specific fee for UMTS licenses -- and the government decides the winners based on the services they pledge to offer.
Earlier on Wednesday, French telecom regulator ART asked the government to delay its sale of next-generation licenses in the light of the failure to attract enough bidders. A major concern is that a market with just two providers will be harmful for consumers.
"To reinforce competition, the commission believes that it's necessary to have a further call for applications to obtain, as was planned, the issuance of four licenses," said Nina Mitz, a Finance Ministry spokeswoman. 
The new applications are expected to meet the same requirements as in the first round, and there is no sign that the French government is willing to cut the price tag in order to draw new bids.
Mitz said the French government is "not considering" whether to lower the cost of the licenses, adding: "We will take into account the need for equal conditions -- particularly financial -- between the different operators."
The bidders who withdrew have said they will only accept a UMTS license with the guarantee that outstanding licenses would not be sold later under unfairly advantageous terms.
The ministry did not set a timetable for the new applications, but Jean-Francois Hernandez, a spokesman for ART, said a decision on the bids from France Telecom and Vivendi will be made no later than May. Those applications are expected to sail through.
France Telecom (PFTE) controls mobile phone company Orange, while media group Vivendi (PEX) owns cell-phone service provider SFR. Vivendi is also allied with British-based Vodafone (VOD), Europe's biggest mobile phone company.
Second thoughts on pricing
Many telecom operators have seen their stocks come under pressure as they swallow the high cost of UMTS licenses elsewhere in Europe. The British government netted some $35 billion in its auction of five licenses, while Germany reaped nearly $50 billion from its auction of six licenses.
Originally, the French licenses were expected to sell for bargain-basement prices.
But after France saw the windfall enjoyed by other governments, they "raised the ante," said one British academic who devised the U.K. auction. 
"[The French government] decided that instead of giving away the licenses for peanuts the were going to try and raise revenue on the level of the British and German examples," said University College professor Ken Binmore in an interview with CNN in London.
Since the German and British auctions last year, industry watchers have questioned the value of UMTS licenses -- and whether the high-speed data and Internet services they facilitate will mean higher revenue for the operators.
Bouygues (PEN), which indicated on Tuesday it would pull out of the French UMTS sale, said it will now focus on lesser technologies in order to save costs. It is the only incumbent cellular operator in Europe to fail to bid for a next-generation license.
-- from staff and wire reports 
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