Should Investors Worry About U.K. 4G Spectrum Auctions?

For some observers, the Long Term Evolution spectrum auctions just beginning in Europe are starting to look like the disastrous 3G auctions of the 2000 period, when mobile operators vastly overbid for spectrum rights, causing financial distress that threatened some of the leading firms with banrkuptcy.

It looks like the same thing is happening again, and the upcoming United Kingdom auctions might confirm the story. The precursor in this case was the Netherlands auction, which cost mobile service providers more than anybody really had expected. 

The first day of stock trading after the completion of the Netherlands spectrum auction, shares of winning bidders fell, across the board. 

KPN fell nearly 15 percent, the steepest drop in more than a decade. Shares of Vodafone were down 1.7 percent by the close of the day. Deutsche Telekom fell 0.3 percent in Frankfurt, and shares of Tele2 declined one percent in Stockholm. 

Up next are similar spectrum auctions in the United Kingdom market, which more than a decade ago witnessed a huge overbidding problem. 

KPN said it wouldn't be able pay its promised end-of-year dividend, because of new spending on the specgtrum. 

KPN bid €1.35 billion for 120 MHz of 4G spectrum covering the Netherlands, The Register reports. 

That doesn't necessarily mean Netherlands service providers have spent too much to acquire 4G spectrum. That can only be assessed over time. 

But there is recent precedent for the entire European mobile industry overspending for 3G spectrum, and some might say the industry is heading for that same mistake again. 

On April 27, 2000, the United Kingdom auctioned off five licenses for 3G wireless spectrum, raising $35 billion. 

Over the next year, a half-dozen other European countries held their own auctions, raising a combined $100 billion in a frenzy of overbidding Ever since then, some have worried about the potential downside of "winning" a major spectrum auction.

The 3.8 billion euros ($4.97 billion) proceeds were much than observers anticipated, far surpassing  the EUR400-500 million the government had expected.

< European mobile phone companies spent $129 billion six years ago to buy 3G licenses  that were expected to trigger new revenue-generating services. As recently as 2006, though, that had not proven to be the case. 

The U.K.’s 3G auction raised£22.5 billion ($35.7 billion) in 2000, amounts that nearly bankrupted many firms. 

Spectrum auctions, especially those enabling the next generation of networks, are strategic matters, of course. But the temptation to overpay is ever present. If European service providers guess wrong, again, and pay more than the business case can support. a period of financial distress is coming.