Carrier attitudes reflect a sea of change, according to Andrew Cole, Adventis VP & global wireless practice head. Wireless Review spoke with him from his London office about 3G auctions, business models and an infamous little company named NextWave.

Wireless Review: Will the U.S. 3G spectrum auctions be feast or famine?

Cole: We’re seeing a major sea change. It’s more than a global warming in funding. We’re starting to see from a carrier perspective a significant change of heart. There’s a very different sentiment from six months ago vs. now.

With $100 billion being spent on licenses at the moment, and with another $100 billion to build out 3G, there are questions being raised about the business model where before people could get away with giving examples of the mobile Internet and so on. But the reality is, now bankers and the people who are lending the money are saying, “Hold on. Tell me a little more about this.”

The big question is, how is this money is going to paid back. It’s going to have a significant effect on the U.S. spectrum auctions. We don’t anticipate that they’ll be anything like the dollar per subscriber that you are seeing in Europe to date. It’s a very different environment today than it was before.

Wireless Review: Why are carriers resisting the idea of incurring huge costs before they begin to build and offer services? It didn't seem to be a problem during the 2G auctions.

Cole: If your debt rating gets affected as they are, that has a massive impact. It’s one thing if you owe a couple of million dollars. If you owe billions of dollars, any change of debt rating has a detrimental effect on the amount of money you have to repay, which in turn means you have to have higher operating returns, and so on.

It’s a trickle-down effect – a negative one. It has really had a significant and detrimental effect on the operations of the company, and therefore on their share price, and so on. It’s a big problem and carriers have woken up – they’ve had a rather significant wakeup call. There’s significant corporate connectivity between Europe and the United States; in other words, the senior teams are either owned by the same company or there are linkages. They talk, and they’ll not be making the same mistakes.

Wireless Review: Were the auction bids for 2G a mistake?

Cole: When they look back, they see that it was a lot of money. But wireless voice was frankly much more of a known quantity and they believed in their heart of hearts it was fine. With the wireless Internet, there’s such a higher beta or risk attached to it that it would be tough to justify.

We happen to be great believers in mobile commerce and so on, but all it takes is for one slip for the year and that is a year of significant interest you are paying on debt. There is less and less room for error. Carriers in the United States believe the Europeans have paid too much for 3G licenses, so they are going to go in with that mindset. I think you are going to see that people will be prepared to back down if necessary rather than pay over the odds.

Wireless Review: If wireless incumbents resist the 3G auctions, who will be paying the FCC piper?

Cole: We are currently working with three MVNOs (mobile virtual network operators) -- two in Europe and one in the United States. One of them may or may not be an Internet company, and they aren’t interested in spectrum or owning networks or towers. They’re interested in having access to the customer and owning the customer relationship. They aren’t interested in running a network.

What you may see is a company or two enter the market, basically a new company that wants to add infrastructure and will be happy to allow other companies to become virtual operators on their network. So you may see a new player enter and win the odd license – that may be an interesting thing to see. But I think you will see most of them (the licenses) go to the incumbents.

Wireless Review: If the wireless Internet takes off, won’t it be the 3G license holders that will be the big fish looking to buy all of the little wireless voice companies? Cole: Without a doubt. Going forward, one will need to have access to 3G or its equivalent. And don’t forget there's the potential to leapfrog so there’s 4G and so on. This is not a static environment. Just because you don’t own 3G at one moment in time doesn’t mean that you’re out of the game by any means. Also traditionally, people tend to get more juice out of given band of spectrum than we ever thought possible. We would wager that people could do an awful lot with 2.5G. I don’t believe you necessarily need to have 3G to win. If you need it eventually, you can buy it.

I have heard this very comment made by some wireless executives in companies. It’s a complete sea change to six months ago. I was with one of the companies that won one of the 3G licenses in the UK. They are an incumbent and they made it clear, “We can not lose.” That was from on high. Under no circumstances were they to lose. They were going to go pretty much until the well ran dry and use the last dime that the company owned. They “had” to get 3G licenses. That was the mandate. It is a very different environment now.

Wireless Review: So what does all of this portend for next year’s U.S. spectrum auctions? What will they be like?

Cole: Competitive but orderly as opposed to irrational as the UK and German auctions were. These things aren’t going to be given away for free – they will be significant line items – but they will not be irrational purchases as we have seen in Europe.

Wireless Review: Do you think spectrum auctions are a good solution?

Cole: Yes, I do. The auctions are a practical way to determine the value of given band of spectrum. As long as the government is prudent with how it deals with other bands such as giving away free spectrum – and the US has a particular bad record of that. Our view is the auction is a good way of doing that as opposed to giving it to a favored company, particularly given the huge value that resides in the wireless industry.

Wireless Review: Asia is taking a bit of a different approach to 3G.

Cole: You have to bear in mind regarding Asia in particular is that telecom is highly political there. There are a lot of favors being done. It’s a very different way of working. That’s some of the reasoning for the ways they have conducted things. It just so happens that DoCoMo by just a quirk of their “bad” 2G-equivalent technology, they have to go to 3G fast because they are running out of capacity, and they were in deep trouble. That’s why they are here now. It’s not because there’s a difference in auction policy. It was a sheer practical issue. This really wasn’t foresight or they wished to be the leader. It was because they had no choice.

Wireless Review: How likely is it that there could be another Nextwave situation?

Cole: The chance of that is far less likely this time around. The qualification process is far more stringent. These auctions will be hotly contested but not irrationally so.

Unfortunately, Nextwave was ahead of its time. Nextwave was spot-on in terms of strategy. It’s very unfortunate. One of our other clients is TRW, a Canadian telephone company. They own a company called Dolphin here in Europe, which is a Nextwave equivalent. They own one of the licenses in the UK and we’re also helping them. Their whole strategy is they will build out 3G with Hutchinson, and they will virtually create a Nextwave, an entity that will support other companies – in this case, virtual operators. Having done the business model for them and so on, it’s extraordinarily profitable to do that. I would anticipate that you would see a Nextwave-like strategy in the U.S. market for one of the winners. But it will be a Nextwave that will have its time as opposed to before its time.

Yes, I would expect to see another, but not with the bad effects -- rather a very successful Nextwave.