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Earlier this month, the French government formally opened bidding for the country's fourth 3G license, with a reserve price set at EUR 240 million ($339 million), a tiny fraction of the EUR 4.95 billion charged for the first two licenses that were awarded to incumbent operators France Telecom (Orange) and SFR. As expected, this has infuriated France Telecom which says that it will appeal against the license fee.

The French mobile market is a bit unusual for such a large development European country. Unlike all its neighbours, France has just three mobile carriers and no 3G-only new market entrant. By comparison, Spain, Germany and Italy have four operators while its cousin across the channel, the UK, has a whopping five. Even countries like Denmark and Sweden, which are much smaller than France, have more national operators. Furthermore, many of France's neighbours, like the UK, Spain and Italy each have a Greenfield operator which entered the market with the award of a 3G license.

France remains the least penetrated country in Western Europe, so there is a strong case for the introduction of a fourth operator to spur competition and drive growth.

To understand the French license problem we need hop back eight years to the spectrum golden era when 3G technology promised to totally revolutionize communications as we knew it. Based on this somewhat exaggerated claim, companies were prepared to pay anything to ensure they secured a piece of 3G spectrum. In 2001, France Telecom and SFR paid EUR 4.95 billion for their licenses, which of course is insane but seemed perfectly sensible at the time.

A year later when the tech bubble burst, reality kicked in and 3G was now rightly viewed as simply evolutionary as opposed to revolutionary. In 2002, the French government attempted to sell the remaining two licenses but was now forced to slash the asking price to EUR 619 million. That was a price that Bouygues, the number three operator, was prepared to pay. Understandably, this gave France Telecom a coronary and it challenged the government which eventually did something which governments rarely do - it refunded both France Telecom and SFR the difference. This has set something of a precedent.

Since then, the French government has continued to explore options for releasing another 3G license and getting a fourth operator into the market. However, it finds itself in a tough situation. 3G is now a mature technology and the business is much better understood than it was back in 2001. No company is going to pay above the market rate simply to own a license. In fact, the cost of building out a nationwide cellular network in a developed European market which is near saturation is so daunting that the government has to put an attractive offer on the table.

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