Strategic Game Theory for Managers The French 3G Beauty Contest March 23, 2006 Antonin Faury

2 March 23, 2006 Strategic Game Theory for Managers Agenda Background Players Bidding: first round Bidding: second round Conclusion Q&A

3 March 23, 2006 Strategic Game Theory for Managers Players Orange > Comprises all France Telecom Group mobile communications activities worldwide SFR – Société Française de radiotéléphone > Vivendi Universal holds 55.8% of SFRs capital, Vodafone holds 43.9% Bouygues Telecom > Bouygues has owned 83% of Bouygues Telecom since the end of 2003 French Government (including ART – Autorité de Régulation des Télécoms) > Coordinated introduction across the European Union of UMTS: established by a decision of the European Parliament (14 December 1998), giving power to Member States to introduce UMTS services on their territories by 1st January 2002 > Legal framework and the means of introducing UMTS in France: prepared by ART and the Ministry of Telecoms

4 March 23, 2006 Strategic Game Theory for Managers Background Late 90s: new demand for real-time and on-demand applications and increased high-speed networks European and Japanese answer to this new demand: Universal Mobile Telecommunications System (UMTS) Choice in March 2000 of a "Beauty Contest" method to allocate four licenses in France > Criteria play a role in allocating rights (such as pledged technical coverage or promised future investments, etc.) > Necessity to rely on governments bureaucrats to assess the merits of competing firms´ business plans. (Binmore and Klemperer 2002). > The alternative: an auction based process, like in UK and Germany License fee to be paid by operators: $4.6 billion fee > The requirements were composed of 14 criteria for 500 possible points (including commercial, technical and financial criteria). > The most important criterion was a minimum coverage of 20% till 2009 and 60% afterwards (100 points out of 500).

5 March 23, 2006 Strategic Game Theory for Managers Bidding: first round Four operators expected to bid: France Telecom, Bouygues Telecom, SFR, alliance of Frances Suez-Lyonnaise des Eaux and Spains Telefonica Game tree set by the French government: a weird approach and a fiasco as a result (no bids from BT & Suez / Telefonica)

6 March 23, 2006 Strategic Game Theory for Managers Bidding: second round ART: a market structured around just two operators [could] not allowed to last and such a situation would make it impossible to meet the goals of developing a competitive market Government position: no choice but lower the license price to 619m > Weak bargaining position > Absolute need to attract new investors > Rising cost of delay

7 March 23, 2006 Strategic Game Theory for Managers Conclusion Poor design and overconfidence: failure to impose high licenses price Critical design features in the French Beauty Contest > Timing > Number of licenses vs. the number of bidders > Entry deterrents Result > Only three licenses allocated (to the three 2G incumbent operators) > Reduced fee > Two of these three operators under financial distress An auction process would have been probably more appropriate in order to raise capital

8 March 23, 2006 Strategic Game Theory for Managers Q&A