France Telecom shares fell more than three percent in the first two hours of trading to 159.00 euros, while Vivendi dropped 2.94 percent to 115.70 euros and Bouygues were down 1.68 percent at 703.00 euros. All three currently operate mobile phone networks in France and learned on Tuesday that they will have to pay a fixed 32.5 billion francs (4.95 billion euros, 4.45 billion dollars) apiece for a Universal Mobile Telecommunications System (UMTS) licence, provided they are judged to offer an adequate service.

The fixed-price "beauty contest" option will cost bidders less than the outright auction which the domestic industry had feared, but the price set was higher than some had hoped. Vivendi, which holds an indirect stake in the SFR network, regards the price as "exorbitant," its President Jean-Marie Messier said.

And he said that given the high price, the operators should be offered some leeway on the level of service required, notably by being given time to provide nationwide coverage with the new system. Finance Minister Laurent Fabius had stressed on Tuesday that the winning candidates for the four UMTS licences on offer would be chosen on criteria including "the widest coverage of the country" to ensure that everyone would have equal access to the new system.

Messier said that asking operators to pay half the money in the first two years, or almost 2.5 billion euros in 2001 and 2002, was "a value-destroying tax" on the company, and that Vivendi had therefore decided to sell three percent of its holding in British satellite TV channel BSkyB to raise its billion-euro share of SFR's payment, presuming it won a licence. France Telecom managing director Gerard Moine also said he was "worried" by the "high entry price" set by the government, and that given the larger territory and different population density in France the licences should have cost half the level of those auctioned in Britain, or some 3.5 billion euros.

Analysts are already suggesting France Telecom paid over the odds last month for British mobile operator Orange. The cost of buying Orange was boosted to 50 billion euros by its British UMTS licence, and it is also planning to bid for licences in Italy and Germany. But Moine said that France Telecom's planned stock market flotation of its mobile activities including Orange would help Finance the bids.

The government had initially said it would award the UMTS licences by the "beauty contest" system, but that was before Britain's auction of UMTS licences reaped an unexpectedly high 38.5 billion euros (34.6 billion dollars) in April, causing the Paris authorities to rethink their strategy. The method finally chosen on Tuesday enables the French government to reap 19.8 billion euros. more than originally expected, from the licences without the risk of crippling the finances of the three French companies already in the mobile phone market in France. The government is well aware that any operator which wishes to remain in the French mobile phone market is bound to do all it can to win a UMTS licence, or face being squeezed out altogether.

The UMTS system, to be operational in 2002, will offer rapid Internet access and services such as video conferencing from mobile phones, services unavailable on the current, second-generation system. France Telecom, Bouygues Telecom and SFR, are widely expected to win licences in the "beauty contest" stakes. But with only four licences on offer they could have expected to pay a crippling price in an outright auction, costs that would ultimately have been passed on to the customer. And the costs do not end with the licence.