back to article Beware of merging, telcos. CHEAPER SPECTRUM follows

What consumers end up paying for mobile phone services isn't the only price we're worried about. Oh aye, thought I, as I scanned El Reg's coverage of mobile operators asking for permission to merge. I can see their game here: or, perhaps, I suspect what they'd rather we didn't think about. That being that what we, as …

  1. Nick Leaton

    But he was right in the way he constructed that auction. In fact that auction was one of the great triumphs of modern empirical microeconomics.

    ==============

    Really? The telcos borrowed to buy. The telcos then took the interest charges off their profits, and the tax revenues dropped afterwards.

    All Brown did was bring forward taxation, spent it, and then because he thought the good times would continue, carried on spending creating the deficit.

    1. Phil O'Sophical Silver badge

      The telcos borrowed to buy.

      Which is an interesting point. The difference between winning with a bid of £10bn versus one of £11bn of your own money is a lot more than the incremental difference in interest that you'll pay if you win with a borrowed £11bn instead of a borrowed £10bn.

      Of course, they still have to pay off the loan eventually, but if they do that through a share issue the very act of winning could increase the company's valuation to the point where the share issue is self-financing. The perceived value of the company will increase by the "value" of the spectrum they've just bought, or more.

      The end result will be that they don't actually care, within reason, what the price is. They just need to find suifficiently gullible shareholders to shoulder the risk, while the treasury collects their money.

    2. Nick Kew

      Really? The telcos borrowed to buy. The telcos then took the interest charges off their profits, and the tax revenues dropped afterwards.

      True. But the more important element of that is that the telcos made big losses paying for spectrum, which they could then offset against profits in later years to avoid tax.

      All Brown did was bring forward taxation, spent it, and then because he thought the good times would continue, carried on spending creating the deficit.

      Worst of all (real) worlds. For the taxpayer, it was as you've already summed up. For Vodafone (being the only UK-headquartered mobile telco) it gave them an undeserved reputation as tax dodger. For everyone in the business it raised awareness of creative financial engineering and encouraged them to engage in it. And finally, it raised the barrier to entry for prospective new competitors.

      1. Anonymous Coward
        Anonymous Coward

        "For Vodafone (being the only UK-headquartered mobile telco)"

        I'm pretty sure BT Cellnet was a UK headquartered outfit at the time of the 3G auctions.

        1. Gordon 10

          Bit of a stretch

          "For everyone in the business it raised awareness of creative financial engineering"

          That's a pretty naïve statement to suggest that before the great spectrum auction they weren't aware of just how many ways they could indulge in tax evasion.

        2. Nick Kew

          I'm pretty sure BT Cellnet was a UK headquartered outfit at the time of the 3G auctions.

          Not really relevant. It ceased to be Cellnet in 2002, before the tax situation as seen at Vodafone hit the radar of the Chattering Classes.

    3. Tom 38

      Really? The telcos borrowed to buy. The telcos then took the interest charges off their profits, and the tax revenues dropped afterwards.

      All Brown did was bring forward taxation

      So you're saying that if we had simply given them the spectrum, we would have reaped the same revenue in taxes as we received from the auction? Somehow I doubt it.

      1. Nick Kew

        So you're saying that if we had simply given them the spectrum, we would have reaped the same revenue in taxes as we received from the auction? Somehow I doubt it.

        The first difference would've been cheaper prices to consumers, as the telcos would've had lower costs to cover.

        Then there'd've been no big losses to offset tax against, so the carriers would have (other things being equal) lots more profit to pay tax on. Other things not being equal might be investment in better technology and infrastructure, and lower prices to consumers. The kind of thing that (at best) might reap rich rewards for everyone: a better experience for consumers, and more users leading to profits for the telcos and more tax for HMRC.

  2. Jason Hindle

    We all paid for Brown's auction

    "The truth being that we want, as a matter of public policy, to shake every last penny out of those companies we can in those auctions, and there being fewer bidders would of course frustrate that aim."

    We all ended up paying for Brown's auction. We paid when minimum monthly fees rose sharply (oh, look at all the extra minutes text, you don't need, that we're giving you anyway) and then in eighteen month contracts, followed by twenty-four month contracts. 3G (and now 4G) mobile data still costs a fortune compared to fixed line.

    1. P. Lee

      Re: We all paid for Brown's auction

      The assumption is that the telco's were already charging the maximum they could and would continue to do so, therefore the cost base is irrelevant and can be taxed with impunity.

      I'm not sure the assumptions hold. Telcos profit from the convenience they offer. That's why voice is so expensive and data (which could carry voice) is so cheap. Mobile data competes against fixed-line data+wifi and its mostly a luxury (little compelling use-case vs the existing tech) and data usage can move between wifi points without a problem. Mobile voice does not have the same competition. Outbound calls can be made from any landline, but inbound calls have geopgraphical monopoly restrictions.

      Worse, I suspect there is an argument to say that the spectrum license costs is a driver for consolidation and therefore has reduced competition.

      I'm with Disraeli, I want Britain to be a cheap place to live. I don't think adding financial cost where it doesn't need to exist is the right thing to do. Even if the analysis is all correct, a better way to balance the government's books would have been to not go to war.

      1. ScottME

        Re: We all paid for Brown's auction

        "Mobile voice does not have the same competition."

        Sure it does - install a VOIP client on your mobile, and use cheap mobile data or WiFi rather than paying extortionate voice call rates. You can also appear to be at home wherever you are in the world.

    2. Number6

      Re: We all paid for Brown's auction

      We all ended up paying for Brown's auction.

      We all ended up paying for pretty much anything he did. All those complicated little taxes to generate red tape. I didn't see any improvement in anything provided by the state to account for the hike in taxes, so where did it all go?

      About the only thing he was worse at than being Chancellor was being Prime Minister.

  3. Anonymous Coward
    Anonymous Coward

    Reserve?

    Given that we know what an acceptable price is - as the price that has already been paid, and the telcos still turn a profit - government could just set a reserve on the auction? Maybe the previous price adjusted for inflation?

  4. Anonymous Coward
    Anonymous Coward

    I rather think spectrum cost DOES affect consumer prices

    We start with the idea that the firms are capitalist bastards. Whatever their cost base, they're going to charge us consumers the maximum they can get away with. So increasing the spectrum price doesn't change what we pay

    Looking at this from the point of view of one of the telcos, I'd have no problem with the first two sentences. Nor, in the absence of competition, the third. But in fact the telcos do have competition. And in a business where their costs (network+spectrum) are more or less fixed, that means they end up having to compete on price to grab as many users as they can, while staying in business. The fixed costs effectively place a floor on how low they can go; if government charges more for spectrum that raises the consumer price floor (or one of them goes bust, their users have to move, and the floor gets reset).

    1. strum

      Re: I rather think spectrum cost DOES affect consumer prices

      >if government charges more for spectrum

      But they didn't. It was an auction. The telcos paid what they thought it was worth (to them).

  5. Eugene Crosser

    Questionable logic

    Whatever their cost base, they're going to charge us consumers the maximum they can get away with. So increasing the spectrum price doesn't change what we pay.

    Err... I am not so sure about the logical relation between these statements.

    When there is competition, every player wants to cover costs plus get as much profit as they can without losing their customers to competition. When the cost base is the same for all competitors, they all end up adding some "average" profit margin on top, and this results in the "average market price" that the consumers pay.

    When cost rises for all the competitors, they all do the only possible thing, and raise prices simultaneously, preserving the margin. If any of them don't, it starts losing money and go out of business. If any of them rises prices too high, it loses customers and go out of business.

    In a sense, auction on "natural resource" is anticompetitive, because it raises the barrier of entry, while doing nothing to impose "fairness".

    1. Tim Worstal

      Re: Questionable logic

      Well, sorta. Except that "average profit margin". Most of the telcos aren't fact covering their cost of capital. Meaning that they're earning a lower than average profit margin.

    2. Anonymous Coward
      Anonymous Coward

      Re: Questionable logic

      @ Eugene

      Or they form a cartel and divvy up the market between themselves with an agreed share whilst charging astoundingly similar high prices thus maintaining an obscene profit.

      1. Eugene Crosser

        Re: Questionable logic

        @Teresa

        That's right, but auction on spectrum does not help it a little bit, does it?

        (I specifically underlined "when there is competition". That's the key, obviously.)

        1. Anonymous Coward
          Anonymous Coward

          Re: Questionable logic

          @ eugene

          You can have what "appears" to be competition but is in fact a cartel. Take Lafarge and friends:

          http://europa.eu/rapid/press-release_IP-02-1744_en.htm?locale=en

          Economic theory can be all very nice in the confines of a lecture theatre or paper but often forgets human nature.

          I'd agree with you that spectrum auctioning is just an indirect tax on the end user as obviously the cost to business is passed on. From a government perspective it's a cheap tax to collect as they gain large revenue while dealing with a handful of clients. The government doubly wins as that passed on cost is also subject to vat.

          1. chris 17 Silver badge

            Re: Questionable logic

            @Teresa

            Just like the Gas & Electric companies then

  6. Anonymous Coward
    Anonymous Coward

    more of it goes .. where?

    "Less of the profit to be made out of the spectrum's mere existence goes to the shareholders and more of it goes to reduce other taxes on those same consumers. It's a great idea"

    Except it doesn't happen; which was the last UK government to reduce - in real terms - the overall tax take? Both individuals and businesses use phones, after all, so both groups are consumers, and if things like line rental go up because of government action / policy requiring increased spectrum license payments then that's an indirect tax, surely ....

    1. chris 17 Silver badge

      Re: more of it goes .. where?

      Also causes inflation

  7. Lallabalalla

    No no no

    We, the retail consumers, pay for everything. Note: Every. Thing. The multinationals, as noted above, reclaim the cost of the spectrum through lower taxation, any fiscal shortfall is paid for by us. A lot of them don't pay any tax anyway - Vodaphone for example. Oil analogy? When oil goes up, pump prices go up, and usually fail to come down again with any sort of promptness. Fixed costs are passed on to us as a baseline minimum price, on top that it's all profit, which doesn't get taxed because of writing off other costs against tax and moving surpluses offshore, and round we go again.

    1. Anonymous Coward
      Anonymous Coward

      Re: No no no

      >reclaim the cost of the spectrum through lower taxation

      In effect they've paid tax upfront on a cost rather than after the fact on their reported profits. Looks like selling the spectrum is more effective than trying to tax the profits - which would no doubt all be in Luxembourg anyway.

      In a way there's an argument that the tax should be on access to the market rather than what they appear to get out of it.

      Alternatively one wonders if there's any need to tax businesses at all. Perhaps the "retail consumers" - that is - "the people in the country" should be the focus for the cost their services anyway?

    2. Squander Two

      Oil.

      > Oil analogy? When oil goes up, pump prices go up, and usually fail to come down again with any sort of promptness.

      Well, this was in the news just recently, so we can check the figures.

      Crude oil price dropped by ~25%. Oil is priced in dollars. Sterling dropped against the Dollar by ~7% over the same period. In the UK, the price of crude accounts for ~1/3 of the price of petrol (the rest being transport, refining, retail, duty, VAT). And UK petrol prices dropped by ~6%.

      (25-7)/3=6

      As for the promptness, there is of course a delay between dragging the black muddy crap out from under some seabed and putting the lovely clear stuff into your car thousands of miles away. How on Earth is that ever going to happen promptly?

      1. randonnamegenerator
        Flame

        Re: Oil.

        It works here in Switzerland, what's 1.45 swiss francs per litre in pounds per gallon? Are gallons still used? I haven't been home for a while.

    3. Tom 13

      Re: No no no

      Yes, but...

      While it may come to as a shock to many tech savy readers, not everyone buys and uses a cell phone. So to the extent that you regard bandwidth as a national resource that is in some sense "owned" by all the people, it makes sense that those who use it most ought to pay the most for it, while those who use it least or not at all should pay similarly smaller amounts, or possibly get a net gain for not using their "share" of the national resource.

      I will grant that this is a purely theoretical analysis and in practice the inefficiencies of the fee on the spectrum might yield no measurable benefit to any given limited or no cell phone use person/family.

  8. Steven Jones

    Even if it's conceded that the original 3G licence auction maximised the prices paid by the operators, and this didn't result in higher prices to the consumer on the grounds that they were sunk costs (more debatable) and that it didn't adversely impact other aspects, like network investment and thereby economic activity (even more debatable), then there is a much more fundamental reason why the exercise can't be repeated.

    That's because at the time of the 3G auction, there were more potential bidders for bandwidth than there were available chunks of spectrum. In addition to the incumbents, there were a number of other operators seeking entry into the UK market including the (state backed) France Telecom and Deutches Telekom. It was this unique blend of ambitious operators and limited supply backed by inflated telecom valuations (and some de-facto state guarantees) that drove bid prices far past their economic value. Once the shareholders and financiers came round to noticing this, the supply of ready money dried up and auctions all across Europe then got fractions of what was achieved in the UK and Germany.

    These circumstances will never happen again. It doesn't matter if there are 3 or 4 operators. The costs of entry into the UK and building a new network are immense. The only way that spectrum prices could be manipulated upwards would be to offer fewer chunks of spectrum than there are operators. By definition, that will lose one operator from the new spectrum. It's quite possible that one of the weaker players might decide the whole thing is not worth pursuing anyway and seek to either run as a low cost operator on existing spectrum or pursue other options. Of course if the spectrum is auctioned off such that all operators can get a chunk, then that's less of an issue, but it will not, of course, recreate the circumstances of the 3G auction.

    So now that the fit of hubris of 2000 is over, there is no way that the telecom companies are ever going to fall for this again. The 2013 auction fell short of government targets by about £1bn (it raise £2.5bn vs the £22.5bn of the 3G auction). The circumstances at the turn of the millennium are not going to repeat themselves.

    There's also another issue. Seeking to maximise the value of the spectrum to the state simply in the capital cost of the license, rather than through more continuous revenues from taxation on increased economic activity is surely short sighted.

    In any event, 3 or 4 operators. It's not going to make a great difference to state revenues. The CEO of Telefónica César Alierta, has noted that the industry is not going to play ball with states that manipulate the circumstances of an auction in order to maximise a one-off return.

    (nb. in the US, a similar auction approach to that which was eventually taken by the UK government in 2000 was ruled illegal and had to be retracted.)

  9. Anonymous Coward
    Anonymous Coward

    Correction: it wasn't Gordon Brown

    He might have asked for an auction, but it was organised by a civil servant. He got a bonus. It was (apparently) in the order of a few hundred quid.

    1. Steven Jones

      Re: Correction: it wasn't Gordon Brown

      Gordon Brown set the objective, which was quite simply to maximise the sale value of the 3G licenses. That he didn't personally design the auction, is not relevant. Although given Gordon Brown loved nothing better than to manipulate figures (like expensive PFI contracts to keep debt off the books), I'd be amazed if he didn't personally approve the final form of the auction.

      nb. the economist who advised on the format of the auction was Paul Klemperer, an Oxford academic, who has been very active in defending the decisions made.

  10. Justthefacts Silver badge

    Spectrum segmentation

    Article misses a technically relevant point [stay with me past first point...]

    3 bidders is still greater than 1 - available spectrum doesn't change, customer usage doesn't change, so a naive thought would be that strike-price doesn't change. Sure, fewer bidders, but each of them needs to buy more => bid more aggressively.

    But actually he's correct that auction price will decrease. Because the total amount of spectrum needed does decrease for technical reasons. Basically, segmenting the spectrum between fewer operators means the overhead of each decreases. E.g. in sparse areas where coverage matters, each of the operators has to have spectrum, when one band can satisfy the capacity.

    Summary: auction price does decrease for technical reasons, because spectrum productivity increases. Why would that be a bad thing for the common good? Economics says that rent-seeking per se is bad.

    Globally, this is classic tradeoff between economies of scale vs competition. Somewhere there is an optimum number of operators for "maximum total happiness". What evidence is there that we currently sit on the left-hand of the optimum (not enough operators) rather than right-hand (too many operators)

  11. JimWin

    Spectrum segmentation

    It was always a quick fix and not properly thought out. Terrestrial TV transmission uses shared resources with the IBA maintaining the network under Ofcom regulation and that ensures near guaranteed reception for all - even in remote areas.

    This is where the current mobile system fails badly with coverage always quoted in % of population and not % of area. There is some mast sharing between the operators, but it's not as effective as a properly administered newtwork operation with the mandate to ensure 99.x% areal coverage. To my way of thinking, the current wireless model is broken and may only be fixed if one operator (or preferrably an industry regulator) has, or is given overall responsibility for the network for use by all operators.

    1. Justthefacts Silver badge

      Re: Spectrum segmentation

      Or more generally, make a modest modification to the spec, to remove the Operator-specific part of message sequence of Registering.

      User just connects to nearest eNodeB, and has their call carried.

      Operators operate some number of eNodeB's, and commit to Ofcom.

      Coverage is determined by sum of all eNodeB's

      Operator builds and runs as many or as few as they like, but have (user transparent) roaming agreements / cross payments

      If you think you can build cheap, run lots of them, operator pays little in roaming charge to its competitors

      If you think cheaper to use others existing infrastructure in areas you haven't built out, then do that- all the way out to completely virtual operator although that is unlikely to make sense financially

  12. earl grey
    Flame

    Are you a customer?

    well, you better bid on this bucket of grease before you bend over.

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