Wednesday, 20 February 2013

"4G Auction Is Yet Another Blow For Osborne"

From Sky News:

If you cast your mind back to George Osborne's boasts of last December, there was one moment in the playground debate that stood out: when young Osborne of Class 4G tripped over his words in his response.

Ed Balls, the bully from Class 5L, was thrown by George Osborne's announcement that, even after a whole load of accounting changes were ignored, George would save more of his pocket money this year than the year before. To be precise, it was £110 more, should he hit his target for re-selling unwanted Xmas gifts in 2012/13.

Balls had expected Osborne to acknowledge that due to increases in the amount he was planning to spend on X-Box games, Osborne would save up less that last year's £121. He had not reckoned on the fact that his elder brother Oliver "The Budgie" would include the proceeds of the auction of his unwanted Xmas gifts in this year's saving figures. It was thanks to that extra money, estimated at £35, that Osborne would be able to claim his savings were rising rather than falling this fiscal year.

All of which is why the final tally of the proceeds from the 4G auction will come as a real fiscal, not to mention political, blow for young Osborne. All else being equal, he will end up saving less this year than last because the 4G auction only generated £23 rather than that expected £35. Now, this does not mean he will break any of his fiscal rules - or to be precise the one he's still got left to break - but it is nonetheless a political disappointment.

It is particularly so, given that some within the Osborne family had been quietly hoping for a far bigger figure.


The Stigler said...

It is particularly so, given that some within the Treasury had been quietly hoping for a far bigger figure.

The problem with 4G is that there is little public demand for it. A few people might want to stream a movie to their phone, but most people don't, because it's rubbish. What they want from their phones is to get email, check Facebook etc and that can be done fine with 3G.

OK, 4G will do it better, but that's a small improvement for most people, so they won't pay much for the privilege.

It's depressing that the government's idea of austerity cuts was that we would spend less than £1bn less than last year.

Mark Wadsworth said...

TS, correct. Brown was lucky to get his £20 billion, Osborne was lucky to get his £2.4 billion. Take the money with thanks and move on.

Dick Puddlecote said...

What's more, if firms like EE keep auto placing customers on the least advantageous package by default, it'll be money badly spent.

We'd heard stories about high bills for internet usage, but they were from people who are generally wrong.

Yesterday, Mrs P got a message saying she can't use internet until the 23rd unless she pays more for it, despite being told moving to 4G would mean the same service as her previous tariff.

She rang up and objected to being mis-sold, and they doubled her data usage for the same price without fuss or argument. They're obviously trying to milk it.

She doesn't stream or use any major amount of data, so I assume they are trying to catch out the unwary who don't call up and complain.

It now makes sense why I've heard stories of users being landed with monthly data bills of £50 or more. If that perception gains traction, 4G could go down in history as a disastrous £2bn+ business mistake.

JimS said...

Surely the 4G auction is just a tax on new data infrastructure?

Ultimately it will be paid by the user.

Actually it is worse than a tax which might be levied on profit or traffic, i.e. an incremental, scalable cost, it is up-front loading, putting the brakes on growth.

Mark Wadsworth said...

DP, that's all a bit dep for me. I signed up with Virgin NTL six years ago, £10 a month for 300 minutes and 300 texts, I've never used up my allowance, they've never increased the price.

JS, exactly not!

If the government gave away the licences for free, then the price the telecoms charge would not be reduced by one penny.

The telecoms are clever enough to work out

a) How much they can charge in future

b) What the actual hard infrastructure will cost

They then deduct b) from a) and the balancing figure is what they are prepared to bid for the licence.

The "tax" is on the airwaves (or the land, or the natural resources). It is the best kind of tax. It does not increase the price to the consumer or reduce the profits of the telecoms.

JimS said...

Oh come off it Mark!

Where does this magic money come from then?

The airwaves don't 'belong' to the state anyway and unlike mining the 'resource' is recoverable the moment the telecoms companies stop using it.

Mark Wadsworth said...

JimS, no, the airwaves don't "belong" to anybody.

But what use are they if everybody can broadcast on any frequency they like at any time?

Not much. So the higher power decides who can broadcast where and charges them for the privilege.

It's not magic money. I've explained how the telecoms calculate how much they pay.

And the telecoms won't "stop using it". They have (I believe) twenty or thirty year leases, and they can easily sell on the remainder of the lease term.

Now, if they stop using it, do you think the telecoms just give away their licence? Or do you think they sell it?

Can you actually think through in your mind how broadcasting would work if everybody could broadcast at any frequency he liked at any time?

JimS said...

Mark, so the existing telecos decide that they can charge £50 and the infrastructure cost is £20 and they would like a profit of £10. By your model that is £50 less £30 or £20, which they are prepared to bid for. That £20 is effectively paid by the customer.

A potential new market entrant sees that existing services sell for £40. He suspects that the existing telecos will add a premium for the new services and if he pitches his offer at that price he will have nothing to differentiate his offer and it will be unknown against known, not a good scenario.

How to break into the market? He offers the new service at £40. His infrastructure cost is £20 and he wants £10 profit. That leaves a margin of £10 for his licence bid.

The treasury receives a bid for £20 and one for £10. It goes for the higher bid. Competition is stifled, customer cost is pushed up and you think nobody pays!

As I said earlier this 'tax' is up-front a non-recoverable 'capital' cost. (It isn't a given that the licence is transferable, the government might impose a 'fitness to bid' condition). High entry costs kill innovation which is surely bad if you want 'growth'.

My point about the resource is that it needs management but it isn't 'owned' by anyone, an external power might flood Europe by satellite for instance so we need the ITU or the like. (Still doesn't stop all the 'Pakistani' FM stations in the Midlands that block BBC R3 and R4 though!).

Richard Allan said...

JimS, your example is an argument FOR this system, not AGAINST it. Users of the service pay an extra £10 to the State, which it uses to defend the property rights in the spectrum (shutting down pirate radio etc). Remember you haven't actually provided an alternative because we're assuming that the broadcast spectrum is only worth something when the user has a monopoly, because of "interference" or what have you.

The analogy is (of course) with land: if you own a farm, I can't plow your crops under and plant my own. If my crop would be more valuable then excluding me would be "stifling competition" in exactly the same way, but we recognise that if we allowed this, then nothing would ever get grown.

You say "[h]igh entry costs kill innovation". That's moving the goalposts because in your own example you've allowed both bidders to have their desired profit, which by definition is the amount necessary to call forth the optimum amount of innovation.

Graeme said...

The question is why is everyone so surprised at the low amount? Haven't people noticed the trend to consolidation within the mobile telco industry? That different companies are now sharing networks and spectrum rather than building everything themselves? Gordon was lucky because there were 8 or so bidders ramping up the prices. No one told Osborne that there would only be 3 or 4 bidders this time around.

Mark Wadsworth said...

JS, see my next post for response.

RA, good answer, as per usual.

G, I'm not surprised at the low amount. Osborne should be grateful for what he gets, and as you say, Brown was lucky. As you say, maybe Osborne should have offered fewer licences, but then that really would be stifling competition. Better all round to auction them all off.

Graeme said...

Since the prices are lower, maybe the network rollouts will be better and there will be be even better coverage. Better still would be if BT's wireless coverage could improve so we could make "free" skype calls rather than using the mobiles at all.