Nope. He doesn't get it.

JimS has left a new comment on post 4G Auction Is Yet Another Blow For Osborne

"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."

Correct, of course it is. The telecos are not charities. Whether they get the licence for free thanks to some back room deal with the regulators, or whether they win the auction makes no difference. The £50 stays the same.


And from the customer's point of view, that £20 does trickle back to him via higher government spending (or lower taxes) or a smaller deficit or whatever.

"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!"

Well, the café next door sells coffees for £2 and I'd love to break into the market by selling coffees for £1.50. So that means I have to pay lower wages, haggle the rent down and ask the coffee wholesaler to sell me coffee for a lower price than he charges the café next door. But the staff insist on working for higher wages, the landlord demands a market rent and the wholesaler refuses to sell me coffee at a loss.

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 is recoverable - the telecos recover it from their customers! He said that in his first paragraph!

"(It isn't a given that the licence is transferable, the government might impose a 'fitness to bid' condition)."

Yes sure, but even if the licence itself not transferable, the teleco can sell whichever subsidiary owns the licence to another teleco.

"High entry costs kill innovation which is surely bad if you want 'growth'."

I think you'll find that the telecos are at the cutting edge of innovation, with all their satellites and stuff. I am constantly amazed at how well the whole thing seems to work.. The cost of that innovation is included in the £20 figure he mentioned.

And there is a limited amount of spectrum. If there is enough space for five telecos, then no sixth firm can ever break into the market - unless they buy out an existing licence. If the government gave away five licences for free on the basis of some back room deal, then there is still no space for six telecos. If a potential new entrant wants to get into the market, he would have to pay £10 or £20 to buy an existing licence.

And whichever teleco sells it to him has banked a handsome £10 or £20 windfall gain - privately collected tax.

"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."

Yes, there is always a higher power. But why should the government go to all the trouble of reserving and protecting broadcasting rights merely in order to increase the profits of the telecos?

That would be not only morally corrupt but would lead to less innovation, because the incumbents can make a profit more easily.

"(Still doesn't stop all the 'Pakistani' FM stations in the Midlands that block BBC R3 and R4 though!)."

Exactly. Here, the government appears to be failing in its duty to clamp down on pirate broadcasters, so if they want to auction off radio licences in the Midlands, they will get a much lower bids.