Thursday, 3 July 2014

Who put him in charge?

From today's FT:

Sir, A point buried in “Scrambled signal” (July 1), your excellent analysis of Europe’s telecom market, should not pass without some comment. Europe did indeed have a global lead on GSM in the 1990s.

But it is hard to see how the sector could have responded to the next wave of technological challenge from the US when, as the article notes, governments screwed €100bn out of the sector by rent-seeking spectrum sales. HM Treasury, if my memory is correct, was in the vanguard.

David Fisk, Laing O’Rourke Professor in Systems Engineering and Innovation, Imperial College London.

I hope he knows more about systems engineering and innovation than he does about economics, about which he clearly knows nothing. Every planned £1 of future spending reduced the bids by £1; so a) the price paid will not have materially affected total investment - it was planned investment which reduced the price paid; and b) on the whole, the telecoms companies are profitable and pay dividends.

Rather more worryingly, I did a quick Google search on "spectrum auctions" just to gen up, which led to Wiki, which tells us that the US government has collected about $60 billion so far in their various auctions.

Adjusted for exchange rates and population size, the US government probably collected as much as the European ones.


Dinero said...

The can be sense in the Profs comments if you stretch the definition of "the sector" a little.

I think you seem to be saying that if the fees had not gone to the Gov then they would have gone to sharehoders.

But aren't shareholders a source of funds for investment at a later date.
And a strong share price a source of obtaining borrowing from banks for investment.

Graeme said...

I think you might be in danger of assuming rational decisions were being made by the telcos, at tleast at the time of the 3G auctions. The cost of the licences in the UK, Germany and Netherlands came close to bankrupting BT, for example. It is also possible that roll-out of 3G networks in Europe was delayed while companies rebuilt their cashpiles. It has also resulted in consolidation of telcos and, possibly, consumers paying higher prices than they would.

Of course, the companies soon recovered and do pay dividends.I guess the question is whether it was beneficial for governments to divert so much cash to themselves instead of letting companies build better and faster networks or letting consumers paying lower prices.

Dinero said...

Its not nessesarily correct to treat the holding of a 3G airwaves liscense as holding an absolute monopoly. There are other ways of comunicating. I suspected at the time that 3G liscences caused the cost of text messages to go up , which have nothing to do with 3g technology and 3G video phone services never materialized anyway.
One Spanish telco asked for their money back.

Ben Jamin' said...

@ Dinero

In which case, let's just give them ALL our money.

@ Greame,

And there's me thinking the telecoms companies are some the most profitable in the World, next to oil ironically.

There has in fact been treasury officials looking into their super-profits, that result from their monopolization of bandwidth. Apparently, the auctions didn't quite do a good enough job.

To say that consumers would pay lower prices is poppycock. The supply is fixed.

Dinero said...

How much a company puts in its accounts as profits is an operational choice. It does not tell you much about taxation and costs and the effect on investement.

Mark Wadsworth said...

Din: "aren't shareholders a source of funds for investment at a later date?"

Actually, no. Customers are the source of all funds, investors merely pre-finance the business between start up phase and profit/cash surplus phase.

G, yes, in the UK, some companies possibly overpaid. Well tough. That's a one-off loss and does not affect the future profitability of the business.

See also Bj's comment. Their estimate of future revenues was the starting figure! This is unaffected by actual costs or licence fee!

G: "instead of letting companies build better and faster networks"

Nonsense. Some auction winners realised they had overreached themselves and sold on the licences second-hand - or a company with a licence but not infrastructure got taken over by another.

Would you say that these payments for second hand licences deprived the new owner of cash for investment?

Din, there is no absolute, absolute monopoly. But there are plenty of things which give you a massive head start advantage over the competition, it's a question of fact and degree.

Bj, agreed.

Din, oh come off it. Large companies understate the profits reported on their tax returns but on the whole, the accounts profits are about right. Some overstate, some understate, for different reasons.

What really counts is dividends - I checked Vodafone and BT, over the past few years their dividends have been increasing rapidly.

So clearly either

a) They have little need for cash for investment.

b) With the benefit of hindsight, they didn't overpay.

Dinero said...

wow you are an accountant and you contest that what a a company declares as profit is an accounting desision. The figure for profit is enumerated after the figure for investemnt and even a fruit and veg trader on Romford market knows they can reduce their profit buy using turnover to buy new stock.

Telcos may have been issuing dividends to appear favourable in their sector. You don't now why.

Mark Wadsworth said...

Din, yes I am an accountant. At the level of our small and medium sized clients, profits in the accounts are correctly stated, no reason to lie one way or another.

At huge company level, there are companies which overstate (Enron etc) and companies which possibly understate (to keep the taxman off their backs), and there is a fair bit of 'smoothing' which goes on.

These quoted companies have to keep their shareholders happy by reporting steadily rising profits if at all possible, so year to year they take the piss but over a five year period, it all evens out.

Companies like Woolworths or HMV were in truth making losses, and companies like Vodafone or BT are in truth making profits, end of discussion.

And if you average all the over- and under-reporting out, then actually the reported profits of quoted huge companies is in fact 'about right'.

It is a bit feeble of you to claim that BT and V are overstating profits and overstating dividends and claim that I don't know why - with the inference being that I am wrong and the prof is right.

Nope. He is wrong and I am right, on the facts, the economics, the profits and the dividends.

Dinero said...

Its does not involve Lying It is a commercial operational decisionn how companies spend their money.

They may have kept profits up by being sparce on investment. Thats the general case, But if in this particular case the liscenses have not had an effect their it is.


Gordon brown raised 15Billion from the 3g licences . If that did not effect the price of calls and in particular text messages , that were previously free , it would need a very, very comprehensive account of the finances and economic principles, to show that was not the case.

Bayard said...

"Gordon brown raised 15Billion from the 3g licences . If that did not effect the price of calls and in particular text messages , that were previously free "

Dinero, you are making the common mistake of thinking that input costs have any bearing on output costs. Output costs are, or should be, what the market will bear. Input costs are, or should be, kept to a minimum. The difference between the two is profit. If the maximum you can sell something for is £1.00, then you can't charge £1.20 for it, even if something causes an increase of 20p in what it costs to make. If the mobile phone companies started charging for texts, it was because they realised that people were prepared to pay for them and they would have done so, if their management was any good, whether Gordon Brown had made £15Bn or £0Bn out of the licenses.

Ben Jamin' said...

@ Bayard

And there's me thinking they weren't interested in profit maximisation.

@ Din

They can charge what the market will bear, because once those bandwidths are allocated, there are no new entrants.

Even Tesco and Virgin are really just O2 And EE.

Graeme said...

mark - has your mobile phone bill decreased since the date of the 3g licence auction?

Graeme said...

and Ben has noticed that mobile phone providers have onsolidated...corporatism in action ... helped by the way that goernment actions were enacted (spectrum auctions0)

Graeme said...


You make many assertions in your comments. Do you have any facts to support them?

Graeme said...

ben Jamin

I guess you are aware that all the mobile providers in the UK now go to BT to supply the back-haul network...the bit that connects all your calls outside the local area. So there is a monopoly.

Go and dream with Maark

Graeme said...


just how many companies came in after the licence fiasco?

i am sure you have exact details

Mark Wadsworth said...

B, Bj, thanks for back up.


"has your mobile phone bill decreased since the date of the 3g licence auction?"

It has neither gone up nor down.

"corporatism in action ... helped by the way that government actions were enacted"

Consolidation is not corporatism you buffoon!

Government subsidies to large corporates is corporatism!

So first you describe the charge for natural resources as a kind of tax and now you all it a subsididy!

"You make many assertions in your comments. Do you have any facts to support them?"

I do not "make assertions". I Google stuff, look it up, check round a bit, and then report what I have discovered.

"just how many companies came in after the licence fiasco?"

I don't know, but I could look it up.

Either way, whether more companies came in or whether there was consolidation afterwards does not have any bearing on the actual explanation I made in the original post.

Do you have any evidence to suggest that the licence auction was a fiasco?

Can you explain why the UK government should have handed large corporates a licence worth £20 billion for free?

Whatever the explanation, if you recommend that, then you are the one promoting corporatism.

Dinero said...

The Professor's point about investment is probably that it was the firms that did not moderate their bids to allow for future investment spending, that ended up the winners of the liscences.

Kj said...

Licensing policy is just the same with mobile networks as any other near-monopoly. You can sell out the monopoly to the highest bidder, that will take what the market will bear, and govt will get the surplus above ROI. Or you can chop up the spectrum a bit, take inn slightly less rents, and let consumers take some of the rents, or have forced common carrier regulations with fixed prices for entry into other networks, which also reduces prices slightly. Personally, I don´t think the revenues for airwave licenses, if you spread them over the years they are valid, are that much money per capita, so I´m slightly in favour of letting consumers get the rents.

Dinero said...

The probem with a one off auction where the unique resource comes to market all at once is that it does not realisticly establish what the market value is for the long term. If its an all or nothing scramble to just stay in buisiness rather than progress then the participants could and possibly did make unrealistic bids.

The Stigler said...


"The cost of the licences in the UK, Germany and Netherlands came close to bankrupting BT, for example. It is also possible that roll-out of 3G networks in Europe was delayed while companies rebuilt their cashpiles. "

Well, as it's BT, I wouldn't be surprised. Incompetent twats from top to bottom as far as I can see.

Who bids for something with no plan for how to roll it out and recoup the investment?

The reality of 3G is that the companies massively overpaid on the basis that they thought they'd make a ton of money from £1.50/minute video calls. As it happens, people didn't like video calls.

If we'd say, taxed the profits, the rollout might have been worse. They might have looked at the returns and thought that it wasn't worth it. With a license, they had to recover as much as they could of it.

Mark Wadsworth said...

Din, inevitably some companies overpaid, others underpaid, it all comes out in the wash, seeing as some of these companies are quite international.

Kj, yes, the government has to strike a balancing act on more licences and more cash.

The government could have somehow tried to ensure that there was no consolidation = more competition = lower prices, but the investment required is huge, so there only so many companies which can compete profitably.

But then people like Graeme would say that the government is standing in the way of market forces and it would be more efficient if there were only 2 or 3 companies.

And if the government allows them to consolidate and build near-monopolies, Graeme will accuse the government of corporatism :-)

Who knows what the overall optimum number of competitors is? 2? 3? 8? 17? Not me and not the government. Probably not the telephone companies either.

TS, agreed, but it's all water under the bridge, the survivors are making good money and I don't think they overcharge us.

The Stigler said...


"TS, agreed, but it's all water under the bridge, the survivors are making good money and I don't think they overcharge us."

Just switched my eldest from PAYG for a contract with 500 minutes, 300 texts and 250mb of data for £7.50/month. I do feel they gouge a bit if you go over your data allowance, but mostly, I'm happy.