Tuesday, 7 January 2014

Radio spectrum auctions: questions for Faux Libs

From Reuters:
T-Mobile US Inc is buying wireless airwave licenses from Verizon Wireless to improve its high-speed network in a $3.3 billion deal and said it hopes to follow up with more spectrum purchases...
T-Mobile, which may itself be an acquisition target of Dish or Sprint Corp, also said on Monday that it hopes to buy additional spectrum in government auctions at the end of 2014 and in 2015...
While they said the spectrum was crucial for T-Mobile US, some analysts noted that the price was steep at a 26 percent premium over what Verizon had paid for it at an auction several years ago...
T-Mobile said it could offer services as soon as the fourth quarter using the new spectrum licenses, which cover more than 150 million people in nine of the top 10 U.S. markets and 21 of the top 30 markets including New York, Atlanta and Los Angeles.
It appears to me that:
a) Verizon did reasonably but not spectacularly well out of this, having made a windfall gain  of $700 million on an investment of $2,600 "several years ago". They would have made that gain even if they had never sent up a single satellite or installed a single phone mast.
b) These companies appear to be heartily indifferent whether they acquire 'new'  spectrum from the government at an auction or 'second hand' spectrum from a previous winning bidder.
c) The prices paid at auction seem reasonable, as this is now an established market.
d) The value of the licences are about $20 for each person in the geographical area covered.
My question for Faux Libs is, would you count payments to the government at the auctions as a tax, and if so, would you also count the payment from T-Mobile to Verizon as a privately collected tax?
Bonus round: who created that value of $20 per person? The people themselves, the government or the telecoms companies?


JimS said...

Radio spectrum doesn't belong to anyone. Governments have appropriated it to themselves and added a cost that goes beyond that of administering a regulatory scheme.

There is no value, just a tax that ultimately falls on the customer.

You say, "They would have made that gain even if they had never sent up a single satellite or installed a single phone mast" and therein lies the stupidity. The Telecos have tied up capital to do absolutely nothing practical, unless you count hamstringing the opposition. The spectrum fee does nothing to generate economic activity, it just puts money in the hands of government to increase their credit worthy-ness, allowing them to borrow more money to saddle your grandchildren with more debt.
Verizon have been lucky to recover the tax; T-mobile have been suckered into paying it plus a premium; T-mobile's customers get to pay $20 more than if Verizon had done the job in the first place.
The original tax will have been frittered away by government and no doubt proved to be the 'straw' that broke the back of the Verizon camel and stopped it using the spectrum.
So the potential customers have been denied a service because the entry costs are taxed too high, existing Verizon customers have been surcharged to fund the tax debt, T-mobile's future customers will pay $20 more than they needed.
Winners? Government and Verizon shareholders. Losers? The customer, as always.

Mark Wadsworth said...

Good, that's the first Faux Lib to walk straight into it.

It's a very simple question: let's assume that Verizon had been given the licence for absolutely free.

Let's assume that instead of an auction, teleco's can put their names in a hat and the first few to be drawn out get a licence for free.

Sooner or later, all available spectrum has been allocated and so the only way to get your hands on it is to buy "second hand".

How much would Verizon's licences now be worth, i.e. how much would T-Mobile have paid Verizon for them?

And, would Verizon have charged each customer a few dollars less, simply because they'd been given the licence for free, or would they have charged the same price anyway?

Supplementary: we know for a fact that the auction price is set by teleco's deduting their running costs from potential income. The potential income is quite independent of the running costs and the licence fee - the licence fee is a function of income and not the other way round.

Mark Wadsworth said...

... and I didn't ask whom the spectrum "belongs" to, I asked who created the value and you denied there was anyway. The markets beg to differ on that!

The question was "Who created that value?"

What if all those 150 million people decide to move abroad?

What if the government decides that rationing radio spectrum is a mugs' game and allows anybody to broadcast anything they like on any frequency they like?

Kj said...

Good find. It´s an apparent problem that spectrum auctions have been done quite wrong in several places. Too few spectrum licenses, and offering them a more or less freeholds rather than adjustable leases.

Kj said...

BTW, found this paper that discusses spectrum auctions, and it says what you´ve talked about before; you can either get a higher income from auctioning to monopoly providers, or reduced income but more competition and downstream prices.

Dinero said...
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Dinero said...

The way the 4G liscenses were auctioned is interesting. The highest bidder wins but the sum they actually pay is the lowest sum required to win.

Dinero said...

That needs a bit of explaining

it is closed bid auction. After the bids are in the auctioneer looks at them and awards it to the highest bidder but they only have to pay what was required to beat the second price.

Mark Wadsworth said...

Din, these auctions were new territory for all the countries involved, and they all had slightly different auction systems.

The UK did very well out of it (perhaps too well), the Italians famously messed up because they tried auctioning off more licences than there were potential bidders and the Yanks seem to have pitched it "about right", details, details.

Dinero said...

This, I have read is Ofcoms explanation

"If the second price rule was not used, the bidder who values the spectrum the most might miss out by second guessing and misjudging what their competitor was bidding – leading to an inefficient outcome where the spectrum is awarded to someone who values it less"