Editorial: the return of the telecoms cash cow

For a quarter of a century, it has been a commonplace of telecoms policy that governments who refused to liberalise the telecoms market because they valued the revenues from state-owned incumbents too much were shooting themselves in the foot.

Being a monopoly meant these state telcos could charge high prices. While this was good news for government, it was bad news for consumers and the economy. The lack of competition stifled innovation and new services, inhibiting growth. In the long term, economic growth generates far higher tax revenues than the sure but steady income from basic telecoms services provided by a state-owned incumbent.

Doesn’t this short-termism sound just like recent debates about the Australian and UK auctions? Politicians may be coy about saying so explicitly, but many regard spectrum auctions primarily as a way of plugging a fiscal hole.

In Australia, the telecoms minister decides that he, not the regulator, should decide the reserve price. He sets it too high and the auction ends after one round. 

In the UK the Chancellor overestimates the likely auction revenue, going way above industry expectations. George Osborne’s prediction is over £1 billion (€1.2 billion) above the mark and opposition politicians counter by saying the government was at fault by failing to make revenue maximisation one of the auction goals.

What is foremost in all these politician’s minds? The long-term economic benefits of a competitive mobile market, or the short-term fix of a quick cash injection? Clearly the latter. Off the record, anyone who’s organised a spectrum auction admits that while the regulator’s stated objective may be spectrum efficiency, at their necks are the treasury vampires, desperate for the blood that will satisfy the government’s balance sheet. 

While there were new entrants, those who work for regulators could keep the bloodstains off their starched white business shirts. The regulator could claim it was all about efficiency, while behind the scenes the new entrants did the vampires’ work for them, forcing up auction prices to satisfy the bloodlust.

But when was the last time you saw a mobile new entrant in a developed country? Canada 2008? All we saw in the UK and Australia were niche players hoping to use 2.6 GHz spectrum for super-wifi.

Even with a perfect auction mechanism, prices will not rise when supply exceeds demand. In these circumstances, the auction process is really a form of spectrum pricing with the charge being set by the reserve price. The real fight does not take place in the auction war room, but beforehand, in discussions with the regulator about the reserve price. 

Spectrum auctions were a cash cow when there were new entrants, but now the market is mature, politicians are likely to be disappointed. Competition between existing operators can produce reasonable price increases, but we seem to have entered a different era. Government finance departments can no longer rely on market forces to deliver a pleasing uplift on the reserve price. 

Eventually the penny dropped with politicians about the true benefits of the fixed line sector. Perhaps these disappointing auction results will force the political classes to focus on the real benefit of the wireless sector: the long term economic growth promise of a dynamic and fairly priced 4G market.•