Telecoms crash

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Please be aware that this is possibly the most biased and factually incorrect article on this site, and it has a lot of competition. The 2001 Telecoms crash is often confused with the Dot Com crash which happened at around the same time. Unlike the dot com crash however, the telecoms sector relied on long engineering research and development cycles, and the development companies on the telecom operators buying software maintenance contracts and upgrade paths. The dot com boom was caused by people investing money in ideas that were unrealistic.

Limited license auctions[edit]

At the beginning of 2000, mobile network operators in Europe, were offered auction of the 3G radio spectrum.[1] A similar auction had been applied in the USA the year before and had to be re-run when the winners defaulted on their bids.[2]

The nature of the auctions was designed to increase competitive pressure on bidders by offering fewer licenses than the number of operators likely to bid and in some cases using sealed bid auctions. This put the telephone operators in a difficult position, because if they lost the auction they were out of the next technological phase of the business. They therefore took risks and made high bids, incurring large debt. In the UK auctions raised £22.5 billion (GBP) and around £30 billion (GBP) in Germany. To put this in perspective, this was 10 times more per megahertz than the TV companies were charging at the time for national broadcasting. Gordon Brown used the same New York firm to handle the auctions---the auctions that were declared unfair and were re-run with different rules the year before in the USA---to organise the British ones, with the mandate to raise the maximum amount of money (seemingly regardless of the potential harm to the telecoms industries future and competitiveness in the global market place).

Debt and subsequent loss of stockmarket confidence[edit]

The stock market lost confidence,[3] partly due to the concept that telecoms were similar to dot com (both were categorised as 'high technology' in the listings) and share prices tumbled. As they did so the ratio of debt to assets based on share price changed making the telephone operators effective credit rating look insecure. They could thus no longer borrow, and pay for the 3G equipment they had paid licenses to implement, and eventually were unable to renew a large proportion of the maintenance and upgrade contracts, for existing earlier generation equipment.

The telecom developers were now in a quandary. They had invested heavily over the years in research and development to keep pace with changing technology, and the telecom operators were no longer in a position to pay the maintenance and upgrades on the ordinary landline equipment, let alone buy the new.[4] This meant the telecoms developer companies, could no longer rely on the 'bread and butter' financial support from their earlier generation products.

Within a year 100,000 jobs were lost in telecoms support and development across Europe with 30,000 coming from the UK.[5] What had initially looked like a tax windfall, for the German and UK governments, turned sour and damaged a European industry that was selling worldwide and was, at the time technologically, ahead in the world markets.

Did the auctions cause the crash in Europe?[edit]

Paul Klemperer, Oxford university economics professor and adviser to the UK government in its 3G auction,[citation needed] has disputed whether the crash should be blamed on the auction rather than broader economic problems. This is understandable in the light of him designing the structure of the auctions, and could be considered a defence of his advice. While agreeing that the licence bidders may have been mistaken in bidding as high as they did, and agreeing that the money was a transfer from shareholders to the governments, he argued that the one off and up front sunk costs of the auction should have had no effect when considering the profitability of future investment and should not have significantly affected the future behaviour of the telecoms companies. He also notes that in the US Global Crossing and WorldCom went bust and other telecoms companies lost stockmarket value, while in the UK it was NTL (which failed in its bid) which ended up in the most trouble financially. Finally he questions whether the $100 billion cost of the auctions could explain the $700 billion drop in two years which was seen in the market capitalisation of the telecoms companies.[6]

Uncertain future of spectrum pricing[edit]

Subsequent government auctions of the 3G spectrum, in Australia and New Zealand, and then further afield, were met with low bids, and strong suspicion of collaboration between operators of bidding low and secretly defining network sharing agreements. Hong Kong's recent approach was to share in the profit from a spectrum allocation rather than issue a potentially damaging upfront payment for licences. Britain's 2013 UK spectrum auction fell £1bn short of the stated target of £3.5bn.[7] Telefónica chairman and CEO César Alierta said the failure of the UK spectrum auction has sent a clear message to the world, and that the £22bn spent on the 3G licences was a mistake the industry was only going to make once. From the information that Gordon Brown had in 2000, of the failed and retracted auction in the USA, it was a questionable decision that it was repeated in the UK.

Notes[edit]

References[edit]

  • Prosperity from Technology - a new approach to industrial production, money and the environment ISBN 1-85776-362-9
  • Radio communications agency Spectrum pricing: year 5, A consultation document January 2002
  • Professor Martin Cave Review of radio spectrum management for department of trade and industry and hm treasury HMSO March 2002
  • David Rudd PhD F.I.E.E C.eng, Spectrum Pricing comes of age Electronics World, Vol. 108, July p. 24 2002
  • CSP International De-regulation of the radio spectrum in the UK March 1987. HMSO
  • David Rudd PhD F.I.E.E C.eng, Spectrum Pricing's uncertain future Electronics World, Vol. 108, September p. 24 2002
  • Economy sharing regulation of privately owned monopolies the political quarterly July 1992