The Telecoms crash was a stock market crash which occurred in 2001. It is sometimes 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
At the beginning of 2000, mobile network operators in Europe were offered auction of the 3G radio spectrum. A similar auction had been applied in the United States the year before and had to be re-run when the winners defaulted on their bids. Gordon Brown, the minister responsible for the auctions (the then Chancellor of the Exchequer), used the same New York based firm that set up the failed/re-run auctions to host the auctions in the UK and paid £750,000 from the public purse for them to do so.
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. Some estimate the damage caused by the auctions of telecom spectrum (previously administration fees were charged for spectrum usage --- with public service conditions such as emergency cover bundled with the usage certificates --- with the raison d'être being public service provision and that profits from the companies providing the service would be taxable) to be as high as 3 trillion dollars worldwide.
Debt and subsequent loss of stockmarket confidence
The stock market lost confidence, 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.
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. Within a year 100,000 jobs were lost in telecoms support and development across Europe with 30,000 coming from the UK.
Paul Klemperer, Oxford University economics professor and adviser to the UK government in its 3G auction, has disputed whether the crash should be blamed on the auction rather than broader economic problems. While agreeing that the licence bidders may have been mistaken in bidding as high as they did, and 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 UK it was NTL (which failed in its bid) which ended up in the most trouble financially, and 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.
Uncertain future of spectrum pricing
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.
Increasingly debt-burdened Telecoms companies, many of which also faced heavy pension liabilities for their ageing workforces, set the stage for failed auctions and subsequent disaster for many technology companies. Equipment manufacturers like Ericsson continue to withdraw employment and financial commitments from the UK (which was the second largest development body outside of their native Sweden before the 2000 spectrum auctions).
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