4G auction could harm the UK telecoms industry

21st August 2012

The bidding process is expected to get underway by the end of this year, allowing the roll-out of next-generation 4G networks in 2013. Ofcom expects "at least 98%" of people in the UK will end up with access to mobile broadband although, less positively, the time taken to get even this far down the road has seen the country fall well behind the US, Asia and other parts of Europe.

Inevitably, Ofcom's announcement will prompt many people to think back to the corresponding auction of third-generation spectrum in 2000 when ‘blind' bids and the febrile atmosphere of the dotcom boom combined to see the winning businesses pay up £22bn – a total now universally accepted as well over the odds.

Well, perhaps not universally – the Labour government of the time was presumably thrilled with its windfall – but the intervening years have shown the pricey auction to have had some unforeseen consequences for the UK's telecommunications companies, their investors and – depending on your perspective – customers. The ‘successful' bidders spent so much money to win their licences they have found it difficult to make sensible returns on their investment and this has limited the cash they've been willing to spend on other aspects of their networks over the last dozen years.

The 3G auction is also responsible for more than a decade of deflationary mobile phone pricing and is at least part of the reason some of the UK's mobile phone giants are not paying any tax in this country today. Essentially, the sums spent in 2000 could be written off for tax purposes over the life of the spectrum licence and, since some of the bids were so huge and the groups' UK profit margins are modest relative to those in made in other countries, the amounts left to pay tax on are lower than one might expect.

As such, the 2000 bidding process and its consequences offer some lessons for the parties on both sides of the 4G auction. For the telecoms companies – most notable the ‘big three' of Vodafone, O2 and Orange/T-Mobile venture Everything Everywhere – it might all be summed up as: "Don't do anything silly – think about what you want to spend and, if the prices get ridiculous, maybe just walk away."

As for the government, while the PR coup and the money, which analysts expect to be in the region of £4bn, will undeniably be hugely welcome, it needs to bear in mind that if it does not pay enough attention to how the auction is structured and run, it could – like the previous administration – end up retarding for a significant period of time the development of an industry that is vital to this country.

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