What would you say if I offered you £485, no questions asked? In fact, what would you say if I offered every man, woman and child in the country £485? You could spend it in any way you wanted. Maybe you'd blow it on a week in the sun. Or maybe you'd put it towards your children's education. There's nothing illicit or criminal involved. It really is a free lunch. There's only one "catch": at some point in the future, you will be offered the opportunity to buy a new service. In fact, this isn't really a condition because, if you decide to refuse the £485, you're still going to be offered this service at the same price.
Interested? Well, I'm afraid it's too late. Ms Etain Doyle, the telecoms regulator, has decided on your behalf that you don't want it. You may get a smaller amount instead, but your chances of getting the full £485 are very slim indeed. If you didn't realise already, I'm talking about the sale of third-generation mobile phone licences, which is taking place across Europe.
Third-generation mobile telephony offers connection speeds up to 200 times faster than current rates. Given the demand for mobile phones, it's clear that the telecom companies that get these licences will make generous profits. This, obviously, makes the licences valuable.
Over the past year, European governments have had to decide how best to allocate these licences.
One of the first countries to decide was Britain. Chancellor of the Exchequer Mr Gordon Brown opted to auction them off. The amount raised by the British auction was more than anybody expected. The government took in £29 billion (or £492 for every person in the country).
In the aftermath, telecom companies were said to be teaming up to ensure they didn't have to pay so much in the next country. In Germany's auction (which finished last week), there were only seven initial participants for six licences. However, the auction ended up raising £40 billion (or £485 per person).
Both the British and German governments have decided to use the funds to help pay-off the national debt, thereby reducing everybody's tax bill for years to come. (OK, I lied in the introduction; it is unlikely that the money would go straight into your pocket. However, this is only because it would be more sensible to pay off your debt.) Despite the success of the auction process elsewhere, Ms Doyle has decided to allocate the licences on the basis of a "beauty contest". Instead of selling to the highest bidder, telecom companies will be vetted and a price for the licences agreed.
The reason given by Ms Doyle is that this will prevent higher costs being passed on to the consumer. However, the cost of the licence is what economists describe as a "sunk cost". It will have no bearing on the subsequent pricing policy of the telecom companies. There is nothing controversial in this statement - you would be hard pushed to find an economist who believed otherwise.
The use of a simple analogy makes it obvious why: Imagine you are a wealthy individual and you see a house in the Ballsbridge area that you are interested in for buy-to-let purposes. If you bought the house on the open market it would cost you £1 million. However, the seller hasn't set foot in the country for 10 years and is oblivious to the boom in the housing market. As a result, he offers you the house for £250,000.
Once you have bought the property at this bargain price, what rent would you charge your tenants? You'd charge the same rent as you would if you had bought the house for its "proper" price.
The principle is exactly the same for the telephone companies. If they are lucky enough to get the mobile licences at a cheap price, it will not affect what they charge their customers. Is there any other reason why Ms Doyle might have decided against the auction option? One suggestion was that the small size of the Irish market made it more likely that there would have been collusion between the telephone companies in the auction process (which would have reduced the amount raised). However, this danger could have been countered by setting a reserve price on the licences.
Another option - which the Italians have used - would be to set the number of licences at one fewer than the number of bidders.
As it stands, the only winners from Ms Doyle's poor decision will be the telecom companies.
Kevin Daly is an economist with Williams de Broe stockbrokers.
Kevin.Daly@wdebroe.com
