Sir,
Paul Klemperer ("The wrong culprit for telecom trouble", November 26) asserts that we should be "enthusiastic" about the high prices achieved in the third-generation licence auctions, which took Dollars 100bn out of the telecoms industry in what amounted to a one-off tax. He asserts that the telecoms companies have only themselves to blame if they now find they paid too much. Since he advised the government on this licence auction, his position cannot be surprising. And no one can seriously argue with one claim in his article, that the telephone companies shot themselves in the foot by paying such large prices.
However, Prof Klemperer is incorrect where he seems to imply that rational analysis at the time would have justified the prices that were paid. I know of no better way of analysing the value of such licences than using a straightforward discounted cash flow valuation of the cash profits flowing from such licences. PA Consulting Group, advising one client at the time, came up with a ceiling price for the licence that was but a small fraction of the amounts that were eventually paid. We advised our client to withdraw once those ceilings were breached, which it did. Any company bidding beyond those ceilings was driven by irrationality.
What Prof Klemperer fails to mention, but I am sure he knows, is that the auctions were specifically designed to wring out the highest possible price - guided as they were by the excellent works of Ken Binmore (such as Game Theory and the Social Contract). The telcos merely fell all too easily into the trap laid for them. The majority of those heads of telcos that had winning bids have now been fired. Apparently, those executives were not up to the job of analysing this complex situation correctly and coming up with the appropriate response. Certainly, governments have impoverished the industry by Dollars 100bn and as a result of this and other major investment mis-steps by these companies in the late 1990s, and with the inevitable negative sentiment engendered by this (and by, among other things, the media's relentless negative message on 3G), capital expenditure in the industry is way down. As a result, 3G telephony is going to be significantly delayed.
This does not make it a bad technology. Indeed, when it eventually arrives it will over time transform much of our lives. The removal of Dollars 100bn from the industry has played its part in delaying these beneficial events, though not permanently. Why is that such a good thing? Why should it have been this industry that was selected by the Treasury for delay and damage, rather than any other? Are we really cast back to the days of Norman Lamont, who thought it was a terrifically clever wheeze to tax anybody who was irritating enough to own a mobile phone?
