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Beware of merging, telcos. CHEAPER SPECTRUM follows

HOW will shareholders rip off taxpayers now?!

By Tim Worstall, 17 Dec 2014

Worstall on Wednesday What consumers end up paying for mobile phone services isn't the only price we're worried about.

Oh aye, thought I, as I scanned El Reg's coverage of mobile operators asking for permission to merge. I can see their game here: or, perhaps, I suspect what they'd rather we didn't think about.

That being that what we, as consumers, have to pay for mobile broadband and the like isn't the only important policy question we've got here. And they might even be right that a bit of merging wouldn't affect that price.

But there's another number that would be impacted by fewer competitors: what they need to pay governments for access to the spectrum.

As I say, they might be correct in this assertion:

Despite the Commission’s antitrust arm worrying that mergers reduce consumer choice and push up prices, Bouverot says: “There is little evidence that markets with four operators have lower prices, over the long term, than those with three.”

The GSMA called on competition authorities to “more readily consider the advantages of mobile mergers and in particular the long-term benefits they can deliver to consumers” and rely less on existing pricing analysis. In other words, “Please put fewer constraints on us”.

Gordon Brown’s mobile spectrum auction was one of the

great triumphs of modern empirical microeconomics

Well, yes, but. There's that whole other area where competition comes into play and influences prices. And that's in those auctions for spectrum.

The truth being that we want, as a matter of public policy, to shake every last penny out of those companies we can in those auctions, and there being fewer bidders would of course frustrate that aim.

I do tend to get shouted at when I make this point to technical audiences: there was most certainly a general tightening of budgets as the telecoms firms realised quite how much they had bid to Gordon Brown a few years back.

But he was right in the way he constructed that auction. In fact that auction was one of the great triumphs of modern empirical microeconomics.

Evil capitalist bastards!

We start with the idea that the firms are capitalist bastards. Whatever their cost base, they're going to charge us consumers the maximum they can get away with. So increasing the spectrum price doesn't change what we pay.

And of course it would be possible for the government to just allocate that nice, valuable, spectrum to a few chums. Certain places have certainly done that. But why should a group of private shareholders make money out of the mere existence of something valuable? Why should BP make a profit out of there having been dead organisms which died under what is now the North Sea?

The value of oil itself, not of the costs of extraction, should be very heavily taxed.

It's fine that BP should make a profit on the capital it uses to drill for, and pump up, the subsequent hydrocarbons; fine that it makes a return on the investment in how to do so (so-called Schumpterian profit or rent). But why should BP get handed the windfall by fact of the simple existence of that oil and gas?

So, oil, the value of oil itself, not of the costs of extraction etc., should be very heavily taxed. This also means that people digging up metal ores should be coughing to the Treasury the value of the ore, as ore.

And yes, this tie-in with Ricardian Rent ideas means that those who use spectrum should be paying the value of that spectrum to government. How we ascertain that value is that we find out what someone's willing to pay for it by having an auction.

As I say, this shouldn't affect the price of the end service one iota. All it does is change the allocation of that revenue stream. Less of the profit to be made out of the spectrum's mere existence goes to the shareholders and more of it goes to reduce other taxes on those same consumers. It's a great idea.

Even better, it gets allocated to those willing to pay the higher price - meaning, we assume, those who have the best ideas about how to exploit that existence. And that's the other price that we want to be careful of.

Brown's auction, and those that have followed on, are usually very careful in trying to make sure that there's fewer spectrum packages on offer than there are people who would like to be in the market. And it's that, of course, that consolidation would hurt.

It's not so much that we're worried about how much consumers would get ripped off if there were only three or four players in the market. We're actually more worried about how the taxpayers won't be able to rip off the shareholders if there's only three or four players in the market. ®

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