Telecoms crash

The 2001 Telecoms crash is often 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 sealed bid auctions

At the beginning of 2000, telecom auctions mobile network operators in Europe, were offered auction of the 3g radio spectrum. A similar auction had been applied, disastrously, in the USA the year before and had to be declared null and void re-run [ [http://www.guardian.co.uk/comment/story/0,,178157,00.html Dial-a-fortune | Guardian daily comment | guardian.co.uk ] ] after it was decided that the industry could not bear the cost of the bids. The lessons from this were not learned by the German and British (Gordon Brown) chancellors, who pressed ahead hoping for a windfall tax. Unlike their government peers in the USA they allowed their telecoms industry to take the full risk of heavy speculative borrowing against an R&D loaded industry.To make matters worse, the state of the industry at the time meant thatthe next wave of technology was being developed, the 3g mobile industry.This was not merely new radio masts and phones. This included the development of a new telecoms infrastructure. This meant the development of:
* new generation telephone exchanges, capable of handling voice and high speed data
* super-digital-highways (e.g. technology to cram 11,000 phone calls onto one optical fibre and extract them again)
* optical ultra high speed national and international 'backbones'
* maintenance and control layers to allow operators to manage the new technologyThis development measured in billions of dollars.

The nature of the auctions, was to offer a limited number of licenses (less than the number of operators likely to bid) and have these as sealed bid auctions. This put the telephone operators in a difficult position,If they lost the auction they were out of the next technological phase of the business. They therefore tookrisks and made high sealed bids, incurring large debt. One critic described this as diabetics being forced to bid for insulin. In the UK auctions raised 22.5 billion (GBP) and around 30 billion (GBP) in Germany. This was 10 times, per megahertz, than the TV companies are administratively charged for national broadcasting.

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 basedon share price changed making the telephone operators effective credit rating look insecure.They could thus no longer borrow, and pay for the 3g equipment they had paid licenses to implement, and eventuallywere unable to renew a large proportion of the maintenance and upgrade contracts, for existing earlier generation equipment.

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. This meant the telecoms developer companies, could no longer rely on the 'bread and butter' financial support from their earlier generation products.

Massive job losses

Unfortunately for Europe the governments of two countries, Britain and Germany, had applied spectrum auctions. Unlike the United States government, they did not re-run the auction when it raised around ten times more than they thought it should have. Within a year 100,000 jobs were lost in telecoms support and development across Europe with 30,000 coming from the UK. What had initially looked like a tax windfall, for the German and UK governments, turned sour and damaged a European industry that was selling worldwide and was, at the time technologically, ahead in the world markets.

The losses due to the fall in income tax and corporation tax quickly swallowed up any windfall gains.The governments of the day failed to understand the time scales of complicated engineering
research and development and market strategies and applied effective taxation interference at a critical time, ultimately damaging a future revenue source.

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.

Notes

References

*Prosperity from Technology - a new approach to industrial production, money and the environment ISBN 1 85776 3629
*Radio communications agency "Spectrum pricing: year 5, A consultation document" January 2002
*Professor Martin Cave "Review of radio spectrum management for department of trade and industry and hm treasury" HMSO March 2002
*David Rudd PhD F.I.E.E C.eng, "Spectrum Pricing comes of age" Electronics World, Vol. 108, July pp. 24 2002
*CSP International "De-regulation of the radio spectrum in the UK" March 1987. HMSO
*David Rudd PhD F.I.E.E C.eng, "Spectrum Pricing's uncertain future" Electronics World, Vol. 108, September pp. 24 2002
*Economy sharing regulation of privately owned monopolies "the political quarterly" July 1992