Mobile phone licence sale reeks of Old Labour ideals

We should not be too surprised by the concept of businesses being valued at billions of pounds on the basis of notional earnings at some distant date in the future. The dot-com industry has shown us that equity and venture capital no longer bothers with anything so prosaic and trivial as a company’s ability to make a profit. So Government’s auction of third-generation mobile phone licences this Eastertide for monumental sums of money, invested in what can only be a market hypothesis, has passed with relatively little comment.

Ever vigilant for signs of shareholders’ funds being sprayed around indiscriminately, I aim to put this right. Over the Easter break, it was impossible to know when the hammer was set to fall in the UK auction for Unified Mobile Telecommunications System (UMTS), which promises a future in which I will be able to access the Internet, my office computer system and, in all probability, command a nuclear submarine through my mobile phone.

It should make commuter trains an ever more pleasurable experience – mobe-junkies will be able to tell entire e-mail address-strings what train they’re on. But being able to run your life from something the size of a bar of chocolate offers the prospect of very big business indeed. There are five licences on offer, with bidders such as Vodafone, Deutsche Telekom’s One 2 One and BT Cellnet putting up between &£4bn and &£6bn apiece, which will raise some &£23bn for the Treasury.

By the time this is read, some winners and losers may be known, but I have to say that, whatever the outcome of this venal exercise, the system stinks. Deutsche Telekom chairman Ron Sommer has already called for changes to the auction process for next-generation mobile phone licences, having failed to persuade the European Commission to open an inquiry into the varied licensing procedures throughout the EU.

Sommer is exercised that, while shareholders can be asked to stump up a fortune in countries such as the UK, in countries such as Spain the licences are being issued virtually gratis. I’d go further and argue that it is anti-commercial for national governments to exploit the technological advancement in telecoms for financial gain.

For a start, there is no real concept of value here. We’ve been through this, of course, with dot-coms. Telecoms companies have no empirical grasp of what sums of money they should raise for the licences – they only know that they have to bid enough to beat the competition. In this regard, they are buying an option on future commodities that may never be deliverable. That should be a tough case to make to shareholders, but I guess that anything goes these days, post-dot-com valuations.

There’s a new-millennial psychology of tolerance now for never-never valuations that allows the likes of the Radio Communications Agency and the DTI, which are organising the UK auction, to get away with what amounts to a windfall tax.

It doesn’t have to be like this. There is a compliant assumption, probably born in the US, that the telecoms markets have to be heavily regulated by highly interventionist central government in order to work properly. The truth is rather different.

Take rather more enlightened Finland, which has some 60 telecoms operators – admittedly not all competing with one another – some of the highest market penetration and the lowest prices in Europe. All without the heavy hand of government regulation. I don’t often say it, but this is one sector in which market forces can effectively take the place of regulation. The market regulates itself.

Free markets, for all that New Labour would have us believe otherwise, are not something this UK Government will easily embrace. It likes market forces only so far as they don’t cause any embarrassment, such as when BMW decides that it is pulling out of Rover. The Government is also pressed for cash for a spending programme that looks distinctly Old Labour.

Hence its demand to make as much out of this telecoms-licence auction as it possibly can. But even at the supply end of the equation the deal looks weak. Chancellor Gordon Brown has let it be known that funds raised from this auction will be used to pay down the national debt.

All very dry and prudent from a man who wants to be seen to be obsessed on our behalf with the balance of payments. But hardly in line with the modern, digitally-aware prospect that we were sold at the general election and during the honeymoon period of the new Government.

At that time, we were persuaded that every school in the country would have sufficient online resource to embrace the digital age of education. Whether or not that ambition will be achieved, it is conceivable that there are telecommunications infrastructure projects that could be funded nationally by a budget of &£23bn, that would be a more appropriate deployment of this windfall than a relief of the balance of payments deficit.

I might add that such a capital investment would serve to keep Britain in the vanguard of telecoms developments. It’s a position we hold and of which we can be proud. In contrast, this auction process has looked grubby and tainted – a point that I hope the successful bidders will feel free to make when they no longer have cause to fear discrimination from the all-powerful auctioneers.

George Pitcher is a partner of issue management consultancy Luther Pendragon.