UK basks in 3G auction success

If you are a UK citizen, congratulations! You have just won £387.54. The trouble is, you won't actually receive it as it is being used to pay off a £5775.86 debt that you never knew you had.

The £387.54 is your share of the great telco sweepstake, formerly known as the third-generation (3G) mobile phone licence auction, which closed on Thursday having raised £22.48bn. The Treasury is sinking the proceeds into the £335bn national debt, rather than perhaps buying a computer for those who don't have one. But since you pay the interest through higher taxes, this is, as Treasury chief secretary Andrew Smith said, "the prudent thing to do".

The auction was designed by Professor Ken Binmore of University College, London, who is a specialist in game theory, or the way people behave when taking part in competitions. The Treasury originally said it expected to earn about £2bn from the process, but the time spent designing the auction has paid enormous dividends.

Some analysts have been claiming that the auction went too far, adding that this could damage the development of ecommerce by pushing up the costs of new phone services. However, these auctions should be seen as a great success.

A risky business
Such events hold risks for governments as well as companies, and it is surely preferable that the UK government doesn't lose out. On Monday 17 April, the Turkish government came unstuck during its auctioning of two mobile licences.

Telecom Italia, with Turkish bank Isbank, put in a relatively big bid of $2.52bn (£1.6bn) for one of the two franchises, causing the remaining four bidders to abandon bidding for the other one. It was a perfect application of game theory, and one which may have handed Telecom Italia a competition-free run on new services.

The UK government has also previously come unstuck. In 1991, Central TV (now owned by Carlton) won the ITV franchise for the Midlands with a bid of £2000 - a very small sum that it knew it could get away with because there were no rival bidders.

By contrast, the 3G mobile spectrum auction has been open, fair, and spectacularly successful in raising money. Although some have pointed to a US auction of local telephone franchises which went wrong when the entrants went bankrupt by bidding too high, the players here include Vodafone Airtouch, valued by the stock market at £175bn, and BT which is worth £75bn. Some of the companies are already raising new finance to pay for the licences, but in the end they can afford it.

Essentially, the government has pulled off, possibly by accident, a stealth tax that makes the projected extra cash from IR35 look like pocket money. The £22.48bn bill will be paid disproportionately by the rich: those who hold shares in the telcos, and those who use mobile phones. But it would be a brave company that went first in increasing charges on its current network. More likely are high prices for early adopters of 3G mobile phones.

Easy money
The UK government has in fact pushed the politics of technology to the left. IT is often about a few individuals getting very rich, with governments offering tax-breaks to help them. Investing in dotcom stocks, for example, has been seen as an easy route to riches - comparable to the privatisations of the 1980s, but only open to those with money to spare in the first place.

The last few weeks have seen eerie echoes of the great crash of October 1987: a massive failure at the London Stock Exchange, a slump in share prices and a botched flotation. Lastminute.com is not exactly BP, which was floated during that crash, but the parallels remain. Individuals hoped to stag the shares, putting in their money to sell as soon as the inevitable price rise took place. Then the unthinkable happened, and they got their fingers seriously burnt.

Interestingly, the UK government cleaned up in 1987, too. It had sold 31.5 per cent of the BP shares to US investment bank Salomon Brothers for them to sell on, and the bank lost more than $100m as the price fell through the floor. Salomon had been making vast profits for years, but in October 1987 it had to cope with losing the kind of bet it thought it would always win.

The business of telecommunications, in a far more civilised, transparent and consensual way, is now suffering the same fate. As many as 15 companies flocked to take part in the auction. The four incumbents had made fortunes from their first batch of licences, which were given to them gratis in 1985. They didn't have to play, and they're big enough and daft enough to look after themselves.

Now they may be faced with repeat performances right across Europe, as France and Ireland start to reconsider how licences will be allocated after the UK government's conspicuous success.

So, let's hear no more bleating. You - the taxpayer - have won. Enjoy your £387.54.