The final shape of the SAR's much agonised over auction for third generation (3G) mobile telephone services is a triumph of cleverness, yet lacks common sense.
By auctioning licences on the basis of future royalty payments rather than up-front cash payments, the Office of the Telecommunications Authority (Ofta) wanted to please everyone. The public would get affordable 3G services; mobile operators would not be saddled with huge debts and the Government would receive a nice slice of recurrent tax income.
While the chosen 'hybrid' auction was better than handing out licences for free as initially planned, this is an auction with a twist - operators will bid against each other but, in effect, also against Ofta.
Auctioning will be on the basis of a 'royalty' rather than an up-front, lump-sum payment. The four firms promising to pay the highest percentage of future turnover will win. The catch is they must also make a minimum annual payment, based on what Ofta guesses the market for 3G services should be up to 15 years in the future.
Unfortunately Ofta has no more idea of how the 3G market will turn out than anyone else. It claims to have picked the best minds in the business in building its model of future demand, yet firms like Vodafone and Hutchison Whampoa also consulted widely when they paid huge prices at last year's European 3G auctions. Their share prices have plunged because investors think they grossly over-estimated 3G's profit prospects.
Ofta has introduced an added uncertainty into an already volatile business equation. Many serious commentators wonder if 3G could be a huge white elephant. While the technology has an undoubtedly bright future, the question is whether operators can earn more than 'commodity' returns. The point is that nobody knows. By insisting on minimum annual payments, smaller SAR operators face large contingent liabilities. This is likely to depress the royalty figure they would otherwise have bid. Those with stronger balance sheets will be at an advantage. By contrast, if 3G defies the sceptics and turns into a trillion-dollar market, bigger players will earn huge 'excess' returns.
