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Are the Governments Bankrupting the Telecommunication Companies?

Mon, 04/30/2001 - 8:17am
David A. Case NCE, Cisco Systems


David A. Case NCE, Cisco Systems davecase@cisco.com.

It seems worldwide one of the biggest moneymakers for government coffers is the auctioning of frequency bands. I am not saying that the bands should be given away, but maybe the overall process needs to be changed.

The US government, the FCC to be exact, just finished up the auction for part of the 700 MHz band and that brought in over $20 billion to the general fund. There are two basic problems I see with the auction.

First, the money is put into the general fund to be used for all types of programs. The frequency auctions are like providing welfare to the government and any of its programs. The only incentive appears to be the money the government will make and not the real efficient use of the bands.

The second issue is that the auctions appear more beneficial to the government coffers then to the actual telecom companies. It is similar to what the government is doing to the tobacco companies but instead of collecting fines (taxes) after the fact, they are doing it before the profits are made.

One can only wonder that if this auction type mentality was used earlier in our country's history could it have prevented certain problems such as smoking.

Imagine you are Sir Walter Raleigh stepping off the boat not to be greeted by Indians, but a government officials. The official was there to auction off the right to grow cigarette tobacco and the price tag was $20 billion. Before you could even start preparing the land to plant the tobacco seeds and develop the crop for market the government wanted a cut. Now you must secure capital to buy licenses before buying the land, plant and cultivate the crops, prepare for market etc.

After several seasons, the crop is good enough to bring in profits. But before you start realizing the real potential profits from the first crop, the government opens up another auction for pipe tobacco, again one needs to come up with millions to avoid being left out.

Also before you can start planting your new tobacco, you must first get the government to reallocate the land used for planting corn to relocate. Then the corn grower's lawyer's petition keeps their fields and prolongs the introduction of the new crop. Again the initial price tag for your crop has gone up. Also with the potential sales falling for the older crop, you risk defaulting on the payments for your license.

Now here comes another new crop of tobacco for chewing. Again to stay in the game, one must acquire financing for the new licenses, putting you further into debt and tapping your resources.

At this point your financial resources are drained and then some. Also due to the expense of getting the various licenses to be able to compete, you are left with little or no resources to actually invest in the growing or production of your crops. With the newer crops being advertised as the way to go your overall growth of the older sector slip off leaving you further in debt.

Unfortunately the scenario is all too real for the telecommunication companies. Even as the PCS auctions wind down, the 3G battle starts.

First where do we put it? This pits the users of the bands right now who have invested in that band against those who want to use it for something else. The real winners here are the lawyers on this issue.

Once the band is allocated for 3G, such as in Europe, then the auctions begin. According to some sources in Europe, several of the telecommunication companies have paid so much for the 3G licenses, they may not have the capital left to actually develop or even deploy the technology.

The actual benefit of owning the license may not be realized other then possible bankruptcy.

Plus with the hype being spread on then advantages of the new technology, some customers may wait on deploying current technology adding further financial woes to the cash strapped telecom companies.

The issue is a thorny one and not easily solved. The governments see it as a cash cow for their general funds. The telecom companies need the licenses to operate but risk the chance of defaulting or bankruptcy if they fail to deploy the technology or make it profitable. However if they pass the cost onto the consumers, they risk the wrath of other government agencies that watch dog this.

There is no easy answer to this mess, but I have a strange feeling that Sir Walter Raleigh may have just gotten back in his boat and sailed home.

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