Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 5 DECEMBER 2001
MR DAVID
HENDON
60. You just said you agreed with that statement.
(Mr Hendon) I think actually that the sums the companies
decided to bid may have turned out to have damaged their business,
but that was their choice, not my choice. I had 13 companies who
wanted these licences and how else was I to decide which ones
to give them to?
61. I will come to that in a minute. You say
you accept that paying £22 billion has damaged the industry,
albeit you do not accept it is your fault?
(Mr Hendon) What I accept is that if a company has
a high debt, then it has more difficulty financing its general
business. That is just a straight matter of business really.
62. Would you agree then with Professor Negroponte,
who is a US technology guru, who said, soon after the auctions,
"What happened in the UK was disastrous. It is the worst
thing that could have happened to the consumer. The £22.5
billion paid for the licence was unsustainable because it would
translate into an extra cost of a thousand dollars per subscriber
on top of the cost of providing the service. That one thousand
dollars has no research behind it, no new products behind it,
no new infrastructure, no new handsets, no new potential for increased
access or making this widely available." Do you agree with
that expert?
(Mr Hendon) No, I do not, and in fact I am not sure
if you took that from the article which was published alongside
another article from me, but it gave the counterbalancing points.
As I said just now, I believe what happens in the market place
is that the prices which are charged are determined by what else
is going on in the market, and not at all by the cost that the
company has to pay for—
63. There must be a cost underlying it. The
reason why new houses cost £100,000, £150,000 rather
than 10p must be based on the cost of the bricks, there must be
an underlying basis to the market conditions which determine the
cost paid by the businesses.
(Mr Hendon) Yes, but the cost of building houses in
Mayfair is not going to be so different from the cost of building
houses in Leeds or somewhere, but the price they sell for is very
substantially more, and that is not just the cost of land but
because people are willing to pay a lot more for them.
64. You have referred to this article in the
FT this morning, that they are having to delay the introduction
of these 3G services for an extra six months. Do you think that
has anything to do with the £22.5 billion?
(Mr Hendon) It is nothing at all to do with our auction,
in fact I think quite the reverse. What has happened is that we
have got five companies out there extremely hungry for advanced
handsets, handsets which will enable them to deliver whizzy new
services which cannot be delivered with existing handsets, and
they are pressing those handset manufacturers extremely hard to
get on with it. I have talked to some of those handset manufacturers
and the Japanese were really looking for more capacity and their
3G networks were aimed in the first place to provide more speech
capacity because their present networks were overloaded. What
we were wanting to see happen was for this technology to deliver
new services which our consumers did not have. So the fact our
companies paid a lot for the spectrum means they are now quite
aggressive in getting those advanced services, and I fully expect
we will see advanced services more quickly in this country than
other countries. The second thing is that I go back far enough
to have been at this stage of the GSM business and I was involved
in some of the early work on GSM, and exactly the same things
happened there. The problem of turning a really very, very complex
technology into a cheap consumer product is a very, very difficult
problem, and the companies can really only do that when the standards
are solid enough and certain enough that they can commit to manufacturing
chips in volume to get the prices down. All of this means that
everything is held up until all the wrinkles are worked out, and
it is absolutely what happens in introducing this sort of technology.
65. On that point, do you not think just having
two licences for 15 MHz, as opposed to four 15 MHz—because
the other three are all just 10 and apparently you need 15 if
you are going to provide these video-type services—was a
mistake if you are going to try and encourage those kind of extra
services?
(Mr Hendon) We gave very considerable thought to that
point because we were very keen to get a new entrant and if we
wanted a new entrant and we could only have four licences, by
definition only three of the incumbents would have got a licence
and that would have been a difficult situation for one of the
incumbents, so we were very concerned about that. At one stage
we expected we would have to go for four licences and we designed
the auction on that basis, but then we had further technical advice
which came from the international work which suggested that actually
it would be possible to deliver these services in 10 rather than
15 MHz spectrum, so we discussed with the bidders in the UACG,
which I mentioned just now, the idea we would have five licences
rather than four. There was quite a difference of view but gradually
the overall opinion moved to the idea that it would be better
for us to go for five and that it was not going to affect the
roll-out of these fast services. It is very unlikely that three
companies would have willingly accepted a 10 MHz allocation if
they felt that was going to constrain what they could do with
the spectrum. So by bidding the sums they did, I think they demonstrated
they—
66. Did not the UMTS recommend 15? Is that not
what they have done in Finland, Sweden, Denmark, Norway, Spain,
France, Belgium, Portugal and Switzerland but not Britain?
(Mr Hendon) That is what they recommended, yes.
67. And that is what has been done in all those
countries?
(Mr Hendon) I am not sure if that is what they have
done in all those countries, certainly in many of them but not
all of them I think.
68. That is what it says in the report which
you signed up to.
(Mr Hendon) I am sure the report is correct.
69. It just seems concerning that we have gone
against all these other countries.
(Mr Hendon) What I can say is that if the industry
had advised us that this was not going to enable them to roll
out the sort of services they wanted to roll out and we wanted
to see rolled out, we would not have done this. So it is based
on their advice, the direct advice of the operators who were preparing
to bid rather than UMTS Forum which is a trade association.
70. That is on the record we can look at that.
On page 12 of the report, it says, "The United Kingdom is
bound by European Directives which require that Member States
should price the spectrum only to ensure its efficient use and
not so as to maximise licence revenues, and they forbid the use
of pricing as a form of taxation. They permit an auction as a
method of allocating spectrum to those operators who will make
most intensive use of it." You have raised £22½
billion which, if you go to the Pre Budget Report, which was published
last week, would pay for the budget deficit of the Government
for all of 2001-02, all of 2002-03 and into the following year,
2003-04. These are substantial sums of money, if that is not taxation,
I do not know what is. What figure would you regard as constituting
taxation in one of these auctions which would contravene the European
Directive. If £22½ billion does not, what figure would
in your judgment?
(Mr Hendon) I am not going to be drawn on any particular
number because I do not think any number is more right than any
other number. We set up this auction and the objectives of the
auction are in the report. I am sure you will have read them.
Basically we said that the objectives were to utilise the available
spectrum with optimum efficiency, promote effective and sustainable
competition and, subject to those above, objectives, design an
auction to realise the full economic value to the consumers, industry
and the taxpayer. So the raising of revenue was the third part
of the third objective in the auction; the most subordinate part
of all. The fact it was £22½ billion was entirely the
doing of the bidders, not of us.
71. You say that but of course you did say earlier
that if you had only had three licences with four incumbents,
that would have raised even more. Also in the report somewhere
it says that you could have reduced the revenue by, for example,
not having an allocated spectrum for a new entrant. There are
all kinds of things you could have done that would have increased
the revenue or reduced the revenue so if you had constructed this
better you would not have raised the £22.5 billion you would
have raised a smaller sum, still have achieved the objective of
the report and you would not have caused the damage to the industry
that you say raising £22.5 billion has done?
(Mr Hendon) I do not see it that way. What we did,
we constructed this auction to deliver the objectives one, two
and three and in that order. We were concerned primarily with
getting those licences out to people who would use them and in
a way which would develop sustainable competition and deliver
economic value to the whole of the UK. The proceeds part of it
was a sort of byproduct and not the essential part of what we
were designing for. In fact, we really were not interested in
what the proceeds were going to be, we did not make any assessment
of them.
72. Perhaps you should have been. This was an
error, a mistake, a cock-up, that has caused quite a substantial
amount of damage to the industry. You said it was not the point
to raise revenue but maybe you should have given more attention
to perhaps over rating revenue in the way the Bank of England
has to pay attention to undershooting its inflation forecast.
(Mr Hendon) I think if we had seriously suggested
to anyone that this auction was going to raise £22.5 billion
and we would therefore need to tweak it a bit, people would have
laughed at us.
73. You had consulted experts.
(Mr Hendon) It was not just civil servants and their
advisers who did not understand that these sums of money were
going to be raised, no-one did. No-one anywhere in the world understood
that spectrum was going to be worth this sort of money. You must
have seen the press comment at the time, everyone was astonished
by these very large figures. The people who made the decision
to pay them were those companies, people like Vodafone and so
on, who had their own advisers, they had their own technical advisers,
their own auction designers, their own game theory people, they
knew how their business plans worked. They saw what other companies
were doing. We designed our auction in a way that everyone could
see what other people were up to and they reached their own decision
about what sum to pay. That was the sum they paid, they could
have stopped earlier if they had wanted to.
74. Are you confident that all these five licence
holders are going to stay in business?
(Mr Hendon) Yes, I think so, at the moment I think
so.
75. You do. BT's fixed line customer, BT has
had to sell their Cellnet side. Do you think they are going to
pay now since the debt is staying with the fixed line element
of BT, are they going to be paying for this over exuberance?
(Mr Hendon) I think myself it is the shareholders
who in the end are paying rather than the customers. All that
I said before about competition in mobile applies to fixed as
well. The price that fixed customers pay is determined by what
is going on in the market. It is quite possible that because the
management of the company decided to pay £6 billion for a
licence that the shareholders will get a lesser return but that
is between the shareholders and the management of the company
not me.
76. Shareholders will suffer which brings us
back, does it not, to the graph on page 27 which shows that at
the time of the auction the share price of all these companies
was falling. You said that was a coincidence, it was not really,
was it?
(Mr Hendon) This is not a graph of the share prices
just of the mobile communications companies, it is a graph of
the whole high technology sector basically.
77. You could have triggered the whole sector.
(Mr Hendon) I do not believe that even our auction
had that sort of influence.
78. £22.5 billion is not a small sum.
(Mr Hendon) No, but what we did was create unprecedented
interest in this new technology. I think we actually gave a kick
start to 3G internationally.
Mr Gibb: Extraordinary kick start.
Mr Davies
79. Well done for raising all that money. Can
I just ask, on the question of the actual cost to the industry
and the consumer, obviously the point you are making is that at
the start, the expectation of your advisers I think was that the
proceeds would be something like £1.5 billion and they raised
£22.5 billion by using again a theoretical model that was
evolved at Oxford University, is that correct? It was various
academics who put this into practice. That was why people did
not know what would happen, the traditional Railtrack sell off.
(Mr Hendon) The estimate of £1.5 billion came
right from the original work on the idea that we should auction
spectrum at all. If you go back to the 1998 Bill then it talks
on the face of the Bill about all spectrum auctions raising between
£1-1.5 billion. During the planning of the auction we used
the rough and ready figure of £1 billion as the place marker
for the sum of money that we thought we might be able to gain
from this auction.
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