Auctions are exciting. When governments run them, the revenue gained can look like money for nothing. The Dutch government just collected euro 3.8 billion from auctioning off the spectrum needed for 4G mobile telephony. That money, though, comes from somewhere.
In effect, the winning companies pay a big upfront tax. They then pass on the burden. Shareholders of Dutch operator KPN will suffer right away. The company has announced a dividend cut for 2012. The customers will pay more slowly, if all goes according to plan. The company hopes to be able to charge enough to make the bid ultimately a winning proposition for shareholders.
The Dutch government might like receiving revenue today which it would otherwise have to extract over many years. And, over those years customers might be less resentful of the higher rates needed to amortise the operator’s spectrum payment than of a higher tax for spectrum use, even though the two are almost indistinguishable in economic terms. The operators are just serving as a “tax farmer”, which has paid in advance for the right to collect taxes later.
But a bidding war can bring problems for the public. A winner’s curse is quite possible: the spectrum cost weighs down the operator so much that profits suffer and investments in technology are inadequate. Even if all goes well, the additional risk and financial strain is unhelpful — and unnecessary.
Auctions like this are just an indirect and inefficient tax increase. Governments shouldn’t extract money from operators before they actually operate. Instead, they should plan to charge taxes from actual revenue. In the mobile phone business, they call that pay-as-you-go.
