Telecoms crash
Encyclopedia
The 2001 Telecoms crash is often confused with the Dot Com crash which happened at around the same time. Unlike the dot com crash however, the telecoms sector relied on long engineering research and development cycles, and the development companies on the telecom operators buying software maintenance contracts and upgrade paths. The dot com boom was caused by people investing money in ideas that were unrealistic.
s in Europe
, were offered auction of the 3G radio spectrum
. A similar auction had been applied, disastrously, in the USA the year before and had to be declared null and void re-run after it was decided that the industry could not bear the cost of the bids. The lessons from this were not learned by the German
and British
governments, who pressed ahead hoping for a windfall tax
. Unlike their government peers in the USA they allowed their telecoms industry to take the full risk of heavy speculative borrowing against an R&D loaded industry. To make matters worse, the state of the industry at the time meant that the next wave of technology was being developed, the 3G mobile industry. This was not merely new radio masts and phones. This included the development of a new telecoms infrastructure. This meant the development of:
This development measured in billions of dollars.
The nature of the auctions was to offer a limited number of licenses (less than the number of operators likely to bid) and have these as sealed bid auctions. This put the telephone operators in a difficult position,
If they lost the auction they were out of the next technological phase of the business. They therefore took risks and made high sealed bids, incurring large debt. One critic described this as diabetics being forced to bid for insulin. In the UK auctions raised 22.5 billion (GBP) and around 30 billion (GBP) in Germany
. This was 10 times more per megahertz than the TV companies are administratively charged for national broadcasting.
based on share price changed making the telephone operators effective credit rating
look insecure. They could thus no longer borrow, and pay for the 3g equipment they had paid licenses to implement, and eventually were unable to renew a large proportion of the maintenance and upgrade contracts, for existing earlier generation equipment.
The telecom developers were now in a quandary. They had invested heavily over the years in research and development to keep pace with changing technology, and the telecom operators were no longer in a position to pay the maintenance and upgrades on the ordinary landline equipment, let alone buy the new. This meant the telecoms developer companies, could no longer rely on the 'bread and butter' financial support from their earlier generation products.
the governments of two countries, Britain and Germany
, had applied spectrum auctions. Unlike the United States government, they did not re-run the auction when it raised around ten times more than they thought it should have. Within a year 100,000 jobs were lost in telecoms support and development across Europe with 30,000 coming from the UK.. What had initially looked like a tax windfall
, for the German and UK governments, turned sour and damaged a European industry that was selling worldwide and was, at the time technologically, ahead in the world markets.
The losses due to the fall in income tax
and corporation tax would have quickly swallowed up any windfall gains. The governments of the day failed to understand the time scales of complicated engineering research and development
and market strategies
and applied effective taxation interference at a critical time, ultimately damaging a future revenue source.
spectrum
, in Australia
and New Zealand
, and then further afield, were met with low bids, and strong suspicion of collaboration between operators of bidding low and secretly defining network sharing agreements.
Hong Kong
's recent approach was to share in the profit from a spectrum allocation rather than issue a potentially damaging upfront payment for licences.
Limited license sealed bid auctions
At the beginning of 2000, mobile network operatorMobile network operator
A mobile network operator , also known as mobile phone operator , carrier service provider , wireless service provider, wireless carrier, or cellular company, or mobile network carrier is a telephone company that provides services for mobile phone subscribers.One essential...
s in Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, were offered auction of the 3G radio spectrum
Radio spectrum
Radio spectrum refers to the part of the electromagnetic spectrum corresponding to radio frequencies – that is, frequencies lower than around 300 GHz ....
. A similar auction had been applied, disastrously, in the USA the year before and had to be declared null and void re-run after it was decided that the industry could not bear the cost of the bids. The lessons from this were not learned by the German
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
and British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
governments, who pressed ahead hoping for a windfall tax
Windfall tax
In Australia, windfall tax may refer to either:* Commonwealth places windfall tax, imposed under the Commonwealth Places Windfall Tax Act 1998 and the Commonwealth Places Windfall Tax Act 1998...
. Unlike their government peers in the USA they allowed their telecoms industry to take the full risk of heavy speculative borrowing against an R&D loaded industry. To make matters worse, the state of the industry at the time meant that the next wave of technology was being developed, the 3G mobile industry. This was not merely new radio masts and phones. This included the development of a new telecoms infrastructure. This meant the development of:
- new generation telephone exchanges, capable of handling voice and high speed data
- super digital-highways (e.g. technology to cram 11,000 phone calls onto one optical fibre and extract them again)
- optical ultra high speed national and internationalFiber-optic communicationFiber-optic communication is a method of transmitting information from one place to another by sending pulses of light through an optical fiber. The light forms an electromagnetic carrier wave that is modulated to carry information...
'backbones' - maintenance and control layers to allow operators to manage the new technology
This development measured in billions of dollars.
The nature of the auctions was to offer a limited number of licenses (less than the number of operators likely to bid) and have these as sealed bid auctions. This put the telephone operators in a difficult position,
If they lost the auction they were out of the next technological phase of the business. They therefore took risks and made high sealed bids, incurring large debt. One critic described this as diabetics being forced to bid for insulin. In the UK auctions raised 22.5 billion (GBP) and around 30 billion (GBP) in Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
. This was 10 times more per megahertz than the TV companies are administratively charged for national broadcasting.
Debt and subsequent loss of stockmarket confidence
The stock market lost confidence, partly due to the concept that telecoms were similar to dot com (both were categorised as 'high technology' in the listings) and share prices tumbled. As they did so the ratio of debt to assetsDebt to equity ratio
The debt-to-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage...
based on share price changed making the telephone operators effective credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
look insecure. They could thus no longer borrow, and pay for the 3g equipment they had paid licenses to implement, and eventually were unable to renew a large proportion of the maintenance and upgrade contracts, for existing earlier generation equipment.
The telecom developers were now in a quandary. They had invested heavily over the years in research and development to keep pace with changing technology, and the telecom operators were no longer in a position to pay the maintenance and upgrades on the ordinary landline equipment, let alone buy the new. This meant the telecoms developer companies, could no longer rely on the 'bread and butter' financial support from their earlier generation products.
Massive job losses
Unfortunately for EuropeEurope
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
the governments of two countries, Britain and Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, had applied spectrum auctions. Unlike the United States government, they did not re-run the auction when it raised around ten times more than they thought it should have. Within a year 100,000 jobs were lost in telecoms support and development across Europe with 30,000 coming from the UK.. What had initially looked like a tax windfall
Windfall tax
In Australia, windfall tax may refer to either:* Commonwealth places windfall tax, imposed under the Commonwealth Places Windfall Tax Act 1998 and the Commonwealth Places Windfall Tax Act 1998...
, for the German and UK governments, turned sour and damaged a European industry that was selling worldwide and was, at the time technologically, ahead in the world markets.
The losses due to the fall in income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and corporation tax would have quickly swallowed up any windfall gains. The governments of the day failed to understand the time scales of complicated engineering research and development
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
and market strategies
Marketing strategy
Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.-Developing a marketing strategy:...
and applied effective taxation interference at a critical time, ultimately damaging a future revenue source.
Uncertain future of spectrum pricing
Subsequent government auctions of the 3G3G
3G or 3rd generation mobile telecommunications is a generation of standards for mobile phones and mobile telecommunication services fulfilling the International Mobile Telecommunications-2000 specifications by the International Telecommunication Union...
spectrum
Radio spectrum
Radio spectrum refers to the part of the electromagnetic spectrum corresponding to radio frequencies – that is, frequencies lower than around 300 GHz ....
, in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
and New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, and then further afield, were met with low bids, and strong suspicion of collaboration between operators of bidding low and secretly defining network sharing agreements.
Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
's recent approach was to share in the profit from a spectrum allocation rather than issue a potentially damaging upfront payment for licences.