How strong is the case for nationalising the mobile phone companies?1
August 23, 2014 by Paul Goldsmith
Should we renationalise the mobile phone companies? If you had asked me that until about a week ago I would have said you were nuts. But then, as has happened a few times since I started reading what he writes Owen Jones has presented a strong case for doing so, which I would like to analyse economically.
I have spent the last 8 years using the communications industry, and particularly mobile phones, as an example of where privatisation and a very positive effect. I have pointed to what the industry was like pre-privatisation, with a six month wait for a black phone to be installed by the post office, to where we are now, with computers powerful enough to have put a man on the moon in our pocket, and the ability to call our friends anywhere in the world for a tiny sum. I have argued that the profit motive, plus deregulation, was key to this, and instructed my students to use the communications industries as an example of the plus points of one of the most controversial of Margaret Thatcher’s policies.
As Jones points out, the mobile phone companies “are a natural monopoly, and the fragmentation of the telecommunications network is inefficient. Their service is often poor because they put profit ahead of the needs of the consumer”. He uses a variety of examples to show this, highlighting the large amount of signal blackspots that exist around the country, even in London. He mentions problems that are had in dealing with customer services, telling stories of companies who had outsourced their technical support, with that contract stating they can only contact their contractors by email, slowing any possible fix down.
Jones explains why a company called Open Signal have calculated that our phones have no signals 15% of the time. It is because the mobile phone network is actually a natural monopoly, meaning it would be a lot more efficient as one company as there are such large economies of scale to be had. The mobile phone companies build masts, but won’t share the them with competitors, so we are often driving past mobile phone masts that we are locked out of. Furthermore, mobile phone companies cannot make such a profit out of a mobile phone mast in a rural area, due to less people using them, so they simply don’t put one there, leaving many people without coverage in the name of putting profit before giving all citizens’ access to what can essentially now be classified in economics as a necessity.
Then there is pricing. If you go into a reseller like Carphone Warehouse and look carefully at their computer screen when they enter your needs (number of minutes, texts, data etc), you would be shocked by the similarity of the prices that the different mobile phone operators offer. This is called price parallelism, and is a classic characteristic of an ‘oligopoly’ (a market with a few dominant firms). They are just not competing on price, instead throwing millions of your money at celebrity endorsements and sponsorship. What’s more, look closer at the deal you are getting for your ‘free’ phone. These come with two year contracts, so on a typical £32 a month contracts you can pay over £700 for a £200 phone. You could save £400 by buying a cheap phone off eBay and getting a £15 a week sim-only deal. When you add this pricing opacity to the number of complaints (28,000) that Citizens’ Advice got about mobile phones, including customers being held to their 24 month contract even though there was no signal in their area, and you can really start to see Jones’s point.
He even puts the claim that progress has been about private sector investment to the test. Touch-screen technology, Siri and GPS came about through public sector funded research, not some entrepreneur fiddling about in his garage. Let’s not forget also that the World Wide Web itself was created by Tim Berners-Lee at the state run CERN in Geneva. He points out that many mobile operators spend more of their retained profits each year on share buybacks than on research and development, retarding progress in technological development. Vodafone has also been the target of anti tax-avoidance campaigns, meaning that they are benefitting from government sponsored technology without paying for their fair share of it. So a key benefit of privatisation, that firms will invest with the incentive of the profits they might earn, has not led to the dynamic efficiency it was supposed to.
On technical grounds, Jones has Dr Oliver Holland of King’s College Centre for Telecommunications Research explaining why one national network of mobile phones makes technological sense. Each mobile phone company is allotted a slice of the frequency spectrum. But at any given time, lots of customers belonging to one company may be using their mobile phones. “You will probably have a reduction in the quality of the service, because they’re all competing for the spectrum.” Customers belonging to another company may be using the service less at the same time, leaving their slice of the spectrum to go to waste when others need it. “If you had just one body, instead of dividing the spectrum into chunks, they can use it more efficiently,” he says.
At this point, it would be good to report that Owen Jones goes further than just points out the problems with something, as he is very good at doing, and explains the actual mechanics of how a solution can be achieved that makes economic sense and is actually likely to happen given the way humans respond to incentives, which he has never been great at doing. It doesn’t have to be run by a bunch of bureaucrats: consumers could elect representatives on to the management board to make sure the publicly run company is properly accountable. Neither does nationalisation have to be costly: Clement Attlee’s postwar Labour government pulled it off by swapping shares for government bonds.
The truth is that it WOULD have to be run by a bunch of bureaucrats, because it would be difficult to find someone with the expertise and experience needed to run a company that big prepared to work for a salary so much lower than the private sector would pay them. Secondly, the government bonds involve taking on a massive amount of debt. Now, if this new nationalised mobile phone company, with its lower prices, better customer service, and higher investment is still able to make profits from the greater economies of scale it might be able to achieve then those debts should be reasonably easily paid off. However, at the size Jones is saying it should be I wouldn’t be surprised if there were some diseconomies of scale (higher costs) too from the difficulties in coordination and communication at that scale, so it might be dangerous to rely on that.
But finding a method to carry out the renationalisation of mobile phones is irrelevant at the moment. Of more importance is hither case for doing it in the first place. When you have a bunch of dominant companies charging too high prices for too poor a service and not investing enough to solve either of those problems, and there are such major gains to be made from integrating the infrastructure into one, then it is a discussion we really should be having.
A great analysis, but it analyses the industry in isolation. Were such a decision to be made it would significantly increase the perceived political risk of both setting up businesses in the UK and investing in existing businesses. Of course, you could argue that this might encourage other oligopolies to behave more competitively and bring about a greater level of efficiency, but if the writing is on the wall they may decide to cut back on investment instead.
Swapping shares for government bonds says nothing about price and so the ultimate cost to government. If the government paid over the odds then the political risk might be reduced but at an unwelcome impact on public finances – unless through all the economies of scale mentioned the government can actually increase the profitability of the combined organisations whilst still improving public service.