In early 2000, companies capable of building and operating third generation (3G) wireless networks were among the hottest stocks around. Using the radio frequency spectrum in a new way, 3G wireless networks promise to achieve revolutionary performance, combining the portability and flexibility of wireless telephony with high-speed data rates capable of satisfying even the most demanding Internet applications. Seeing opportunity, investors bid up these companies’ shares, providing them with the financial wherewithal to fund network construction for years to come.

Then something unexpected happened. Bureaucrats figured out a way to cash in on the boom.

This month, the German government auctioned licenses for blocks of radio frequencies suitable for 3G networks, raising about 45 billion dollars. In April 2000, the U.K. government conducted a similar auction, raising about 35 billion dollars, equal to about 7% of the country’s annual tax revenues. Seeing how much money the German and the UK governments raked in, bureaucrats around the world are now eager to similarly fatten their coffers with this newfound source of cash. Unfortunately, these governments’ gains are likely to instigate telecom operators’ pain.

Telecommunications analysts estimate that license fees could top $100 billion in Europe. That’s on top of the estimated $200 billion that phone companies may need to spend on building new networks. This incremental cost is likely to retard these companies’ ability to rapidly and profitably roll out revolutionary services. As Ericsson’s president Kurt Hellstoem said, ” It’s obvious that growth in the cellular market runs the risk of being damped as a consequence of the high charges.”

Though governments claim their multi-billion dollar fees won’t result in higher prices for consumers, we certainly know that someone has to pay for them. If telecommunications companies can’t pass costs on to customers, then profitability and operations take a hit.

Knowing that telecom companies must significantly increase their debt to pay the governments, bond rating agencies have placed such companies on watch for bond rating downgrades, with Fitch stating that “there will generally be more than a two-notch move downward for most operators.”

In other words, some formerly high-rated “blue chip” bond issuers could be knocked nearly into “junk” status, leading to greater difficulty in funding the construction of networks, riskier balance sheets, and higher interest costs.

Indeed, since April 27th, the day of the UK auction’s completion, European telecommunications stocks (represented by the Bloomberg Euro bloc telecom service index) have declined 29% in dollar terms, as investors suspect they’ re the ones who will ultimately pay the governments’ bills.

Like unsettled land, underutilized radio frequencies are not the government’ s properties to be sold or leased.

As the premier theoretician of capitalism, Ayn Rand, wrote in “The Property Status of Airwaves” published in her Capitalism: The Unknown Ideal,

A notable example of the proper method of establishing private ownership from scratch, in a previously ownerless area, is the Homestead Act of 1862, by which the government opened the Western frontier for settlement and turned “public land” over to private owners. The government offered a 160-acres farm to any adult citizen who would settle on it and cultivate it for five years, after which it would become his property. Although that land was originally regarded, in law, as “public property,” the method of its allocation, in fact, followed the proper principle (in fact, but not in explicit ideological intention). The citizens did not have to pay the government as if it were an owner; ownership began with them, and they earned it by the method which is the source and root of the concept of “property”: by working on unused material resources, by turning a wilderness into a civilized settlement. Thus, the government, in this case, was acting not as the owner but as the custodian of ownerless resources who defines objectively impartial rules by which potential owners may acquire them…

…As soon as it became apparent that radio broadcasting had opened a new realm of material resources which, in the absence of legal definitions, would become a wilderness of clashing individual claims, the government should have promulgated the equivalent of a Homestead Act of the airways -an act defining private property rights in the new realm, establishing the rule that the user of a radio frequency would own it after he had operated a station for a certain number of years, and allocating all frequencies by the rule of priority, i.e., “first come, first served.”

Because the value of these currently underutilized frequencies are created through commercial use, governments should have simply opened them up to the fastest and most industrious companies, allowing them to establish properties by building successful communications enterprises. Again quoting Ayn Rand,

Bear in mind that the development of commercial radio took many years of struggle and experimentation, and that the gold rush of the “wishers” did not start until the pioneers-who had taken the risks of venturing into the unknown – had built it into a bright promise of great commercial value. By what right, code or standard was anyone entitled to that value except the men who had created it?…As usual, the “wishers” seek, not to create, but to take over the rewards and advantages created by others.

These recent government auctions of radio frequencies suitable for 3G networks represent an unjust transfer of wealth and productivity away from the companies that deserve it. Only time will tell how much damage they will do to the entire telecommunications industry. Government officials make a big show of their desire to encourage communications and information systems. Yet, these Vampire governments, rather than facilitating the growth of telecommunications, are feasting upon it.

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Andrew West

Andrew West is a Contributing Economics Editor for Capitalism Magazine. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.