Examination of Witnesses (Questions 20
WEDNESDAY 5 DECEMBER 2001
20. I am sure I read in the reportit
is going to be difficult to find it nowyes, that is right,
at 4.29 ". . . an implied value of £6 billion, as opposed
to £4.385 billion. . ." they paid for the licence. Therefore,
there is a difference of £1.7 billion so, in effect, they
paid £1.7 billion for that particular licence. Why did you
not get a percentage of that £1.7 billion?
(Mr Hendon) I think that figure is derived from the
amount that NTT DoCoMo and KPN paid for their shares in Hutchison
3G rather than what Hutchison 3G paid TIW. I say, again, I do
not believe we know what they paid for the licence. Anyway, I
do not agree that it is insider dealing, as it were, because what
we had was 13 companies bidding in a very public way for a set
of licences and TIW was the new entrant who kept on bidding and
in the end won that licence.
21. That is fair enough. In the strictest terms
it might be insider dealing but, at the end of the day, Hutchison
were not able to bid on the basis that they knew that they were
going to take over a successful bidder and, therefore, did not
have to come into the bidding. If they had to come into the bidding
they may well have had to pay more for the licence, although it
is not exactly in strict terms insider dealing, I will accept
that, it is a bit underhanded, is it not?
(Mr Hendon) I do not agree with that analysis because,
first of all, they did not know that they were going to be able
to buy the licence from TIW because all they had, as far as we
were aware, was an agreement that they would put traffic on the
22. Okay. I will not pursue it because you are
not going to accept that, obviously. We will move on.
(Mr Hendon) Sorry, if I may just add. In fact, if
Hutchison at a very early stage had decided to enter the bidding,
presumably in place of TIW in your model, then they would still
have got the licence for what TIW paid because the figure is determined
by the last one to drop out rather than the one who wins.
23. I am not going to go further down that route.
I do not accept that. We will move on. On page 39, 4.10, the second
little square, it says "One company cannot own or operate
two 3G licences and, in the event of a merger or an acquisition,
the Agency could revoke a licence and transfer the rights and
obligations through the issue of a new licence to a new operator".
Well, this whole industry seems to be in takeover mode, does it
not? You read in a newspaper that so and so has taken over so
and so on. In fact, Hutchison was taken over before it had even
started. It is possible this is going to happen again in the future.
We are told there have to be five licences all the time, no company
can have more than one licence, but this paragraph says ".
. . could revoke a licence. . .", why does it not say "should"
or "would" revoke a licence. That gives me the indication
that perhaps you might succumb a little bit?
(Mr Hendon) In fact, since this report was written,
we have had further legal advice on the situation where two companies
merge and these two companies happen to have two licences. The
licences themselves do not provide that we have the means to revoke
the licence. So, if two companies join together then the question
of whether they can join, whether they can have two licences is
a matter for competition law, straight forward competition law.
The case where we would revoke a licence would be where they were
in breach, assuming the competition authorities allowed them to
hold two licences, then we would revoke a licence if they were
in breach of some of the conditions of one of the licences. The
most obvious condition that they might breach is that they fail
to roll out the network.
24. In fact, are you saying in that event you
could have one company owning two licences?
(Mr Hendon) I think it is a theoretical possibility,
25. Is that not against the whole principle
of what the whole thing originally started for? If that does happen
then surely that is going to reduce competition?
(Mr Hendon) The original plan was to get five licences
so we could get competition. I think the point is we recognise
that just as you are saying yourself we cannot predict what sort
of structural changes there are going to be in the industry in
the years that follow the award of the licence, indeed it is actually
rather unwise, I think, to put into something you write on day
one a condition that applies for perhaps many years and prevents
companies making mergers and sales that make sense.
26. Theoretically they could all end up with
(Mr Hendon) No, I do not think that would happen under
competition law. Another point is that they cannot treat them
as one licence. If each licence has spectrum associated with it,
and if a company finds itself in a position of having subordinate
companies in the group who own licences, they have to run those
as separate networks, they have to exploit both licences and compete
with each other and they would be subject to regulation by Oftel
in the same way as the rest of the mobile sector. They would not
be able to use all of the spectrum for one network and if they
only rolled out one network, or did not meet the roll out conditions
for the second network, then we would have the means to revoke
27. I am going to run out of time very shortly.
If there was not a merger and you decided to revoke a licence,
how would you then sell the next licence, would it be by auction
(Mr Hendon) I really do not know.
28. You have not thought about that?
(Mr Hendon) That would be something ministers would
have to decide but I would think that is likely, as an opinion.
29. Right. Okay. Further on in the report, if
we are to take note of the industry and what they are saying,
according to the report, it has to be a worry the consumer at
the end of the day now is going to end up paying for these licences,
are they not? I want to turn figure 7 on page 19. What the industry
is saying is that because they have had to pay so much for the
licence, it may well be they will pass the cost on to the consumer.
Figure 7 clearly shows how much the licence operators had to pay
compared with the rest of Europe. What they are saying is indeed
a worry because they had to pay a lot more than, for example,
most other countries. What is the regulator going to do to watch
out for this scenario where Vodafone and Cellnet decide they are
going to get their money back through the consumer?
(Mr Hendon) Okay. I think the first thing to say is
that these costs here are not the entire costs of building the
network, of course. The actual infrastructure cost is probably
a billion or one and a half billion per network or maybe two billion,
that sort of order, on top of the cost of the spectrum. As well
as that, there is the promotion of the service and all the advertising
and so on that goes with it which is probably a similar amount
again. The spectrum cost is a big but not dominating part of the
overall cost. The more important point, really, is that the price
that someone can charge for something in a market place is determined
by what the market will stand not by the cost, I think that is
really what I would say.
30. I accept that. What worries me again is
if the regulator is not severe about this you could have a situation
where a company can bid far more than one would expect them to
on the basis that they know, at the end of the day, the consumer
is going to pay for it.
(Mr Hendon) But how, how do they know that?
Mr Steinberg: Perhaps when I say they know,
what they could do is they could overpay and pass it on to the
consumer. We all know at the end of the day that people will want
this technology and, therefore, they will buy it. Let me give
you an example. Dickhead here paid a £1,000 for a mobile
telephone 15 years ago. I bought one. Stupid, ridiculous but I
paid it. People want this technology. I was happy to pay that
at that particular time, well I was not happy but I paid it.
Mr Davies: Did anyone phone you?
31. The damn thing does not work. The point
I am making is the consumer will pay for it at the end of the
day. We all pay for it at the end of the day.
(Mr Hendon) I think you showed great discernment in
jumping ahead in front of everyone else, who then followed you
like sheep. The point is that you have five people competing here,
the only way they can get their money back is by getting volume
on their network. They can only get volume by competing keenly,
they have to compete with the prices for the services on second
generation phones, and it is really a question of the figure the
market will bear.
32. I have only got about a minute left and
I have another 20 questions I want to ask you. Can I put two questions
into one. Two things which really bothered me about the consequences
of 3G were, that we are going to get 28,000 more transmitters
and masts and at the moment in my constituency there is a huge
outcry against masts which are going up and masts which are being
added to, and I can imagine the outcry which is going to take
place when 28,000 new ones go up. That is the first question.
The second point is, in rural areas, if I remember reading the
reports, it is said by 2005, 2007, only 80 per cent of the country
will be covered. I still have areas in my constituency in the
rural areas which cannot get G2; I have a Cellnet and I cannot
get it in certain parts in my constituency and this is not on.
So two questions. A lot of masts, something has to be done about
that, and why on earth should people who live in rural areas not
have the guarantee they will be on? You could even have dropped
the bid price a little to allow them to go into the rural areas.
I know the two questions might be conflictingwe do not
want more masts but we want more in the rural areasbut
those are two very, very main issues we are going to have to face
as Members of Parliament when this comes on.
(Mr Hendon) They are two completely different questions
but I will try and answer them both quickly. We are working with
operators to encourage them to share masts and we are very keen
for them to do that. The Radiocommunications Agency has also tried
to provide more information for people in their localities about
what masts are used for and what is on those masts, and if you
go to our websiteand I am happy to give you the addressthere
is an application called Sitefinder which will enable you to look
at any cellular, or 3G in due course, mast and see what it is
used for and who is using it. So we are helping to provide people
with information which enables them to act in an effective way
when people are making applications in their area. On the second
point, the rural areas point, the real problem is that it is very
difficult to force people to invest in something which does not
actually make sense, and some of our other experiences have been
that if you do that all that happens is that the financiers see
the business case is suspect and they get very worried about putting
more cash in if the company is going to be forced to roll out
infrastructure into areas which are not viable.
33. You could have subsidised them, could you
(Mr Hendon) It is very difficult.
34. £22½ billion?
(Mr Hendon) Well, you cannot really subsidise. It
turns into a big question.
Chairman: I think that is about it on that one.
35. Can I start by saying, by way of interest,
that I have and always have had since it was privatised a small
number of BT shares. I have a rather more interesting interest
in a way, in that Vodafone headquarters are in my constituency
and is one of the major players in this whole business, and that
gives me a particular interest in it. Having said that, can I
turn you first of all to page 27 and Figure 14, where it showsand
I ask this question both on behalf of my shares and on behalf
of Vodafonequite clearly that the auction coincided with
the moment when the share price collapsed. Is that pure coincidence?
(Mr Hendon) I think it is pure coincidence, yes. I
know Chris Gent, although probably not as well as you do, but
he has never struck me as a man who does not take notice of what
his share price is telling him. I think what we saw was the stock
market generally beginning to catch a bit of a cold on the whole
dotcom/internet world, and it just happens that from our point
of view the timing was extraordinary. You can say whether it is
good timing or bad timing but it just happened that was the time.
I think it is a coincidence.
36. In spite of the fact that both BT and Vodafone
have since said they paid too much?
(Mr Hendon) I do not think they have said they paid
too much. If you see what Peter Erskine of mm02, which is BT of
course, said in the reports in today's papers, he talks about
it beingI forget his exact words, I would have to look
them upgood value and will repay in the end. They did not
have to pay what they paid. It was entirely up to them. We just
gave them the opportunity to tell us what the market price for
this asset was.
37. Can I come back then to the question of
masts which Mr Steinberg was asking you about a moment ago. I
share with him, having a rural constituency, the fear we will
have an awful lot of constituents who will be very angry about
the number of masts but at the same time want to have the servicea
very difficult situation we are in, we have to answer to both
sides. Why do you not insist on all masts coming under one company
and everybody sharing the masts?
(Mr Hendon) The difficulty with that is that you are
telling people who are private landowners what they may do with
their land, because all these masts are on sites which are owned
by numerous different organisations and companies and these are
effectively their property. For us to say they could only make
a deal with one company, in effect a monopoly, and then that company
sells it on, it is just not a free market, is it? It would be
quite difficult to do, I think. We were not attracted to that
38. I assume you could advise Government that
they could have a private mast company or use it as a Government
company and then sell off, as indeed you have been selling off
bands, the right to be on a Government mast.
(Mr Hendon) I think I would have found it difficult
to attract my ministers to that idea. I have to admit I did not
39. Can I come on to payment dates because there
was a great fuss at the time about the fact that the payment dates
were different and whether this was known in advance and whether
it was fair. What is your view on that?
(Mr Hendon) I am glad to say that I do not have to
fall back on my own view, because I can say what the courts thought
about it. As you know, recently the Court of Appeal gave out a
judgment on the appeal that BT and One2One had brought about the
payment dates, and they concluded that we were right. If you read
the judgment, which I am sure you have not had the time to do,
and it is a long and complex document which, in view of my appearance
here today, I did read again yesterday, there are a number of
things in there which are rather pertinent. One is that the document
explains that the fact the dates of payments might be different
for different licences was always explicit in the rules for the
auction, and indeed it goes on to explain exactly which paragraph
it is and where it is to be found and so on. So the fact the dates
might be different was never in doubt. Then you get down to whether
we were right to insist that the payments were made on the dates
they were made, and the courts have agreed we were right. I can
go into some of the detail of that if you like, but bearing in
mind the Chairman's instructions to keep my answers short, I will