Greenspan runs out of road as rates turn negative

Mobile charges; All change at C4
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The Independent Online

With demand in the US economy still deep in the doldrums, the US Federal Reserve has little option but to keep cutting interest rates until the medicine works, but for how much longer can the Fed carry on propping up the US and world economy in this way? The point hardly needs making that with short-term rates now at just 1.75 per cent, Alan Greenspan, the Fed chairman, is speeding down a deadend street that has an impenetrable brick wall at the end of it. He's running out of road.

Since American inflation is quite a lot higher, the US economy is now in the almost unprecedented position of having negative real interest rates. The way things are going it will soon pay to borrow money just to leave it under the bed. Even Japan, with lower nominal interest rates still, doesn't enjoy such a position, since in Japan prices are deflating.

The Fed's statement yesterday contained some soothing remarks about "long-term prospects for productivity growth", but this was the only positive in an otherwise gloom-laden assessment, and whether Mr Greenspan is right to be optimistic even on productivity is anyone's guess. But optimistic he must be. In the past, a monetary easing as dramatic and deep as this one, would almost certainly eventually cause an inflationary surge. Mr Greenspan seems to be banking on a revival in productivity growth to prevent it from happening this time around. It's a slender hope.

Mobile charges

LAST TIME Oftel packed the mobile phones industry off to the Competition Commission over termination charges it won. This time around the outcome is a lot less certain, if only because Oftel's director-general, David Edmonds, is batting against the combined might of all four mobile phone operators, not just the two he was dealing with last time.

Mr Edmonds wants to put a price cap of inflation minus 12 per cent on the termination charges of all four operators in a move he reckons will be worth £800m to consumers over four years. It sounds like a good, popularist thing to be doing, except that it is not. If the consumer sees any benefit at all, it will be so small once disaggregated as to be virtually worthless. Meanwhile the industry will have lost an important source of revenue, and its plans for 3G investment will suffer correspondingly.

The termination charge is the bit of the tariff the mobile phone operator charges for connecting you to one of its customers. Whether you are using a land line or another mobile phone, you always have to pay this charge, and compared with an ordinary landline call, it always seems expensive. By definition, it is also a charge where there can be no competition or consumer choice. If you want to phone a mobile customer, whether he's a Vodafone, Orange, One2One or Cellnet subscriber, you have to pay the charge. Needless to say, all four operators charge broadly the same, so it's an obvious target for price regulation.

That said, Mr Edmonds is surely going too far. By refusing to accept his determination, the mobile phone companies are calling his bluff. They think him wrong in principle and wrong in his calculations. It's hard to disagree. If the mobile phones industry is as uncompetitive in the round as Mr Edmonds implies by trying to control its prices, then all that will happen is that other mobile phone charges are puffed up to compensate for the loss of revenue on the termination charge. In the round, the consumer won't feel the difference and there will be no net benefit to the economy.

If on the other hand the mobile phones industry is so competitive that charges cannot be raised elsewhere, then the net effect is to deprive the industry of £200m a year it can ill afford at a time when it is being asked to invest heavily in 3G networks, without which next generation mobile services cannot be introduced. Either way, it's hard to see how the consumer gains.

Since all four networks get a broadly equal share of revenue from the termination charge, the other effect of price controls will be further to strengthen the relative position of the stronger players (Vodafone and Orange) at the expense of the less strong (Cellnet and One2One). From a competitive standpoint, then, this is a quite retrogressive step. Any initiative that fails to deliver either benefit to the consumer or enhanced competition to the industry flunks the first test of good regulation and should be sent packing.

So should Mr Edmonds, who has failed to live up to the high standards of his predecessors at Oftel, Sir Bryan Carsberg and Don Cruickshank.

All change at C4

THE FIRST thing that will strike Mark Thompson once he gets his feet under the table as Channel 4's new chief executive is that his new charge makes a lot of good, pioneering television. The second is likely to be the company's soaraway staff costs. At more than £53,000, Channel 4's average pay per employee last year was on a par with some top City investment banks. Even by the standards of an industry not known for skimping on salary costs, Channel 4 is an excellent payer.

If this average included money spent on developing new talent like C4's Ali G, it might be understandable. But in fact the average, drawn from the last accounts, refers only to the channel's full time and contract staff of commissioning editors, operational managers, marketing people and other such operatives. They don't pay like that round at BBC Television, which is Mr Thompson's present home. Nor do they generally pay like that elsewhere in the public sector, and lest it be forgotten, Channel 4 is government owned.

Gordon Brown, the Chancellor, should have privatised this media gravy train while he had the chance and indeed it has always been a bit of a mystery as to why he didn't. While the Government got itself bogged down with the much more controversial privatisation of air traffic control, Channel 4 was allowed to lie fallow. Even no hope companies like the Post Office were further up New Labour's hit list of possible privatisations than Channel 4.

Anyway, it's too late now. Like ITV, Channel 4 relies entirely on advertising for its revenue, and also like ITV, it's run up some heavy costs expanding into multi-channel TV, in Channel 4's case through E4 and FilmFour. Channel 4 would fetch a decent price if it was sold to another big media group, but it would struggle in the present environment to launch a convincing IPO as a ring fenced independent.

In any case, Channel 4's glory years may be over. During Michael Jackson's reign as chief executive, it brilliantly transformed itself from an eccentric irrelevance into a mainstream pioneer. Because it has no outside shareholders to answer to, or cost of capital to soak up its revenues, it was able to plough everything back into programming and staff costs.

Now the boots on the other foot. While the BBC's revenues thanks to the licence fee continue to grow in line with inflation, Channel 4's are taking a battering. It's not the happiest of times for Mr Thompson to be joining. Channel 4 is said to be no more than a staging post for Mr Thompson in his ultimate ambition of succeeding Greg Dyke as director general of the BBC, but if so, it may not be the best of bases from which to mount the assault.