Advice Worth $1 Billion

Usually, when people talk in terms of billions of dollars, they are referring to macroeconomic questions. Recently, however, three economists (Jeremy Bulow, Jonathan Levin, and Paul Milgrom) were hired as consultants to advise a group that was bidding in a spectrum auction that would allow them to provide wireless service.

By following the advice of the economists, the group was able to purchase wireless coverage for the United States for $2.4 billion, while their major competitors ended up paying $3.5 billion for the same spectrum in the same auction. Thus, their advice was worth more than $1 billion to their clients.

Unfortunately for the economists, they were not paid as a share of the value they generated. They got a flat fee that was many zeros short of what they could have earned if they had negotiated a different contract.

The ultimate proof that these guys are academics at heart: they wrote up the results in an academic paper, giving away their billion-dollar secrets to anyone who wants them.

I’ve talked to one of the authors, however, and he says they have more secrets up their sleeves. He also told me that if I could convince a future client to sign a contract that made the consulting fee a share of the value they add, he would give me a piece of the action. So if you have any plans to bid in a spectrum auction anytime soon, please contact me.

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  1. Helen says:

    If your consultants eat up that much of the savings, there’s less and less incentive to get good (or any) consultants. The value of BEING a good consultant also declines. Better for everyone if consultant fees are kept somewhat lower.

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  2. Justme says:

    Wow, how easily you forget the market when pondering your own earning potential.

    How many other people in the worldcould have offered the same advice? We only need but a handful for them to get into a bidding war and have their fee drop to marginal cost: the time they spent thinking.

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  3. Tracy says:

    Pareto optimum!

    I love a story with a good ending.

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  4. Amin says:

    Steve,
    The Indian Government is just about to open the bid’s for the 3G mobile spectrum(India has the second largest number of cell phone users across the globe!!). Bet a lot of bidders here wouldnt mind cost saving consultations for a piecie of the pie.
    There, I have directed you towards the action. Good luck!!

    Amin

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  5. science minded says:

    Am happy to hear there are others who understand that it is not all about money.

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  6. Matt says:

    I’m not sure Helen’s comment makes sense. If a consultant gets paid a small percentage of the value they generate then it’s in the best interest of the consultant to provide the greatest value. Similarly a sports agent gets paid more for negotiating a larger contract which benefits both the agent and his client.

    As for a bidding war for consultants, I’m skeptical that a group investing Billions of dollars would consider a consultant’s FEE over the consultant’s ability or reputation.

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  7. Αμάτι Nώνυμος says:

    A good example of double accounting obscured by smoke and mirrors. The spectators easily see the enormous profit generated by the consultant but fail to see the enormous risk of taking advice from the consultant. Will then the consultant first agree to one billion dollars of professional liability. Will Loids of Londinium insure him from malpractice? Will insurance premium include tail out policy and for less than consultant’s take?

    Sharing in profits does not stop at point zero. In a rectifier circuit?

    Hey, man! How come you got over 2^10 responses for your name-five-city’s blurb but only a lucky seven for your double accounting?
    ?

    You in the wrong neighborhood
    ?

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  8. David says:

    Great post. Steven, I wonder what you think about the likelihood that market forces explain why economists can’t get (so far) a piece of the pie (along with the fact that bidders may not be able to select ex-ante the economists that will add value)?

    On another note, there is an issue with “Value Added” compensation, in that it could give economists an incentive to encourage overbidding, in order to maximize the differential (value added), as opposed to minimizing the costs to the firm for which they consult?
    However, in an oligopoly, this may not be such a bad thing for their client, because it empties the pockets of the other firms more…

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