Deutsche Telekom case against 1&1 looks weak

Timotheus Höttges and Ralph Dommermuth are both in the business of communications, but it's hard to imagine they are on speaking terms with each other. Höttges runs Deutsche Telekom, Germany's oldest and largest telecom operator. Dommermuth is his counterpart at 1&1, the country's youngest and smallest mobile network. This week, it was unflatteringly described as "just one big white spot" by Höttges, according to a Bloomberg report, while he addressed shareholders at Deutsche Telekom's annual general meeting.

This was presumably after a speech, published in full on Deutsche Telekom's website, in which Höttges was just as scathing: "There is a fourth provider on the market. With a portfolio of key spectrum. Which remains largely untapped. Barely any network is being built on their watch." Note the use of periods in the published version to convey several dramatic pauses.

Competitors aren't expected to be nice to each other, but this all smacks of the preternaturally big kid bullying the smallest boy in school. Deutsche Telekom collected about €112 billion (US$119 billion) in revenues last year and basic earnings of more than €10 billion ($10.6 billion). 1&1's revenues were less than €4.1 billion ($4.4 billion), and its mobile network business registered a €132 million ($140 million) loss. Nor is Deutsche Telekom the only bully in town, as far as 1&1 is concerned. A gang that includes the incumbent along with Telefónica and Vodafone, the two other mobile network operators, seems determined to block 1&1's access to spectrum, a telco's most valuable resource.

The "one big white spot" insult is a clear reference to 1&1's failure to build a network that meets targets set by the regulator. Under the conditions of its license, 1&1 was supposed to have erected about 1,000 antennas by the end of 2022. It badly undershot. And while it claimed to have installed 1,062 antennas by the end of last year, just 243 sites were equipped with basestations, Dommermuth admitted during a recent call with analysts.

Disadvantaged towers

This miss, however, was largely blamed on Vodafone. Besides competing against it for consumer business, 1&1 is also a client of Vantage Towers, a Vodafone subsidiary that rents space on masts to host mobile network equipment. Back in 2021, 1&1 had agreed on the "shared use" of about 3,800 sites. Yet just five had been made available by the end of 2022, while Vodafone had access to some 1,600, said 1&1. In an angrily worded statement, 1&1 complained about "obstruction by Vodafone" and "persistent obstacles," threatening legal action.

In Höttges' opinion, the last thing Germany needs is another mobile network. Along with the group CEOs of Orange (the French incumbent), Telefónica and Vodafone, he routinely grumbles about excessive competition in Europe, noting that the giant countries of China and the US are each home to just three big mobile networks. Bigger numbers in smaller markets have driven down prices, thinned customer numbers per telco and hammered returns. Europe consequently under invests in 5G.

Yet Germany has been a notable exception to Europe's rule of four, with effectively just three mobile networks everywhere bar 1&1's 243 sites (it needs 1,000 to cover about 4% of the population, said Markus Huhn, 1&1's chief financial officer, implying 243 sites gives it less than 1% coverage). And there is not much sign Germans are better off than consumers in four-player markets. Deutsche Telekom boasted 5G population coverage of 96% in its last annual report, delivered by more than 80,000 antennas. But only 10,000 of these were designed for 3.6GHz spectrum, the range needed for higher-speed services.

This probably equates to about 3,300 sites. That would be enough to cover just 13% of the German population, according to 1&1's calculations, although the figure may be higher if these are installed in densely populated areas. Back in 2021, Germany had already fallen behind countries including China, Saudi Arabia, South Korea and the United Arab Emirates on 5G throughput performance, according to slides shared with Light Reading at the time by Ericsson. It also ranked just behind Switzerland and the four-player UK.

Spectrum shenanigans

Höttges evidently thinks 1&1 should not be rewarded with additional frequencies after missing regulatory targets. But this would clearly be unjust if Vodafone was to blame. A perpetual spectrum imbalance, moreover, would be unfair and further impede 1&1's ability to compete. 1&1 already has less of what Höttges refers to as "key spectrum" in the 3.6GHz band than any of its rivals, and it paid the same as they did on a per MHz, per head of population basis.

The latest scuffle is over lower-band frequencies held by Deutsche Telekom, Telefónica and Vodafone, which are up for renewal. At their urging, BNetzA, the German regulator, has proposed extending licenses. But Aetha, a consulting firm with expertise in spectrum matters, says there are "good, rational arguments to rethink" this approach.

In a study commissioned by 1&1, Aetha found that spectrum in several bands under the control of the big three operators is not even being used. Only 5% of German locations use more than 40MHz of the 60MHz to 70MHz available to each of those operators, said 1&1 in a summary of the report published here. Aetha's advice to Germany? Ditch the proposal about extending licenses and hold a "low-band auction with swap rights for the existing operators."

None of this completely exonerates 1&1. It has riskily chosen Japan's Rakuten Symphony, a relatively new entrant, rather than an Ericsson or Nokia to build its network. Dommermuth insists on running fiber-optic lines between small data facilities and his mobile sites, even though 1&1 could launch services without this. On the last earnings call, he admitted it was a rollout "bottleneck."

Nevertheless, if the project works out, 1&1 will be able to support services with much lower latency, a measure in milliseconds of the network journey time for a mobile signal. That could encourage the development of new applications. As for Rakuten, Europe is desperate to cultivate alternatives to the big kit vendors, and Germany looks unhealthily reliant on China's Huawei, the very biggest, as 1&1 frequently points out.

"I don't think we had the choice to continue business as usual," said Dommermuth when asked during 1&1's earnings call if he regretted the decision to build a network instead of continuing to rent capacity from Telefónica. "There was a rule in our contract that said we discuss prices twice per year. And then we asked Telefónica well, can we discuss, can we negotiate prices, and Telefónica simply declined. We never ever spoke to Telefónica again without lawyers being present." German authorities would do well to ignore the latest Höttges rant.