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Germany's 5G Auction & the Gigabit Dream

Iain Morris
2/1/2018
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The sale of "air" to companies in the telecom sector once held great excitement for cash-starved politicians. Auctions of 3G licenses around the turn of the millennium raised a jaw-dropping $46.2 billion for German state coffers, and left operators mired in debt.

Governments have subsequently had to settle for less profligate spending. After 3G turned into a colossal disappointment, a 4G auction in 2010 racked up the much lower (although by no means insignificant) sum of €4.4 billion ($5.5 billion, at today's exchange rate) in Germany, with operators spending another €5.1 billion ($6.4 billion) on airwaves in 2015. Bidding is unlikely to approach 3G levels during a forthcoming sale of 5G spectrum, according to experts.

But Germany's operators sound uneasy. Markus Hass, the CEO of Telefónica Deutschland, has issued a strident warning that 5G auction plans "won't work out" if the regulator holds a competitive auction while forcing operators to meet rural coverage targets, according to German newspaper Handelsblatt. National incumbent Deutsche Telekom AG (NYSE: DT) is also reported to have sounded concern that "political calculation" may inflate spectrum fees.

Their anxiety is understandable. Fretting that Germany lags other countries in the broadband speed tables, politicians including Chancellor Angela Merkel have proposed investing €20 billion ($25 billion) in the rollout of higher-speed fiber networks. One idea is to fund this using the proceeds from a 5G spectrum auction. Others have suggested selling the government's 31.9% stake in Deutsche Telekom to help pay for it.

A 5G auction could happen relatively soon. This week, Germany's Federal Network Agency, which regulates the country's telecom market, published a draft proposal for that process. It aims to sell 120MHz of paired frequencies in the 2GHz band, and a 300MHz block of unpaired spectrum in the 3.6GHz range. Interested parties have been given until the end of this month to provide feedback. The regulator's intention is to hold an auction before the end of the year.

The politicians may have a point. Germany has clearly fallen behind its southern European neighbors on the rollout of all-fiber networks that can support "gigabit-speed" connections. That is largely because Deutsche Telekom remains unconvinced by the investment case. It estimates that connecting every home and office in Germany to fiber would cost anything between €60 billion ($75 billion) and €80 billion ($100 billion). Authorities might then force it to let rivals use that network on unfavorable terms. (See Germany's Gigabit Lag.)

Instead, Deutsche Telekom has been extending fiber as far as local street cabinets and then using a technology called vectoring to boost last-mile copper connections. Unfortunately, vectoring tops out at 100 Mbit/s, even in the most ideal circumstances.


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Nevertheless, a gradual shift toward fiber is underway. In late 2017, Vodafone Germany , the country's second biggest operator, said it would invest €2 billion ($2.5 billion) in building fiber networks, mainly to serve business parks. Under pressure from competitors and politicians, Deutsche Telekom has also upped its game. In November it promised to pilot the rollout of fiber-to-the-home networks in smaller towns. A month later it claimed to have laid 40,000 kilometers of optical fiber in 2017, 10,000 kilometers more than it managed in 2016, and said it would lay another 60,000 kilometers in 2018. (See Vodafone to Pump €2B Into German Gigabit Networks and FTTH Pressure Grows on Deutsche Telekom.)

Those updates followed assurances from CFO Thomas Dannenfeldt, during a third-quarter earnings call, that Deutsche Telekom would start to ramp up spending on fiber-to-the-home networks in 2019. Operators may also need to increase investments in fiber as they prepare to launch 5G services, which will rely on high-speed fixed lines for "backhaul" connections between basestations and core network systems. (See DT to Ramp Up FTTH Capex Starting in 2019.)

None of this may happen quickly enough for Germany's politicians. But an auction of 5G spectrum would probably not raise enough to pay for a widespread all-fiber network unless authorities intervened to set high base prices. Amit Nagpal, a partner at spectrum advisory group Aetha Consulting, reckons operators globally are unlikely to spend as much on 5G licenses as they did on 4G. Higher frequency spectrum is relatively abundant, he told Light Reading during an interview last year, and may see little use outside more densely populated communities. Many operators already own sub-gigahertz licenses they could use to support 5G, even if this first meant shifting older technologies off those frequencies. (See 5G Spectrum to Cost Less Than 4G, Says Expert.)

A sale of the government's stake in Deutsche Telekom looks more promising for the state's gigabit enthusiasts. At the operator's current market value, that would raise about €21 billion ($26 billion). But even this would fall well short of the requirements for a nationwide network. And the ruling conservatives are opposed to a sale. However much some politicians want it, Germany is unlikely to become one of Europe's gigabit leaders anytime soon.

— Iain Morris, News Editor, Light Reading

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