To bad drivers and bald dictators, add overpriced 5G spectrum to the list of unsavory things you associate with Italy. Its 5G auction, which closed late Tuesday after 14 days of bidding, has raised a jaw-dropping €6.55 billion (US$7.6 billion) for the public sector. That is €4 billion ($4.6 billion) more than Italy's government had written in the "5G auction" column of its budget.

Of course, the spectrum might not turn out to be so costly if 5G services sell like gelato on a summer's day. But few are optimistic. The rollout of 4G, observers note, did not spur revenue growth for telcos, even though 4G is seen as one of the most successful generations of mobile technology. (See Italy's €6B+ 5G Auction Risks Roman Ruins and Italy 5G Auction Bids Top €4.4B in Worrying Sign for Telcos.)

Nick Read, Vodafone Group plc (NYSE: VOD)'s incoming CEO, appeared to blame the Italian government for the high level of spending, after his business, Vodafone Italy, coughed up €2.4 billion ($2.8 billion) for licenses. "Auctions should be designed to balance fiscal requirements with the need for investment to enable economic development," he said in a company statement. "Telecom is the sector that enables all other sectors to participate in the gigabit economy. It is critical that European governments avoid artificial auction constructs which fail to strike a healthy balance for the industry."

It certainly wouldn't have helped that Italy had four operators fighting over mere scraps in the 3.7GHz band, the one largely to blame for the auction outcome. Italy had only 200MHz of mid-band spectrum to make available, and it carved that into two 80MHz and two 20MHz licenses. Compare that with this week's Finnish 5G auction in which three operators each collected a 130MHz license. The Finnish sale raised just €77.6 million ($89.7 million), with no operator facing an exorbitant bill. In the mid-band, Italy's generated a staggering €4.35 billion ($5 billion). (See Finland's 5G sale is no Italian job.)

The size of Italy next to Finland does not justify the huge disparity. Light Reading's 5G spectrum database shows that Finnish operators spent about $0.04 per MHz per head of population (per MHz pop) on mid-band spectrum. Their Italian peers forked out $0.42, a figure that is without precedent in 5G auctions so far. (See The Great 5G Spectrum Devaluation, UK's £1.4B '5G' auction looks bad for industry and Spanish 5G Auction Nets €438M for Govt.)

Figure 1: Price per MHz Pop ($) for 3.4-3.8GHz Spectrum Source: operators, regulators, Light Reading. Note: All currency conversions are at exchange rates this week.

Moreover, for the operators that picked up 20MHz licenses -- Iliad (Euronext: ILD) and Wind Tre -- competing in a future market for advanced 5G services may be difficult. Wind Tre seemed to betray this concern in its auction statement. "By combining our existing and unused 30MHz of 2.6GHz '5G ready' spectrum with the newly acquired frequencies, we will be able to launch 5G services on 50MHz," said Jeffrey Hedburg, Wind Tre's CEO. Others might not be so easily persuaded that 50MHz of non-contiguous spectrum is enough to support the most demanding applications.

In the 700MHz and 26GHz bands, the others sold off, the outcome was less of a surprise or worry. After it had reserved a chunk of 700MHz spectrum for Iliad, the country's youngest network operator, Italy raised about €2 billion ($2.3 billion) from these airwaves. At $0.65 per MHz pop, the takings were high, but they did not dramatically exceed the €0.51 ($0.59, at today's exchange rate) that various European governments made from 4G auctions of 800MHz spectrum several years ago, according to market research firm Analysys Mason. (See Italy Wraps Up Sale of 700MHz Spectrum for 5G, Raises €2B.)

Figure 2: Italian Spectrum Job "You're only supposed to blow the bloody doors off."

Italy's 700MHz sale leaves Iliad, Telecom Italia (TIM) and Vodafone Italy each holding a 20MHz "paired spectrum" license (which means 10MHz is used for uplink communications and another 10MHz for downlink). Wind Tre, the other mobile network operator, came away empty-handed. Given its mountain of debt and declining sales, it is no wonder that operator accounted for just €517 million ($598 million) of the auction proceeds. But its paucity of 5G holdings puts it on shaky ground. (See ZTE ban and Iliad entry blow Wind Tre of course.)

As for the 26GHz spectrum, five 200MHz licenses were up for grabs. Predictably enough, four were shared among the big mobile operators, with broadband telco Fastweb SpA (Milan: FWB) snatching the fifth. But the wow factor was definitely absent: Despite the hullabaloo about high-frequency spectrum in the US market, Italian operators spent as little as €164 million ($190 million) on these airwaves. Fastweb's involvement indicates that 26GHz spectrum will probably be used to provide broadband services in areas that are economically off-limits to fixed-line technology.

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Mobile operators like to play the victim in exchanges with regulatory authorities, bitterly complaining that high spectrum charges will restrict their ability to roll out better networks. For all their grumbling, industry profit margins remain healthy, and competition usually goads them to invest. Yet Italy's auction seems bound to hit the operators there hard. Vodafone Italy's overall licensing costs of €2.4 billion ($2.8 billion) equal about 56% of what it made last year in mobile service revenues. Like Wind Tre, it has recently suffered a decline in sales following the market entry of Iliad, one of Europe's most price-competitive telcos. Nor is Telecom Italia -- which also spent €2.4 billion ($2.8 billion) on 5G spectrum -- in much healthier shape. While it seems to have coped better with Iliad's arrival, its net debts currently equal about 2.9 times annual earnings (before interest, tax, depreciation and amortization). (See Iliad Grabs 1M Customers by Day 50 of Italian Odyssey and Sales Squeeze to Drive Heavier Cutbacks at Vodafone.)

Nevertheless, Telecom Italia said it would make "immediate use" of the 700MHz spectrum during trials it is conducting in Turin, Bari, Matera and the Republic of San Marino. It expects to bring the 26GHz spectrum into play next year. Vodafone, meanwhile, said its 3.7GHz and 26GHz licenses would be available starting in January. Before then, its priority is to cover 80% of Milan with a trial 5G network. It seems the operators will have to wait until 2022 before the 700MHz spectrum becomes available.

Unsurprisingly, none of the Italian operators had anything substantive to say about commercial 5G targets.

— Iain Morris, International Editor, Light Reading