Outrageous outlays on spectrum licenses leave operators with less money to invest in networks. No wonder Ericsson is no fan of the auctions taking place in some European countries. A lackadaisical rollout of 5G networks by cash-strapped operators would darken the Swedish equipment maker's sales outlook in its own European backyard.
CEO Börje Ekholm has sounded increasingly worked up over the spectrum issue this year. During a phone call with analysts today, he delivered a stinging assessment of European authorities and their auction strategies. "Regulators are trying to maximize revenues from spectrum auctions instead of considering the macro economic benefits from building out the telecom network," he said.
The main offender remains Italy, which raised €6.55 billion ($7.4 billion) last year from the sale of 5G licenses, prompting talk of job cuts and network-sharing deals among Italian telcos. But the 5G auction currently underway in Germany has already raised more than €5 billion ($5.7 billion), exceeding analyst and government forecasts, and caused similar rumblings. Last week, Timotheus Höttges, the CEO of German telecom incumbent Deutsche Telekom, said licensing costs would chew into the budget for mobile sites.
That is probably not just scaremongering. Deutsche Telekom forked out €4.2 billion ($4.8 billion) in capital expenditure in Germany last year, and it has pledged to spend the same amount in 2019 minus spectrum fees. Yet as things stood on Tuesday morning, it had bid more than €1.8 billion ($2 billion) for new spectrum licenses, or 43% of last year's capex budget. Unless it can persuade investors of the need to raise capital intensity (capex as a percentage of sales), something will have to give.
Investors seem unlikely to be in the mood for any dividend-threatening splurge. Outside the US market, capital intensity at Deutsche Telekom has already soared from 14% in 2013 to 20% last year, and that increase has not been accompanied by any meaningful improvement in mobile service revenues. Few shareholders are optimistic that 5G will boost customer spending.
Table 1: Europe Capex and Sales (€B)
|DT non-US capex||5.9||6.2||6.6||6.8||7.5||7.8|
|DT non-US revenues||41.6||40.3||40.3||39.4||39.2||39.1|
|DT non-US capital intensity||14%||16%||16%||17%||19%||20%|
|Orange capital intensity||14%||14%||16%||17%||17%||18%|
|Telefonica capital intensity||14%||16%||17%||16%||16%||15%|
|Total capital intensity||14%||15%||17%||17%||17%||17%|
Cost is not Ericsson's only concern, however. Helena Norrman, Ericsson's chief marketing officer, complains that spectrum availability "comes later" in Europe than in other parts of the world. France is one major European economy that has yet to even hold a 5G auction. And in others that have sold licenses, spectrum is still not ready to be used. "There is one exception to the rule and that is Switzerland, where Swisscom switched on 5G yesterday together with us, but that is unfortunately only one country," says Norrman. "The rest of Europe is quite slow and that is a concern both for our business and for Europe's competitiveness."
Germany's spectrum plans include other features that Ericsson does not seem to admire. In a controversial move, authorities did not include 100MHz of available "mid-band" spectrum in the current auction, preferring to save this for a separate sale to industrial groups. Having reportedly expressed interest in building their own 5G networks to support factory-based applications, German carmakers including Volkswagen could be enthusiastic spectrum bidders. Asked to comment on the move, Norrman says: "What is most important is that spectrum is made available to operators. We believe operators are the logical go-to-market for industrial applications and new industry verticals."
Both Ericsson and its telco customers would lose out if airwaves are eventually sold to non-telco organizations. It would leave Deutsche Telekom and its rivals with less spectrum to support 5G networks and erode their opportunity to provide 5G services to business customers. That could spell trouble for Ericsson, which is worried that serving carmakers or other businesses directly might aggravate the telcos. "When we provide connectivity to enterprises we do it together with service providers," said Ekholm at this year's Mobile World Congress in Barcelona. "We don't think it is a good idea to compete with customers but much better to find a win-win solution."
China's Huawei and Finland's Nokia appear to have no such qualms. Each maintains an enterprise division that caters to business customers directly. In selling network products to industrial groups, Ericsson's main rivals would have to tread carefully to avoid upsetting the telcos. But their enterprise strategies may represent a growth opportunity that remains unavailable to Ericsson.
So far, however, there is little sign other countries will go down the same road as Germany. Ericsson will probably hope it stays that way. And for the sake of its German business, it will pray that 5G auction wraps up soon.
- Ericsson Gets Off to Flying 2019 Start but Must Cough Up for Corruption
- Europe's Telcos Less Tight-Fisted Than Yanks
- Eurobites: Swisscom & Ericsson Flip the 5G Switch
- Deutsche Telekom targets 99% 5G coverage in Germany by 2025
- Germany's 5G Auction Riches May Equal a Big Win for China
- Volkswagen Plan Is Latest 5G Car Wreck for German Telcos
- Europe Must Pray for Sobriety in German 5G Auction
- Hands off our 5G spectrum – Vodafone's message for verticals
— Iain Morris, International Editor, Light Reading