Europe's telecom executives are growing anxious after bidding in Germany's keenly watched 5G spectrum auction topped the €2 billion ($2.2 billion) mark this week.
In comments that have already been widely reported, Timotheus Höttges, the CEO of German incumbent Deutsche Telekom, accused regulators of creating an "artificial shortage of public resources" that could drive up the price. "In the end, there is no money for the build-out," he said. And that was before bids had even reached €1.2 billion ($1.3 billion). Is Germany about to follow the example of Italy, where operators spent so much on 5G spectrum that cost-cutting network partnerships and layoffs are suddenly in vogue?
Despite the panic, that still seems unlikely. After round 108, bidding in Germany had reached nearly €2.3 billion ($2.6 billion), according to the auction site of the Bundesnetzagentur, Germany's telecom regulator. Of that, roughly €1 billion ($1.1 billion) was for 3.6GHz spectrum, the "mid-band" 5G frequencies that attracted so much interest in Italy, while another €1.1 billion ($1.2 billion) was for the 2GHz range. The small remainder represented additional payment obligations on auction participants. While these are not insignificant sums, they do not (yet) point to a re-run of the €6.55 billion ($7.3 billion) Italian job.
That's apparent when you crunch the numbers. Italy's operators ended up paying about $0.40 per MHz for each person in the country (so-called "per MHz pop," a common way to value spectrum). No other 5G mid-band auction that has taken place in Europe so far has even come close. And Germany is still way off that amount.
If the auction ended now, German operators -- Deutsche Telekom, Vodafone, Telefónica and 1&1 Drillisch -- would pay about $0.05 per MHz pop for 300MHz worth of 3.6GHz licenses, just an eighth of the amount that was spent in Italy on a per-MHz-pop basis. To match Italy, the auction would have to raise about $10.1 billion from 3.6GHz licenses alone.
That still leaves 120MHz in the 2GHz band, which had generated bids worth about $0.13 per MHz pop after round 108. The fight over a smaller amount of spectrum may have driven up prices. Operators might also value these airwaves highly because they provide better coverage than 3.6GHz spectrum and are usable with the existing set-up of mobile sites in Germany.
Höttges is upset because Germany's regulator has held back a 100MHz block of mid-band spectrum. Had that been included, operators would be competing for as much as 400MHz of mid-band frequencies, putting some downward pressure on pricing. Germany's regulator, however, plans to sell this spectrum to industrial companies, such as carmakers -- a move that has horrified telecom executives besides Höttges.
"There are some consultations in certain countries regarding ringfencing mobile spectrum for industrial use cases and for operators this is not the correct approach because you end up reducing the trunking efficiency by locking up spectrum in a way that doesn't allow us to get the full benefits," said Luke Ibbetson, the chief engineer at Vodafone, during a press conference at the recent Mobile World Congress tradeshow.
A much bigger commercial concern is that industrial companies could build their own localized 5G networks, after securing spectrum, and cut operators out of the picture. Such a development is likely to bother Ericsson, as well. Unlike Huawei and Nokia, the other two big 5G infrastructure vendors, the Swedish company does not sell directly to enterprise customers, preferring to work through telcos when addressing the enterprise market.
"We are working with service providers and you will see when we provide connectivity to enterprises we do it together with service providers," said Börje Ekholm, Ericsson's CEO, during a press conference at MWC. "We don't think it is a good idea to compete with customers but much better to find a win-win solution."
Squeezing the amount of spectrum available to operators is bound to have driven up prices, as Höttges argues. Yet there is still more mid-band spectrum on sale to Germany's four bidders than Italy offered during its 5G auction last year, when the same number of companies were fighting over 200MHz worth of licenses.
The other pressure point in Germany is 1&1 Drillisch, a broadband service provider with ambitions to become a fourth national mobile network operator. Bidding aggressively for airwaves in the 5G auction, 1&1 Drillisch has reportedly said it will slash dividends to fund the acquisition of licenses and the rollout of 5G networks. Since the start of the year, its share price has fallen 27% in Frankfurt, to €32.40 ($36.30) at the time of publication.
For the license winners, a further worry is the regulator's tough stance on coverage obligations. An operator securing a 5G license would need to hit a 98% coverage target by 2022, under the existing rules. Last month, the Cologne Administrative Court rejected a legal challenge to those rules by operators.
Analysts cited in the mainstream press currently expect the German auction to fetch between €3 billion ($3.4 billion) and €5 billion ($5.6 billion), an amount that would not cripple operators but looks high in comparison with 5G auction results everywhere bar Italy. If prices continue to rise as they have in the last few days, analysts may have to go back to their spreadsheets.
As Höttges indicates, the more operators spend on licenses, the less they will have for investment in 5G networks. A Germany that falls behind other major economies in 5G would be seriously weakened if the next-generation technology lives up to its promise. What happens in the next few days could be critical.
- Europe Must Pray for Sobriety in German 5G Auction
- Hands off our 5G spectrum – Vodafone's message for verticals
- Vodafone UK Threatens Legal Challenge Over Next 5G Auction
- Italy's $7.6B 5G bonanza puts telcos on the rack
- The Great 5G Spectrum Devaluation
— Iain Morris, International Editor, Light Reading