European spectrum auctions must be a source of either amusement or puzzlement to the Chinese. In China, operators typically pay a token fee for licenses and have plenty of money left for network rollout. The preferred system in large European countries is twofold: First, squeeze operators painfully in costly auctions; second, worry about falling behind Asia as networks take root at a speed usually observed in the plant kingdom. To an outsider, it must look as bonkers as Brexit, the UK's crackpot effort to leave the European Union (EU) club while clinging on to the benefits of EU membership.
It is especially baffling in Germany, an industrial powerhouse that evidently sees 5G mobile technology as an essential component in its digitalization strategy. German policymakers are worried the country's large manufacturing sector will lose out to China if it does not modernize fast. Next-generation data networks could be critical, supporting factory automation, robotics and other whizzy applications that are not currently feasible. Yet regulators are now running a 5G auction that risks undermining that entire strategy. It is like entering an athlete for the most important race of his life, and then slicing his Achilles tendon before it starts.
On April 11, the day before this article was written, the bidding in Germany's 5G auction crossed the €5 billion ($5.7 billion) threshold, exceeding the upper limit of both analyst and government expectations for the first time. A day earlier, as bidding approached the €5 billion mark, Timotheus Höttges, the outspoken CEO of German phone incumbent Deutsche Telekom, warned of the consequences for Germany at a conference in Berlin. Spending that much on spectrum would eat away at funds that would otherwise be used for deploying around 23,000 5G antennas, he is reported to have said.
Operators clearly have a vested interest in dramatizing the impact of costly spectrum auctions. If Germany's 5G auction ended today, it would not imperil any of its four participants. Besides Deutsche Telekom, those include Telefónica and Vodafone, the country's other two mobile network operators, and 1&1 Drillisch, a broadband service provider with major mobile plans. Critics unsympathetic to large corporations think it is only fair they compensate the public sector for the resources they use, even if that is literally just air. Government authorities could invest that money sensibly to boost the German economy, they add.
But if auction spending does impede 5G rollout, then Germany could be far worse off. Its big manufacturing sector makes it unique in Europe. And if 5G will mainly be a dull story about faster smartphone connections for the next two or three years, some industrial "use cases" for the technology are starting to crystallize. One is simply to replace somewhat unreliable WiFi services with guaranteed 5G connections in certain office and factory environments. Another entails using a technique called "network slicing" to reserve connectivity for critical factory services. That is something an operator could not do with today's 4G technology, while factory owners have balked at the wiring that comes with fixed-line alternatives, according to one source.
Bidding activity in the German 5G auction seems to have been fueled by the determination of 1&1 Drillisch to capture spectrum in the 2GHz band, which would provide much better coverage than the 3.5GHz spectrum also on sale. Having initially stayed out of the 2GHz process, Telefónica is now involved, perhaps seeking to limit 1&1's gains, and that has only spurred competition for these airwaves. With just 120MHz on offer, bidding had reached about €2.3 billion ($2.6 billion) on the morning of April 12. On a per-MHz, per-person basis (per MHz pop, a common valuation metric), that spectrum is worth as much as $0.26, far more than 3.5GHz spectrum in most European markets.
But the value of 3.5GHz spectrum in Germany is also ticking up. As things stood on the morning of April 12, the bidding for 300MHz of spectrum had reached about €2.8 billion ($3.2 billion), meaning frequencies are worth about $0.13 per MHz pop. This "mid-band" spectrum is the slice of airwave capacity most closely associated with 5G technology in Europe, and it has generally sold for prices ranging from $0.04 (Finland) to $0.15 (UK) per MHz pop. In Italy, however, it raised as much as $0.41 last year when authorities offered up a relatively small serving to four auction bidders, and then chopped it into uneven blocks. That Italian auction generated €6.55 billion ($7.4 billion) in total and has been followed by news of job cuts and network-sharing deals as operators look to slash their rollout and operating costs.
The fear is that Germany is veering into the same hazardous lane. Yes, its 3.5GHz spectrum is still much cheaper than Italy's and seems unlikely to approach Italian levels. But the costliness of 2GHz spectrum is making up for this gap. If one factors in all the spectrum sold in Italy's auction, including the large swathe of low-priced 26GHz spectrum, it generated about $0.10 per MHz pop. Germany's is now running at $0.17.
Germany's mid-band airwaves also look far more expensive than 3.5GHz spectrum in other European countries, such as Spain. A government decision to hold back 100MHz has undoubtedly contributed to the auction costs, reducing the supply of spectrum available, and infuriated German telcos.
The government plan is to sell this spectrum to other types of business -- such as German carmakers -- that have expressed interest in building local 5G networks. This could undermine one of the big 5G service opportunities for German telcos, weakening the 5G investment case even as it pushes up fees.
Nor would it necessarily address the risk to German industry posed by slow 5G deployment. German businesses do not have experience of managing cellular data networks, for one thing. Finding equipment suppliers could also be tricky. Worried about aggravating the telcos, Ericsson does not want to sell directly to other types of business. And the use of China's Huawei could reignite the national debate about the security of its technology and perceived links to China's government.
For all these concerns, overall bidding remains less than the amount raised in Italy, and Germany is a much bigger and wealthier market. Its service providers are in better financial shape, too. The main worry is probably 1&1, whose CEO has indicated he will slash dividends to fund his 5G activities. 1&1's share price has lost a quarter of its value on the Frankfurt stock exchange since the beginning of the year.
But investor concern also surrounds Telefónica, the smallest of the German mobile operators by revenues and the one most at risk from 1&1's arrival in the market. The share price of the local holding company has fallen by one fifth this year. Deutsche Telekom's has barely changed over the same period. Whether it continues to show that resilience could depend on what happens in the 5G auction over the next few days.
Whatever happens, it's unlikely to allay the fears of those German policymakers who are wondering if the country can remain a cutting edge, in-demand and cost-efficient manufacturing hub once the 5G industrial era becomes a reality.
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- German 5G Bids Top €2B, But It's Too Soon to Panic
- 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