Italy's closely watched auction of 5G spectrum dramatically shot past expectations last week and has now raised more than 4.4 billion ($5.2 billion), against an initial government target of just 2.5 billion ($2.9 billion).
Italy wrapped up its sale of paired spectrum in the 700MHz band after those licenses fetched more than 2 billion ($2.4 billion). But the sale is still going for other frequencies, including the 3.6-3.8GHz band, and the outcome can only get better for Italy's government. In the corridors of Rome's Palazzo Chigi, Prime Minister Giuseppe Conte and his minions may be in party spirits already. (See Italy Wraps Up Sale of 700MHz Spectrum for 5G, Raises 2B and Italian Operators Bid 2.5B in 5G Spectrum Auction.)
That the 700MHz airwave licenses raised as much as they did should not be a huge surprise. Lower frequency bands have typically attracted the most generous bids in spectrum auctions, simply because these airwaves are the most economical way to provide coverage indoors and over wide areas. Iliad (Euronext: ILD), Telecom Italia (TIM) and Vodafone Italy appear to have spent about 0.56 ($0.66) per MHz per capita (or MHz pop), a common valuation measure, for their 700MHz licenses. That fee is a little bit higher than the 0.51 ($0.60) that an assortment of European operators paid for 800MHz licenses in 4G auctions several years ago, according to market research firm Analysys Mason, but it is not outlandish. (See The Great 5G Spectrum Devaluation.)
What few would have seen coming was that operators would so far have bid more than 2.2 billion ($2.6 billion) for the mid-band airwaves that fall between 3.6GHz and 3.8GHz. The update provided by Italy's Ministry of Economic Development late last Friday means that spectrum is currently valued at about 0.18 ($0.21) per MHz pop. In Spain, an auction of this spectrum in July raised about 0.05 ($0.06) per MHz pop, while Irish authorities scooped the same amount per MHz pop during a 3.6GHz auction in May 2017. Italy is even ahead of the UK, which managed £0.15 ($0.20) per MHz pop during a 3.4GHz sale in April. (See UK's £1.4B '5G' auction looks bad for industry and Spanish 5G Auction Nets 438M for Govt.)
So far, it seems, no one has overwhelming interest in the 26GHz spectrum up for grabs. While these super-high frequency bands -- a focus of 5G interest in the US market -- would support the very fastest 5G services, they are lousy for coverage. There is even concern that a user's hand or head could block the 5G signal in a 26GHz smartphone. As a result, the industry tends to view 26GHz and surrounding bands as a way to provide residential broadband services in areas lacking copper, fiber or cable access network coverage. But outside rural and broadband-deprived communities, that opportunity may be small. Bids for 26GHz spectrum reached just 164 million ($193.5 million) in Italy on Friday, according to market research firm Telegeography.
That aside, the overall bid level of 4.4 billion ($5.2 billion) is a worrying development for Italy's operators, and it should potentially worry the country's telecom authorities, too. Even when the government thought it would raise about 2.5 billion ($3.3 billion), telcos had sounded nervous about the size of the bill heading their way. Telecom Italia, the incumbent, said it might have to sell "non-core" assets to cope with 5G spending. In the worst-case scenario, the auction could put a major squeeze on investment in next-generation infrastructure. (See Telecom Italia Says 5G Auction May Force It to Sell Assets.)
Competition seems largely to blame for driving up spectrum prices. When authorities previously allowed mobile operators 3 Italia and Wind Telecomunicazioni SpA to merge and form Wind Tre, it did so on the condition they would sell a chunk of their assets to Iliad, an aggressive French operator with Italian ambitions. The merger has consequently made competition in the mobile market even tougher, with four mobile network operators now desperate to acquire new 5G licenses. In addition, a broadband operator called Fastweb SpA (Milan: FWB) is also a participant in the 5G auction, boosting demand for the airwaves that are available. (See Iliad Grabs 1M Customers by Day 50 of Italian Odyssey and Seven Bidders Register for Italy 5G Auction.)
None of this would be such a concern if 5G promised riches for its operators. Yet few analysts are optimistic it will fuel revenue growth from existing services, or even lead to new business opportunities. Why are telcos investing in 5G today? Partly because it is seen as an efficient way to cope with growth in mobile data traffic, but also because telcos fret about falling behind rivals that promise higher speeds to customers and fatter margins to investors. (See 5G Still More Like Rocket Fuel Than a Mission to Mars and Piecing Together the 5G Big Picture.)
Throughout Europe, telcos have repeatedly argued that exorbitant license fees will constrain their ability to roll out state-of-the-art networks that can meet user demands. At 4.4 billion ($5.2 billion), 5G bid levels in Italy remain well below what some countries witnessed during the 3G auctions at the turn of the century. But in few other countries are telcos in such a tight spot. Telecom Italia remains one of Europe's most leveraged incumbents, with net debts in June equal to about 2.9 times its earnings (before interest, tax, depreciation and amortization) last year. Vodafone's service revenues fell 6.5% in the April-to-June quarter, compared with the year-earlier period. Wind Tre's slumped 10% in the first half. And with a net debt that equals 4.5 times its annual earnings, it makes Telecom Italia look thrifty. (See ZTE ban and Iliad entry blow Wind Tre of course and Sales Squeeze to Drive Heavier Cutbacks at Vodafone.)
Iliad's arrival bodes ill for all three of its mobile rivals in the next year, warned ratings agency Moody's in July. Unless 5G quickly proves the skeptics wrong, Italy's ongoing spectrum auction could make the pain last much longer.
Iain Morris, International Editor, Light Reading