1&1 prepares to launch 5G for smartphones on its tiny open RAN

Board members of big companies, telcos included, are typically excited by healthy returns and meaningful growth. But what apparently set heart rates soaring at Germany's 1&1 was the revelation it would be able to change one antenna supplier for another but keep the server and software vendors it already had. "The board raves that with open RAN technology they can combine NEC antennas with Dell servers and simply replace individual parts if problems arise," says Handelsblatt newspaper (Google translated) in a positive feature about the rollout.

Outside Japan and the US, 1&1 is the highest-profile greenfield investor in open RAN, the mix-and-match technology concept that is seemingly such a turn-on for the telco's board. A mobile subsidiary of United Internet, 1&1 has hired Rakuten, the company building a network in Japan, to take charge of its rollout. Having already switched on a home broadband service delivered by 5G, 1&1 is now promising a smartphone offer on December 8.

But despite Handelsblatt's upbeat take, the project so far has not gone to plan. Under the terms of its license, 1&1 was supposed to have 1,000 sites in operation at the end of last year. Just 20 were up and running in May, according to a Handelsblatt interview at the time with Ralph Dommermuth, United Internet's CEO. When 1&1 launches its mobile service next month, it will have fewer than 100 active antennas, according to the more recent Handelsblatt story.

The blame lies not with open RAN or Rakuten but Vodafone, according to Dommermuth. Through a subsidiary called Vantage Towers, Vodafone is under contract to provide access to thousands of mobile sites for 1&1. Indeed, Handelsblatt reports at least 6,000 of 12,000 planned antenna masts are supposed to come from Vantage. In an angrily worded statement published in February, 1&1 said Vantage had prioritized Vodafone's expansion plans over its own deployment, calling on German authorities to "investigate interference by Vodafone in the construction of the fourth German mobile phone network."

Staying on target

Whoever's to blame, all this leaves 1&1 way off target. In its latest earnings update, United Internet revealed there were just 503 antenna locations at the end of September. It expects to have 1,000 by year end, but this does not mean they will be in service. Rather, those are locations "available to us for the installation of our 5G high-performance antennas and connection to fiber," said United Internet. Judging by the reference to 100 active antennas in Handelsblatt's recent report, there will be considerably fewer than 1,000 in operation.

Regardless, 1&1 is not altering its longer-term guidance. By 2025, it aims to provide 5G coverage to about a quarter of the population in Germany, and by 2030 it targets half. While it has not attached an antenna or site figure to this coverage target, a few thousand will probably not suffice. Deutsche Telekom, the incumbent, previously claimed to have reached about 50% coverage with 30,000 antennas, for instance.

To extrapolate, 1&1 would need to add more than 4,000 antennas a year between now and 2030 to hit the number Deutsche Telekom reported back in 2020. The German incumbent, however, pumped about €4.2 billion (US$4.6 billion) into capital expenditure in Germany that year. United Internet is spending far less. Having put €461.5 million ($506.6 million) into capex over the first nine months of 2023, United Internet expects to invest another €338.5 million ($371.6 million) this quarter. And that €800 million ($878 million) total is already a dramatic increase on the €290 million ($318 million) it forked out in 2021.

1&1 did not guide for capital expenditure next year in its latest financial report. Yet the pressure is already showing. Despite sales growth, operating profits at United Internet fell 15% for the first nine months, to about €593 million ($651 million), and net income slumped 22%, to €307 million ($327 million). The company blamed startup costs at 1&1 and depreciation charges booked against fiber and mobile rollout for the earnings hit.

What's evident from a LinkedIn update by Michael Martin, the 1&1 CEO, is that it still plans to connect its antennas with fiber to about 500 data centers sprinkled across Germany. The hope is that such a distributed network will bring service and operational benefits. It should, for instance, cut latency, a measure in milliseconds of the roundtrip journey time for a mobile signal on the network. Operators insist lower latency is needed to support more advanced 5G services, including extended-reality applications.

Yet fiber rollout is expensive. And just 81 regional far edge data centers had been fiber-connected to 23 local edge and two core data centers at the end of September, according to United Internet's third-quarter report.

A bad advert for open RAN

The wonder is that 1&1 is not faring worse. John Strand, the CEO of Danish advisory firm Strand Consult, questions the terms of 1&1's arrangement with Rakuten Symphony, the subsidiary of the Japanese company that sells telco products. Desperate to prove itself and its new-look technologies against more established rivals, it may see 1&1 as a marketing opportunity rather than a revenue source, he speculates. Revenues at Rakuten Symphony fell 5% for the first nine months, to about $232 million, and the company has fallen badly short of its original aggressive targets.

Unfortunately, Rakuten Mobile, the telco operation in Japan, is not a great advertisement for open RAN, either. The parent company has amassed net losses of more than $6.2 billion since 2019, due largely to the cost of building a new mobile network, and signed up only about 5 million customers, in a country of 126 million people, since it launched 4G in April 2020.

Nor do others share 1&1's apparent excitement about the ease of swapping open RAN parts. Critics say it merely transfers responsibility for ensuring those parts work together from big kit vendors like Ericsson and Nokia to other systems integrators or the telcos themselves. One implies reliance on a different entity, and the other means buying the necessary expertise. Unit costs are often lower when more parts come from one supplier.

No doubt, open RAN promises opportunities for specialists focused on one area of the RAN. But it does not guarantee sustainable diversity in each of the different areas, or necessarily make operators less reliant on important vendors. 1&1, notably, appears to have only one RAN software provider (Rakuten). It has not publicly identified any radio unit suppliers other than Japan's NEC.

1&1's open RAN will evidently be a work in progress for years. In the meantime, it has signed a roaming deal with Vodafone – despite its antipathy on the issue of towers – to replace an arrangement with Telefónica that expires in October 2024. If the new deal is on more favorable terms than the old one, it could prompt 1&1 to reconsider its network plan, posited Barclays in an August research note: "This is a big question as the company is late in rolling its network and the economics of the network deployment are challenging."

Shareholders do not look persuaded. In Germany, United Internet's share price currently trades at half its level back in August 2020. It fell to as little as €12.55 ($14) in June but has subsequently recovered to more than €20 ($22). Meanwhile, the industry consensus is that Europe needs fewer networks, not more. So far, 1&1's experience is unlikely to convince anyone that building an open RAN from scratch is a very good idea.