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30 September 2019

Amid fears of 5G licence fee inflation, some regulators are bucking the trend

Auctions of 5G-targeted spectrum continue to pile up around the world, with most regulators selling 3.5 GHz midband licences first and planning to offer sub-GHz and millimeter wave assets at a later date.

The bands may be similar, outside North America at least, but policies on minimum pricing vary wildly – and so, therefore, do the economic considerations for operators. At one extreme is Japan, which gives spectrum away on a beauty contest basis; China allocates it to the incumbent operators (plus, this time, China Broadcast Network).

So far, Asian countries which do conduct auctions have tended to go with lower reserve prices, prioritizing rapid roll-out over money for government coffers. South Korea’s auction prices were among the lowest, per MHz/pop, of the midband sales so far, and the upcoming process in Hong Kong is taking a similar line.

That could all change when India kicks off its first 5G auctions, probably early in 2020, though the operators are calling for a delay while they improve their financial position. So far, regulator TRAI is indicating it will follow its usual pattern of charging very high reserve prices, which maximize Treasury revenue but make it hard for debt-laden operators, in a low-ARPU market, to justify investment in the large chunks of spectrum which full 5G services will require.

Hong Kong’s auction will start next month and the four main MNOs have all applied to take part, which could drive prices up through competitive bidding. However, the regulator, OFCA, is taking steps to keep costs down. It has already said it will give away 1,200 MHz of spectrum in the 26 GHz and 28 GHz bands for free because of the “abundant supply” available.

And for October’s auction, which starts on the 14th and will cover the 3.3 GHz, 3.5 GHz and 4.9 GHz bands, a combination of low reserve prices and spectrum caps should prevent runaway bidding.

China Mobile, HKT, Hutchison and SmarTone have all submitted applications to participate in the auctions – the 3.5 GHz one comes first and is the most important, with 200 MHz available in a band which is establishing itself as the key spectrum for the first wave of 5G deployments everywhere but the USA.

Most MNOs are using these midband frequencies to add capacity to their networks; and – by installing Massive MIMO to boost cell coverage despite the relatively high frequencies – they can large reuse the site footprint in place for 2.5 GHz or 2.1 GHz technologies. Meanwhile, they typically continue to rely on LTE for wide area coverage, until they buy sub-GHz spectrum in later auctions.

The Hong Kong operators will also have the mmWave frequencies if they want to support very high capacity hotzones or fixed wireless access, plus additional spectrum in the other two midrange bands covered by this auction. There will be 180 MHz available in total across 3.3 GHz and 4.9 GHz.

The reserve prices have been set at HK$4m ($510,000) per MHz for 3.5 GHz and around HK$2m/MHz for the rest, amouting to a minimum of HK1.24bn (US$158m) for the whole transaction.

And spectrum caps imposed by OFCA are designed to prevent prices spiralling upwards. “As telecom operators have been publicly urging for lower spectrum costs in the past 1-2 years, we believe they are unlikely to bid up spectrum prices significantly higher,” DBS Bank analysts wrote in a recent research note. “This will be positive to mobile operators in the medium term for 5G network investment. We expect mobile operators to manage the overall 5G capex in a gradual and prolonged pace to maintain a relatively stable capex and dividend policy.”

In Europe, prices per MHz in the 3.5 GHz band have been generally rising, with Italy’s recent auction producing the highest fees so far and fuelling concern of an inflationary trend which could damage operators’ ability to invest in rapid, wide-scale deployment. But, aware of such risks, the Austrian regulator, RTR, is proposing low reserve prices and relatively light conditions to encourage broad roll-out, though with minimum coverage obligations for roads and railways.

RTR published its proposals for next year’s auction, the second 5G sale in the country, which offered 3.5 GHz licences early in 2019. The regulator said it wants to be “investment-friendly”, and so proposes 20-year licences and a reserve price totalling just €295m for spectrum across three bands – 700 MHz, 1500 MHz and 2.1 GHz. That would include the sub-GHz spectrum – often priced at a high premium because of its value for supporting cost-effective coverage, and its relative scarcity.

However, with 3.5 GHz already in operators’ hands, these two midrange bands are less interesting. They are less commonly supported, at this early stage, in 5G infrastructure and devices (though that will change quite quickly as European operators start to refarm 3G spectrum in 2.1 GHz, and even switch off 3G altogether, as Vodafone, among others, plans to do in the coming 2-3 years).

Licences will not mandate wholesale access, after a recent review of MVNO requirements, so the coverage obligations are the biggest condition. RTR is asking for

minimum speeds of 10Mbps downlink/1Mbps uplink to 98% of highways, expressways and selected rail links, and to 90% of federal and state highways; as well as 3Mbps/ 3Mbps to 900 underserved locations. If operators deploy to more than these 900 locations, and address some of the next 1,100 that the regulator classes as underserved. they will receive a rebate on their spectrum bids.

“To grant this bonus, a substantial sum has been reserved from the pot of minimum bids,” RTR explained.

Once the conditions have been approved by the Federal Minister of Transport, Innovation and Technology, the auction is scheduled for spring 2020.

In its 3.5 GHz auction, Austria awarded 20-year 3.4-3.8 GHz licences to the three national MNOs – A1, T-Mobile and Hutchison Drei – and to four regional players for a total of €188 million, also a modest sum compared to prices in Italy or Spain. A1 gained between 100 MHz and 140 MHz in all regions, while the other two won 100 MHz in all regions. Each must activate at least 300 5G base stations before the end of 2020. Four regional players (Mass Response, Liwest, Salzburg AG, Holding Graz) secured between 30 and 80 MHz of spectrum in one or two regions.

If prices rise in some regions, operators will be incentivized to reuse existing assets, by refarming some or all of their 2G or 3G spectrum, or leveraging underused frequencies like the unpaired 2.6 GHz spectrum which many European MNOs own but hardly use.

Others may add to 4G capacity in parallel with 5G upgrades. Three UK is an example – it plans to add support for LTE in the 1.4 GHz band on sites where it is upgrading equipment to support 5G in 3.5 GHz. Three has 20 MHz in 1.4 GHz (Band 32), but has done little with in it in the four years since it acquired the licences. It said that, since it is getting into sites to replace radios and antennas for 5G, it will be a good time to upgrade 4G at the same time by adding this new capacity.

The 1.4 GHz MHz antennas will be 4T4R MIMO and Three says this could boost LTE speeds by 150% on compatible devices, and there will even be some improvement for those with non-compatible devices. Three, which plans to extend 5G to 6,000 sites by 2023, also plans to refarm some 3G spectrum to add LTE capacity, at about 12,500 sites.