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28 May 2019

German 5G spectrum costs escalate; no common pattern to global auctions

Germany’s controversial 5G spectrum auction has raised €6bn ($6.6bn) so far (as of May 23), after 10 weeks and 405 rounds of bidding. This is sparking fears that the major European economies will increasingly see the return of inflated spectrum prices, as already seen in Italy, which damages the 5G deployment case. However, auctions around the world are not revealing a common pattern of spectrum value or regulatory conditions.

The operators continue to complain about the auction conditions set by the Federal Network Agency (BNetzA). They have been deeply opposed to the decision to set aside spectrum for industrial use, in response to demands from the powerful manufacturing and automotive sectors. They have also threatened legal action over coverage requirements attached to some licences. And Deutsche Telekom argues that BNetzA has forced up prices by offering too little spectrum – a total of 41 blocks.

The incumbent leads the bidding in 13 of those blocks, with Vodafone ahead in

12 and Telefónica O2 in eight, according to the latest update from the regulator. New entrant 1&1 Drillisch – which is currently an MVNO, but whose parent United Internet is seeking to have an MNO – also leads in eight blocks. United Internet has slashed its dividends to boost cash to bid in the auction.

Other recent auctions have focused on near term 5G roll-outs, but the award mechanism, pricing and regulatory policy are not following any common patterns, as recent sales or auction plans in Canada, the USA, Japan and Norway illustrate.

  • Canada made 70 MHz in the 600 MHz band available nationally in a recent auction, following in the USA’s footsteps after the latter’s broadcaster incentive auction last year. Canada split the band (in 614-698 MHz including the guard band and duplex gap), into seven chunks of 10 MHz, each divided between 16 regions, making 112 licenses in total.

Rogers got almost half of them, spending C$1.725bn on 52 licenses. Telus bought just 12, for C$931m, though its licenses support coverage of almost 20m POPs, while Rogers’ licenses have fewer densely populated locations, and reach 35m POPs.

The second biggest winner in terms of POPs covered was Freedom (part of Shaw Communications) though it spent less money than Telus, securing 11 licenses for C$492m. Six smaller or regional operators also bought spectrum.

Incumbent Bell BCE did not participate. CTO Stephen Howe said: “Bell looks forward to participating in upcoming federal auctions of the mid band 3500 MHz and high band millimeter wave spectrum that will be required to drive the fifth generation of wireless.”

  • Japan did not run an auction for its initial 5G allocations but awarded 28 GHz and 3.7 GHz licenses directly. The established MNOs – NTT Docomo, KDDI and Softbank – plus new entrant Rakuten, all received the licenses they applied for, though some come with coverage and security commitments.

The Ministry of Internal Affairs and Communications said last month that each operator had been awarded 400 MHz of the millimeter wave spectrum, while the three incumbents secured 200 MHz in the 3.7 GHz band, and Rakuten requested 100 MHz. All four plan to deploy 5G services from next year, targeting availability at the Tokyo Olympic Games. The total investment planned by the operators to the end of 2024 amounted to ¥1.6 trillion ($14.4bn).

NTT Docomo and KDDI have pledged to cover over 90% of the country within five years; Softbank plans to cover 64% of the country and Rakuten 56% in the same timeframe. The minimum requirement from the government is to serve every prefecture within two years, and within five years, at least 50% of the 4,500 geographical blocks into which the government divides Japan.

Other commitments attached to the new licenses include expansion of optical fiber networks, improved safety measures to minimize outage during natural disasters, prevention of interference with existing radios, and a requirement to “take appropriate cybersecurity measures including measures to respond to supply chain risks”, which was taken to apply to Chinese vendors. Japan has stopped short of an outright ban on Huawei and ZTE, despite reports, but has restricted their presence in public networks. The biggest Huawei customer in Japan, Softbank, has been reported to be phasing out the Chinese firm’s gear in favor of an Ericsson/Nokia 5G deployment.

  • The FCC is gearing up for Auction 103, which is due to start on December 10 and is slated to be the “the largest spectrum auction in American history”. The regulator will release a total of 3,400 MHz of spectrum across the upper 37 GHz, 39 GHz and 47 GHz bands in one auction. However, expectations for the amount of money this will raise are muted, since the first mmWave sale, in 28 GHz, raised just $704m in winning bids. The more recent 24 GHz auction, whose licenses were considered more useful in location, did better at $2bn, but nowhere close analyst expectations, or to the windfalls from earlier, midband sales such as AWS, or from the 600 MHz incentive sale.
  • Norway plans to auction spectrum in the 700 MHz and 2.1 GHz bands starting on June 3, and will allow winning bidders to postpone the bulk of their payments if they agree to meet certain coverage targets. The National Communications Authority (Nkom) will offer 30 MHz of paired spectrum in the 700 MHz band and 2×15 MHz in 2.1 GHz; frequencies in both bands will be auctioned off in 5 MHz blocks.

    The reserve price for a 700 MHz block will be NOK125m (€13m), although there are two blocks available that carry road and railway coverage obligations and have a minimum price of NOK55m and NOK30m respectively. The minimum per bock price in the 2.1 GHz band is NOK25m.

    Winning bidders can also choose to take up a further national roads coverage obligation that is not tied to any spectrum block, but brings with it a discount of up to NOK40m on the total bill. This is in addition to the provision for deferred payments for those who agree to prioritize coverage over the more common hotspot approach, in which operators build out 5G in locations specifically targeted to user groups or industries where demand for high capacity is proven.

These rules allow winning bidders to postpone the payment of 90% of their auction spend for up to two years, though they will be required to invest NOK250m (€26m) or more to cover a new area, including the establishment of at least 100 new base stations.