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4 February 2019

Germany stands up to MNOs and aims to earmark spectrum for industrial 5G

We have often bemoaned the timorous nature of the regulators in setting the rules for the first wave of 5G auctions. In most of the advanced 5G countries, there has been a huge gap between the visions of governments and the actual spectrum rules, especially when it comes to the challenges of delivering enterprise, in-building and IoT services. At last, some regulators are taking a more creative view, with Germany seeking to extend the 5G airwaves beyond just the established MNOs. However, its plans are highly controversial, and regulator BNetzA will face a political battle to adopt a new approach, but unless they win, some of 5G’s benefits will certainly be diluted or lost.

Despite grand strategy documents outlining the potential to transform enterprises and society by harnessing 5G in innovative ways, in reality the early licences, mainly mid-band, have been auctioned and allocated in the same old way. Regulators have generally deferred to the lobbying power of the large operators – and the fact that they have the biggest budgets set aside to deploy new networks.

But MNOs continue to acknowledge that they find it hard to make a business case for most enterprise, in-building and IoT applications – even though these are the heart of most 5G visions for transformation and revenue. The logic is to put some spectrum in the hands of organizations which CAN make the business case work – the enterprises themselves, or their familiar integrators, or a new wave of specialized neutral host players, private network operators and industrial MVNOs.

If these entities can acquire spectrum, in quantities and at prices that work for their business case, they can help to deliver 5G benefits to eager companies and government projects. They can even help to sweeten the case for MNOs, which can ride on these multi-operator or specialist networks themselves, acting as MVNOs in certain environments, so they can reach the enterprises without having to invest in all the infrastructure themselves.

This approach requires active support from regulators, because new and specialized entrants will not be able to compete with MNOs on the price of big national or regional licences. Those will still be essential to support national coverage for mobile broadband, and those networks will be best deployed by MNOs, leveraging their existing infrastructure, back office systems and customer relationships. But to allow innovative service providers to fill in the gaps with local or specialized enterprise ‘subnets’, they must be able to access spectrum that aligns to those needs – smaller geographical areas, for instance; spectrum earmarked specifically for new players or neutral hosts, and therefore likely to be less price-competitive; shorter licence terms; more access to dynamic and shared spectrum.

Even in the USA, where the FCC has been innovative in opening up millimeter wave bands and supporting shared access in the 3.5 GHz CBRS spectrum, the rules for the 3.5 GHz auctions missed an opportunity to support the needs of enterprise and IoT. The general access (GAA) portion of the CBRS band represents the creative side of regulatory thinking, offering new entrants the chance to experiment with new models and services without having to buy spectrum – but with more QoS protection, thanks to the Spectrum Access System (SAS), than the free-for-all of the unlicensed 2.4 GHz band.

Sadly, the licensed, priority access (PAL) tier in the three-layered CBRS system (top priority goes to federal incumbents) has been disappointing. For some high QoS or high security enterprise services, shared spectrum will not be reliable enough – because federal users and licence holders take priority, there is a risk of certain channels being unavailable (though there is a swathe allocated only to GAA). There were hopes that the PAL licences would be based on small geographic areas and three-year licence terms, with two groups – enterprise providers and rural telcos – lobbying for those rules, which would make spectrum more affordable, and enable bidders to buy airwaves covering the specific location in which they operate.

However, when the terms were finalized at the end of last year, the FCC went for 10-year licence terms, and compromised on the territory sizes – going for counties, which fall between the census tracts which WISPs and enterprises like GE wanted, and the partial economic areas favoured by MNOs, especially T-Mobile USA.

So the baton may now pass to the major European economies, and perhaps Japan and Australia, to show the way to a more enterprise-friendly spectrum regime. Some smaller countries are pushing in that direction – in Ireland, for instance, which has a long history of flexible and short term licensing to support new use cases, one of the C-band 5G licences was awarded to Dense Air, a neutral host start-up (and subsidiary of vendor Airspan), focused on enabling enterprise networks.

Nowhere has the enterprise lobbying for spectrum been more influential than in heavily industrialized Germany. A group of auto makers – BMW, Daimler/Mercedes and Volkswagen – has called for airwaves to be set aside for them, and some manufacturers are also calling for dedicated spectrum in which they, or their specialist service providers, can build 5G networks in the locations they need them, and with the particular performance characteristics they require for applications like mobile robotics and predictive maintenance.

The auto group’s main motivation is to ensure that sensitive data is fully secured and controlled within their plants. Volkswagen said it wants to run 5G “inside the factory fence”. This need for better control will be a key driver of private cellular networks – in many cases, a more important one than ultra-low latency, which only applies to a few use cases in the short to medium term. Enterprises are extremely nervous about ceding control over their data, or their critical processes, and want the same level of management that they have over their internal LANs and WLANs.

There is a gulf of trust in many markets, with enterprises assuming that MNOs will always prioritize the needs of their own consumers over the very different network requirements of industrial applications. These are the dynamics which are opening up the market for specialist or neutral host operators, which can deploy and run networks entirely to the enterprise’s requirements.

The federal networks regulator, Bundesnetzagentur (BNetzA), has responded with plans to offer localized licences within the C-band and 26 GHz frequencies to industries engaged in ‘Industrie 4.0’ programs, initially as part of the 3.6 GHz auction scheduled for March. These local licences will be provided on “better-than-operator” terms, said the agency, as the deadline to apply expired this week. The allocation process will run in parallel with a more conventional auction of national licences in 3.6 GHz and 2 GHz. “There’s a gold rush atmosphere about it,” according to Jochen Homann, the head of BNetzA, who claims many industrial verticals have been enquiring about private spectrum.

The EU-wide Industrie 4.0 initiative originated in Germany and is focused on high degrees of automation, flexibility and AI-enabled intelligence, to make Europe’s manufacturing and other industries as competitive as possible with those of other regions. Some of these applications will be enhanced by the high mobility, low latency and national coverage of 5G, argue the enterprises.

As well as the car giants, other manufacturers are eager to assert control over 5G. A spokesperson for Siemens told Reuters: “We can’t wait for the network operators to be ready – we are in the midst of Industrie 4.0.” It wants to use 5G in its plants in Berlin and Erlangen to support direct communications between machines, and to make better use of the firm’s Mindsphere AI-assisted process platform.

Even in the national licence auction, Germany has made room for a fourth player. Having permitted the consolidation of its four MNOs, down to three (Deutsche Telekom’s T-Mobile, Vodafone and Telefónica O2, which acquired KPN’s E-Plus), it made it a regulatory condition of the merger that Telefónica must offer capacity for a new MVNO. Drillisch was that newcomer, and made strong headway in its first year of operation, before being acquired by wholesale and retail fiber Internet provider United Internet (UI). UI took a majority stake and merged Drillisch with its own 1&1 retail broadband subsidiary to create a converged operator with 12m customers and annual revenues of more than €3.2bn ($3.5bn). It may now look to leverage its fiber network and move beyond MVNO status by acquiring 5G spectrum.

UI has said it will participate in the auction but not necessarily decide to buy spectrum – that will depend on the price, of course, and whether Germany continues the trend set in the recent Italian auction of pushing 5G midband spectrum prices up and up. But it has secured a €2.8bn credit line with a syndicate of European banks, in addition to inter-company credit UI. If the aggressive broadband provider does secure licences, the three larger MNOs will fear a situation like the one their French counterparts faced when fixed-line operator Iliad launched its disruptive Free Mobile MNO, sparking price wars and consolidation.

Germany’s major MVNOs are already in a powerful position. Freenet claims 12% of the mobile market and has 13m customers across its TV and mobile activities, while 1&1 Drillisch has 8% of mobile revenues. However, Freenet has opted out of becoming a spectrum owner via a 5G bid.

BNetzA may be showing some vision with regards to enterprise – or Germany’s industrial companies have greater lobbying clout and unity against the telcos than their counterparts elsewhere – but it has come under intense fire during the protracted process of agreeing the auction rules. It was criticized for seeking to apply heavy conditions to the national licences, including build-out deadlines.

Some of this reflected reasonable concern about a regulator clinging to the ways of the past – Germany has traditionally been quite rigid about its spectrum conditions, for instance when it insisted that MNOs which bought 800 MHz licences for LTE had to reach a certain level of rural coverage before they could build in the more profitable urban centers.

However, a lot of the fury came from the operators because of BNetzA’s wish to spread the spectrum around more. The MNOs’ powerful trade body, the GSMA, launched a series of attacks last year on proposals to allocate about 25% of the spectrum in question (100 MHz) for localized and enterprise purposes. It repeated the usual MNO arguments – that unless they have as much spectrum as possible, they will be unable to build the best networks to support all the new services required. The sub-text, of course, is that they will not be motivated to invest in networks if they have to face additional competition, even though they have repeatedly failed to respond to enterprise requirements when deploying their previous networks in their exclusive, MNO-only spectrum.

But the GSMA said the plan to keep 100 MHz back for local purposes would “undercut Germany’s efforts at 5G leadership, by driving up spectrum costs and limiting the amount of spectrum available for nationwide usage.”

And the three incumbent MNOs went further than strong words, each filing legal action against the regulator late last year over the 5G auction terms, especially the new entrants and rules about national roaming. Last week, DT’s SVP for regulatory affairs, Wolfgang Kopf, put out a statement saying: “Legal uncertainty is toxic for investments. Unfortunately, the award conditions approved by Germany’s Federal Network Agency are imprecise and disproportionate in many places, thus hampering investment.”

He added: “To successfully deploy and roll-out 5G networks, we require legal certainty and appropriate framework conditions. Unfortunately, this was not the case for this auction. This is the reason why we at Deutsche Telekom have filed a suit against the award conditions of the Federal Network Agency … By filing our suit, we hope that these conditions will be improved retrospectively.”

He repeated the MNOs’ opposition to compulsory roaming. Several regulators, including those in the UK and Australia, have tried to adopt this approach to bring cellular coverage to underserved rural areas, but it is hugely unpopular with MNOs. DT argued: “Yes to roaming, but based on voluntary agreements. There are many good reasons to collaborate in network build-out, particularly in rural areas … The award conditions refer to the possibility of future requirements for local roaming, in accordance with the new EU legal framework. As a result, the Federal Network Agency could officially intervene in roaming negotiations and even mandate agreements granting access to existing network infrastructure. This will undermine commercial agreements and favor free riders – to the detriment of companies that actually invest.”

Some of his points were echoed by Achim Berg, president of German digital association Bitkom, who said: “Never before has a frequency auction been fraught with such a wealth of uncertainties”, referring to unclear rules on procurement and the potential for roaming mandates. “This auction involves many unknown variables and it requires special entrepreneurial courage,” he said.

Meanwhile, in France, regulator ARCEP has said its 3.5 GHz auction will take place this autumn. It is consulting on terms and conditions, and says it is seeking to find a pricing mechanism which will not make the licences so expensive that MNOs will be restricted in their ability to invest in the best networks. The regulator has also voiced concerns that there will not be enough 3.5 GHz spectrum to enable all four MNOs to support the most advanced 5G services, some of which need at least 100 MHz bandwidths.

This does not sound as though France will be considering additional entrants, even for specialized purposes, at least until it comes to consider millimeter wave bands. Because of the high capacity and limited range of these airwaves, they are well-suited to localized small cell networks, and as these auctions begin to be scheduled, there is hope that regulators will take another look at earmarking spectrum for industrial use, taking advantage of the large amounts available in the 26 GHz and other high frequency 5G bands.