The Germany regulator had a rocky build-up to the current auction with legal challenges to its coverage requirements, and operator hostility to its decision to set aside spectrum for industrial players. However, now it is underway, the conventional aspect – the sale of exclusive mid-band spectrum licences to the MNOs – is following a familiar pattern of price inflation.
After a lull, bidding accelerated on Wednesday and Thursday, making it likely that the four participants would have to pay high fees for their airwaves. At the start of the week, there was speculation that the auction could be one of the lowest ever in Germany, in terms of the revenue it generated for the Treasury, but an uptick in activity made it look more like the sales of the past.
Deutsche Telekom ended Wednesday in a dominant position, and as of the start of Thursday, the total amount pledged had reached €2.9bn (£2.5bn).
Germany is auctioning 41 blocks of spectrum in the 2 GHz and 3.6 GHz bands. Analyst Usman Ghazi at Berenberg Bank had forecast that the best case for MNOs would be total charges of about €3bn, but a total of €4-5bn would be more likely, and the costs could even reach €8bn. That would be in line with Italy’s 5G auction, to date the most expensive, and one which has aroused fears that Europe’s operators will have to raise large sums of money, increasing their debt levels in a reprise of the 4G experience (though not the huge bubble of the 3G auctions). Germany’s main 4G auction netted €5.1bn.
After Italy’s 5G auction netted €6.55bn ($7.4bn), there has been a deep impact on the pressurized Italian telecoms market. Telecom Italia and Vodafone have announced a deal to partner on building the 5G network, to reduce costs, and Vodafone has also said it will have to slash more than 1,100 jobs, or about 17% of its workforce in Italy.
In a research note, Gharzi evoked memories of those past gold rushes, saying that Germany’s new entrant MNO – 1&1 Drillisch, currently an MVNO – had been bidding to “irrational” levels in the 2 GHz band, which it wants to use to deploy its own 4G network.
Early in the auction, Drillisch had made little impact, but in Round 97 it made a massive bid and got back in the game. But Telefónica Deutschland has not been bidding in 2 GHz, suggesting it has enough spectrum around that area of the spectrum. As of Round 126 on Thursday morning, Drillisch, Vodafone and Deutsche Telekom had offered about €1.5bn ($1.7bn) between them for the120 MHz available in 2 GHz.
Bids have been generally lower in the more plentiful 3.6 GHz band, where 300 MHz is on offer. As of Round 126 on Thursday morning, Deutsche Telekom was leading in 12 blocks, Vodafone in 11, Drillisch in 10, and Telefónica Deutschland in just two. Bids had been withdrawn on the other six blocks.
In fact, bidding for 3.6 GHz licences hardly changed in the second half of last week, with spectrum priced at about $0.05 per MHz/POP, far less than the $0.40 Italy’s operators paid in 3.5 GHz. But the value of the 2 GHz spectrum rose from $0.13 to $0.17 per MHz/POP on Tuesday and Wednesday because of Drillisch’s activity.
Timotheus Höttges, CEO of DT, has already criticized the regulator for excluding a 100 MHz block of mid-band spectrum from the current sale and planning to sell it to industrial players, saying this had driven up prices for MNOs and weakened the business case for 5G.
“An artificial shortage of public resources is being created, which may push up the price,” Hoettges told his firm’s annual general meeting in Bonn, ahead of the auction. “In the end, there is no money for the build-out.”
The decision to set aside this spectrum was in response to calls from a group of auto makers – BMW, Daimler/Mercedes and Volkswagen – and other manufacturers, which wanted dedicated spectrum in which they, or their specialist service providers, could build 5G networks in the locations they need them, and with the particular performance characteristics they will require for applications like mobile robotics and predictive maintenance.
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.
The auto group’s main motivation was to ensure that sensitive data is fully secured and controlled within their plants.
The regulator 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. These local licences will be provided on “better-than-operator” terms.
The MNOs opposed the policy vociferously, as well as the minimum service obligations put in place for the 3.5 GHz licences, but a court dismissed motions brought by DT, Telefónica Deutschland and Vodafone before the start of the auction, seeking to have those obligations set aside. The regulator wants successful bidders to commit to covering 98% of German households with access to mobile broadband speeds of 100Mbps by the end of 2022.
The MNOs are also hostile to proposals that might force them to grant access to their networks if a fourth MNO enters the market. As a condition of the merger of Telefónica O2 and E-Plus in 2016, the merged entity had to 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 is now looking to leverage its fiber network and move beyond MVNO status by acquiring 5G spectrum.