Germany prepares to launch LTE using digital dividend spectrum

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Germany became one of the first countries in Europe to redistribute the so-called ‘digital dividend’ bandwidth to mobile operators in a spectrum auction that closed late last week. The auctions – which netted the government around EUR4.38 billion in total – were contested solely by the country’s four existing mobile operators and were wrapped-up after 224 rounds of bidding for the 41 blocks of spectrum on offer. However, the auctions raised less than expected – advisory firm KPMG had predicted total gains of around EUR6 billion to EUR8 billion – and fell well short of the EUR50 billion generated from the sale of Germany’s first 3G licenses a decade ago.

Spectrum was acquired in several frequency bands, including 1.8GHz, 2GHz and 2.6GHz, most of which will be used to add capacity to the operators’ existing 2G and 3G networks. But it was airwaves in the 800MHz digital dividend band that was most sought after and commanded the highest fees. This spectrum is being freed-up by the TV broadcasters’ move to digital TV and is deemed particularly suitable for deploying next-generation mobile technologies such as LTE. The lower frequency band will also allow mobile broadband to be rolled-out more economically to rural areas as well as providing better ‘in-building’ coverage.

However, only three of the four mobile operators acquired 800MHz spectrum with KPN’s German unit, E-Plus, the one to lose out. As the breakdown of expenditure in the auctions by individual operator reveals, 800MHz spectrum accounted for the vast majority of the outlay (see table); T-Mobile, Vodafone and O2 each spent over EUR1 billion more than E-Plus, which reportedly withdrew a EUR8.6 million bid for two blocks of 800MHz bandwidth during the auction process. E-Plus has already expressed an interest in striking a deal with one of its rivals to rent capacity on any new network that uses the digital dividend spectrum. Under the terms of the 800MHz licenses, the three winners must first use the spectrum to provide service to rural areas, which could serve to fill gaps in E-Plus’ network coverage. Market-leader T-Mobile has said it will start testing LTE services at 800MHz later this year.  

That the auction produced no potential new market entrants will disappoint those that hoped the new bandwidth could be used to stimulate competition in the market, which is the largest European mobile market by revenue. According to the German regulator – Bundesnetzagentur (BNetzA) – one applicant withdrew its application for admission to the bidding procedure, while another had its application rejected as it did not meet the regulator’s requirements. However, with around 100 MVNOs and various operator sub-brands already active in a competitive market, regulators saw no reason to enforce auction terms that would have facilitated a new market entrant. Nevertheless, the auction process has proved controversial: E-Plus and O2 – the two smaller players – took legal action against the regulator last year, arguing that the auction rules favoured T-Mobile and Vodafone as they already own significant spectrum below 1GHz. This action was later rejected by the courts.

Deployment of LTE in 800MHz would mark a departure from the early roll-outs of the technology seen elsewhere in Europe – notably via TeliaSonera in Sweden and Norway – which are typically using 2.6GHz, the 3G expansion band. 2.6GHz is seen as a useful compliment to lower frequency deployments as it works better in dense urban areas but it is less suited to long-range coverage. European regulators are currently to looking harmonise both bands for mobile broadband deployments.

The German auctions are set to be followed by digital dividend auctions elsewhere in Europe with auctions scheduled in Switzerland, France and the UK among others. The corresponding airwaves in the US – which were sold-off at auction in 2008 – are already being used for LTE deployments with market-leader Verizon Wireless set to switch on its first LTE networks at 700MHz later this year.

Will Croft, Analyst, Wireless Intelligence:

In an auction that is expected to set the stage for forthcoming 2.6GHz European auctions, total bidding in the latest German auctions inevitably commanded a lower sum than the country’s 3G auctions a decade ago. In August 2000, 125MHz of 1900/2100MHz spectrum was sold-off between six operators for just over EUR50.5 billion. In the 2010 auction, however, a far greater sum of spectrum was available – almost 360MHz across 800/1800/2600 MHz bands – but sold-off for just EUR4.4 billion. The average price per MHz per population in 2000 was a huge EUR4.92 compared to just EUR0.15 in this year’s auctions. There are three main reasons why the two auctions had such widely different outcomes. Firstly, the most recent auction attracted no new (successful) competition. But back in 2000, data services over WCDMA represented a lucrative- if untested – market opportunity, which helped to lure new competition and fuel sky high bidding. Secondly, regulation on the 800MHz proposed band for LTE is significantly stricter than prior licenses, requiring rural rollouts before urban cities are tackled. Lastly, the industry has matured in its last decade: return-on-investment (if any) from the original 3G auctions has long been a matter of debate, and the latest auction represents a re-evaluation of the value of spectrum compared to the revenue of the services it supports. No doubt Germany will be seen as a mid-priced model going forward for the pan-European digital dividend and 2.6GHz auctions, but the picture remains far from clear in terms of operator expenditure given the 135 times difference between the most expensive (Sweden) and cheapest (Netherlands) auctions seen so far.

Germany mobile connections (1Q10) and 2000/2010 auction expenditure
Source: Wireless Intelligence, Bundesnetzagentur, company data

^† Totals include licences awarded to MobilCom (21 MHz, EUR 8.37 billion) and Viag Interkom (British Telecom) (20 MHz, EUR 8.44 billion)