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Expensive spectrum puts European 5G at risk

The UK’s infamous auction of 3G spectrum in 2000 had lasting ramifications for the mobile industry. Intense competition between BT Cellnet, One2One, Orange, Three, and Vodafone resulted in an astonishing £22 billion spent on licences for airwaves that would power new mobile services.

But as difficult as it is to believe in 2019, the mobile phone was not entrenched in everyday life as it is today. An absence of “killer” applications exacerbated limited consumer demand and the huge amounts of money spent on the licences meant operators were constrained in their ability to invest in infrastructure.

By the time smartphones arrived in their modern guise with the iPhone in 2007, it became apparent that 3G networks lacked the capacity and speeds required for emerging use cases.

Learning lessons

It was a lesson that regulator Ofcom recognised when it (finally) auctioned 4G airwaves back in 2013. Some observers lamented the sale only generated £2.31 billion rather than the £4 billion windfall anticipated by the treasury, but the regulator was keen to stress that its role is to maximise the efficiency of the spectrum and its value to society.

This role was reprised at the first 5G auction when £1.4 billion was raised at the first 5G spectrum auction in early 2018. Ofcom will be pleased that all four mobile operators will launch next generation services this year rather than next.

Although Ofcom will sell more bandwidth in the years to come, the amount raised pales in comparison to the recent German 5G auction, raising fears that the cost of spectrum in some countries could hinder network rollout.

German 5G auction

The marathon process finally concluded last week after 497 rounds of bidding for 41 blocks of 2GHz and 2.GHz spectrum, raising €6.5 billion – beating estimates of between €3 billion and €5 billion. Deutsche Telekom, Vodafone and O2 all won licences, as did Mobile Virtual Network Operator 1&1 Drillisch.

However, all were critical of the process, claiming the high cost of the spectrum would hinder their ability to invest. Although far less than the gargantuan €50 billion raised in the 3G sale, the proceeds from the sale exceeded the €5.1 billion raised for 4G licences in 2015.

“The network rollout in Germany has suffered a significant setback,” declared Dirk Wössner, a member of Deutsche Telekom’s management board. “The price could have been much lower. Once again, the spectrum in Germany is much more expensive than in other countries. Network operators now lack the money to expand their networks. With the auction proceeds one could have built approximately 50,000 new mobile sites and close many white spots.”

“We believe it is important to have a balance between the price paid for spectrum and our strong desire to create an inclusive society through investment in mobile network coverage,” added Nick Read, Vodafone Group CEO.

(Image credit: EE)

(Image credit: EE)

(Image credit: EE)

Rising costs

At least in Germany, operators will indirectly benefit from the proceeds as the Federal Network Agency (BNetzA) will use the money to upgrade Germany’s fixed line network – boosting backhaul services.

But the fear within the industry is that regulators and governments will see spectrum auctions as a way to line their pockets and will overlook the wider economic benefit of 5G that could be forefeited if spectrum costs are too high. Late last year, the Italian 5G auction raised €6.5 billion, for example.

“Every Euro spent acquiring spectrum is one less that is available to deploy the networks,” Kester Mann, an analyst with CCS Insight told TechRadar Pro. “While squeezing every last cent is good news for government coffers, it puts operators on the back-foot as they begin the roll-out of expensive infrastructure vital to supporting Germany’s huge manufacturing sector.

“The terms of the auction have already been contentious and the high amounts pledged so far will only serve to further strain the fragile relationship between the network operators and the government.

“Europe is already on the back-foot in 5G network roll-out compared to other regions and expensive spectrum auctions will do nothing to narrow the gap. Europe’s fragmented market structure and belligerent regulation compared to the US and developed Asian markets mean that it will be playing catch-up once again.”

It’s not all doom and gloom. Although the US and South Korea have beaten Europe to the punch when it comes to 5G, Switzerland and the UK already have next generation network services in place. And the continent continues to have the best 4G networks in the world.

With the truly revolutionary features of 5G, such as ultra-low latency, and new entertainment and business applications not expected until the mid-2020s, Europe can still play a vital role in 5G. But Europe is a fragmented marketplace with so many operators in each country.

Regulators needed to decide whether the direct or indirect economic advantages of 5G are more important.

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