High 5G Spectrum Prices Are Braking European Rollouts

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4Q 2018 | IN-5287

While low-band spectrum is ideal in providing wide area coverage, mid-band spectrum can satisfy booming capacity demand for dense urban areas. High-band spectrum is optimal in providing ultrahigh speed mobile broadband and fixed wireless connectivity, even replacing Fiber to the Home (FTTH). Midrange frequencies have specific attributes enabling them to deliver Enhanced Mobile Broadband (eMBB) with the best compromise between capacity and coverage. This gives a unique importance and attention to the 3.4–3.8 GHz spectrum in the early times of 5G. However, the available midrange frequencies are limited. Radio astronomy, satellites, military, radio, and TV services are using this block in many countries, and industry activities are now underway to free spectrum for 5G. The stakes are high: allocating spectrum early helps vertical industries to achieve critical mass in their 5G-related products and services before others. Most countries have not auctioned 5G spectrum yet, but a few have already completed 5G spectrum auctions.

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Mid-Band Frequencies Are Essential in the Early Times of 5G

NEWS


While low-band spectrum is ideal in providing wide area coverage, mid-band spectrum can satisfy booming capacity demand for dense urban areas. High-band spectrum is optimal in providing ultrahigh speed mobile broadband and fixed wireless connectivity, even replacing Fiber to the Home (FTTH). Midrange frequencies have specific attributes enabling them to deliver Enhanced Mobile Broadband (eMBB) with the best compromise between capacity and coverage. This gives a unique importance and attention to the 3.4–3.8 GHz spectrum in the early times of 5G. However, the available midrange frequencies are limited. Radio astronomy, satellites, military, radio, and TV services are using this block in many countries, and industry activities are now underway to free spectrum for 5G. The stakes are high: allocating spectrum early helps vertical industries to achieve critical mass in their 5G-related products and services before others. Most countries have not auctioned 5G spectrum yet, but a few have already completed 5G spectrum auctions.

The Italian government has set a new world record by raising €6.5 billion for 5G spectrum. While it is true that the auction includes 694–790 MHz, 3.6–3.8 GHz, and 26.5–27.5 GHz frequencies, the final price surprised the entire ecosystem and somewhat shocked the global Mobile Service Provider (MSP) community. Finland also completed its mid-frequency 5G spectrum auction in October, with the final price for the 3.4–3.8 GHz being €78 million. One of the first 5G spectrum allocations in Ireland had a similar outcome last year, when Irish authorities closed the auction of the 3.4–3.8 GHz for €78 million.

Operator Market, Offered Spectrums, and Country Characteristics Are All Determining the Spectrum Prices

IMPACT


In order to make 5G mid-frequency costs comparable between different markets, the final auction price has been divided with bandwidth size and country’s population. This proportional metric of spectrum price per MHz per population (€/MHz/pop) can provide a common ground to compare the amount each operator paid for its spectrum.

  Mid Frequency Spectrum Prices  

Spectrum prices for 5G are affected by three main factors: mobile operator market, nature of the offered spectrum, and country characteristics, including population and Average Revenue per User (ARPU). For instance, the emergence of a new entrant in the operator market will raise competition for the limited frequency bands and increase spectrum prices. Three fixed broadband operators (Fastweb, Linkem, Open Fiber) and four mobile operators (Iliad, TIM, Vodafone, Wind Tre) registered for the Italian auctions. In the end, all of the MSPs bid successfully. The appearance of an aggressive newcomer with a disruptive strategy shook up the market: the French company Iliad increased demand for limited mid-spectrums, heating up competition in the Italian market. As an example, Rakuten already has a license and plan to launch as a Mobile Network Operator (MNO) in Japan, similar entrants can potentially cause more tense competition for the limited 5G suitable midrange frequencies.

While some European countries such as Italy, Spain, or the United Kingdom offered smaller different-sized blocks, Finland has dedicated three equally sized 130 MHz spectrum allocations for 5G. Italy offers two 80 MHz and two 20 MHz blocks, which intentionally promotes competition and higher prices. Furthermore, Finland’s exceptional 4G network and network sharing between operators also imply lower prices. The combination of these three factors led to record-high Italian mid-frequency prices and the short-term success of the Italian government.

High Spectrum Fees Impact Operators’ Capital Expenditure Budget

RECOMMENDATIONS


Italy’s record-setting spectrum prices are directly affecting MSPs the most: Telecom Italia (TIM) will pay €2.4 billion for 5G spectrum, which will take significant share of its Capital Expenditure (CAPEX) budget. The leading Italian MSP spent €5.7 billion on CAPEX in 2017; this record-high spectrum cost will affect network deployments. TIM is currently heavily deploying fiber and expanding its 4G network, as unexpected 5G spectrum prices will lead to a reassessment of their upcoming CAPEX plans. Wind Tre is also seeking options to cut debt by selling its tower assets after acquiring 5G spectrums for €516 million. The four Italian MSPs are required to pay just a portion of the full fee in 2018. This will be followed by installments in the upcoming years, with most of the fees due in 2022. Regulators should consider operator concerns and long-term aspects—offering equally sized spectra is a way to avoid artificial auction constructs and give a healthy balance to the industry.

European service providers spent billions of euros on 3G auctions, causing high dept level and slower investments on network rollouts and new services. It is still arguable whether they have achieved a Return of Investment (ROI). Such an action in the age of spectrum scarcity and plateauing operator CAPEX will cost more in the 5G era. Based on 5G’s stronger industrial focus and higher prices, slower network deployment will likely retrain the entire 5G ecosystem and industry verticals. Higher 5G spectrum prices and short-sighted mentality of the regulators could not only slow down investments and innovation in the fragmented European market but also endanger the competitiveness of the European telecommunication ecosystem.