Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
The LTE spectrum auctions are changing competitive dynamics in mobile markets. Leading mobile operators are paying billions to achieve long-term spectrum dominance, while challengers are hoping to use acquired spectrum to deploy smart network solutions and boost their competitiveness. In this article, we assess who may be the winners and the losers of the spectrum poker.
In reaction to the explosion in mobile data traffic and to open the possibilities of mobile data to rural areas, the European Union ensured that the “Digital Dividend,” (800 MHz) spectrum previously used by analog television, will be used for mobile data networks. Most countries are using this opportunity to auction off new 2.6 GHz spectrum at the same time and to enable limited refarming of existing spectrum to increase market competition. Auctions have already been completed in Germany, France, Spain and Italy, and auctions are planned to be conducted soon in most remaining European countries.
LTE auctions: surprise results
The fight for 800 MHz spectrum has dominated auction results. Depending on the competitive situation, auction rules and spectrum availability, operators have taken one of two strategies: either push aggressively for 800 MHz spectrum, or sidestep and go for the spectrum bands above 1 GHz.
While the prices for the 800 MHz spectrum skyrocketed in Germany, in other markets such as Spain, Sweden and Austria, bidders managed to keep the fee to be paid in the auction low. The Spanish government hoped to raise approximately $2.6 billion, but auction revenues reached only $2.16 billion, as a pre-auction phase ensured spectrum for the fourth player, Yoigo, leaving only three bidders for three slots in the primary auction.
In Sweden, Telenor and Tele2 decided to build a shared LTE network, creating the joint venture Net4Mobility, thus reducing the auction from four to three bidders. Austria has auctioned off only the 2.6 GHz spectrum so far, and the $51.7 million in proceeds were only a quarter of the Danish auction, possibly due to unusual coverage obligations on this band and because operators want to keep their cash for the upcoming 800 MHz auction.
In Germany, the smallest operator, E-Plus, chose not acquire 800 MHz spectrum as it feared rural coverage obligations could negatively affect profitability and as the price surged to unexpected heights during the auction. As a result, Deutsche Telekom, Vodafone and Telefónica Germany (O2) paid over $1.6 billion for two blocks of 800 MHz spectrum each. In total, the German auction resulted in revenue of approximately $5.8 billion.
In Italy, Hutchison 3G also passed on 800 MHz spectrum and went for the 1.8 GHz spectrum instead, but competition of the four other mobile network operators and on other bands amounted to auction proceeds of $5.1 billion, far exceeding the expected $3.4 billion.
800 MHz most valuable, but may be overhyped
As auction results show, 800 MHz is clearly the most valuable spectrum in LTE auctions. It has the best outdoor and indoor coverage parameters, enabling operators to deploy and maintain fewer sites than in other typical LTE 1.8 GHz and 2.6 GHz spectrum bands. Operators with 800 MHz spectrum thus can have sustainably lower network operating expenses and capital expenses – and they will be the only ones with nationwide LTE networks, as nationwide networks on the other bands would be too costly. Moreover, the large cell size and resulting large overlap areas of 800 MHz antennas ensures continuous data connections while moving in cars or on trains, for example. As good coverage remains key to customer satisfaction, operators who own 800 MHz spectrum will have a strong competitive position.
However, there are compelling network alternatives for operators that do not have 800 MHz spectrum. The licenses for the 800 MHz band are expensive to acquire and often cannot be used for a few years. Cheaper alternatives are available and operators can impact the market in the short-term with smart strategic moves on other bands.
1.8 GHz will be the strongest LTE ecosystem – combining decent coverage parameter with good spectrum availability
As operators are waiting for clearing of 800 MHz spectrum bands, the innovative solutions offered by suppliers move the focus of current LTE activities to the 1.8 GHz band. Compared to higher frequencies antennas, 1.8 GHz sites still have acceptable radii to be used outside urban areas, for example in suburbs or along busy transport routes.
Going for 1.8 GHz instead of 800 MHz is the most interesting strategy observed in LTE spectrum auctions so far. The investment saved in the auction can enable market players to invest into accelerating LTE deployment. In Spain, for example, owners of 2×10 megahertz spectrum blocks in the 800 MHz bands jointly have to cover 90% of villages with less than 5,000 inhabitants by the end of 2019, while small challenger Yoigo can focus on 1.8 GHz LTE deployment in profitable areas. Worldwide over 20 operators have already committed to deploying LTE in 1.8 GHz on newly acquired spectrum blocks or as part of refarming strategies.
Network partnerships are smart game changers
Spectrum acquisition is just one aspect of the LTE challenge, as network rollout will be very expensive (additional $1.05 billion to $1.6 billion per mobile network in each major European country) and operational hurdles in building at least 30% more additional base stations (i.e. 2,000 to 4,000 additional sites per mobile operator) in a considerably shorter period of time.
Consequently, we expect network cooperation partnerships to become more prevalent, at least among those operators that have secured the same frequency bands (i.e. two groups: with and without 800 MHz). These network cooperation agreements will be increasingly sophisticated, with not only passive site sharing, but also even solutions requiring co-management of a single radio access network by third parties.
The reality of LTE myths
Based on our analysis of auctions and LTE markets, we have developed a set of LTE myths and realities. (See Figure 4)
