IHS Global Insight Perspective | |
Significance | The major spectrum auction in Germany has concluded, yielding a combined total of 4.4 billion euro (US$5.5 billion) out of the available 41 frequency blocks. |
Implications | Vodafone, Telefónica, and Deutsche Telekom each overbid KPN's E-Plus by over one billion euro, most notably leaving the latter without access to the 800-MHz digital dividend. |
Outlook | Pending the outcome of the regulator's market assessment later this year, KPN has now basically three strategic options in Germany. It may try to focus exclusively on operating in the major cities, initiate a merger between E-Plus and O2, or exit the market altogether by selling the unit to Telefónica. |
German regulator BNA's auction of new radio frequencies has ended, raising 4.4 billion euro (US$5.5 billion) in proceeds. Of the 41 frequency blocks that were allocated, the six blocks in the 800-MHz band generated 3.6 billion, or 82%, of the combined total.
Of the four bidders, Vodafone spent 1.42 billion euro, followed by Telefónica O2 with 1.38 billion and Deutsche Telekom with 1.3 billion. Royal KPN's E-Plus invested 283.6 million euro in its winning bids. KPN was the only bidder left without blocks in the 800-MHz band, with the other three securing two per each.
Outlook and Implications
- Europe's First Digital Dividend: Significantly, the auction was the first allocation of the 800-MHz digital dividend spectrum in the European Union (EU), and as such it will serve as a benchmark for the future ones elsewhere. At the same time, it is a major catalyst in the German government's national broadband strategy, which aims at bringing mobile or fixed broadband to every household by the end of 2010. The accumulated proceeds are clearly in the lower end of the most industry estimates, which due to the lack of an earlier benchmark varied quite wildly in the first place, with a span from two to eight billion euro. In our view, the total sum out of the digital dividend is a rather realistic outcome, given that Germany may probably already next year free up the technically very similar 900-MHz band—at the moment reserved for voice services—for mobile data. In anticipation of this, the digital dividend was never going to be the only game in town.
- Regulator's Market Assessment May Alter Landscape: When evaluating the fallout from the auction, it is worth bearing in mind that the regulator is committed to reassess the market's competitive dynamics in the second half of this year (see Germany: 22 December 2009: German Mobile Spectrum Auction Back on Track as EU, German Regulator Resolve Differences). If the market analysis concludes that the outcome has significantly undermined competition, the BNA will likely impose certain corrective measures, although it is quite arguable whether this could, in the scheme of things, change much. The most obvious conclusion of the current state of things is that E-Plus will be in a major disadvantage against its three rivals, and namely because its license portfolio does not comprise anything in the 800/900-MHz range. Besides making it infeasible for E-Plus to roll out 3G and 4G networks outside metropolitan areas, the lack of lower frequencies will also give its broadband services a worse indoor coverage across the network, which is a factor that should not be overlooked. We expect KPN to wait and see the results of the forthcoming market assessment, before it decides on its German strategy. In the best case scenario for E-Plus, the conditions for the redistribution of the 900-MHz band could be fixed slightly in its favour, yet the operator should not count solely on this.
- E-Plus/O2 Merger Likelier Than Ever: All in all, a case for a tie-up involving E-Plus and O2 is now greater than ever. In the future, E-Plus could remain independent if it focused its strategy more or less exclusively on the major cities—where its licence portfolio gives it a better chance to compete effectively—but even there it will face fierce competition from the other three. In addition, the KPN unit is the only mobile-only operator, with no fixed-line presence, which is another major disadvantage in its strategy. The combined market share of E-Plus and O2 would put them in the same category with Deutsche Telekom and Vodafone, besides which the new entity would enjoy from a competitive frequency portfolio, as well as Telefónica's extensive fixed-line presence. Taking into account that Telefónica has at the same time to direct a chunk of its available war chest to its Latin American ambitions, as well as that a full divestment of E-Plus would shrink KPN quite dramatically in size, the most viable way forward might be a 50/50 joint venture, along the lines of what Deutsche Telekom and Orange have created in the U.K. market.