On October 12, the Federal Network Agency (Bundesnetzagentur - "BNetzA") adopted the rules for auctioning frequencies formerly used for broadcasting in the range of 800 MHz (the so-called "digital dividend"). The application deadline for bidders runs until January 21, 2010; the actual auction is to take place in the second quarter of 2010 - if it has not been stopped by the courts beforehand.

The wireless carriers O2 (Telefonica) and E-Plus (KPN) criticize the awarding guidelines as favoring the large providers T-Mobil and Vodafone which already have a bigger frequency spectrum at their disposal. It was for this same reason that the EU Commissioner Reding had again tried to influence the proceeding by writing to the BNetzA and by even threatening to initiate proceedings against the Federal Republic of Germany for violation of EU Directives. Finally, broadcasters and cable network operators expressed their concerns that, on the technical side, the new LTE network technology interferes with DVB-T and cable reception.

Background

In a compromise negotiated between the Federal Government and the Länder it was agreed to make the frequency spectrum formerly used by analog broadcasting, the so-called digital dividend, available to be awarded by the Federal Network Agency. This spectrum is particularly used to supply broadband Internet to undersupplied rural areas ("white spots"). The accelerated development of broadband supply is part of the federal government's broadband initiative, which is why the government is also interested in an expedited awarding procedure and probably why it supported the BNetzA. The low-wave frequencies of the digital dividend are especially well suited to supplying sparselypopulated areas and require, for example, only half as many antenna stations as frequencies above 1 GHz. It is therefore cheaper to establish and maintain a network in the 800-MHz range and the indoor coverage is also easier to provide. This is the reason for which these frequencies are in demand among wireless carriers who primarily intend to use them to cover the increased bandwidth demand of data traffic and improve indoor coverage, but who are not very interested in the expensive coverage of rural areas. Upon the states' request, the license terms will contain detailed supply obligations which will mandate network coverage first in areas with no broadband supply at all, so-called white spots, before extending coverage to undersupplied regions. Densely populated urban regions, which are the most profitable for network operators, may only be supplied once the targeted coverage in less populated priority areas has been achieved. This way, 90 per cent of the population is to be supplied with mobile broadband by the year 2016. As there is not enough of the 800-MHz spectrum available for all interested parties, the Federal Network Agency intends to award these frequencies to the highest bidder in an auction. The auction will take place in the second quarter of 2010 together with the auction of further mobile radio frequencies in the 1.8 and 2.6-GHz range.

Altogether 360 MHz will be put up for auction, i.e. a quantity of frequency spectrum so far unrivaled and which can probably not be awarded again in the next 20 years. This also explains the nervousness regarding the auction design. In particular, there is a conflict of interests between the two large wireless carriers T-Mobil/Vodafone and the smaller providers O2 and E-Plus. Furthermore, the interest of the states to supply rural areas with broadband as soon as possible is not necessarily compatible with the fiscal interests of the federal government to generate the highest auction proceeds possible.

The small providers (and, with them, the EU Commissioner Viviane Reding) fear for long-term disadvantages in competition if the larger providers are able to acquire large parts of the precious spectrum due to their larger financial capacities. With regard to the 800-MHz range, altogether 6 frequency blocks with 5 MHz each can be acquired individually at the auction.

In order to ensure equal opportunity for all providers, the Federal Network Agency has restricted the number of frequency blocks which wireless carriers can acquire via a so-called "frequency cap", while taking the low-wave spectrum in the 900-MHz range the individual providers are already entitled to into account. According to this, T-Mobil and Vodafone may only acquire two 5- MHz blocks as they both already have 12.5 MHz spectrums in the 900-MHz range at their disposal. E-Plus and O2 can purchase three 5-MHz blocks at the auction (they both have 5 MHz in the 900 band) and a new entrant into the market which does not have any mobile radio frequency at present could purchase a maximum of four 5-MHz blocks at the auction.

Technically, at least two 5-MHz frequency blocks are necessary in order to provide a acceptable network coverage of Germany with an adequate data rate from the economical perspective. Given the number of available 5-MHz frequency blocks under the currently intended auction design, i.e. six, there is therefore only sufficient 800-MHz spectrum for three of the four mobile telephony providers active on the German market. One provider will inevitably miss out and therefore suffer considerable strategic disadvantages in terms of competition with regard to supplying its customers. Given their greater financial capability, it is assumed that Vodafone and T-Mobil will each purchase the two admissible blocks at the auction and that E-Plus and O2 will fight over the remaining two blocks. In the end, either E-Plus or O2 will receive none of the attractive frequencies and the successful bidders will have to pay a "strategic", probably unreasonably high, price for the frequencies. It is currently assumed that the auction will generate total revenues of more than EUR 5 billion for the available spectrum, but experience with the UMTS auction in 2000 shows that it can easily be more.

This is where the criticism of the smaller providers and the EU Commissioner sets in: they see a competitive disadvantage for financially less powerful, smaller providers and demand a lower frequency cap of only 5 or 7.5 MHz each for T-Mobil and Vodafone, which would result in E-Plus and O2 being able to purchase two blocks at the auction against payment of an affordable price. Alternatively, T-Mobil and Vodafone could be obliged to make part of their 900-MHz range frequencies available so that this part could be used for a broadband supply (so-called "refarming"). The license of this frequency spectrum, which expires in 2016, is also used for voice telephony at present. The Federal Network Agency, however, was not convinced by the arguments of E-Plus and O2 and also rejected the competitive concerns expressed by the EU Commissioner Reding. It has opted to retain its current frequency caps which lead to an artificial scarcity of the 800- MHz spectrum (3 licenses for 4 providers) in the hope of large auction proceeds.

It is the federal government, not the states, which is entitled to the auction proceeds although they will largely be generated from broadcasting spectrum (i.e. under state control). Given the current budget situation, it is understandable that the auction conditions are also being interpreted in such a way as to maximize proceeds. After all, the frequencies are a public good which should not be sold below their value. From the states' point of view, however, the question arises if the auction design has not lost sight of its goal to provide undersupplied rural areas with broadband access as soon as possible in favor of high auction proceeds. It is obvious that the high price paid for the frequencies can no longer be invested into developing the network. After completion of the UMTS auction, the companies lacked the financial means to quickly develop the network and some of the bidders had to give up altogether (Quam, Mobilcom), which resulted in a weakening of competition. In the end, customers had to foot the bill in the form of higher prices.

The current auction format was laid out for only three licensees from the start. The Federal Network Agency thus accepts the fact that one of the four German mobile carriers will miss out and will thus not be able to remain competitive longterm. The capital markets will react to this accordingly so that the weakened party could be taken over. Is it justifiable for a regulator to provoke market consolidation via the frequency auction, or at least accept it, in order to maximize auction proceeds? Either way, this would be short-term thinking and cannot do justice to the compromise agreed on between the Federation and the states regarding the digital dividend.

Even if the frequencies are scarce, it is by no means inevitable for mobile carriers to be driven to participate in a ruinous bidding procedure. The Federal Network Agency would only have to reserve two of the six 800-MHz blocks for an independent bidder who would then have to offer an open network to all interested parties and accept the obligation to quickly develop the network. Without having to face the bidding competition of the mobile carriers, such bidder would have to spend considerably less for the license so that a sufficient investment volume would be available to develop the network in rural areas. Mobile carriers who did not get a chance to purchase the remaining blocks by auction could still supply their customers via the independent operator's network. This would ensure their competitiveness so that a consolidation would not be accelerated. An independent network operator would also grant access to service providers in its own interest, something that is not foreseen in the current design of the auction and the license conditions. According to previous experience, service providers like United Internet have been successful in marketing Internet connections, even if they had to make use of external infrastructures. They would increase price competition and, in doing so, help to increase broadband coverage.

What the Federal Network Agency failed to do, or consciously disregarded in favor of increasing the auction proceeds, can still be achieved if the mobile carriers act sensibly even on the basis of the current auction format (a fact also pointed out by the president of the Federal Network Agency, Mr. Kurth). An independent bidder, or a syndicate supported by small mobile carriers could buy two 5-MHz frequency blocks at the auction and then provide them as an open network to the non-bidding mobile carriers and to other interested parties (service providers). The conditions may be agreed upon in advance. The money saved by the independent bidder at the auction could be invested into developing the network in order to supply rural areas even faster than provided for in the supply obligation imposed by the Federal Network Agency.

History does not necessarily have to repeat itself if the mobile carrier's memory is able to stretch back 10 years. It has not yet forgotten that the Federation received almost EUR 50 billion at its last big frequency auction, destroying some of the providers along with it and paralyzing the sector with shock for years.