Broadband Internet Billions at Stake in Spectrum Battle

Upstart firm Liquid Broadband says the auction for highly coveted mobile communications frequencies favors Germany's established networks and stifles competition.
The cost of new spectrum could be sky-high.

If the German government has its way, wireless phone and Internet operators bidding for new radio frequencies next year can expect to pay billions for the spectrum.

Berlin aims to auction the frequencies in the second quarter of 2015 and use the proceeds for broadband expansion, after promising high-speed Internet for all by 2018. The last auction raised more than €4 billion ($4.93 billion).

Germany’s three mobile communications network operators, Deutsche Telekom, Vodafone and Telefónica, are expected to place bids. All three have sufficient funds and could drive up prices if forced to.

Liquid Broadband, a new market player, also intends to participate in the auction but believes the process is a major hurdle to market entry. "Competition is clearly being eliminated," said Beate Rickert, managing director of Liquid Broadband.

Ms. Rickert isn’t alone with this assessment.

Competition is clearly being eliminated. Beate Rickert, Managing Director, Liquid Broadband

"There are solid indications this process is not free of discrimination," said Thomas Maibaum, an expert on procurement law. The current scheme, he explained, makes no exceptions for new market entrants, which generally lack the funds to compete with bids from established network operators. As a result, young companies are blocked from entering the market for 15 years, the period of the spectrum licenses.

Justus Haucap, the former head of the German monopolies commission, said the procedure is hampered by "knockout prices."

Liquid Broadband hired Mr. Haucap to conduct a study to determine whether the envisaged rules for granting frequencies are fair. He concluded they are not. The three major operators, he argued, would try to keep a newcomer from entering to protect their market share.

To prevent this from happening, the federal network agency, which is in charge of the auction, could reserve individual blocks for newcomers, according to Mr. Haucap.

Liquid Broadband has its sights set on two 10-megahertz blocks of the 700-megahertz frequencies, spectrum that is being called the Digital Dividend II. The company intends to use the radio frequencies to connect terminals in homes and apartments for customers to create high-speed wireless networks.

The ARD and ZDF public television broadcasters called the agency's timeframe for clearing the 700-megahertz frequency illusionary.

The Digital Dividend II frequencies, which until now have been used by broadcasting companies, are in high demand. Among other things, they support wireless reception in rural areas, where broadband expansion with cables is very expensive.

Whether the federal government is prepared to change its frequency auction scheme remains to be seen. State premiers will meet on Thursday to discuss the conditions.

Mr. Haucaup conceded that a move to reserve blocks for newcomers would likely reduce proceeds from the frequency auction. But he said the goal should not be to maximize government revenues but to ensure competition and stimulate innovation and investment.

Ms. Rickert is considering legal action if a special rule for newcomers is not agreed.

The network agency declined to comment on the current discussions, but noted that all concerns and interests would be included in its deliberations.

The agency confirmed receiving 32 statements from various parties, including broadcasting companies.

The ARD and ZDF public television broadcasters called the agency's timeframe for clearing the 700-megahertz frequency "illusionary."

The plan calls for transitioning the use of wireless networks beginning in mid-2015. But the broadcasters claim this process can’t begin until early 2017 and be complete until mid-2019.

 

Ina Karabasz is an editor with Handelblatt Live. To contact the author: [email protected]