How the Telefonica Deutschland / E-Plus merger could play out

This week it was reported that the European Commission and the German telecom regulator (Bundesnetzagentur) are applying pressure to Telefonica regarding their planned takeover of KPN’s subsidiary E-Plus in Germany.

We think on balance the deal will get approved but both parties will need to make significant concessions to get it done. This will be especially the case with regard to spectrum holdings and as we saw in Austria commitments to support virtual operators and branded resellers (i.e. wholesale access). There is always a chance that the concessions are so onerous that they may effectively destroy the deal.

The combined entity will have approximately a 39% mobile customer and 32% mobile service revenue market share in Germany, so the European competition authorities (and the German telecom regulator) will no doubt review it very carefully. Revenue market share figures would of course look much lower if the fixed and mobile markets were combined and no doubt KPN/E-Plus and Telefonica Deutschland will be arguing for this. They have a point, given the recent €7.7bn deal by Vodafone to acquire Kabel Deutschland and the fact that Deutsche Telekom sells fixed and mobile services effectively under one brand.

Regarding spectrum, the combined entity will on the face of it have a whopping 64% of the 1800MHz and 54% of the paired 2100 MHz bands, so it is likely that regulators will require a sale or handback of some of the holdings in these core bands.  In the less scarce 2600MHz band, it holds 42% of the spectrum. A similar situation was seen in the UK with regard to 1800MHz spectrum when EE was created from the merger of Orange and T-Mobile. It is possible that the other German operators will lobby to have “excess” spectrum handed back rather than sold so that the merged entity does not benefit. Some of the excess spectrum is due to for renewal in 2016 and the merger will reduce competition for these frequencies.

By contrast, in the very scarce and more valuable sub 1 GHz bands, it holds 33% of the 800MHz and 29% of the 900MHz spectrum, so there should be less of an issue here.

Clearly the deal is going to require significant concessions.  It makes sense for the competition authorities to scrutinise these deals to ensure that monopolies are not arising and customers have enough market choice.  Yet at the same time, telecom operators need to generate acceptable returns in a fiercely competitive and mature market. A difficult balancing act for the competition authorities.

By Scott McKenzie, Director, Coleago Consulting and former supervisory board member of E-Plus

An upset in Norway following an auction of existing spectrum assets

In my article on spectrum renewal by auction, which was recently published on www.telecoms.com, I highlighted the potential risks that the Norwegian regulator, the NPT, was taking in renewing spectrum using a first price sealed bid auction. http://www.telecoms.com/197611/uncertainty-and-risk-the-results-of-spectrum-renewal-by-auction/ In the article I asked whether Norway would provide the first real upset and whether an incumbent would be deprived of key spectrum assets.

The NPT announced the results of the auction today and whilst incumbents Telenor and NetCom secured spectrum in the key 800, 900 and 1800MHz bands the other incumbent, Tele2, failed to win any spectrum at all. Tele2’s CEO, Mats Granryd made clear in the company’s press release that they regarded the auction outcome as an upset. Granryd said, “We are obviously not satisfied with the outcome of the auction, but we will continue to build on our strong position in Norway.” Instead of Tele2 securing spectrum, the mysterious Telco Data secured a robust portfolio of spectrum assets comprising 2×10MHz in the 800MHz band, 2×5MHz in the 900MHz band and 2×20MHz in the 1800MHz band.

So what contributed to this upset?

The choice of auction format is the primary candidate. In a first price sealed bid auction bidders effectively write a number down in an envelope and the highest bidders win and pay the amount they each bid. In such an auction it makes sense to bid less than the value you place on the spectrum or, as game theorists like to say “shade your bid.” The challenge, however, is to determine how much to shade your bid. Shade aggressively and if you are successful in the auction you create significant value. The risk, however, is that you shade too aggressively and someone with a lower valuation, but who shaded less aggressively, wins the spectrum.

Coleago Consulting has supported operators in over 60 spectrum auctions and we have worked on behalf of both incumbents and new entrants. As markets have matured it has become increasingly apparent that the business case for new market entry is not an attractive one and heroic assumptions are often required just to turn the business case positive. Tele2, as the smallest player in the Norwegian market, may well have taken the view that they only needed to outbid a new entrant and that a new entrant would have had a very low valuation. As a result Tele2 may have decided to shade very aggressively in the hope of securing spectrum at a low price and thus create significant value. The combination of very aggressive shading from Tele2 however and a super charged new entrant business case is likely to have generated the upset.

Written by Graham Friend, Managing Director at Coleago Consulting

Bidders in spectrum auction attach a high value to 1800MHz spectrum

The multi-band combinatorial spectrum auction (CCA) in Austria ended on the 21^st of October, with bidders paying €2,014 million for 2x30MHz of 800MHz, 2x35MHz of 900MHz and 2x75MHz of 1800MHz spectrum. The 800MHz spectrum was new spectrum whereas the two other bands were renewals. The only bidders were the three incumbent operators Austria Telekom, T-Mobile, Hutchison.

The overall price paid for sub-1GHz spectrum and the 1800MHz spectrum amounted to €0.85/MHz/pop. This is only slightly less than the implied price for the sub-1GHz spectrum of €0.96/MHz/pop.

The price for sub-1 GHz spectrum is roughly in line with prices paid for 800MHz spectrum in recent European auctions.  The price paid for 800MHz spectrum in Germany was €0.73/MHz/pop (May 2010) and the average in Europe during 2010 to 2013 was €0.52/MHz/pop. So the price paid in Austria for 800MHz spectrum is relatively high. Benchmark prices paid to renew 900MHz spectrum are in the €0.19-0.53 range whereas the implied price paid in Austria amounts to €0.96/MHz/pop.

Exhibit 1: Austrian Spectrum Auction Results

 

However, since the overall price per MHz per pop paid is only slightly lower than the implied price for sub-1GHz spectrum, this means that operators valued the 1800Mhz spectrum very highly at €0.76/MHz pop.  This is significantly above prices paid for 1800MHz spectrum in recent auctions, and certainly massively more than prices paid for 2.6GHz spectrum. Benchmark prices paid to renew 1800MHz spectrum are in the €0.10 – 0.21 range.  In this context the comments by Telekom Austria’s CEO Hannes Ametsreiter, referring to a “bitter pill to swallow,” are quite appropriate.

The auction outcome highlights that in the context of the rapid growth of data traffic, spectrum is becoming an ever more valuable resource. The re-farming of 1800MHz from GSM to LTE requires more spectrum in the short term because spectrum resources cannot be used efficiently. In that sense governments can hold a gun to operators’ heads and demand almost any price.

1800MHz spectrum is the spectrum of choice for LTE in Europe. Most operators have built a grid based on 1800MHz and hence the 1800MHz band provides both an LTE capacity and an LTE coverage layer. In contrast 2.6GHz is “only” a capacity band. I placed quotation marks around the word “only” because LTE capacity is of course very important in urban areas and here cell sizes are quite small. Nevertheless, the in-building propagation characteristics of 1800MHz spectrum are significantly better than for 2.6GHz spectrum and in-building capacity matters for mobile broadband.

The auction outcome, with A1 Telekom (Telekom Austria) acquiring 2/3^rds of the 800MHz band means that the company now holds 53.8% of sub-1 GHz spectrum compared to a subscriber market share of around 39%. As the operator with the weakest cash flow it is likely that Hutchison faced budget constraints. The result is that the market leader managed has managed to acquire a disproportionate share of spectrum.

The design of the Austrian auction and the absence of effective caps on sub 1GHz spectrum holdings suggest that the Austrian government is not particularly concerned about the effects of spectrum concentration on competition. On the other hand, the spectrum divesture conditions imposed on Hutchison (European Commission, DG Competition, CASE M.6497) to clear its acquisition of One Austria, suggests a very different view of spectrum concentration is applied when it comes to approving in-market consolidation.  The only saving grace for Hutchison is that there was no new entrant and so the requirement to divest 2x10MHz the 2.6GHz frequency band lapses; however the MVNO access requirement remains.

While Hutchison managed to increase its sub-1 GHz spectrum holding from 1.6MHz to 2x5MHz, the cost per eNodeB of deploying LTE is 2x5MHz is roughly the same as for Telekom Austria deploying LTE in 2x15MHz in the same band. Furthermore, there are already many smartphones with 800MHz LTE, where Telekom Austria acquired 2x20MHz, but as yet, none with 900MHz LTE.

In the light of this the comments by Trionow, CEO of H3G, describing the auction as a “disaster for the industry” are understandable. Certainly it is a disaster for Hutchison and for a competitive mobile broadband market in Austria.

 

Written by Stefan Zehle, CEO, Coleago Consulting

New LTE Bands in European Version of iPhone 5S?

When back in September 2012, Apple launched the iPhone5, I commented on the fact that the Region 1 version (Europe and Africa) only included the 1800MHz band for LTE whereas Samsung and HTC already had triple band LTE models in the market with the 800MHz, 1800MHz and 2.6GHz bands.

This week came the announcement that Vodafone UK delayed its LTE launch to coincide with the launch of the iPhone 5S. This seems to indicate that that the new version of the iPhone will include three main Region 1 LTE bands.

It was reported that Vodafone’s Group CEO Vittorio Colao commented on the delayed launch: “End of the summer means when there’s going to be a good commercial moment for launching 4G … EE had a little bit of an advantage because of the iPhone at 1800MHz. To be honest that will go away as soon as we launch our 4G.”

The fact that Vodafone UK organised its launch date around a handset speaks volumes of the marketing power of Apple.  Many consumers make handset choices first and network choices second.  Mobile network operators would gain a lot from promoting Android and Windows phones to counteract the marketing power of Apple. 

Written by Stefan Zehle, CEO Coleago Consulting

Austrian 2.6GHz spectrum auction results show some consistency with previous auctions but the picture is still confusing

The Austrian regulator RTR concluded the auction of 140MHz of paired spectrum and 50MHz of unpaired spectrum raising proceeds of €39.5 million from the four incumbent operators Telkom, Hutchison, T-Mobile and Orange. The benchmark for the paired spectrum of approximately €0.04 is at a similar level to the results from the German auction which also saw the 4 incumbents secure spectrum but 4 times lower than the Danish auction, another market with 4 existing operators. Whilst relative levels of spectrum supply relative to operator demand is often a significant determinant of spectrum prices achieved at auction it is clearly not the full story.

Austria has one of the most competitive and developed mobile broadband markets in Europe and the need for capacity should have pushed prices higher. However, unusually the RTR attached roll-out requirements to the 2.6GHz band requiring 25% of the population to be provided with coverage with a downlink of 1 MBit/s and 256 KBit/s on the uplink by no later than December 2013. This represents an onerous requirement for operators as it will require them to deploy LTE sooner than perhaps they might have preferred. The coverage requirements will have depressed auction prices. Attaching coverage requirements to the 2.6GHz spectrum is unusual as coverage is usually addressed through lower frequency spectrum bands such as 900MHz and 800MHz as the propagation characteristics of the lower bands are more suited to providing coverage. The mix of strong demand and onerous roll-out conditions mean that the auction results provide little additional insight for regulators and operators who have yet to auction the spectrum.

The relative prices for paired and unpaired spectrum also remains confusing as Hutchison paid less in total for its paired and unpaired spectrum (a total of 65MHz) compared to T-Mobile which only acquired 40MHz of paired spectrum. This outcome is however more likely to be due to the algorithm (effectively a second price rule) used by the regulator to determine the final prices.
The use of second price rules, where the highest bidder wins but only has to pay the amount of the 2nd highest bidder, tends to result in more economically efficient allocations of spectrum but it can lead to interesting variations in price for similar lots. For example Telkom paid 20% more for the same amount of spectrum as Hutchison and T-Mobile paid 40% more on a €/MHz/Pop for its 40MHz of paired spectrum than Orange paid for its 20MHz and the difference is unlikely to be explained in full by differences in spectral efficiencies of LTE in wider bands
As countries such as Switzerland, Spain and the UK prepare to auction spectrum in the 2.6GHz band the Austrian auction provide some insight into the potential value of the spectrum but considerable uncertainty remains.