Significant Coordination Problems May Be Encountered During the Expansion

The 5G mobile network standard is expected to lay the basis for Germany’s digital economy. In November, the country’s Bundesnetzagentur (Federal Network Agency) approved the proposed rules for allocating 5G frequencies and set out the conditions for the frequency auction, which is scheduled for the spring of 2019. Professor Vitali Gretschko, an expert on market design, discusses the new rules.

What does the resolution of the Federal Network Agency address?

The resolution sets out the rules and conditions for the auctioning of the mobile frequencies required for 5G. Among the auction conditions, those concerning coverage requirements are particularly important. At present, every mobile operator acquiring frequencies at auction is obligated to provide 98 per cent of households with 100Mb internet by the end of 2022. Motorways, roads, railways, ports and waterways also have to be supplied with high-speed internet.

In addition, providers will have to build a pre-defined number of 5G base stations and ensure provision in mobile internet ‘white spots’ in rural areas. For newcomers to the mobile internet market, the requirements are less stringent: depending on the spectrum acquired, they will have to provide between 25 and 50 per cent of households with 100Mb internet by the end of 2025. The rules of the auction itself contained few surprises – they were essentially the same as those used in previous auctions.

What is your view of the Agency’s resolution?

The coverage requirements are very strict. Any bidder who receives a tender has to build the 5G base stations and ensure household supply, white spot provision, and motorway coverage. For other roads and for railways and waterways, a deduction clause will be invoked. This stipulates that once one operator has provided the necessary infrastructure in an area, it will be considered as covered for all providers. Where expansion in rural areas and along traffic routes is concerned, the frequencies that are to be auctioned are unsuitable, since they have poorer propagation characteristics than those auctioned in 2010 and 2015.

The auction rules also leave room for improvement. To my mind, there is little sense in allowing different bids for absolutely identical abstract frequency blocks. This allows bidders to send one another complex signals through their bids and coordinate their bidding strategies. It is also problematic that more information is made available to bidders than to the general public. While bidders see all of the bids per round, only the highest bids are made public.

Where might adjustments be made?

Though the resolution allows for discussions among mobile operators so that they can better fulfil their commitments, significant coordination problems may be encountered during the expansion. This issue could be addressed by first dividing up the rural regions and transport routes among the bidders, and only imposing the relevant conditions on the provider responsible for each region. This provider would then have to allow the other providers to use its network in the region. The most efficient way of achieving this would be to establish a separate auction for the coverage requirements or to integrate them into the 5G auctions. 

Are rural regions at a disadvantage?

The coverage requirements aim to ensure that rural regions are also provided with fast internet services. If the requirements are successfully implemented, rural regions will be able to catch up with other areas. It nonetheless makes little sense to establish, say, three network infrastructures in a sparsely populated region. That’s why it would have been helpful to integrate the coverage requirements into the auctions, so that only one provider would have to fulfil them per region.

Established mobile internet providers have contested the resolution. Why is that?

The established providers have contested it mainly because the frequencies that are to be auctioned are insufficient to meet the coverage requirements. Frequencies from the 2010 and 2015 auctions will therefore be used to fill the gap. The providers have argued that this retrospectively devalues them.