An Auction Serves the Purpose of Ensuring Supply Better
OpinionOpinion by ZEW President Achim Wambach and Vitali Gretschko, Professor of Economics at the University of Münster
The Federal Network Agency recently unveiled a draft outlining the framework for allocating mobile radio frequencies from 2026 onward. Rather than opting for an auction, the agency contemplates extending current usage rights, set to expire in 2025, until 2033.
The debate on the extension of frequency licenses touches on central aspects of telecommunications infrastructure and competition. While the streamlining of frequency durations and the potential benefits of collaborative allocation offer advantages, it is crucial to ensure fair and dynamic competition. Additionally, consideration should be given to a more efficient way of imposing supply obligations.
Advantages of an extension
The Federal Network Agency justifies this move by emphasising the necessity to standardise frequency license durations. Some licenses conclude in 2025, while others persist until 2033. A joint auction of all frequencies in 2033 would allow providers to combine them more effectively and thus optimise their use. Furthermore, this year’s World Radiocommunication Conference is deliberating on whether additional frequencies will be made available in the future, facilitating adequate allocation of frequencies to all mobile operators.
Opting to standardise frequency durations and allocate them jointly through an auction is a sound decision. This collaborative process reduces uncertainty for bidders: If a business model requires a certain number of frequencies, a bidder can acquire them in a single process. In contrast, multiple allocations create uncertainties and speculations about future allocation conditions. This could lead to bidders hoping for more favourable future conditions winning the bid, rather than those with the best business models. Moreover, a process that considers a broad spectrum of frequencies eases entry for new market participants.
Disadvantages of an extension
A significant objection to the extension of licenses is the rapid pace of technological change. Frequency allocations deemed efficient at one point may be considered inefficient later due to technological advances. Longer license periods increase the likelihood of such inefficiencies. A vivid example of this is the United States, where frequencies were historically allocated indefinitely. As a result, many were used by broadcast and television, which would have been better utilised in mobile broadband. Since frequencies could not be easily reallocated, a complex auction process became necessary, where TV stations sold their frequencies and telecommunications companies could acquire them.
Given the short duration of the extension of usage rights, the impact of technological change may not be as significant. However, the effects on competition are more crucial. Not all mobile operators would equally benefit from an extension of licenses expiring in 2025, particularly posing challenges for newcomer 1&1 Drillisch. Therefore, the Federal Network Agency is considering linking the temporary license extension with various measures to promote competition and mobile radio coverage. This includes, for example, a temporary negotiation obligation for established network operators regarding national roaming with 1&1 Drillisch.
Requirements and ramifications
Extending licenses also means the Federal Network Agency misses a chance to link the reassignment of expiring licenses to supply goals through an auction. A proposed compromise involves tying the extension to new supply obligations that promote expansion in rural areas. Mobile network operators are suggested to provide at least 98 per cent of households in sparsely populated areas in each federal state with a minimum speed of 100 Mbit/s by the end of 2028. All companies must meet these requirements.
However, such comprehensive obligations affecting all operators pose certain problems. In areas with effective infrastructure competition, these supply obligations may be irrelevant or even counterproductive, making it difficult for companies to stand out. In regions where infrastructure competition is insufficient to ensure adequate coverage, the redundant construction of infrastructures is uneconomical.
A more sensible approach would be ensuring coverage in underserved areas through a single network operator. Other operators could gain access through passive infrastructure sharing, as seen in the cooperation between Telekom, Vodafone, and O2 in underserved areas, or through roaming. The most efficient method for determining the best company to meet supply obligations would be an auction: the company offering the most cost-effective expansion wins the bid and commits to the build-out. Financing could come from additional fees for frequency extension, ensuring no extra burden on the state budget for the expansion.
