(Bloomberg) -- Germany’s effort to catch up to the digital age starts this week when the gavel falls on the auction for the airwaves to build ultra-fast 5G wireless networks.
The rollout of the technology is critical as Europe’s biggest economy seeks to transition away from its reliance on old-school engineering. The country lags behind the likes of Qatar, Albania and Moldova when it comes to mobile internet speeds, and its clunky network is becoming a handicap in the transition to a data-based economy.
“Updating Germany’s digital infrastructure is very important,” said Rubin Ritter, co-chief executive officer of Berlin-based Zalando SE, Europe’s biggest online fashion retailer. “There are moments when customers have difficulties accessing our app.”
Chancellor Angela Merkel’s government has promised to create “world-class” digital infrastructure and end the notorious dead zones that dot the countryside. It expects proceeds of as much as 5 billion euros ($5.7 billion), but the actual bill will be hard to predict.
The goal goes beyond streaming video, but allowing family-owned manufacturers and corporate giants like Siemens AG to digitalize production processes and develop data services.
The bidders are a select group, comprising current network operators Deutsche Telekom AG, Vodafone Group Plc and Telefonica SA as well as new entrant United Internet AG. The buildup to the auction, which starts Tuesday, has been accompanied by controversy, including legal disputes over the conditions and pressure on the German government to ban equipment from China’s Huawei Technologies Co. over security concerns.
5G promises to be lightning fast, offering enough bandwidth and speed to download a full-length feature film in seconds. After years of falling share prices, the telecommunications industry is hoping the technology opens up fresh revenue streams, with visions of holographic chats, remote surgery and driverless cars.
But it will cost billions to realize that potential. Over the next three years, Deutsche Telekom plans to invest 20 billion euros in Germany on 5G services and high-speed internet connections.
The foreboding investment levels prompted bidders to try to stop the auction by filing lawsuits against the government’s requirements -- including providing coverage for 98 percent of German homes, every highway and all federal roads with download speeds of 100 megabits per second by the end of 2022. A court threw out those suits on Friday, clearing the way for the auction to start as planned.
Hey Bidder, Bidder
This won’t be like a cattle auction with an auctioneer driving up the price. It’s more similar to a drawn-out chess game that could take several weeks. The bidding teams are in closed rooms at the headquarters of Germany’s network regulator in Mainz. They will bid on 41 blocks of frequencies -- akin to wireless building lots with some more prized than others.
Despite the enormous potential, bidders are likely to be cautious. Auctions in Italy and the U.K. overshot on costs, fueling complaints by carriers that governments are using the sales to fill their tax coffers instead of fostering network investment.
Back in 2000, at the height of dot.com bubble, the carriers plunged into a bidding frenzy for 3G frequencies, resulting in auction proceeds of more than 50 billion euros, saddling operators with massive debt. Given that Germany needs to catch up, there may be interest in keeping auction proceeds under control to not sap the resources needed to invest in the complex network roll-out.
Germany can’t afford to lose any more time. In the U.S., Verizon Communications Inc. and AT&T Inc. have already started 5G services in several cities, and China -- another early mover that’s investing aggressively -- is forecast to be the world’s biggest 5G market by 2025, according to the GSMA wireless trade association.
Meanwhile, Germany is just trying to stay connected.
“Driving with a car through Germany you lose your cellular connection every five kilometers,” said Stefan Brandl, chief executive officer of EBM-Papst GmbH, a maker of industrial fans based in rural Baden-Wuerttemberg. “The network and the infrastructure we have right now in Germany is a big weakness.”
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