For a country that is known for being as efficient, organized, and technologically advanced as Germany, its state of mobile networks constitutes a rare black mark. Germany is the third largest economy in the world with 82 million inhabitants (double that of California in half of the area) with a highly efficient and advanced high-tech manufacturing industry. Where it is struggling is with the digitalization of the economy and both fixed and wireless networks. Germany’s wireless networks are ranked 32nd out of 34 countries, ahead only of Ireland and Belarus. Yet no other European country has a larger share of 3G users than Germany, and it is not uncommon to fall back to EDGE networks both in urban and rural areas. The reasons for this atypical performance lie with the actions of regulators and companies alike.
In 2010, Germany auctioned 4G licenses with the requirement that within 5 years 97% of the population would be covered by 4G. However, even by 2020, every operator has failed to meet the 2015 buildout requirement. How could this happen in a country that prides itself on following the rules?
Souce: Bundesnetzagentur, May 2020
With every new generation, German mobile operators suffer from low technology adoption because they use the same playbook over and over again (3G, 4G and now 5G), resulting in the same poor outcome. Wireless licenses in Germany and most of Europe are tied to a specific technology, whereas US licenses can be used with any technology that allows a more efficient transition from one generation to the next. Regardless, German operators rightfully realize the high value of new spectrum for next generation technology and bid more money per capita for next generational licenses than anywhere else in Europe. As a result of the significant investment in licenses, German operators position the next generation product as a premium product with a significant price premium. For this reason, consumers and businesses are reluctant to adopt next generation service plans and devices, leading to suppressed next generation revenues and profits. These low profits are then used as a justification limit capital investment in next generation technologies. Consequently, German wireless networks cover less area than they can and should. This self-fulfilling prophesy is now in its third iteration. We have seen it in 3G, 4G, and now 5G in Germany.
US carriers start from the same point of recognizing the value of next generation technology and spectrum, and US spectrum auctions have yielded the highest values globally. Unlike Germany, US mobile operators make the new technology available for the same price point as the last generation technology, creating greater profitability through a significantly lower cost structure given that next generation technology typically lowers the cost per gigabyte by 90% over the previous generation. As a result, US mobile operators see a rapid shift from the old generation to the next generation network usage as customers upgrade their devices to be able to take advantage of the new networks. By holding the price points steady for next generation networks with their faster speeds, US operators are under less price pressure than European operators, allowing operators to invest heavily in their networks and differentiate on coverage. As a result, the US ranks fifth in the world for 4G availability, behind South Korea, Japan, Norway and Hong Kong, which make up a combined 9.3% of the areas of the United States. As a result, everyone wins in the US approach: customers have faster access to next generation technology, and operators make a higher profit.
Germany’s cost problem is compounded by a legal and regulatory regime that does not favor the building of cell sites similar to Section 332 of the Telecom Act. German building permits are notoriously lengthy endeavors that take a long time. Frequent lawsuits against many cell sites lead to drawn-out legal reviews which slows down network buildout. All of these policies are not friendly for capital investment in wireless networks.
The problem of how to cover thinly populated rural areas in Germany persists. Mobile operators complain that it is unprofitable to cover many rural areas. During the 2018 Mobilfunkgipfel (Mobile Summit) between the German government and mobile operators, the government committed to share part of the cost of covering rural parts of Germany.
Coverage issues in rural parts of a country are not unique. Germany’s neighbor France – roughly the size of Texas – has tackled the issue in three different ways. For the 2G rollout mobile operators, the central government, and the departments (provinces) with coverage gaps in the rural parts of France split the cost three ways between the parties. In 2015, the French government set aside $1 billion to close the 3G coverage gaps. In 2018, the French government came to an agreement with the four incumbent operators to extend the license term in exchange for closing coverage gaps and to install jointly more than 5,000 masts and antennas.
There are four key lessons that we can take away from the German and French examples:
- The business model matters. American operators are providing world class service, especially considering the size of the country. The US operator model of capturing profit through cost reduction rather than price increases is the superior model. It results in faster and higher adoption of next generation technology and greater capital investment. The one US carrier who tried to charge a premium for 5G, Verizon, has two European executives at the helm. Customer pressure quickly forced Verizon to abandon its European model of a price premium and revert back to the US model.
- A mobile-friendly regulatory regime that enables the rapid building of new cell sites makes a positive difference. It is a no-brainer that when it is difficult for operators build new sites, coverage suffers.
- Even medium-size economically prosperous countries like France and Germany have similar problems to economically build out mobile networks. While it is more cost effective to build out rural areas with wireless rather than fixed technology, the business case is far from a foregone conclusion.
- The comparison between the US and more tightly regulated countries shows that incentives and support for wireless networks without red tape and strings attached are creating better results.