(Adds comment from regulator, analyst; shares; adds MAINZ dateline)
By Harro Ten Wolde and Peter Maushagen
FRANKFURT/MAINZ, Germany, May 27 (Reuters) - Germany started an auction of radio frequencies for mobile phone network operators, hoping to raise billions of euros to help improve a national broadband network that has fallen behind those of poorer countries such as Hungary, Portugal and Spain.
“The auction will point the way for the development of mobile services in Germany,” said regulator Jochen Homann at the start of the auction on Wednesday in the city of Mainz, near Frankfurt. “I expect a lively auction.”
But analysts expect the auction to raise only a maximum of 4 to 5 billion euros ($4.4 to $5.4 billion), a far cry from the 50.8 billion euros the government raised in the auction in 2000 for new 3G network licences, when there were six groups bidding.
Fifteen years later, the number of network operators competing for the mix of 4G frequencies has been reduced from four to three after Telefonica Deutschland bought E-Plus from KPN for 8.6 billion euros last year.
The new market dynamics make fierce competition unlikely between former state monopoly Deutsche Telekom, Telefonica Deutschland and Vodafone, said Antonios Drossos, co-founder of Finnish telecoms advisory firm Rewheel.
“In this case, there are three players with equal market share of about a third. In such a case nobody is willing to pay extra for additional spectrum ... They are comfortable with the current status quo,” he said.
Consultancy firm Arthur D. Little expects that the proceeds of the auction will be only 20-30 percent above the floor of 1.5 billion euros.
But analysts at private bank Bankhaus Lampe said on Wednesday they expected total proceeds of three times the minimum bids.
“We expect the bidding process to draw out over several weeks and rake in total proceeds of 4.7 billion euros, representing a considerable burden for the industry,” they wrote in a note.
Deutsche Telekom shares rose 0.5 percent, Telefonica Deutschland shares slid 0.4 percent and Vodafone shares rose 1 percent by 1131 GMT.
The auction gives the network operators the chance to be the first in Europe to operate spectrum in the low-frequency 700 megahertz (MHz) band that was used to carry the analogue signals of regional television stations before the switchover to digital transmission.
These longer wavebands have further reach in terms of distance and deeper penetration of buildings than the higher frequencies currently used by mobile network operators so that winners of the auction will have to promise there will be almost no “black holes” in network coverage.
Meanwhile the German government has earmarked the proceeds of the auction for fostering the development of a fast fixed-line broadband network, which Transport and Digital Infrastructure Minister Alexander Dobrindt has said will be one of his top priorities in the coming years.
Germany’s broadband network was one of Europe’s fastest before the costly 3G auction in 2000 left the mobile operators saddled with debt and disinclined to invest in infrastructure.
Deutsche Telekom, the only one with a national fixed-line network, had little competition at the time.
But in the meantime, cable companies such as Liberty Global’s Unitymedia and Vodafone’s Kabel Deutschland - who have been consolidating their own networks - have been snapping up subscribers wanting faster internet speeds.
Less than a fifth of German households had a broadband connection faster than 10 megabits per second (Mbit/s) as recently as last year, a study published by the United Nations’ International Telecommunication Union (ITU) on Tuesday showed.
France and Korea topped the list with 35.7 and 38 percent of households respectively.
The auction takes place in former military barracks that have been turned into an office for the German telecoms supervisor.
Delegates of the three mobile operators have been escorted into secured rooms, where they communicate via dedicated datalines and encrypted messages with their headquarters.
At headquarters, management is locked up in safe rooms, with no laptops and mobile phones allowed to minimise the risk of collusion, and the bidding process will follow the principle of the so-called simultaneous multiple round auction (SMRA).
Bidders are able to see bids from the competition to make the process as transparent as possible, said Ruediger Hahn, the regulator’s project leader for the auction. ($1 = 0.9189 euros) (Additional reporting by Georgina Prodhan; Editing by Greg Mahlich and Susan Thomas)