1&1:5G Infrastracture

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1&1 5G rationale

In January 2019, 1&1 announced that it would participate in 5G licenses auction with the intention of becoming Germany's fourth MNO. The decision to participate in the auction will mark a change in the business model, which has been relying on a wholesale agreement, called MBA-MVNO. This wholesale agreement came into effect as a result of EU antitrust remedy following E-Plus/Telefonica merger in 2014. The agreement gave 1&1 the right to host its customers on the Telefonica network and other networks for a fee. As of September 2019, 1&1 had rented out 20% of Telefonica's hosting capacity. The hosting was mainly for 3G and 4G but had a guaranteed option for 5G products in future. Nevertheless, 1&1 had the option to increase hosting capacity up to 30% until 2030. Additionally, the wholesale agreement had regulatory price protection until 2030. 1&1 also had wholesale agreement with Vodafone for 3G hosting. However, due to better rates in Telefonica's network, 1&1 started migrating its customers from Vodafone network to Telefonica network.

Even though the wholesale agreement requires little capital, carries regulatory price protection and doesn't have a lot of risks, it can lead to margin squeeze in future as the number of users grows. Nevertheless, 1&1 will be subjected to non-discriminatory prices from June 2029. That is why 1&1 had to participate in 5G frequency auction in 2019. 1&1 notes that its own 5G network comes with a lot of advantages which include:

• Independence from MNO's, hence it can offer hosting services to other network services.
• Better network quality.
• Product differentiation as its network will be free from legacy networks.
• More revenue and higher profits.

1&1's bid in the 5G auction was successful. It was able to get 5x10 MHz in 3.6 GHz frequencies. This spectrum will be available from January 2021 and 1&1 paid 735 million euros for it in September 2019. Additionally, 1&1 won itself 2x10 MHz1 in 2 GHz frequencies. Usage for this spectrum will start from January 2026 and 1&1 will pay 335 million euros in June 2024 for it. However, as part of the auction requirements, 1&1 will have to fulfill certain obligations. It had to have at least 1,000 5G active antenna sites by 2022. Additionally, it must achieve 25% household coverage by 2025 and up to 50% household coverage by the end of 2024. 1&1 estimates that in needs12,000-13,000 antenna sites to achieve 50% coverage. However, Warbug research indicates that for 1&1 to be able to compete favorably with other MNOs and even enter whole sale agreements to host other MNO's users, it should have 26,821 antenna sites in the 50% coverage obligation. Fortunately, 5G build using Open RAN architecture ensures faster deployments and easier scalability of its structures.

Despite getting those frequencies (2 GHz and 3.6 GHz) in 2019, it is critical that 1&1 gets the low-band frequency (800 Mhz) to be auctioned in 2024 in order to be able to offer seemless network experience to its users. This is because a network built on high -band frequencies is incapable of penetrating through walls. If 1&1 is unsuccessfull in the 2024 auction, it will have to lease it from Telefonica. However, as noted by its CEO Ralph Dommermuth during Q1 2022 earnings call, this woud be expensive. It will also reduce their competitive position. 1&1 said during Q2 2022 earnings call that it is open to any of the 700 MHz, 800 MHz or 900 MHz.

One of the important assets in 1&1's 5G construction is 1&1 Versatel, which is 100% owned by United Internet.1&1 Versatel owns one of the largest fibre networks in Germany. The network spans over 47,013 km and is available in 250 German cities, including 19 of the 25 largest cities. 1&1 will leverage this network as 5G backhaul.

Key Risks

1. HSBC Projects that 1&1 might be able to offload 30-50% of its customers from Telofonica network into its own by 2025(before access to national roaming in Telefonica's network gets limited in June 2026). That means up to 50-70% of 1&1's clients risk getting limited network. This may result in these clients moving to other networks.
2. HSBC points out that future low-band spectrums (800MHz,1,800MHz and 2,600MHz licences to be renewed in 2024) may come with higher coverage obligations as well as minimum speed and latency. This may not be good for 1&1, especially if its network will not have picked up in 2024.
3. 1&1 risks being penalised for failing to meet its 2022 network obligations. In the worst case scenario, its license might be suspended.
4. The antenna sites that 1&1 will have at its disposal by 2030 may not be enough to compete favorably with other MNOs.

1&1 5G Partners

1. Vodafone

August 2,2023: 1&1 signs a binding preliminary agreement with Vodafone that will ensure longterm and exclusive national roaming for 1&1. Here are the main points from the heads of terms;

• Vodafone will provide non-discriminatory national roaming services in areas not covered by 1&1 new network and will comprise 5G, 4G and 2G as well as any future mobile standards and technologies.
• National roaming services will be offered beginning on October 1, 2024 at the latest.
• The agreement will carry a term of 5 years, with the option of extending it for 13 years including the transition period.
• 1&1 will pay a fixed price based on the percentage of Vodafone's network that its customers use but such fixed price will change from time to time in line with the cost associated with developing Vodafone network.
• When 1&1 launches its network scheduled to happen at the end of next month, all its 4G customers will start using national roaming services on Telefonica's network until national roaming on Vodafone's network is available.
• Until 1&1 customers can be supplied with 5G roaming from Vodafone network, 1&1 will provide its customers 5G services under the previous MVNO-model, provided either by Telefonica or Vodafone.

2. Telefonica

Telefonica is one of the Gernan's four MNOs. It had a revenue of 8.224 billion euros in 2022. The network operator currently has more than 99% 4G/LTE coverage across Germany. Additionally, its 5G currently covers more than 80% of German population. It plans to achieve nationwide 5G coverage by 2025. Its 4G/LTE customers enjoy network speeds of up to 225 Mbit/s.

Its contract with 1&1

In May 2021, 1&1 and Telefonica signed a long-term national roaming agreement. The roaming agreement "goes back to a commitment by Telefónica as part of the EU antitrust approval of the merger with E-Plus in 2014" and it has an initial term until 30 June 2025 when 1&1 can unilaterally extend it until 30 June 2029. Thereafter, 1&1 can request for an extension up to 30 June 2034. The contract notes, " the national roaming agreement provides for annually decreasing prices, which apply retroactively from July 2020 also to the ongoing MBA MVNO agreement." It adds, " The prices for the first extension option until June 2029 are determined by specific rules. In the period thereafter, Telefónica continues to be obliged to offer non-discriminatory prices."

"The start date for national roaming will be set by 1&1 Drillisch in parallel with the launch of the 1&1 Drillisch mobile network. From this date, all new customers and all 1&1 Drillisch customers migrated to 1&1 Drillisch's network will have access to 1&1 Drillisch's 5G network, and automatically non-discriminatory access to Telefónica's 2G and 4G mobile network via national roaming in areas not yet rolled out by 1&1 Drillisch. From 1 January 2026, access to 4G national roaming in Telefónica's mobile network will be limited to some extent in certain urban areas which will then be covered by 1&1 Drillisch's 5G network. However, in these areas a minimum coverage of national roaming of up to 50 Mbit/s is always ensured. The agreed national roaming services complement the exceptional innovation potential of 1&1 Drillisch's 5G network.

1&1 Drillisch customers, who are currently activated on Telefónica's network, will step-by-step be migrated within a contractually agreed transition period following the launch of 1&1 Drillisch's 5G network and will continue to have 2G, 4G and 5G access to Telefónica's mobile network until then." Said the contract.

3. Vantage Towers

Vantage Towers is Europe's largest tower company. It constructs, builds and rents out mobile towers or sites. Vantage Towers was formed in 2019 by Vodafone with the aim of using it to rent out its European mobile masts. It has operations in 10 markets in Europe and has around 82,000 sites. In the year ended March 2022, it generated a profit of €251 million before tax and had gross assets of €10.5 billion. Vantage Towers was IPOed in March 2021 at €12.1 billion euros valuation and an offer price of 24 euros. Its headquarters is in Düsseldorf, Germany. Vodafone has 81.7% stake in Vantage Towers. However, there is a joint venture deal that will see transfer of 40% of its stake to a Consortium by the first half of 2023. The deal will see Vantage Towers becomes less dependant on Vodafone, hence accelerating its growth potential.

Its Contract with 1&1

On December 9 2021, 1&1 Mobilfunk GmbH, a subsidiary of 1&1 AG, signed a long-term agreement with Vantage Towers. The agreement will give 1&1 AG access to up to 5,000 antennna sites belonging to Vantage Towers. The first sites were to be availed in 2022 with the aim of giving 1&1 access to at least 3,800 sites by 2025. The contract has a term of 20 years with the first contract expiring in 2040. However, 1&1 has an option to extend it until 2060.

1&1-Vantage Towers Partnership developments

On February 24 2022, 1&1 announced that it was going to launch a complaint against Vantage Towers at the Federal Cartel Office for failing to meet its antenna sites obligations. The complaint is also against Vodafone who happens to be the majority shareholder of Vantage Towers with a 81 percent stake. According to 1&1, Vodafone is using its influence to get preferential treatment from Vantage Towers at the expense of 1&1. As at the end of 2022, 1&1 had only five 5G antenna sites, some provided by Vantage Towers. On the other hand, Vodafone had 1,600 5G antenna sites based on Vantage Towers infrastructure. Other than failing to meet its 2022 antenna site obligations, Vantage Towers and Vodafone has also told 1&1 that they won't be able to meet their obligations in the first quarters of 2023. This means that the 1&1's planned launch of 5G in Q3 2022 will be pushed to another date. 1&1 is also complaining that Vodafone is supporting the extension of low-band frequencies given to incumbent network operators Vodafone, Deutsche Telekom and Telefónica for further years without an auction. According to 1&1, this is wrong considering that its network is hardly built up and Vodafone is somehow to be blamed for the low-build out of Vantage Towers antenna sites. We believe that the immediate action taken by 1&1 had been carefully planned and that 1&1 wants to capitalise on the new capital structure at Vantage Towers. The capital structure makes Vantage Towers independent from its main shareholders. It also make third party customers more important than shareholders. 1&1 probably hopes to compel Vantage Towers to give them access to the next towers to be constructed at the expense of Vodafone. Given that 1&1 stands to be the fourth MNO in Germany and its good track record of leveraging regulatory bodies, we believe that 1&1 stands a chance to win the complaint.

On September 16 2022, 1&1 announced that it was not going to meet its obligation of 1,000 5G antenna sites by 2022 due to supply bottlenecks experienced by its major partner(Vantage Towers). Vantage Towers was supposed to provide around two-thirds of the 1,000 antenna sites by the end of 2022. 1&1 added that its other partners were performing as expected and that the delay was not expected to affect the planned launch of its 5G network in 2023. Additionally, the delay was not going to affect the fulfillment of its 50% network coverage by 2025. 1&1 hoped to close the gap with its other partners. However, the 1,000 5G sites was not going to be reached untill Summer 2023.

4. Rakuten

https://global.rakuten.com/corp/investors/documents/results/

Rakuten is a Japanese multinational company with operations in more than 30 countries and regions. It has over 28,000 employees and operates more than 70 businesses which span retail, financial services, mobile carrier services, fintech, security, etc. In the financial year 2022, Rakuten achieved a revenue of 1.9 trillion yen, representing 14.6% year-on-year growth. It also recorded 39 million active users or growth of 11.2% year-on-year in Japan alone. However despite its massive revenue and size, the group continues to record operating losses, driven mainly by ongoing investments in the mobile division, which also still struggles to attract clients. In the year ended 2022, the group recorded operating losses of 325.6 billion yen, representing year-on-year growth of 44.71%. The good news is that the operating losses in Rakuten Mobile continues to contract sequentially after peaking in Q1 2022. In Q4 2022, Rakuten Mobile operating losses declined by 5.33% to $ 114.43 billion yen from $120.869 billion in Q3 2022. Rakuten Mobile also keeps seeing substantial growth in revenue. In Q4 2022, its revenue grew by 75.2% year-on-year to $114,430 million. The division now has 52,003 4G base stations, with 15% of base stations left to be constructed. It aims to achieve 99%+ coverage before the end of 2023.

In August 2021, Rakuten Group launched Rakuten Symphony, an organization aimed at spearheading global adoption of Open RAN architecture. In Germany, 1&1 is Rakuten Symphony's major client. At the end of financial year 2022, Rakuten Symphony had 14 clients. Five of the clients are from the Americas, two are in Asia/Pacific while seven are in Europe. Rakuten Symphony is also in the process of closing 8 major deals while 56 are in early stages of engagement. Its pipeline grew from $3.1 billion in Q3 2022 to $4.1 billion in Q4 2022 while its revenue was $476m, boosted by $231m in the fourth quarter alone.

Our major concern with Rakuten is that if its mobile division continues making losses, the group's financial position will be severely impacted. This will impact the construction of 1&1's network. Our asssesment is based on the current situation of its balance sheet and that of Bloomberg analysts. Due to the mobile losses and capex, Bloomberg Intelligence expected its non-financial segment cash burn to exceed 500 billion yen in 2022. This could affect its credit rating, which is already on the downward trend. In December 2022, Rakuten's long-term credit rating was lowered to BB from BB+ by S&P Global Ratings. Bloomberg Intelligence Strategist Sharon Chen, believes that Rakuten needs to repair its balance sheet by Q4 2023 when $2.2 billion of bonds come due. However, we believe that even if the group were to go bankrupt, the business will be sold to another company or big investor who will see to it that the group's partnership obligations are honored.

Its contract with 1&1

Rakuten is a pioneer in OpenRAN technology. In August 2021, it entered into a partnership with 1&1 for the construction of German's fourth MNO 5G network based on Open RAN architecture. Rakuten will use its own playbook in Japan to implement this project. According to the contract, Rakuten will install 1&1's Open RAN equipment as well as oversee its performance. The contract notes, " 1&1 will have access to the Rakuten Communications Platform (RCP) stack of access, core, cloud and operations solutions as well as to its partner network. In this context, Rakuten will also provide its specially developed orchestration software so that the 1&1 network can be operated in a highly automated manner."

1&1-Rakuten Partnership developments

So far, the partnership between 1&1 and Rakuten is going on well as 1&1 CEO Ralph Dommermuth said during Q2 2022 earnings call, " Maybe I can start with our cooperation with Rakuten, which is going on very well. And I stated yesterday in a Supervisory Board Meeting, if it continued as is, that will be perfect. We really have the best possible partner there. And I and the whole team, are enthusiastic about it. Of course, it has to remain as as is now over the years, but what we've seen so far is really pleasing. Now concerning performance optimization, we didn't take a lot of time there. The test began in July, the friendly user test did. And I'd say we're three weeks into it now. And at the beginning, of course, we didn't have the values we have now. But within 2 to 3 weeks, the desired values did show and hasn't been a problem for us so far." Dommermuth's words were echoed by Azita Arvani, Rakuten's CEO of North America who noted that the test results are impressive.

5. America Tower Corporation

America Tower Corporation(ATC) is one of the leading real estate investment trusts in the world. It owns and operates wireless and broadcast communications infrastracture in 6 continents. It has over 220, 000 communications sites in 25 countries. In Germany a lone, it has around 15,000 communications sites. Its revenue in 2022 was $10.711 billion while its AFFO was $4.517 billion.

Its contract with 1&1

On April 2022, 1&1 Mobilfunk GmbH, a subsidiary of 1&1 AG signed a contract with ATC Germany. The contract is for the lease of ATC Germany antenna sites by 1&1 for efficient rollout of its network. ATC Germany will provide 1&1 with sites for construction of its own antennas. Each site will have a lease term of 20 years which can be extended by 1&1 multiple times.

6. Orange

Orange is a telecommunications network provider that is present in 26 countries and had a revenue of 42.5 billion euros in 2021. As of June 2022, it had 137,000 employees and 282 million customers. Its presence is majorly in Africa and Middle East where it is availabe in 18 countries. In Europe, it is only available in 8 Europe countries. Orange's 5G network is in the preparation, testing and deployment stage in most countries (other than in Spain where it has launched 5G in 1,222 towns and cities). In its home country, France( where it had a revenue of 18.09 billion euros in 2021), the company plans to launch advanced 5G network (for general public) from 2023. A report which assesses Mobile Network Experience in Spain indicates Orange is not badly off in terms of 4G availability and coverage, as it ranks 2nd and 1st respectively. Also, its 5G is good. Interestingly, Orange seems to have a cool international roaming set up.

Its contract with 1&1

In November 2022, 1&1 and Orange signed a long-term agreement to provide 1&1 mobile network with international roaming services.

7. Eubanet GmbH

Eubanet GmbH is a German consulting and service company operating in the telecommunications industry. It acts as a link between site owners and network operators. The company has over 30 years experience conduscting site analysis and acquisitions for installation of radio masts and telecommunications facilities. Some of its clients include Vodafone, Telefonica, Nokia, Ericsson, Vanatage Towers, etc. It employs 11-20 people and makes a revenue of $1 million to $5 million per year.

Its contract with 1&1

On December 2022, 1&1 Towers GmbH – an indirect 100 % subsidiary of 1&1 AG – and Eubanet GmbH signed a contract for the acquisition of up to 7,500 new 5G antenna locations.

8. GfTD

GfTD is one of the leading telecommunications service provider that is involved with construction of radio infrastructure. Founded in 2005, GfTD employes 200 to 500 people. Its annual revenue is estimated to be around $25 to $100 million.

Its contract with 1&1

In April 2022, 1&1 Mobilfunk GmbH, a subsidiary of 1&1 AG signed a contract for the construction of 1&1's antenna sites. GfTD will construct 500 antenna sites for 1&1 in the initial stages of the contract.

Are there any cost-savings from OPEN RAN?

Cost savings from building their own network is not to be expected. According to 1&1;

• "The costs of network operation (excluding antenna sites) will be financed by savings on voice traffic and international roaming."
• "Operation costs of an antenna site are largely covered by savings on national roaming, fully from the end of the second expansion stage, completely at 50% household coverage."
• Spectrum costs are to be refinanced through new business areas (FWA, branded reselling, B2B tariffs, etc.).

Developments

February 2024

February 6, 2024: 1&1 CEO Ralph Dommermuth said in an interview with the International Club of Frankfurt Economic Journalists (ICFW) that they are targeting to have 1,350 antenna sites at the end of March 2024. He added that they have signed lease contracts for another 750 sites on rooftops and other viable deployment locations. Dommermuth pointed out that the primary bottleneck is the connection of masts to fibre networks. Assessment: 1&1 wants to add 2,000 antenna sites at the end of 2024, hence the addition of 350 antenna sites at the end of Q1 will be below the 500 quarterly average. But maybe they plan to scale up in the coming quarters. This just tells us that we have to remain cautious about its antenna site plans.

January 2024

January 17, 2024: In an interview with FAZ, CEO Ralph Dommermuth said there are now 100 active antenna locations, up from 60 in November but lower than their 200 target. "There are now around 100 active locations. We want to be at 200 in February. The bottleneck when setting up radio networks is the availability of mast locations, which we have now overcome. Laying fibre optics and connecting antennas is, above all, hard work. We have thousands of antennas in stock. " Dommermuth said. However, they were able to hit their target of 1,000 for passive antennas and still expect to achieve their 2,000 target for 2024. “At the end of the year we had 1,055 locations and thus reached our adjusted goal of 1,000 with passive infrastructure,” he said. “We have currently ordered a total of 5,000 locations and have started the new year well. I think we will have more than 2,000 additional cell towers by the end of the year.” He pointed out that since December they have gained 260,000 new customers and the transition to the new network has been smooth. “We’re doing well. Since December, 260,000 new contracts have been won and these customers have access to the new network. The next step is about moving our 12 million existing customers step by step. This has just begun. So far we have not received any significant complaints,” he said.

December 2023

December 8, 2023: 1&1 launches mobile services in its network as planned, making the network fully operational. The company said 5G national roaming in Telefonica’s network began yesterday.

December 4, 2023: NEC, one of the 1&1 radio unit suppliers downgraded the 2026 global outlook of 5G revenue outside Japan from $580 million to $210 million. The revision is a result of “slower business progress in global 5G business due to delay of international open RAN market start-up.”

November 2023

November 22, 2023: 1&1 said it will launch smartphone tariffs in its network from December 8, making the network fully functional. Before its customers start using Vodafone 5G under a national roaming agreement in areas that don’t have 1&1 coverage from the summer of 2024, they will have access to Telefonica Deutscheland’s 2G/4G/5G network under an expanded agreement to include 5G network.

November 15, 2023: In an interview with Handelsblatt, CEO Ralph Dommermuth said they now have 60 active antenna sites but that they plan to start 2024 with 200 active antenna sites. Dommermuth said that its 2019 commitment of setting up antennas in 400 “white spot” areas by 2022 won’t be completed this year either. As at July 2023, 1&1 had 40 active antenna sites.

September 2023

September 18, 2023: 1&1 concluded a comprehensive national roaming agreement with Vodafone in August. 1&1 will be able to provide 5G MVNO wholesale services using Vodafone Network from December 2023 (pushed forward from September) and 4G services on a transitional basis using Telefonica network until summer 2024, but this will need an extension of parallel sales from the Federal Network Agency. Federal Network Agency is expected to decide on the extension of parallel sales in November 2023. 1&1 reiterated that it expects to have 500 antenna sites at the end of this month as well as 300 leased antenna sites.

July 2023

July 19, 2023: Germany’s Koblenz Regional Court ruled against Deutsche Telecom claims that 1&1 cannot describe its network as the “most modern 5G network in Europe" in its advertising content. However, Handelsblatt said that with the ruling, 1&1 will no longer describe its network as “5G für zu Hause” (5G for at home) in its current form, a statement disagreed with by 1&1. Deutsche Telecom said it will not take any other legal steps in the matter. "The Higher Regional Court of Koblenz followed our argumentation to this effect and issued a further ban, so that 1&1 may not continue to advertise its 5G product as in the past. Unfortunately, the court did not agree with our view that the phrase ‘most modern network in Europe’ is a misleading designation, since, among other things, the availability of the network is still limited to only a few locations and no significant network expansion is currently discernible. Deutsche Telekom will not take any further legal steps in this matter," Deutsche Telecom said after the ruling. CEO Ralph Dommermuth said that the ongoing efforts by established MNOs to keep them out of the game are a “confirmation that we are on the right track”.

July 11, 2023: CEO Ralph Dommermuth said there are now 40 broadcasting stations. He added that if the fine expected to be imposed by the Federal Network Agency will be high and without a grace period, that would be hard for the company. Dommermuth noted that there have been negotiations on national roaming(in competitor's network) but the price per gigabyte would sometimes be 10 times the market price. He complained of a lack of support from regulators in ensuring more competition in the industry. Dommermuth said that they expect to have 500 locations by the end of this quarter and 1,200 locations by the end of the year. Currently, they are at 200 locations. When asked whether he regrets investing in the network infrastructure, he said, "Sometimes it's better if you don't know exactly what's coming beforehand. If I had foreseen all this, I might really not have done it." He repeated that it was a mistake to contract Vantage Towers. "In retrospect, yes - and even 35 years of professional experience didn't protect me from it," he admitted. "They left us hanging while the expansion for Vodafone itself worked with 4,200 special 5G locations." "We were assured that the company was really independent, efficient and that Vodafone's share in it would be further reduced. Well, then things turned out differently," he noted.

June 2023

June 20, 2023: Germany’s federal coalition government through its representatives in the BNetzA Advisory Board has urged the Federal Networks Agency/BNetzA to ensure competition in the mobile communications industry. “Fair and non-discriminatory access for service providers and mobile virtual network operators in the wholesale market must be ensured, " their amendment read. The coalition government has asked BNetzA to provide it with “comprehensive information on the current market situation” until the agency meets again. The BNetzA amendment is seen to be in response to a study conducted by 1&1 and the Federal Broadband Communications Association/BREKO in June, which asserted that the three big MNOs are unfairly inhibiting competition by blocking rollout of 5G by small companies. “ We want competitors without their own mobile network — fibre-optic network operators and service providers — to be granted exactly the same conditions as the mobile network operators’ own sales departments, ” said Sven Knapp, head of BREKO’s Berlin office.

June 6, 2023: 1&1 sticks to plan to construct 3,000 antenna sites annually from 2024. “Can I shine today? No, I can’t,” said 1&1 boss Ralph Dommermuth in an interview with Frankfurter Allgemeine Zeitung. “But construction capacities are growing and if things go as contractually guaranteed by our expansion partners, then we will complete 3,000 locations in each of the next few years,” He added. “In the second quarter [three months to 30 June], we can see that construction output is already increasing significantly”, he added. “By the end of the quarter, we will have 200 cell towers, " he pointed out. That is above the 160 annena site target set during the latest earnings call.