1&1 does 5G deal with Vodafone, but Telefonica refuses to panic

1&1 has brokered a roaming deal that will give it access to Vodafone’s 5G network in Germany, a move that is great news for both parties, but comes as a blow to the telco’s current MVNO host Telefonica.

Technically, the operators have yet to ink the final terms and conditions of their deal, but they aim to do so as soon as possible. At this stage we know that 1&1 will be able to use Vodafone’s 5G network in areas that are not yet covered by its own network – the slow rollout of which remains something of a sore point, incidentally – as well as piggybacking on its 2G and 4G infrastructure, plus having access to “future mobile standards and technologies.”

Those future technologies could well come into play during the course of the proposed agreement. It has an initial term of five years from the final agreement between them, or 1 October next year at the latest. 1&1 will then be able to extend the deal by a further 10 years, in two five-year increments, and a transition period of three years is tacked on the end.

1&1 noted that it will pay a fixed price per percentage point for the amount of the Vodafone network its customers use. While there is potential for that fixed price to change, based on the changing costs associated with the development of the Vodafone network, 1&1 is clearly happy to have some certainty in its payment model.

“The conditions are hereby geared to future market developments and enable 1&1 to make competitive offers over the long term,” it said.

That certainty appears to be something that is missing in its relationship with current network provider Telefonica; that, and 5G coverage, of course. Handelsblatt reports that earlier this year Ralph Dommermuth, founder and CEO of 1&1 parent United Internet, complained of out-of-date conditions in its agreement with Telefonica.

Bloomberg, meanwhile, quoted Berenberg analyst Usman Ghazi as saying that Telefonica Deutschland generates as much as 40% of its free cash flow from the 1&1 deal. The telco’s FCF came to €1.1 billion last year, so presuming that figure is correct, that’s quite a hit it will take from effectively losing the contract.

And it helps to explain why the telco’s share price plummeted as the news broke on Wednesday afternoon.

Telefonica remains bullish. It issued a statement confirming its full-year outlook on revenue and earnings and its dividend commitment, and reminded the market that it still has a 4G roaming deal in place with 1&1 until the end of June 2025. “This ensures revenue streams for Telefónica Deutschland,” it said.

Searching desperately for that silver lining, it added: “Telefónica Deutschland can use valuable network capacity becoming available for own or other partner’s customers.” While we can’t deny the veracity of that statement, it’s scant consolation.

Vodafone, meanwhile, didn’t have a lot to say on the matter. It confirmed the terms of the deal, as outlined by 1&1, including the fact that it will be implemented gradually over the course of 2025, adding that it will be cash flow accretive from FY2026.

It’s probably for the best that Vodafone doesn’t crow too much, given its high-profile – and ongoing – spat with 1&1 over the rollout of the latter’s own 5G infrastructure.

Germany’s Federal Cartel Office is currently investigating whether Vodafone, through its Vantage Towers unit, broke competition law by effectively blocking 1&1’s 5G deployment. The Bundeskartellamt is acting following a complaint to that end from 1&1, which claims that Vantage Towers is deliberately impeding its rollout by failing to provide access to its sites as per a contract between them.

Essentially, Vantage Towers repeatedly failed to meet targets to activate 1&1 sites on its infrastructure, leaving the market challenger with just five operational 5G sites at end-2022, a long way behind the 1,000 it was required to have under the terms of its spectrum licences.

The investigation is still underway. Ultimately, both companies could face censure, Vodafone for violating competition law and 1&1 for missing its targets with telecoms regulator the Bundesnetzagentur. This roaming deal has no bearing on either of those issues, but surely it signals something of a rapprochement between the telcos.

Either way, it’s good news for 1&1, which will finally be able to offer a 5G service that can compete with those of its bigger rivals.

“1&1 sets course for nationwide 5G,” it said. “The long-term assured access to nationwide 5G national roaming services is another milestone in the building of Europe’s most innovative mobile network.”

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