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UPDATE 2-Operators howl, markets hail German 5G auction as newcomer joins fray

Douglas Busvine

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* Pricey auction leaves "bitter aftertaste" - Deutsche Telekom

* Shares in new entrant Drillisch rally

* Germany lags on connectivity, industry urges quick action

* More competition good seen as good for consumers (New throughout)

FRANKFURT, June 13 (Reuters) - Germany's pricey 5G spectrum auction drew protests from existing mobile operators but cheered investors betting the entry of a new player will revive competition and help close a connectivity gap with the United States and Japan.

For market leader Deutsche Telekom the auction, which ran for a record 12 weeks and raised 6.55 billion euros ($7.4 billion), left a "bitter aftertaste," while rival Vodafone called the result "catastrophic."

Markets took a different view on Thursday after 1&1 Drillisch, the mobile upstart run by billionaire Ralph Dommermuth, bagged the spectrum he needs to realize his dream of becoming Germany's fourth network operator.

Shares in 1&1 Drillisch, hitherto a 'virtual' player that rented network access from others, rallied by up to 7%. They had lost half their value over the past year on concerns that heavy network outlays would wreck its profitable asset-light model.

United Internet, which controls Drillisch and is also run by Dommermuth, gained 5%.

"We're happy with the spectrum we got - and the price we paid for it," Dommermuth's spokesman said after Drillisch paid 1.07 billion euros for 70 Megaherz of the 420 MHz allocated by the Federal Network Regulator (BNetzA).

Drillisch eventually stepped back from contesting the last of the 41 spectrum blocks, bringing the auction to a close after a record 497th round https://www.bundesnetzagentur.de/ttools/FrequenzXml/Auktion2019tXML/497.html.

One opponent, speaking on condition of anonymity, complained that Drillisch could have achieved the same result as early as Round 111 https://www.bundesnetzagentur.de/ttools/FrequenzXml/Auktion2019tXML/111.html. "Its continued bidding inflicted damage of 4 billion euros on the entire industry," the person said.

A source close to Drillisch rejected that suggestion, saying there was still everything to play for at that stage.

Analysts say Dommermuth played a shrewd poker hand because, even after buying spectrum, he is not pre-committed to building his own network and can bargain from a position of greater strength on network access with the existing operators.

Drillisch had a strong management team that was exploring options "to improve an existing, sustainable business," said Jefferies analyst Ulrich Rathe.

EXPORT CHAMPION, DIGITAL LAGGARD

Europe's largest economy scores poorly on measures of connectivity - in part the result of high spectrum costs that have over the years driven mobile industry consolidation, leaving three operators standing - Deutsche Telekom, Vodafone and Telefonica Deutschland.

That structure has encouraged complacency, leaving politicians fuming as voters complain about 'Funkloecher' - network holes - and leading the regulator to set tough coverage requirements in this auction round.

The Federation of German Industry said that, now the 5G auction was over, it was vital to support industrial digitalisation - networks to run connected factories are one 5G use - to ensure that Germany keeps its export edge.

"The goal must be to provide industry with the world's fastest and safest networks," the federation said on Thursday.

Finance Minister Olaf Scholz pledged to plow 70% of the auction proceeds back into upgrading Germany's fiber-optic broadband networks, with the remaining 30% supporting digital schooling.

Germany is lagging countries like the United States, Japan and Korea that are already starting to roll out 5G services.

50,000 TOWERS

Vodafone's Germany boss Hannes Ametsreiter called for some of the proceeds to subsidize mobile network investments as part of a broader 5G industry alliance.

Operators complain that other European countries have either awarded 5G spectrum for free, like Finland, or more cheaply, like Austria. Germany's auction proceeds would be enough to erect 50,000 mobile masts, said Ametsreiter.

But, said the second industry source, much of the complaining was "for the gallery" and reflected the advantageous terms offered by the regulator to smoothe the way for Drillisch to enter the fray as a fourth operator.

Freenet, another mobile virtual network operator (MVNO), said the result of the 5G auction was good news for both itself and consumers.

"With four networks, not only will infrastructure competition be encouraged, but also competition to provide the best services," Freenet's Rickman von Platen said.

Germany's main consumer federation agreed: "Competition livens up business and leads to lower prices," Klaus Mueller, head of the vzbv, told the Rheinische Post. ($1 = 0.8853 euros)

(Reporting by Douglas Busvine, Patricia Uhlig and Tom Sims in Frankfurt; additional reporting by Josephine Mason in London and Markus Wacket in Berlin; Editing by Thomas Seythal/Thomas Escritt and Emelia Sithole-Matarise)