Network sharing to beat downturn? Not only.

Reading yesterday that the UAE phone company du may been in talks for a network-sharing arrangement with rival Etisalat to combat the downturn, and following on with the previous related post written by Teja, I wanted to share our vision and approach on network sharing, an exercise started by Vodafone and Telefonica this year in Europe and that has extended worldwide in all those mature markets where the network assets is understood as a commodity and not as a core asset.

Network sharing is not a new concept to Telco players and in the market. Born under the umbrella of partnering economies, it is nevertheless struggled for a wide-scale implementation. But the market may be changing as a result of an increased pressure for operators to find cost efficiencies as market revenue growth matures.

On the face of an economic crisis, mobile players must deal with fading top-line results and increased margin pressure. As such, it is vital to continuously explore cost efficiencies, without hurting the development of new technologies, cornerstone for new services. Nevertheless, mobile operators must face the reality that the introduction of new services will not compensate the deceleration in revenue growth and sales decline. Furthermore, these services will bring additional implementation costs.

The degree to which operators and past competitors seem to be willing to cooperate is increasing, although the scale of agreements still reflects a more cautious approach, involving only passive elements of each network. The question is: to what extent are operators ready to share their core assets, even if only partially? And what is the real cost benefit behind these operations? Network efficiency savings will play a key role in the mid-term in an industry with a likely less profitable future.

What is network sharing?
Let’s start from the beginning. Network sharing is an agreement between two or more parties to cooperate at network infrastructure level. The major driver behind network sharing is cost reduction and it can be divided into two main categories: (i) CapEx, for example in the deployment of a new network such as 3G or; (ii) OpEx, when the deal involves a consolidation of existing networks and is aimed at reducing base stations’ operational and maintenance costs.

The degree of network sharing varies in terms of assets involved (scope) and number of players and operations in the deal (scale). The benefits of these agreements will depend thus on the level to which operators are willing to share their networks and of the number of participants.

The scope of network sharing depends on the items that are included in the deal and there can be multiple combinations. It ranges from cooperation at a more passive level to a full integration of mobile networks. However, network sharing agreements can be grouped into three major categories:

  • Site sharing. This option includes the sharing of passive elements, such as towers, battery, electric supply, etc. This is the most common practice of network sharing and the one that represents the least cooperation. In this case, operators can split maintenance costs or deployment costs of passive elements, without conflicting with the active part of their networks.
  • Active RAN sharing. This option includes site sharing plus networks’ active components related with transmissions, such as radio equipment, antennas, microwave radio equipment, amplifiers, etc. This cooperation involves a deeper cooperation than site sharing and requires a technology alignment between participants. Nowadays, this solution is becoming more in focus for the deployment of new mobile broadband networks.
  • Coverage area sharing. In this case each operator owns separate networks and share the “access” to its network to all end-users through roaming agreements. Normally, operators have overlapping networks in urban areas and agreements are established for areas where only one of them has coverage. This way each operator enhances coverage through already existing networks in the short-term. This example is not as common as the previous ones, mainly due to compatibility issues in the mid-term.

Who has done it and why?
Network sharing concept gained traction between 1999-2001 when operators addressed 3G’s network development, more costly than 2G, and searched for potential optimizations. By partnering in this field, instead of building overlapped networks, they pursued cost efficiencies. Since then, many operators have agreed to share their networks with different degrees of scope and scale.

Network sharing has proved successful for all parties involved with contracts being prolonged and even expanded, both in scale, with new operators, as well as scope, with more shared components. Network sharing has a direct impact in cost efficiency as is a vital piece of mobile operators’ cost efficiency puzzle. Typically, network investments account for most CapEx, 70% to 90%, and about 10% to 15% of OpEx. Even small improvements can have an important role in operators’ bottom-line. Despite the main focus in cost savings, network sharing’s benefits are far more reaching and involve all parties in the industry: mobile operators, consumers and regulator entities.

Let’s enter into the details of the mobile operators.In our opinion, the main reasons why operators are starting this practice are:

  • Lower network costs. Cost savings are the cornerstone of every network sharing agreement. There are two main categories of savings: OpEx and CapEx. In the case of sharing existing networks, operators will find the most significant savings in OpEx, regarding for example maintenance and repairs, power and space rental. In the case of deploying a new network, the cost benefits will instead be higher on CapEx, by reducing investment requirements. Moreover, the focus in only one network will provide a higher negotiation power with network service providers and potentially unlock economies of scale. However, in the deployment of a new network, cost savings in CaPex do not preclude the above mentioned OpEx impact, but represent a cumulative effect of both. As an external benefit, there will also be a positive impact from re-selling / re-using residual transmission equipment.
  • Faster time-to-market. Mobile operators’ joint efforts will allow for faster network deployments. This will then enable a faster commercialization of services which are based on that specific network technology. Considering ceteris paribus, critical mass will be reached faster than in a scenario of no network-sharing and thus the development of related new services will happen sooner.
  • Launch of new revenue generation services. The widespread dissemination of a new and more advanced technology (when it is the case) will provide an additional incentive for operators to deploy new revenue generating services that use the newly available technological capabilities. These new services will foster the development of customers, as well as support in acquisition and retention campaigns.
  • Better network coverage. Mobile operators have long fought for premium locations where to place their antennas. Some of these locations are critical in coverage because of their cost efficiency, serving a large cell from only one point. Network sharing will allow operators better access to these critical locations and thus provide an overall better network coverage. Also, by partnering and sharing the cost load it will be possible for operators to deploy network in places where otherwise it wouldn’t be economically viable.
  • Easier access to other networks. A network sharing framework in place will provide a clear and transparent process to access third-party networks.

What are the risks of network sharing? Network sharing has long been promoted by operators, suppliers and even consulting firms. Despite the extensive upsides that it can provide, there are certain risks associated that must be weighed carefully:

  1. Network as a differentiator ceases to exist. Companies that enjoyed a positive differentiation in network can erode this advantage by partnering and sharing. Market perception of this cooperation can still be influenced, but for companies with a clear advantage in network, sharing must not be taken lightly.
  2. Risk of collusion and excluding third-parties. One of the biggest risks of network sharing is collusive behaviour, maintaining overall prices high. However, cost benefits of network sharing vary in the same direction as the number of operators involved. As such, there is a clear incentive for adding including third-parties.
  3. Compatible technologies. Network sharing agreements can be shaped at different levels, from just a couple of passive elements, to full network integration. While in a new deployment it is possible to conciliate technologies, technologies already deployed can create feasibility issues.
  4. Equality of terms and conditions. For operators in different network development stages it can be difficult to measure the premium necessary to compensate for first-movers’ initial investments and risk, creating a sustainable penalization of one of the parties.
  5. Aligned technology roadmaps. It is common to see different operators pushing for different technology standards. A networks sharing implies, at deeper levels of cooperation, an alignment not only of present technologies, but also of future ones. For example, mobile operators with fixed-line presence might not be interested in deploying competitive wireless broadband technologies, such as Wi-Max, while challenger mobile operators might want to push it to compete with convergent offers and bundle-plays.
  6. Transition costs. While in a totally new network deployment there might be few transition costs, in a network sharing agreement involving consolidation it implies costs in the areas of technical adjustment, new equipment, software upgrade, coverage testing, logistics for physical assets, etc.

Despite several different possible combinations to network sharing, these always involve a degree of cooperation with commercial competitors. Network has been an intense battleground for mobile operators and a key cornerstone to their strategic positioning and marketing activities. Although top-down pressure may reinforce the need for reaching agreements, cooperation processes tend to be troublesome at negotiation levels, becoming lengthy and complicated. Most importantly, the incentives for cooperation are not materialized at lower levels of the organization, in charge of detailing the agreements.

I will be posting a detailed network sharing best practice soon. Considering the significant analytical apporach of the case I’ll try to keep it as simple as possible. In the meantime, enjoy the reading of similar posts here.

Nice weekend. Best, CVA

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