Share and share alike – Update on network sharing
Tower sharing has been one of the telecom industry’s global hot topics for close to a decade. The first wave was seen in the US and Europe, while recently, India has taken center stage with several multi-billion dollar asset carve-outs. Reading Informa’s latest report on network sharing, we read that leading operators in Western Europe have instigated infrastructure sharing and outsourcing deals, but carriers in developing markets are now beginning to look into alliances that would relieve them of heavy costs and speed expansion into rural areas.
Network infrastructure sharing and outsourcing is finding strong acceptance with mobile operators around the world, they follow, as an effective way to cut down coverage costs, while reducing the time to market. Such initiatives are well established in Europe, where they have been adopted by leading players such as Vodafone and Telefonica, but they have also seen significant traction in India, and are poised to make their impact felt in the Middle East and Africa.
Operators across the world, both in mature and developing markets, face challenges in sustaining margins with declining ARPU. But population distribution patterns in developing markets complicate the situation, since access to telecom services varies significantly between urban and rural areas leaving operators in these countries to balance the cost of operations in congested and saturated urban setups with the costs of new network rollouts in other areas. So in many contexts, infrastructure sharing offers a compelling proposition.
In Europe, the UK makes an interesting showcase for network sharing, since Deutsche Telekom and France Telekom’s September announcement to merge their respective UK operations. The two European heavyweights plan to merge T-Mobile UK and Orange UK into a 50:50 joint venture, and the agreement, should it be approved by the competition authorities, will create a new market leader, with over 33 million subscribers and a 43 per cent share of the market, according to the latest figures from Informa’s WCIS. Current leader O2 has a user base of 22.44 million, which represents a 29 per cent market share.
The deal is expected to generate synergies in excess of €4bn, with estimated opex-based synergies reaching an annual run rate of over £445m from 2014 onwards, through saving in network and IT expenditure, marketing and distribution. The joint venture would also be expected to invest £600 – 800m in integration costs over the period from 2010 to 2014, related to the decommissioning of mobile sites and the streamlining of operations.
But more importantly, the UK deal brings the prospect of a single network market closer to reality. Orange and T-Mobile will have the opportunity to combine their 23,000 or so 2G base station sites as part of their merger. But any attempts to consolidate their 3G networks will bring Hutchison’s 3UK into the equation.
T-Mobile and 3 formed a 50:50 joint venture called Mobile Broadband Network Ltd (MBNL) in December 2007. This was the world’s largest known active 3G network sharing agreement at the time, and saw the two operators elect to share their masts and 3G access networks. MBNL was given the aim of making 13,000 combined base station deployments, and around 7,000 are currently in operation. The marriage of Orange and T-Mobile would bring another 7,000 3G sites to the table, and Hutchison wants to share the synergies afforded by the agreement, especially seeing as Orange UK already hosts 3’s 2G traffic. In a statement, 3UK said: “Our network infrastructure joint venture with T-Mobile inevitably makes us an interested party.”
The UK is one of the more interesting case studies in network sharing but in early 2009 the European market as a whole reached a tipping point-the result of a flurry of network outsourcing deals. An increasing number of mobile operators were deciding that running a network was no longer their core business.
As Informa analyst Kris Szaniawski points out, network sharing and outsourcing are increasingly popular strategies for operators in mature markets such as Western Europe as they are facing tremendous pressure to reduce opex and capex while coping with extreme growth in data traffic. Average cost savings of 20-25 per cent over the life of a managed services contract are a strong driver but not the only one. “Whereas two or three years ago the more adventurous operators were typically asking vendors to help them run their networks at reduced cost it is now as much to do with helping them transform their networks and business processes,” he says.
But in April 2009, a deal signed between Zain Kenya and Essar Telecom Kenya indicated a sea change in carrier strategy for developing markest, with operators in those territories following the lead of those in Europe by striking an agreement to share 300 base stations over 15 years in Kenya. According to the analysts, this move is almost certainly an indication that Zain will look to strike more infrastructure sharing deals in some of the 21 other countries in the Middle East and Africa where it operates. And such a move could have major significance for all operators in the region because, as with their peers in Europe, it will herald a shift in focus from operating networks to selling services.
Romain Delavenne, director of analyst CG’s telecoms, media and entertainment consulting practice said that cell towers constitute almost 50 per cent of an operator’s total capex. Yet while many operators in developed markets have moved on to sharing network elements to save costs, in emerging markets with low penetration levels, operators are faced with the dual challenge of maintaining margins, while ensuring rapid rollout to keep pace with the growth in subscriber numbers.
Their estimates indicate that tower sharing could help operators in India and the Middle East achieve total savings of $4bn and $8b respectively in the next five years, with such savings resulting from the benefits of having reduced capex and opex. Operating costs associated with the running and maintenance of tower infrastructure, like diesel generators, air-conditioning equipment, and security and site rentals, form a significant portion (nearly 60 per cent) of operator opex. These costs are compounded in rural areas due to limited infrastructure facilities such as roads and a steady supply of electricity. For instance, in India the operational costs per tower have been estimated by analysts to increase by up to 20 per cent in remote inaccessible terrain.
For incumbent operators, sharing their existing tower assets helps in reducing the cost of network operations significantly. For instance, in the MEA region, it is estimated that tower sharing with a tenancy ratio of two would enable operators to achieve an annual tower opex reduction of 12-15 per cent resulting in savings of $1bn.
In most developing markets, incumbents are still expanding their networks to reach rural areas and improving coverage in dense urban pockets. Tower sharing benefits operators in achieving cost effective market coverage by helping reduce cost duplication. For example, in MEA, it has been estimated that an additional 100,000 towers would be required to extend reach in the next five years, a growth of over 50 per cent from current figures. Tower sharing could achieve potential savings of $8bn in that period, according to Delavenne.
As Chris Gabriel, chief executive officer of Zain Africa, puts it: “The rules of the game have changed with a paradigm shift from customer numbers to customer value (share of wallet) and business models must adapt to optimising asset utilisation through right sizing, outsourcing and infrastructure sharing.”
For new entrants the installation of cell sites is an expensive, complicated and labour-intensive process as there are a number of municipal clearances and government approvals required. For greenfield operators, partnerships in the form of joint ventures and sharing agreements with incumbent operators and tower companies are particularly attractive as they help reduce time to market significantly. For a mobile operator, more than 60 per cent of the total network rollout cost is accounted for by towers and accompanying infrastructure. For a new entrant, this translates into a significant financial burden which tower sharing and outsourcing helps to alleviate. According to analyst estimates, tower sharing can reduce overall cost of ownership after accounting for the tower lease costs, by 16 to 23 per cent.
Already established in mature markets, tower sharing and outsourcing models offer growth paths to service expansion and enhanced subscriber penetration for incumbents, new entrants and regulators in developing markets. So says Informa research analyst Thecla Mbongue, “Operators need to expand into rural-and less profitable-areas, but the economic downturn has affected the availability of financing. Lack of financing leads investors to look at ways to cut operating expenses, so site-sharing and managed networks are expected to play a bigger role in the near future.”
Benefits of network sharing
|Operating Model||Benefits to Incumbent||Benefits to New Entrant|
|Selective Tower Sharing||Reduction in OPEX; Plugs network inadequacies||Not applicable as new entrant does not have assets|
|Sharing Separated Tower Assets||Removal of depreciation costs; Transfers CAPEX to OPEX; Unlocks equity||Not applicable to new entrants|
|Fully Fledged Sharing/Joint Venture||Savings through reduced O&M costs||Cuts down on CAPEX costs|
|Outsourcing to Third Party||Similar savings as joint venture model||Lower CAPEX but slightly increased OPEX; Quicker time-to-market|