Telco infrastructure sharing : Assessing benefits and overcoming challenges

Presentation1At a high-level meeting during Mobile World Congress in Barcelona, senior leaders from eight major mobile operator groups, serving 551 million mobile connections across Africa and the Middle East, resolved to cooperate on network infrastructure sharing initiatives that recognise the profound impact of mobile broadband and Internet services on the citizens of both regions. The participating operators made this commitment in order to provide Internet and mobile broadband access to unserved rural communities and drive down the cost of mobile services for all sections of the population.

This initiative basically echoes the GSMA’s call that telecom regulatory frameworks should encourage flexible commercial sharing arrangements and facilitate access to government-owned assets at preferential rates to help speed up the roll-out of new networks and support the business case to extend mobile networks into rural areas. Regulators should consider the competitive advantage that sharing of towers could provide in their respective markets. However, what they have to bear in mind is the fact that new and smaller operators will be incurring lease payments as an operating expense with relative lower risk, whilst the large and incumbent operators are still recovering the capital expense incurred in erecting the towers.

So what is really driving this network sharing phenomena apart from the altruistic motives of bridging the digital divide ?? Well how about the fact that increasing competition, along with investments in ever-changing technology, which has been pushing telecom operators towards new ways of maintaining margins. Since building and operating infrastructure is a significant cost for operators ,network sharing it is the ideal way to roll out infrastructure quickly and efficiently in low ARPU rural environments. operators can rely on a single set of infrastructure for their network. According to experts the estimated Capex savings resulting from tower sharing in the Middle East and Africa region amount to USD 10 billion. Quantifying and realising these savings requires a rigorous business plan and a meticulous execution controlled through appropriate contract governance structures and well-defined service level agreements.

Currently the most commonly shared infrastructure among operators is passive infrastructure, as it is easier to contract its set-up and maintenance. Sharing passive infrastructure only, means that newer operators still need to set up their own transceivers and other transmission equipment.Passive infrastructure sharing (commonly referred to as tower sharing) has attracted significant interest from both operators and tower companies. Companies like Helios Africa, American Towers and Eaton Telecom are already working to gain first-mover advantage by pursuing tower acquisitions in the region. Over the last 2 years, the tower business has grown into a fully-fledged industry in Africa and the Middle East.

Passive infrastructure sharing requires the consideration of many technical, practical and logistical factors although the principle is simple in theory. Any potential impact must be assessed and fully understood before sharing commences to ensure that there are no adverse effects on the operation of the site and the supporting network equipment and systems. Operators must consider items such as load bearing capacity of towers, azimuth angle of different service providers, tilt of the antenna, height of the antenna, before executing the agreement. Although, tower sharing enables new entrants to scale-up faster, it exposes established players to the risk of market share loss. Furthermore, the challenges of monitoring network performance and quality will increase as control over network roll out and equipment maintenance decreases.

As passive infrastructure business has evolved into a separate industry around the world, many tower companies in the telecom industry face several challenges. These include:

• High capital requirement: Tower deployment is a highly capital-intensive activity. The installation of each tower requires an investment of USD 55 000 to USD 75 000. Thus, tower companies the world over end up being highly leveraged

• Regulatory clearances: The first step should be to ensure that the regulatory authority is in favour of infrastructure sharing. Projects may stall because of delays in regulatory clearances. Apart from dealing with telecom regulators, tower companies also have to deal with other governmental bodies such as municipalities, forestry departments and environmental departments.Hurdles in obtaining clearance from a multitude of governmental bodies are often cited as reasons for delays in several site installations across developing nations. Since most of them are regional in nature, tower companies have to deal with quite a few governmental offices scattered across the country

• Operational cost optimisation: Although operational costs such as power and fuel are generally passed on to the operators, these are usually subject to agreed maximum limits. Thus, tower companies must work towards building controls to limit operational costs. Tower companies also face the problem of finalising the cost-sharing percentage and building a technology road map.

• Handling of local issues: Tower deployment and operation involves dealing with location-specific issues, including dealing with the landlord and local authorities, and running operations across a variety of geographies and terrains.

According to KPMG , the accounting treatment for infrastructure arrangements would depend on the model applied and the structure of the transaction. Accounting for these arrangements could be complex and a detailed analysis of the substance of the arrangement is required. Operators could:

• Retain the infrastructure assets on their books (typically if risks and rewards of ownership are retained)

• Derecognise the infrastructure assets (typically if risks and rewards of ownership are transferred to the third-party tower company)

• Recognise a portion of the assets (typically if there is joint control over the asset)

In the US , TowerStream has formed Hetnets Tower Corporation, which will offer wireless carriers and others a range of shared infrastructure services and access for mobile wireless Internet services. They believe the explosion in mobile data in urban markets is driving a migration to small cell architecture, and the major carriers are presently focused on the densification of their networks. With the rise of mobile data placing a tremendous demand on the networks of the carriers, TowerStream concluded that its Wi-Fi network can serve carriers’ data offload needs. To serve this need, Hetnets Tower Corporation rents space on street level rooftops for the installation of customer-owned small cells, which includes Wi-Fi antennas, DAS, and metro and pico cells. Channels on TowerStream’s Wi-Fi network are available for rent for the offloading of mobile data.

Concurrently there is a growing industry in green technology that specialises in producing energy from renewable sources or with zero or reduced carbon impact. Such technologies include solar power, wind power, wave power and bio fuels. Operators should be in a position to benefit from these technologies as the amount of power they can generate continues to improve. Vendors have already successfully trialled a combined solar and wind powered base station in various African countries, which not only reduces the environmental impact of the site but also makes it more feasible for operators to deploy sites in remote regions by negating the need for traditional power supplies or maintaining a fuel generator.

Network roaming can be considered a form of infrastructure sharing although traffic from one operator’s subscriber is actually being carried and routed on another operator’s network. However, there are no requirements for any common network elements for this type of sharing to occur. As long as a roaming agreement between the two operators exists then roaming can take place. For this reason operators may not classify roaming as a form of sharing as it does not require any shared investment in infrastructure. When roaming agreements come to an end they can be renegotiated either with the existing host network or another operator with minimal effort and transitional impact.

Network sharing is increasingly favoured by progressive policy makers as a way of ensuring more rapid provision of 3G services and on environmental grounds. On this basis the European Union has consistently ruled in favour of permitting passive network sharing and more recently also national roaming under the caveat that competition rules are respected. The sharing of sites and masts, national roaming and RAN sharing tend to impact coverage, quality of service and pricing of services to consumers positively, as the cost saving characteristics of infrastructure sharing allow for increased efficiency.

One of the largest commercial infra sharing deals occurred in August 2004 between Telstra and Hutchinson in Australia This was cleared by the ACCC ( Regulator ) who assessed the benefits outweighed the potential competitive impact. Telstra paid $450 million to Hutchison Telecommunications Ltd for a 50% share in ownership and operation of its 3G radio access network infrastructure. The cost to Telsra of building a network over four years would have been $900 million to $1.0 billion. Telstra stated the deal was undertaken to save on costs of entering the 3G market and that they scored a tried and tested network at half the cost.Surely the same logic would apply to 4G LTE networks in MEA.

Ofcourse we have to wait and see in the MEA Telcos will actually realise the well known savings of passive sharing and whether some of these savings will be passed onto the rural consumers in form of lower data / voice prices. In spirit at least , infrastructure sharing is a step in the right direction for MEA telcos.

Sadiq Malik ( Telco Strategist )

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