Tower sharing offers opportunities for emerging markets

While the large operators in Western Europe like Telefonica or Vodafone have instigated advanced active infrastructure sharing and outsourcing, telecom operators in developing markets are now beginning to look into alliances that would help relieve them of heavy costs and speed their expansion into rural areas.

Network infrastructure sharing and outsourcing is finding strong acceptance with mobile operators around the world as an effective way to cut down coverage costs, while reducing the time-to-market. These initiatives have already seen significant traction in India, and are poised to make their impact felt in the Middle East and Africa (MEA).

Operators across the world, especially those in developing markets, face challenges in sustaining margins with declining ARPU. 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. In this context, tower sharing offers a compelling proposition.

In a whitepaper entitled Mobile Tower Sharing and Outsourcing: Benefits and Challenges for Developing Market Operators, Romain Delavenne, director of Capgemini’s telecoms, media and entertainment consulting practice in the Middle East, reveals that towers constitute almost 50 per cent of the total capital expenditure (CAPEX) for an operator. Yet while many operators in developed markets have moved on to sharing both active and passive 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.

Capgemini’s 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 operating expenditure (OPEX).

Tower sharing has largely been an operator-led initiative in most developing markets, however regulators have also played a significant part in ensuring uptake of tower sharing initiatives. Tower sharing prevents the proliferation of masts thereby reducing the environmental and visual impact of operator networks especially in urban and ecologically sensitive areas. Tower sharing also helps in spurring competition due to a reduction of entry barrier for new operators. More importantly, from a regulatory perspective the pooling of tower infrastructure helps operators expand into rural markets achieving the objectives of universal coverage, while ensuring that operators do not incur significant CAPEX in doing so.

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 continue to expand their networks to reach out to rural areas and improve 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.

Establishing a separate tower company helps incumbents to unlock the inherent value of their physical infrastructure. Forming independent tower companies that attract additional tenants can aid operators to generate additional revenues, thereby creating value from an otherwise depreciating asset. With incremental operating costs being low, additional tenants on towers lead to very high margins. In developing markets the tenancy ratio per tower ranges between 1.1 and 1.3 compared to 2.2 -3.0 in developed markets such as the US12. Capgemini’s estimates indicate that a typical breakeven tenancy ratio per tower site in developing markets of Asia, Middle East and Africa is 1.5.

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.

Capgemini concludes that tower sharing and outsourcing have a significant role to play in developing markets in order to promote universal telecommunication access and especially so, given the background of the global economic turmoil which has affected investment pipelines. For incumbents, new entrants and regulators in developing markets, tower sharing and outsourcing models offer growth paths to service expansion and enhanced subscriber penetration. However, tower sharing brings in its wake numerous challenges. Operators and independent tower companies need to clearly identify the path most suitable to their needs to avoid the pitfalls and realize the potential benefits.

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

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