Analysis The vast cost of keeping up with demand for mobile data is intensifying the pressure on mobile operators’ capex budgets and accelerating their moves to improve their infrastructure cost base. Major agreements to share passive and active cell site equipment are becoming commonplace as regulators ease up on previous restrictions, accepting that, in the age of the MVNO, a common network need not reduce consumer choice at the services and pricing level.
The need to reduce network costs is also driving operators to out-source their towers or their whole RANs, and to seek new mechanisms to acquire and manage sites – a trend now extending from macrocells to small cells amid the move towards densification, as Sprint’s new site leasing initiative illustrates.
And in turn, all these changes are creating significant upheaval in the tower business itself, with a trend towards towercos, rather than operator-owned sites, being offset by the revenue squeeze that sharing can create for those independent site owners.
China’s three network operators recently placed many of their towers and sites into a joint venture, and China Telecom and China Unicom followed that with a more extensive RAN sharing agreement, particularly targeted at rural areas.
India’s two Reliances step up their sharing
India’s MNOs are also lobbying for further relaxation of the rules on sharing of active infrastructure, as they face one of the most challenging cost:ARPU ratios in the world, which has not been improved sufficiently by 3G and 4G to guarantee that their business models will remain viable. The regulator, TRAI, has been more open in recent years to spectrum and infrastructure sharing, and may well allow full RAN and even core network sharing.
The major players are already taking advantage of the sharing that is permitted. New entrant Reliance Jio has site sharing deals in place with its former stablemate Reliance Communications and several other operators, as it prepares to launch its long-awaited LTE services with as efficient a cost base as possible.
And the two Reliance companies have also signed a spectrum sharing and trading pact this month. This allows Jio to share its partner’s 800 MHz spectrum in 17 of India’s 22 telecoms operating circles, and to buy frequencies outright, in nine circles where it currently has no holdings in this band, considered essential for cost-effective 4G coverage. Jio has acquired spectrum in recent 800 MHz and 1.8 GHz auctions but its major assets are in the unpaired 2.3 GHz band, so it plans to roll out dual-mode FDD/TDD-LTE services, banking on its its significant data capacity to give it an edge over more established mobile rivals.
As well as undisclosed fees, RCom will also get access to Jio’s 4G network to add more capacity for its own customers.
"The spectrum arrangements between RJIL and RCOM will result in network synergies, enhanced network capacity and will optimiSe spectrum utilization and capex efficiencies," said the companies in a joint statement. "Both operators anticipate considerable savings in operating costs and future investment in networks."
The new pact will complement the existing infrastructure sharing deals for towers and fibre, and proposed intra-circle roaming agreements. In 2013, RCom agreed to share its intercity fibre network with Jio in an INR12bn deal, which it followed with an INR120bn agreement to lease space on 45,000 of its towers.
The latest deal will only stoke speculation that the two companies will merge their telecoms operations completely to achieve greater scale against the three market leaders, Bharti Airtel, Vo-dafone and Idea Cellular. RCom is already preparing a three-way merger with Aircel and CDMA player SSTL. However, Jio’s new agreement with RCom is contingent on that company liberalizing its CDMA spectrum.
In Russia, MegaFon and Vimpelcom in new deal
Russia is another country where the regulator has traditionally been hostile to active infrastructure sharing, but is easing its stance as the market becomes more competitive and costs escalate. A government-backed scheme to create a wholesale LTE network – financed and shared by the main MNOs plus startup Yota – fell apart amidst operator politics, with the network itself ending up in the hands of one of the three big players, MegaFon.
MegaFon is also involved in the latest move towards network consolidation in Russia, announcing a plan to work with rival Vimpel-com to build a jointly owned LTE network, comprising about 1,300 new base stations in the 1.8 GHz band, in 10 regions. This will reduce cost and accelerate build-out times, though they did not specify the figures involved. They plan to launch the network by the end of June, and it will end up covering the regions of Smolensk, Belgorod, Voronezh, Lipetsk, Bryansk and Arkhangelsk regions, as well as the Republic of Karelia.
"The implementation of a joint RAN sharing project with Vimpel-com will allow us to enhance harmoniously our infrastructure in the 1800 MHz band in the most efficient way," said MegaFon's CTO Alexander Bashmakov, in a statement. "With this project, we are going not only to improve the existing network significantly, but also to rapidly launch LTE in new locations in the selected regions at a minimum cost.”
Vimpelcom saw the number of LTE devices on its network grow by 3.3 times in 2015, the operator said, and its 4G traffic quadrupled. MegaFon said LTE now accounts for 40% of its total data traffic, and 40% of its customers were on 4G, as of the end of Q315.
However, Vimpelcom is looking for more radical changes to its network cost base, and is offering its 10,400 Russian cell towers for sale. There are also reports that it plans to sell its towers elsewhere in the CIS region, while MegaFon and the third Russian national MNO, MTS, are also said to be considering this option.
The rise of the towerco
This is all part of a broader move by MNOs to offload their cell sites. Telecom Italia is currently weighing up three bids for a 45% stake in its infrastructure business, Inwit; and Turkcell has opened discussions with bankers about the potential sale of its 7,500 towers in Turkey. Other rumours are that Telefonica wants to sell its sites in Germany, and put its 11,500 sites in Spain up for IPO or sale; and that Orange is looking to do the same in Poland.
The frontrunner in Italy is Spain’s towerco Cellnex, which has set out plans to be the “American Tower of Europe” and has assets in Germany as well as Spain. It has partnered with F2i to bid between €4.35 and €4.45 a share, in a proposal which would deliver savings of about €1bn. However, the price may be too low for Telecom Italia, which already raised €875m in an IPO of 40% of Inwit last year. The other bidders, according to Reuters, are American Tower and Ei Towers. Cellnex-F2i and American Tower would be required by Italian law to mount a bid for the rest of Inwit, if they succeed – this becomes compulsory once a 30% threshold is reached. Ei is said to have bid for less than a 30% stake to get round that issue, but that may be too low for TI, which wants to hold onto just 15% of the firm.
The confirmed deals in Italy, Russia and Turkey, if they take place, could see 23% of Europe’s 600,000 tower sites falling into the hands of independent tower companies this year, up from 18% now, according to calculations by TowerXchange. And other reported sales could push the figure as high as 36%.
The tower analysts say this could be a "transformational year" for the European towerco sector. Scott Coates, CEO of the Wireless Infrastructure Group and chairman of the European Wireless Industry Association (EWIA), said: “EWIA's members have over €60bn of global wireless infrastructure assets and our industry is set to make transformational investments across Europe that will improve connectivity.”
Sprint’s site leasing approach
Across the water, AT&T and T-Mobile USA have already sold large numbers of towers, and a whole new approach to sites will underpin Sprint’s current push to densify and expand its 4G network. Its tactics include moving sites to government land, where rents are cheaper, and establishing a financing entity for network build-out. The latter will be a collaboration with parent Softbank and its financial partners, on similar lines to the leasing firm already established for handsets.
"We are establishing a network-related financing entity in co-operation with SoftBank and its partners," said Sprint’s CFO Tarek Robbiati on the operator's fiscal third quarter earnings call this week. He says that the entity will raise between $3bn and $5bn in fiscal 2016, using some of the US firm’s spectrum as collateral (though Sprint will still own it).
Sprint will also aim to reduce network costs by refusing to renew leasing deals with more expensive third party site providers and moving base stations to towers which are on public rights of way. The main priority for Sprint’s build-out in 2016 will be small cells, which will no doubt introduce further changes in site approaches.
CTO John Saw also said that the firm is looking to add more microwave radio backhaul (including in its own 2.5 GHz spectrum) as well as using more dark fibre, to reduce its reliance on leased fibre lines.
"We are focused on densification, without jeopardizing the customer network," CEO Marcelo Claure said on the call. "We'll look at towers, rooftops and monopoles and then choose the most efficient way to plan. Everything will make the network more dense. By no means is this rip and replace." He added that Sprint would be "very opportunistic in optimizing antennae on lower cost infrastructure such as macro sites and public sites for similar or better performance at lower cost."
Claure did not put a figure on the cost savings he aimed to make from these changes, but some sources put this at about $1bn.
This is in addition to the $1bn a year Sprint aims to save by paying less to AT&T and Verizon for leased lines.
The risks of Sprint’s great transition
However, transitions to new site and backhaul providers will take time, as contracts are typically at least five years in length. Analyst Walter Piecyk of BTIG commented in a client note: "The tower companies we spoke with seemed unaware of Sprint's latest version of its network plan and noted that tower leases extend for 5+ year. Sprint's lack of information on the network has created confusion in the market which may be extending to potential customers. Press stories about cell site reductions is simply not the best way to convince consumers that Sprint's network performance is about to improve.”
The risk is that Sprint will engage on another disruptive cycle of change to its network, before it has fully delivered the benefits of its Network Vision program to create a multi-technology infrastructure capable of delivering market-leading 4G capacity across several bands, as well as hosting third party networks. Network Vision encountered many delays and changes of direction, although it has helped enable some new services like Sprint’s triband Spark LTE offering. It was recently superseded by a new plan dubbed Next Generation Network (NGN), following the departure of the executives behind Network Vision, former network chief Steve Elfman and CTO Stephen Bye.
NGN is designed to build on Network Vision but also to introduce new architectures far more rapidly in order to deliver the LTE speeds which Sprint has promised for years. The small cell layer, which has been neglected, will be a priority, as will carrier aggregation, and the densification of the macro layer with MIMO. Various sources suggest that the program will include the roll-out of about 70,000 small cells, plus several thousand additional macrocells and the use of the 2.5 GHz spectrum for backhaul as well as access.
Analysts at Evercore ISI highlighted the problems for Sprint of these constant changes in network strategy, which give the overall impression of a company running very fast to keep still. They believe a significant change in tower strategy at this point “would create meaningful network service disruptions - not dissimilar to those experienced by Sprint customers during Network Vision."
According to Re/code, Mobilitie is one of Sprint’s partners in relocating its sites to government land. Last year, Wells Fargo analyst Jennifer Fritzsche also named Mobilitie as a Sprint supplier – as a partner in deploying 20,000 of its planned small cells.
Sprint, however, insists that its network and infrastructure transformations are starting to deliver the targeted results. On the earnings call, it said it had doubled the number of markets in which it offers triband ‘LTE Plus’ during the quarter and cited recent data from Nielsen which says that network is faster than those of Verizon, AT&T and T-Mobile.
Copyright © 2016, Wireless Watch
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