Booz & Company: How to overcome objections to network sharing

Following the release of Booz & Company’s “Sharing Mobile Networks, Why the Pros Outweigh the Cons” viewpoint, TowerXchange spoke two of the report’s authors. Roman Friedrich is a partner with Booz & Company who leads the firm’s global communications, media, and technology practice. Steven Pattheeuws is a senior executive advisor who specializes in network and technology transformation, with a specific focus on active and passive network sharing. Booz & Company are one of the leading strategic consulting firms in the world.

TowerXchange: I enjoyed reading the “Sharing Mobile Networks” viewpoint – please could you tell us about some of the strategic objections to network sharing highlighted in the report, how they apply in Africa, and how they can be overcome.

Some operators are already convinced about the benefits of network sharing. However many operators still see significant risks, yet the reasons behind their reluctance to share networks do not hold up under scrutiny. Operators have different objections depending on their market position: incumbent or new market entrant, while those with a mature network might think differently from those still actively rolling out.

From a strategic point of view, many operators feel that their network provides competitive advantage in terms of coverage, quality, redundancy or backhaul capacity. Incumbents whose early entrance into markets has given them the best coverage and network quality might fear that sharing their network means relinquishing these advantages, with potential repercussions for their market position. Even in markets with mature network rollouts, some CTOs still don’t see the network as a commodity given growing smart phone penetration and network traffic.

You have to ask if the network really is a genuine differentiator in the long term. Is network competitive advantage sustainable over time in Africa? Even market leaders may not be able to rollout in low ARPU areas, suggesting a selective network sharing or roaming model, and surveys of 2G and 3G networks have shown that subscribers in many cases do not notice any difference between networks.

In many African countries where the rollout of networks is an ongoing process, we see a lot of c-level concern that sharing networks might mean losing the flexibility to adjust capex, such as the choice of hardware and vendors, or the ability to control the direction of network expansion based on commercial performance and potential, especially where regulators impose stringent coverage requirements. There’s a concern that network sharing creates a rollout plan “lock in”, sacrificing the ability to financially steer the company and manage cash flows.

Operators’ fear of losing control over the future direction of networks is simply misguided. While a shared network will have agreed performance targets, operators should structure network sharing agreements that allow them to maintain autonomy and control of selected, strategically important sites.

TowerXchange: Tell us how to overcome operators’ objections to network sharing on technology grounds.

Operators might have practical concerns about the compatibility of shared networks. One operator might have 3G on 1800MHz, and might be reluctant to share with another based on 900 MHz. They might also have concern about sharing networks with an operator with a different vision for the rollout of 3G or LTE.

Built networks can be shared, especially if network sharing is combined with a modernization cycle that implements single RAN technology, allowing networks of different generations to be combined on the same site with relatively inexpensive upgrades, thereby increasing the potential financial benefit of network sharing.

TowerXchange: “Sharing Mobile Networks” made an interesting point about the transaction cost ($20-30,000 per site) and timeline to return on investment being two to three years. How should we overcome concerns about the transactional cost of network sharing?

Operators are often concerned about the complexity of network sharing deals, whether sharing only passive networks, or progressing to include backhaul or antennae under active network sharing arrangements. Operators aren’t comfortable when they feel it’s difficult to guarantee network quality and control over network build outs. Operators are also concerned about the length and complexity of negotiations, which is why it’s essential to have clear expectations, targets and time lines at the outset.

The transaction cost of $20-30,000 per site is made up of decommissioning or moving towers, strengthening towers, adding space in sheds, site accessibility improvements, updating certification and security arrangements.

The transaction cost tends to be at the higher end of the range in developed markets with mature, overlapping networks as this gives rise to more decommissioning and reconfiguration costs. Less mature markets require less decommissioning and therefore lower transaction costs. The costs rise again if you’re sharing backhaul or active equipment, as you may then need to invest in the reconfiguration and upgrade of backhaul networks, or the addition or replacement of antennas.

This can make the initial cost of network sharing seem daunting, so some operators feel they simply can’t afford to participate. However, some operators are turning to outside investors to finance the initial costs involved in network sharing. Investors are attracted to infrastructure-heavy investments with limited risk, and can provide an independent platform for additional operators to join the network sharing arrangement, lowering the cost base and improving the competitive position for all, while mitigating any regulatory concerns.

The cash flow profile of network sharing deals is a typical hockey stick. The initial capital expenditure required over the first two to three years is gradually paid for through savings over a the term of a ten year network sharing contract. In most cases where two operators share networks in a joint venture, the breakeven point will occur after two to three years.

Many operators ask us how to flatten the investment profile to release funds for rollout in the first two years, but the best way to do this is to spread decommissioning over five to six years, which only delays the benefits of network sharing, particularly if during this period upgrades or investments are required on towers that will need to be decommissioned in the context of the deal.

Note: Figures include unilateral micro sites. Source: Booz & Company analysis

TowerXchange: Why should operators act now to start sharing their networks?

Operators’ objections to network sharing are often fair, but can be addressed properly. Potential cost savings soon exceed the up-front transformation costs, and the range of governance models open to operators means early movers can shape network sharing deals with joint venture or third party partners of their choice, giving them a distinct cost advantage in their markets.

We have to start by establishing whether infrastructure sharing makes sense from strategic perspective. It’s important to understand if tower sharing is already happening in a market or not. In some markets in Europe operators aren’t forced to share by regulators, but the actions of competitors sharing gives them little choice. For example, in Denmark the second and third ranked operators started sharing and the incumbent was left out of a relevant deal.

First movers in network sharing are able to shape deals; whether nationwide or focused in a specific area, whether inclusive of passive or active network components or backhaul. The objective is to negotiate a win-win deal; an operating model that makes sense for both operators in a joint venture, not providing benefits for one at the expense of the other. I can think of examples in Africa where relatively empty networks with good backhaul and core networks were shared with operators with traffic-congested networks, thus creating a win-win deal with very different impact drivers for each of the telecom partners.

Sometimes infrastructure sharing is about more than towers; operators need to take a holistic view, and play with scope of a deal. We’ve already seen several operators that have adopted a wait-and-see attitude to network sharing being left out in the cold – first movers in network sharing can improve their bottom line and will gain a real advantage over their non-sharing competitors.

TowerXchange: We’ve seen a lot more sale and leaseback deals to towercos in Africa than we’ve seen Indus-style operator joint ventures. We’ve discussed the potential benefits for operators to share towers in a joint venture deal, how can third party tower companies add value?

Joint ventures between telcos generate the most value, as they don’t have to give up a management / operating / profit “fee” to a third party.

Especially in Africa, we often encounter concern that working with a third party towerco means losing control over with whom assets are shared, a particular concern where the competitive positions of operators are very different. The concern is that if a towerco manages the assets, they might be able to generate limited value with few towers shared except for competitors to cherry picking high value towers, accelerating their ability to compete for high value customers.

However, I see two ways in which independent towercos can generate value. In African markets with four or more operators, each with partial coverage, the involvement of a third party towerco can facilitate securing deals with multiple operators. With Africa’s low ARPU, it’s important to maximise use of assets, and sharing among multiple operators creates more value than two operators sharing bi-laterally. That said, some of the operator-led towerco spin-offs in India have created deals with multiple operators.

The second benefit of working with towercos is that they can be impartial. There’s definitely a benefit of having an independent party, with some skin in the game, who is able to push a deal through as a middle man between operators who’s working relationship might not be strong enough to create a joint venture. In this manner, towercos are able to create value where no deal would otherwise be possible.

In Africa it may also be helpful that towercos can bring cash to the table, enabling rapid build-out. However there may be less investment appetite for smaller tower portfolios or towers brought to market late.

TowerXchange: What factors determine the shareability of a network?

From a strategic perspective, shareability depends on operators’ willingness to open up assets in certain high value, high population density locations for sharing. With low cost towers in rural areas often lacking both the capacity for additional tenants, and the revenue potential necessary to justify upgrades, there’s a strategic disincentive to share in both rural and urban areas.

Then from a technical point of view, you have to determine if the towers are strong enough to hold additional antenna, and whether there is space in cabinets for additional equipment. These issues can be overcome, but if you need to replace towers and expand cabinets that means heavier capital investment. In our experience, in Africa and the Middle East many operators have deployed moveable towers, so the capacity for additional loading may be much more limited.

While rural areas in African typically rely on microwave backhaul, the use of fibre or leased line connectivity in cities compromises shareability as it can make it difficult to reconfigure networks if sharing requires that you move towers.

Then you have to consider the financial feasibility of sharing as a factor in shareability. A portfolio of towers might constitute an attractive number for a substantial sharing deal at the outset, but a bottom up analysis of shareable tower gives you a significantly lower number of towers that could be brought to market, and that affects their value.

TowerXchange: Are infrastructure sharing deals in Africa resulting in many sites being decommissioned?

While network sharing in Europe can mean 40-50% of sites are ultimately decommissioned, we’d anticipate less decommissioning in Africa, where towers are more frequently moved rather than decommissioned, although moving towers is still a painful and complicated exercise particularly with regards to (fixed) backhaul. With operators upgrading to real 3G and, in some cases soon to LTE in African cities, and with market share and usage patterns so much more difficult to forecast in Africa, CTOs rightfully see no point in decommissioning towers they might need in two to three years. Hence the importance of establishing a clear view on how user numbers and traffic patterns will evolve over the next years before starting a network sharing redesign exercise.

It can be complicated to structure decommissioning of sites where multiple operators have assets covering the same subscribers. The site may not be as important for local traffic as it is for transmission. Some sites are shared with other operators and hence cannot easily be decommissioned or moved. And in many cases operators signed long term leases that have to be paid for anyway. So unless decommissioning is structured effectively, it can mean it takes 20-25 years to realise the benefits of network sharing.