Keith Boyd has been a leader of the African tower industry since before there was a tower industry! Over 15 years spanning Plessey, Venture Communications and Eaton Towers, Keith has become a respected authority on South African towers, and he’ll again be hosting a round table devoted to the country at the forthcoming TowerXchange Meetup Africa. TowerXchange caught up with Keith to find out about how his business, and the South African tower industry at large, had grown over the last twelve months.
TowerXchange: Great to catchup with you again Keith. How has the Eaton Towers South African business been progressing since we spoke a year ago, when you had under 100 constructed sites?
Keith Boyd, Managing Director, Eaton Towers South Africa:
Since then, Eaton Towers have more than doubled the size of our tower portfolio in South Africa. In addition, we have acquired almost 850 sites, which we would plan to develop as operator demand grows. Our tenancy installation rate is currently at about 20 per month, and this will rise as operator demand, and our portfolio size increases. This growth is driven by the requirement for cell site densification which itself is driven by the falling cost and therefore increasing uptake of smart phones. The associated growth in demand for data, and increasing price competition requires South Africa’s operators to leverage co-location to reduce time to market, and minimise costs.
Eaton Towers South Africa’s tenancy ratio is now well north of two, which is very pleasing, given that only two of our sites are more than two years old.
The acceleration in the growth of our business is based on the sound property work we started three years ago. We’ve worked hard to balance our portfolio, devoting a lot of attention to less well off areas with high population density and high demand. As most people in affluent areas already have smart phones, the biggest percentage increase in smart phone usage is going to be in these less well off areas. We are balancing that strategy with an approach to providing aesthetically acceptable coverage and capacity in gated communities in the more up market suburbs.
TowerXchange: How has South Africa’s transition from 2G to 3G and now the rollout of LTE affected demand for tenancies?
Keith Boyd, Managing Director, Eaton Towers South Africa:
2G coverage is already very extensive in South Africa – all the new demand is coming from data hungry 3G and LTE. Site separations are coming down to 500m between large tower sites, with filler sites in urban areas.
As next generation networks mature, towercos will likely diversify product offerings to include microsites and lamp post type solutions. Demand is also rising for coverage and capacity solutions within South Africa’s many gated communities and walled office estates. Eaton Towers offer products that comply with specific building guidelines and homeowner association preferences. In many cases you can’t erect a 25m tower, so you may need 10-15m flagpole or lamp-post type structures perhaps 200-300m apart to provide coverage in these estates.
As next generation networks mature, towercos will likely diversify product offerings to include microsites and lamp post type solutions
The full effect of LTE will be felt across Africa when handsets are available and affordable. South Africa’s largest resellers of cellular handsets reported that 1% of their handsets sold in the second half of 2013 were smart phones. That increased to 13% in the first six months of 2014. In one month alone – March 2014 – the smartphone contribution was at 23%, thanks to special offers and new low-cost handsets. And they’re now forecasting that number to rise to 30% in the last quarter of the year.
There are some remarkably smart handsets on the market for as little as US$50-60 that can do almost anything an iPhone can do data-wise. This falling cost of smart phones is a big driver for the uptake of 3G.
TowerXchange: How has the last year been in terms of demand for tenancies?
Keith Boyd, Managing Director, Eaton Towers South Africa:
All of South Africa’s operators are enthusiastic co-locating tenants. The cost to build sites, as well as the operator revenue on our sites, dwarfs our lease rates, so if we have a site in the right place, the MNOs will almost always co-locate.
Average voice revenues per minute have dropped from approximately US$0.20 to US$0.08 in the last year in South Africa. With margins under that kind of pressure, all of South Africa’s operators have had to take a long look at return on capital deployed.
TowerXchange: Are build to suit (BTS) programmes being largely managed in-house by South Africa’s MNOs, or allocated to the towercos?
Keith Boyd, Managing Director, Eaton Towers South Africa:
It’s a mix. MNOs are building their own sites in some instances, but as they transition from that 20 US cents to an 8 cent per minute reality, we can expect an increased focus on cost management. In addition, operators will find it ever more difficult to predict with accuracy, 12 months ahead, where their data demand will be the greatest, and therefore where and when they will need more sites. And it is impossible for the operators to speculatively acquire and permit sites in every single space where they might need one in the next 12 – 24 months. This makes BTS a key element which will allow operators to reduce the time it takes them to fill capacity gaps as they arise – especially when there are fully permitted sites near to their desired location, and they can therefore get on air very quickly.
TowerXchange: Tell us a bit more about how the BTS market works in South Africa, how do the economics work in terms of the timelag to adding a second tenant?
Keith Boyd, Managing Director, Eaton Towers South Africa:
As I’m always telling my team, a single tenant tower has a shocking IRR – they’re liabilities in many cases, not assets. Obviously we won’t break ground without an anchor tenant, but you wouldn’t want to build a tower anywhere where you didn’t have a strong sense that you could add a second tenant within a maximum of three years.
So a critical measure of a tower company’s ability to create value is how good we are at the property work – at selecting sites that will attract more than one tenant – and doing so two to five years before they actually occupy the site!
TowerXchange: Does that make it more difficult for MNOs to get towers built in more remote locations where attracting a second tenant is not as easy?
Keith Boyd, Managing Director, Eaton Towers South Africa:
Of course it depends on the pricing model. A low cost single tenant tower can yield an acceptable IRR if the lease pricing is high enough. But we strive to keep lease pricing as low as we can, and our model is predicated on cutting costs in a sustainable manner. We think the best way we can deliver value to the telecoms industry is focusing on co-location.
TowerXchange: What are your views of the potential for a substantial sale and leaseback opportunity in South Africa in the coming twelve months?
Keith Boyd, Managing Director, Eaton Towers South Africa:
I don’t think any operator can afford to sit on assets with the market having changed as quickly as it has.
The regulator has brought in asymmetric interconnect rates, which means the larger operators pay double the fee to terminate their calls on another operator’s network as the smaller operators do. Telkom Mobile and Cell C benefit from asymmetric interconnection rates, which has increased competition and driven down the headline price of minutes. Price reductions may be good for consumers, but they create a ‘new normal’ for business models. So, if any operator has assets that aren’t being maximised, that aren’t being sweated for their full value, then they need to revisit the strategy around those assets. So, I expect that all the South African operators will be considering how best to effect a towers transaction which best suits their key business challenges.
TowerXchange: Is there a risk that towers transactions structured to maximise up front cash, accepting a higher leaseback rate, can lead to “sellers remorse” in later years?
Keith Boyd, Managing Director, Eaton Towers South Africa:
I believe that our industry could improve relationships with operators by simply listening to what frustrates the customers whose assets we bought. Conversely, operators need to remember why they did a tower deal in the first place. It’s fine to repair your balance sheet by selling towers at an inflated price, but your successors will have to live with the long term consequences of that – no prospect of driving their site costs down to a level of “normalised” site opex.
TowerXchange: Finally, how can competing tower companies differentiate themselves from one another?
Keith Boyd, Managing Director, Eaton Towers South Africa:
The reality is that towercos are rarely in competition with one another. Most of the time we have a unique asset in a unique location – there is seldom more than 20% overlap in competing tower company’s networks. And no-one would be silly enough to build a new tower within a couple of hundred metres of an existing shared tower. So the differentiation is about service – and the ensuing trust relationships between towercos and tenants. For example we’ve invested in site hardening; palisade fences are often inadequate: you need electric fences, lights, sirens, code controlled keys to access the site – it’s all about ensuring our sites have the least break ins, combating operator equipment theft, and thereby maximising their users’ uptime.
Ultimately Eaton Towers South Africa want to provide the best level of service so we’re our customer’s first choice, and we want to maintain our excellent property work to select unique, highly desirable locations.
Keith Boyd will be hosting a round table at the TowerXchange Meetup Africa, taking place on October 20 and 21 in Johannesburg. Click here for details of the event.
