A wave of consolidation is taking place across Europe. In Britain, BT plans to take over EE while O2 is in the process of selling its network to Three. In France, Altice’s subsidiary, Numericable-SRF, is acquiring Bouygues, while in Norway, Telia plans to acquire Tele2. These consolidations are primarily as a result of the pressures that mobile operators are facing due to declining revenues and margins. Voice revenues have been declining much faster than data revenues have been rising, creating intensive pressure on mobile operators’ finances.
To put this into perspective, the Financial Times[1] reports that European mobile revenues decreased by 18% between 2008 and 2014, whilst the return on capital employed halved in the same period to around 10.9% (post tax). Further, the European Commission is pushing for a single market in digital communications in order to encourage economic growth and increased employment. As a result, an overhaul of EU telecoms rules is expected, with EU-wide criteria for spectrum allocation at a national level and incentives for high-speed broadband. The aim will be to ensure a level playing field for all existing as well as new players in the telecoms market. Whilst it is too early to speculate on the implications for existing operators, the changes are likely to result in the need for more investments by operators.The introduction of higher-speed networks, cheaper smartphones and a thriving ecosystem of applications have resulted in a significant increase in mobile data usage. Ericsson[2] estimates that, by the end of 2015, more than half of Europe’s mobile subscribers will be smartphone users and that, by 2019, the total number of smartphones will exceed the total population. Mobile broadband data has been increasing at annual rates of 40%–50% driven by new services such as new video applications and connected devices. Cisco forecasts that Western European mobile monthly data usage will increase seven fold between 2014 and 2019[3]. Whilst this may sound like good news for the mobile operators, the incremental revenue as a result of the new investments is limited; ABI Research reported in 2014 that the price premium for Long-Term Evolution (LTE) over 3G had declined to 20% in developed countries and it is likely to erode completely. The growing gap between demand and supply is forcing operators to do more with less and while technological step changes such as Network Function Virtualisation (NVF), Software Defined Networks (SDN), BBU pooling and multi-operator core networks with shared/pooled operator spectrum (MOCN) provide opportunities for efficiencies, operators are re-thinking their approaches to network infrastructure. For many European operators, the access network is no longer seen as the key differentiator as evidenced by the number of shared infrastructure deals, active as well as passive, that have taken place in Europe. Differentiation is increasingly seen to come through launching innovative bundled data and communications services to end users, integration with unlicensed spectrum, loyalty programmes and premium content. Infrastructure sharing has been one strategy that operators have been pursuing for some time in order to reduce both capital outlay and operating costs. The majority of the active infrastructure deals have been set up through a joint venture, where typically the two mobile operators consolidate the shared assets, including towers and masts, which are transferred to the joint venture or decommissioned over time if deemed surplus to requirements. European regulators have generally been supportive of network sharing although deals are generally looked at on a case-by-case basis. The key concerns are typically around ensuring that such deals are not anti-competitive.
Active infrastructure-sharing deals typically provide operational savings of 25%–35%, depending on several factors. This is higher than for passive tower-sharing deals, which typically deliver 15%[4] operational savings. Operator-operator deals, typically via joint ventures, have been more prevalent in European markets (see Table 1-3) compared to the sale of an operator’s tower portfolio to third parties. More recently however, there have been several instances where operators are selling all or part of their tower portfolios to independent third-party companies under a sale-and-lease-back arrangement. The Dutch incumbent, KPN, for example, has been divesting its towers across The Netherlands in a phased approach for some time. In addition, the last two years have also seen operators in France, Spain and Italy selling off their towers or a majority of their shareholding (see Table 4) to independent tower companies. The shift towards the sale of most or all of the tower estate is partly due to the need to raise capital but also to the perceived need for trusted third parties to deliver a cleaner separation of network infrastructure. This separation not only helps in addressing anti-competitive concerns but takes away any inherent tension between competing operators trying to share the infrastructure. However, joint ventures and operator-operator agreements are difficult to unwind once established and can potentially make consolidation with other operators not involved in an agreement difficult or slow. The consolidation taking place in the UK is a case in point. Here, Hutchison’s Three is in the process of acquiring Telefonica’s O2 while BT is planning on acquiring EE. Currently O2 has an active sharing agreement with Vodafone UK and Three has a joint venture, MBNL, with active sharing with EE, which has already integrated T-Mobile and Orange.
Table 1 Active Infrastructure Sharing via MORAN (Dedicated spectrum) in Europe
Table 2 Active Infrastructure Sharing via MOCN (Shared/pooled spectrum) in Europe
Table 3 Passive Infrastructure sharing amongst MNOs in Europe
Table 4 Towerco deals in Europe
Network and IT expenditure often constitutes 75% of capital expenditure and 45% of annual operational costs and thus the scope for efficiencies in this area can be significant. With consolidation more likely amongst European operators, further innovative ways to make network spending more efficient need to emerge. With NFV, it is possible to envisage, for example, multi-tenanted network elements, not just at the Radio Access Network (RAN) layer but deeper into the core network. Such sharing could however significantly impact service differentiation and independence among operators and will be subject to regulatory approvals.
Other developments are on the horizon, such as the move towards smaller cell technology with heterogeneous networks and the deployment of 5G. These developments will however impact third-party infrastructure economics as tenancy opportunities decrease. As an independent tower company’s business model is generally built around tenancy additions, any deal with an operator starts to look more like an infrastructure outsourcing agreement where suppliers have to make their margin through service efficiencies, which may lead to a lower valuation of the operator’s tower portfolio.
European tower companies are looking at diversification, Arqiva for example, the UK’s largest independent provider of wireless sites, has recently partnered with SIGFOX to deploy a countrywide ultra-low-band network for M2M. Cellnex, the Spanish tower company, is looking to exploit its recently acquired cellular towers in Spain and Italy for other digital dividend opportunities as well as expand internationally. Could independent tower companies move from passive infrastructure to running shared infrastructure for the operators? With the right strategy and skill set, independent tower companies can offer additional value-added services to the mobile operators as witnessed by several organisations in Europe already offering managed services for active equipment and backhaul.
As for European operators, the pace at which returns on infrastructure investment have decreased over the last few years, with no sign of change, means that there is an urgent need to have a good strategy in place. The new technological step changes, in particular NFV, will bring significant benefit in operational efficiencies as well as reduced capital expenditure. However, this may not be enough and operators may need to consider more radical changes. Potential strategies beyond consolidation or network sharing include the separation of an operator into an ultra-efficient network-focused organisation (NetCo), with sole responsibility for the network infrastructure, offering wholesale services to a service company (ServiceCo), with responsibility for delivering services to end users. Such separation could allow NetCo to operate independently of ServiceCo, offering wholesale services to other service providers and ServiceCo could potentially outsource all its operations to a third party to achieve economies of scale. ServiceCo would focus on providing differentiated services by using wholesale services, not just from NetCo but also from other wholesale providers, to compete with the over-the-top providers. KPN, for example, has already created a NetCo that combines the operations of its IT and network infrastructure covering the mobile, landline and wholesale divisions.
European operators need to continually evaluate potential strategies and find innovative options for making their network spending more efficient in order to reverse the trends in revenue and return on capital employed. Bold options are needed; for example, if the network is no longer a source of differentiation, does a retail telecommunications operator actually need its own dedicated network? It could be argued that vertical integration of operators and the duplication of national networks is actually hurting investment and slowing down the proliferation of high-capacity end-to-end networks – both fixed and wireless. Competitive wholesale supply of capacity to nimble retail operators could be the delivery paradigm of the future. For this to happen, regulators, investors and operators need to start thinking about their industry afresh as the model developed during the 1980s looks increasingly unsustainable. What operators do with their network assets is central to this debate.
Over the next few editions of the TowerXchange Journal, PA Consulting will be exploring the state of the European mobile infrastructure market, reporting on existing joint venture initiatives, the impact of consolidation in Europe and assessing the potential strategies operators need to adopt in this shifting landscape
[1] www.ft.com, Lex in-depth, European Telecoms , 18th Nov 2014
[2] Ericsson Mobility Report; 2014, 2015
[3] Cisco VNI, 2015
[4] GSMA, Mobile Infrastructure Sharing, 2012
About the authors
Michel Grech and Andrew Doyle work at management and technology consultancy, PA Consulting Group as part of the Technology and Innovation practice. There they work closely with network operators and blue chip enterprises, advising them on the implications of legislative and technological shifts and helping develop appropriate responses
