Protecting towerco revenues from MNO consolidation in the Irish market

The acquisition of O2 by 3 in Ireland coupled with the EU ruling that Mosaic, the network sharing agreement between Meteor and O2, must remain has effectively created two transmission networks in the Irish market – Vodafone and the rest. Not only must consolidation of the O2 and 3 tower infrastructure take place, but where some towers originally may have had four MNO tenants in the past, this  will be reduced to two, threatening towerco revenue. In this interview Ronnie Horan, Infrastructure Manager for ESB Telecoms (which owns and operates 377 of Ireland’s 3,780 towers and  manages 1,600km of National fibre optic cable) shares some of the challenges this consolidation has placed on Ireland’s towercos and discusses strategies that the company is deploying to protect their revenues.

TowerXchange: Please can you introduce yourself and how you got into the telecoms sector?

I started my career training as a telecoms technician in the state telecoms company which used to be called the Department of Posts & Telegraphs before joining ESB in 1980. Back then there was no commercial telecoms business at ESB and I worked on our own microwave and radio network. In the nineties, when ESB set up a commercial business to leverage the towers they had, I transitioned into this area, and then in the early 2000s a fibre optic component was  added to my remit. My current role is as infrastructure manager for three teams – the tower team, the fibre team and the safety team (critical for a business particularly in the power sector).

TowerXchange: Can you give us a bit of background to ESB Telecoms’ role in the telecommunications industry?

ESB is the Electricity Supply Board of Ireland and ESB Telecoms is a  wholly owned subsidiary of ESB Group. The telecoms business was originally founded back in the seventies as the incumbent operator wasn’t delivering a network that could meet ESB’s requirements and so we developed  our own radio and microwave network to support our operations on the power side.

As mentioned previously, it was decided back in the nineties to set up a commercial business to leverage the towers that we owned and we started renting tower space, originally to MNOs and then to wireless broadband operators. In the early 2000s ESB decided to  rollout a fibre optic business and so as well as the 400 towers that we own, we  have 1,600km of fibre. Excess capacity on this fibre optic network is leased to MNOs and broadband providers.

TowerXchange: We understand the majority of ESB Telecoms’ towers to be located adjacent to power distribution stations – what challenges does this bring, particularly in regards to safety?

Whilst our telecom tower sites are adjacent to power distribution stations they have separate access systems and usually separate compounds. Access to sites is controlled by our own safety extranet system which also includes method statements and work plans. Contractors are only issued a permit for the system once they have been through our own rigorous training and induction programme. Generally supervision is not necessary once the training and induction programme has been completed. The only exceptions being for example, if they’re using lifting equipment which may bring them in close proximity to power cables and they are not allowed to do any digging on site.

We  process 4,000 access requests per year and ESB Networks,  that controls the power distribution stations, allow us to grant this access because of the rigorous safety control measures we implement. When it comes to contractors working on the fibre network, even more rigorous procedures are required due to the added safety risks. For both the tower and fibre business, we have our OHSAS system (like an ISO18001 safety management system) and every manager in the business has a safety audit quota so the work and sites are monitored and checked regularly.

TowerXchange: With such a rigorous process for contractors to go through does this mean that you tend to be reluctant to change contractors?

Our contractors are generally on three year cycles, but this is more of a procurement value thing. We operate on framework contracts which go to tender every three years – the safety angle doesn’t stop us going to tender.

TowerXchange: There has been a great deal of MNO consolidation in Ireland, what challenges does this create and how does it affect your ability to forward plan? 

It has been challenging. Up until recently the four MNOs (Vodafone, O2, 3 and Meteor) were independent and so all four MNOs were occupying our towers. Consolidation means that aside from engineering challenges, there are going to be serious revenue challenges going forward, as the number of tenancies are set to decrease – where you had four MNO tenants previously this in effect could reduce to two. Complexity has also been added by the network sharing alliances that MNOs had been forming. For example O2 and Meteor created a joint venture called Mosaic. Since the acquisition of O2 by 3 the EU has mandated that Mosaic must remain, effectively tying O2, 3 and Meteor networks together.

In terms of required new build, the MNOs’ current focus appears to be on consolidation rather than new build, we need to get past this to plot new build opportunities. Our sales and marketing people are in negotiations with different entities to try and see what can be retained and progressed. We have made significant progress, but it has been challenging for both sides. Our business development people are constantly exercised by this, before the purchase of O2 by 3, our team were well advanced in negotiations but that takeover changed the Mosaic/Netshare configuration. All the towercos in Ireland are facing the same challenges, there is a huge degree of uncertainty.

This uncertainty has been around for the past two years so we are working on enhancing the value of our sites for our customers and entering into long term tenancy agreements.

TowerXchange: What strategies are there to increase the value of your towers to tenants and mitigate loss of tenancies through the period of MNO consolidation?

One of the key things that we are looking at is bringing fibre optic cable to more towers. With this added feature, operators are more likely to view them as core sites and thus retain them. With the fibre side to our business we are ideally positioned to do this. In fact other towercos are coming to us with enquiries about running fibre to their towers.

We are also starting to look more at small cells and less expensive structures. The days of building huge lattice structures in urban areas are probably numbered – with 4G technology you need to be closer to users and in lot of cities, towers are just not an option. We are looking at more discrete monopole structures and have had some early traction with one of the MNOs in that space.

TowerXchange: How has your interaction with MNOs changed?

When we started in this business we were mainly dealing with transmission engineers and so if we wanted to do something on a site, the conversation was from one engineer to another. Now we have started to deal with property managers, so it’s a landlord type scenario and a different type of discussion.

We have also found that a lot of MNOs are moving away from core staff and are looking at leveraging more value from their contractors. Instead of looking for contractors to do pure rigging and climbing they are looking at contractors to do the setting up and commissioning of links for example. As a result of this we have seen a lot of the important experts within MNOs taking early retirement and leaving.

We also see variation between MNOs in how they manage their strategy and decision making. For example, one MNO still operates very much as an independent entity, whereas  another seems to be heavily influenced by the parent global organisation.

TowerXchange: Beyond the challenges presented by MNO consolidation, what are some of the other key challenges that you face?

For us, one of the biggest problems is in the bandwidth business. The price per MB is being squeezed but the capital cost for network deployment and maintenance is not. The business case is getting very difficult as there are limitations on what the retailer can ultimately charge, but for us the cost of rolling out fibre is at best stable.

We try and drive down costs through our contracting framework as we operate a heavily outsourced model, but there are only so many savings that you can achieve before you start compromising on safety, which we will not do. With our business being linked to the power side our safety standards are more stringent than other companies, for example in burying fibre in the ground we do it in the same way that we would with the power network.

With our contractors, we get them to sign up to a rate card when we appoint them, we list as many tasks as possible and ask for prices for everything from cement to building a fence so that there are no random items – that is where unexpected costs can arise. We also arrange both volume discounts and regional discounts if they’re working on maintenance.  This model ensures best value and speed of delivery to our customers.

TowerXchange: Given the pressures on both the tower and the fibre business, how do you anticipate each to contribute to revenues going forward?  

At present, the towers business is more reliable - despite everything that is going on with MNOs the tower business is solid. With regards to both sides of the business we need to wait another few years and see how it plays out, although pressure on fibre revenues will continue, there will have to be a realignment in the value chain to ensure commercial returns for future fibre investment. In parallel, ESBT has significant opportunities to drive growth by broadening our customer base and enhancing our product portfolio.

TowerXchange: Is a fibre business a natural fit for towerco?

I believe increasingly so.  As mobile traffic volumes increase the number of microwave hops are reducing with fibre connection required at an increasing number of towers.  We are unusual in that we do both, as far as we’re aware we’re the only player active in both in the country. As mentioned, other site owners are looking at increasing value to their sites by bringing fibre to the tower, but they are speaking to fibre providers (including us) to do so and we also expect a lot of other towercos to do the same.

TowerXchange: Following the sale of towers by Coillte to Cignal last year do you forecast any more tower transactions or towerco buyouts in the Irish market?

We looked at the Coillte network and whether we could buy it but couldn’t justify it on the basis of the expected return. We are always constantly looking at potential acquisitions but they have to add value and a good fit with our existing portfolio.

With regards to MNOs and towers we will have to wait and see still.

At a slight tangent, on the fibre side there are some interesting opportunities arising. Rural Ireland has a serious issue with lack of broadband and just this December the government have opened a tender to address the issue. The challenge remains as to how to make this profitable, it will take massive capital investment to run fibre to remote areas and it almost becomes more of a social than a commercial play. This fits well with ESB’s track record of operating commercially in the national interest. The government is putting forward funding and whilst wireless operators are seeing this fibre rollout as a threat, opportunities will arise as fibre can’t be deployed to all areas – and with this will come new opportunities for towers.