Hosted by CTIL’s Malcolm Collins, the UK roundtable at the 2017 TowerXchange Meetup Europe brought the Digital Economy Bill, EE’s Emergency Services Network Rollout, MNO consolidation and the future of the country’s JV infracos and towercos to the forefront of discussions. TowerXchange examine the debate at this year’s UK market discussion group.
The shape of the UK tower industry
The UK has a tower market structure unlike any other in the world. Independent towercos, headed by Arqiva and Wireless Infrastructure Group and Cellnex (who recently acquired Shere Group), own 38% of the 38,500 active towers in the UK. The balance are contained within two joint venture infracos: CTIL, which operates Vodafone and O2’s network (Telefónica), and MBNL, which performs a similar function for EE (now BT) and 3 (Hutchison). CTIL and MBNL are both the primary clients of the UK’s independent towercos, and site sharing businesses in their own right. Their business models differ in that the tower assets are actually on CTIL’s balance sheet, while MBNL is a management company with the assets retained by the MNOs. CTIL is a passive infrastructure sharing play, while MBNL’s model extends to active infrastructure and transmission sharing. TowerXchange were pleased to welcome all players to this year’s Meetup in London, alongside a number of the UK’s smaller players.
Figure one: Who owns/operates the UK’s 38,500 active cell sites?
The Digital Economy Bill
Having been published in July 2016 and with it being intended to lead to the passing of a new Digital Economy Act, the Digital Economy Bill featured highly during discussions at this year’s UK roundtable. A new Electronic Communications Code is being proposed in the bill, introducing measures aimed at simplifying and reducing the cost of digital infrastructure rollout. One issue the amendments seek to address is escalating lease payments being demanded by landlords who own the ground or rooftop on which the tower sits. Under the current code, landlords have the right to renegotiate rent when the equipment on a site is upgraded or when further tenants are added. Towercos complain about being “held to ransom” by landlords with one company voicing they have even been charged to remove equipment.
The new bill looks to regulate the increase in ground rent and also to remove the consent right of landlords over equipment upgrades and network sharing. Whilst the bill is yet to make it into law, on the second day of the Meetup the Bill passed through the House of Lords, marking another important milestone. For more detail on the bill read Vinson & Elkins’ article “The Digital Economy Bill – supporting the UK through turbulent times” in TowerXchange Journal 18.
With escalating lease payments being a major challenge that they UK’s infracos have been facing, all at the UK roundtable said the amendments were a positive step. Participants did however feel that the potential impact of the Bill had been overstated. The changes will really only apply to new sites and government projections that the revisions could save almost £200mn a year most thought were significantly wide of the mark. The Digital Economy Bill is not the “silver bullet” that people had hoped but it does represent a step in the right direction.
Whilst the amendments to the Electronic Communications Code would give towercos new power in negotiations with landlords, participants cautioned against abuse of such power. The new bill has unsurprisingly been met with resistance from landlords who fear they will be unfairly remunerated for the use of their sites. It was in the interest of the industry to act responsibly; becoming too aggressive in negotiations and threatening legal action would only damage the reputation of the industry and harm relations. Deals should still be reached consensually wherever possible and landlords should still receive meaningful rent. Whilst all lease negotiations have slowed as people await the outcome of the bill, should it pass towercos expect a reduction in rental payments of at least 20% over the next decade.
The rollout of the Emergency Services Network
Having been awarded the contract to rollout the new Emergency Services contract, discussions turned to the manner in which this was being done by EE. The majority of new sites that are being built are structures 12-15m in height which are only suitable for a single tenant. As part of the terms of the contract, EE are forced to share sites with their competitors but with the sites being unsuitable for additional tenants this prevents other operators from using the towers.
This led to debate at the table of whether this was very much a conscious strategy from EE, using the opportunity to gain a competitive advantage. Some felt that this was very much the case and voiced their frustration of EE’s choice of location preventing them from getting planning permission on shareable sites they were constructing. Other participants questioned whether the decision to construct smaller towers was more about rolling out the network quickly, EE are subject to severe penalties should they miss deadlines.
Rate limiting factors in new site build
Participants at the table felt that there had been a vast improvement in the efficiency of the planning regime in the UK with one towerco saying that in Scotland in particular, applications had been sailing through. Planners are starting to be tuned in to wanting improved connectivity and telecoms infrastructure which is really helping with new rollout. Whilst some local authorities and MPs are particularly supportive, some towercos voiced that other MPs still put up resistance. The protest element from local communities is on the rise and NIMBY (“not in my backyard”) sentiment is strong. Whilst one side of a rural community may be supportive of a tower which is going to bring improved coverage, those on the other side of the village where the tower is going to be built are less so.
Whilst progress has been made in improving the time to obtain planning permission, where the real delays come in is in securing transmission to site. It is essential to arrange transmission long ahead of time in order to not delay connection of sites once they have been built.
The future of the UK’s towercos and JV infracos
As with all discussions at this year’s Meetup, 5G rollout and implications for the towerco business model was once again raised. If the UK wants to be a leading digital economy akin to the likes of Japan and Korea significant investment is required. With MNOs still not having got a return on their 4G infrastructure however severe challenges as to how this will be realised are discussed.
One participant voiced their opinion that the blocked takeover of O2 by Hutchison was a missed opportunity in the UK market. Whilst OFCOM were of the opinion that a four player market is inherently a more competitive market than a three player one, it was observed that the leading digital economies typically just have three MNOs.
Whilst the merits of a four versus three player market can be discussed, one participant explained how the market would be radically different and almost unrecognisable in ten years from now. Whilst there is always a need for a towerco, they felt that there would be very different tenants on sites ten years from now.
Returning to 5G deployment however, all were in agreement that an industrialised process would be required in order to address the densification required cost effectively. Towercos need to learn lessons from Wi-Fi companies who are more experienced in this type of deployment and change their mindset and business models accordingly.
With two JV infracos in the market in the form of MBNL and CTIL, participants questioned what the future had in store for them and whether we would see the towers transition into independent hands. JVs in the UK are already using towercos to build out new sites, with one JV infraco referencing that half of their rural new build programme has been given to towercos. In reality, if they are a true towerco, they should be doing the new build themselves and getting additional tenants on their new sites but ultimately they have prioritised speed and as such are giving away value to other players. There is little overlap between the sites of the JV infracos and their independent contemporaries, with JV infracos assessing options on existing sites prior to rolling out new ones. One JV infraco referenced they were reassessing the potential of 500 sites belong to a towerco in the market.
In terms of selling off their assets, it was observed that part of the reason for the existence of the JV infracos was that their shareholders didn’t necessarily trust the industry, with the MNOs concerned about escalations in lease rates they would ultimately face. Should the private market develop a proposition offering interesting value added services, there could be the motivation to flip their towers but in the meantime it is important for JV infracos to focus on staying current and competitive with the independent towercos in the market - a difficult balance given the motivations of their shareholders.
Further reading on the UK market:
Scalable, replicable, successful: how the Cellnex model is rolling out across Europe
The Digital Economy Bill – supporting the UK through turbulent times
