Tough times for the build-to-suit market in CALA

The build-to-suit panel at the fourth TowerXchange Meetup Americas offered a unique 360 degree perspective on the industry thanks to the presence of three towercos and a carrier, between them representing markets including Mexico, Nicaragua, Guatemala, Peru and Colombia. The panel focused on the practicalities of rural deployment, the tough competition among towercos, as well as the need for towercos to expand their offering to embrace small cells, DAS, fibre and more.

The panel opened with a brief introduction of Maria Scotti, CEO of Torrecom, José Sola, CEO of Mexico Tower Partners (MTP), Mariano Gomez, EVP at newly formed BTS Towers (and former EVP of NMS) and Entel Peru’s Fernando Álvarez, who quickly jumped on the main topic of the anticipated build volume for the years to come in CALA.

Entel Peru, whose entrance in the country in 2014 changed the competitive landscape and brought lot of new BTS activities to the market, has so far deployed 50% of its sites in-house but is aiming at outsourcing 70% of new builds to towercos going forward.

Torrecom runs a 752-site portfolio across four markets and, with the exception of the 25 sites they recently acquired in Panama, has built all of its sites via BTS. However, Scotti noted how Central American BTS activities, which have been very positive over the past couple of years, are likely to slow down as carriers are now focused on driving consumer usage up rather than on expanding their networks.

MTP is reporting a slow year in Mexican BTS and isn’t expecting that to change dramatically in the near future. In fact, AT&T hasn’t assigned any BTS work to towercos beside an estimated 800 sites soon after its entrance in Mexico, hence disappointing the expectations of the many infrastructure companies counting on its expansion plans.

BTS Towers was created following the sale of NMS Towers to Uniti Towers and is now resuming its BTS activities in Mexico, Central America, Colombia and Peru. “Fiercely competitive markets” in the words of Gomez but as “new beginners” for the second time around, BTS Towers knows very well the rules of the game.

When it comes to network extension, much work is needed in rural areas and we often wonder how the towerco business model can work in areas where towers could remain single tenant for a while.

Nicaragua and Guatemala for example are more rural than urban, and towercos do face tough pricing pressure by the carriers when it comes to negotiating BTS terms. Building a rural site is an expensive proposition due to complex logistics, security and operational issues such as remote, inaccessible locations and weather/terrain conditions. Moreover, many new sites are beyond the existing grid, hence requiring power connectivity, or distributed generation via solar or other renewable solutions, and will often need access control measures.

Towercos aren’t opposed to building rural sites but do need to counterbalance operational and financial considerations with the tough price conditions often imposed by carriers. And in countries with a multitude of towercos, the risk of prices being driven down below sustainable levels is real. A risk that can lead to low quality towers being built at heavily discounted prices.

Rural sites are just one example of tough deployments. Entel Peru, and many carriers across CALA, have to comply with stringent coverage targets as set by their licenses and to meet their own sales plans. In the case of Entel Peru, a challenger in its own market ready to experiment new solutions, the status of the network is being reviewed every two weeks by the CEO but negotiations with towercos don’t move as fast. With over ten towercos active in Peru, it is hard to find one that offers a comprehensive array of connectivity solutions and according to Álvarez, and what’s often shown in presentations - small cells, DAS, fibre et cetera - doesn’t always translate into reality as most towercos aren’t ready to actually deploy them. On the other hand, towercos pointed out that now every carrier bets on innovation and quality and often the approach is less focused on partnerships and more on cheap solutions.

Innovation requires towercos to look beyond the pure real estate model offered today in CALA and expand into new site typologies, active solutions and even power. A change in skillset, business and financial modelling that will take quite some time to digest! Carriers are already trying to push for the change but most CALA towercos aren’t quite there yet.

The slow approach to change links back to the business model adopted by most towercos, which is one of high margins and returns for shareholders and private investors. Conventional towercos are putting their expected returns at risks while competing with a wide array of new BTS firms, who are sometimes ready to offer carriers deeply discounted terms other towercos simply cannot match. And this spiral needs to be contextualised with the reality of markets like Mexico or Colombia where demand for new sites is not high enough to justify the growing number of infrastructure entities, whether they be conventional towercos or construction companies now offering BTS services.

What is clear is that towercos aren’t ready to offer what carriers are starting to need, and needing with increasing urgency. Thus carriers are self-deploying small cells, fibre and DAS in the absence of third parties to do the job. Is innovation moving too fast for CALA towercos? Are they too focused on their low risk real estate businesses?

Interestingly, Torrecom’s Scotti highlighted that towercos often don’t pay enough attention to what drives the carriers’ business and tend to disconnect from the reality of consumer activity, ARPU, subscriber churn et cetera. Some towercos might not be able to meet the needs of carriers because of the way they are financed, but all towercos should know more and understand in depth the reality of the mobile market, since they are one of its key partners. And if towercos are under pricing pressure, the same can be said about carriers which are squeezed between the cost of network deployment and new technology and a subscriber base that requires more data for less money.

The discussion on prices could extend way beyond the time and scope of the panel and panelists agreed that while MLAs lock prices regardless of the location of the site, a dynamic pricing structure would allow towercos and carriers to agree on prices depending on the location, prices of permits et cetera. But would carriers agree to pay a premium when needed? “Some carriers just care about a cheap solution” was one of the comments from the panel but Entel Peru countered that price was not the problem, and that they’d be willing to pay more for the right service or product in certain circumstances.

So maybe it’s true that while towercos and carriers don’t always understand each other, some carriers and some towercos are more willing to come to terms and find common grounds to work together. But that isn’t always true in a market filled with so many BTS entities TowerXchange struggles to track them all!

What could make sense due to the high number of BTS firms often struggling for new business would be to consolidate them. And some of the towercos on stage and attending the TowerXchange Meetup Americas surely have an appetite to roll-up existing portfolios across CALA. However, as Torrecom’s Scotti noted, many of these portfolios are built in ways that a disciplined towerco - or a smart investor - would find simply not buyable. Some of the less disciplined entities might have been financed by banks who don’t look at the final product - the tower - the same way an industry investor does. And this has happened in countries like Mexico where some new firms ramped up to build hundreds of towers after the entrance of AT&T only to find themselves with no more than a handful of towers, and with an unsustainable company structure to maintain.

Something similar happened in Colombia where carriers aren’t yet committing to huge capex while waiting for the 700MHz auction to run (an auction that has been planned for over two years) and tens of towercos crowded the market without enough search rings to go round. This situation has once again resulted in a price war and in some firms accepting very discounted rates and unfavourable conditions which risk of jeopardising the balance of the market and halting the potential for consolidation among towercos in the long run.

Yet another example is Argentina… Less than two years since the entrance of its first towerco, Torresec, Argentina is already starting to look overcrowded with several firms exploring opportunities and only a handful actually deploying, while the government is busy sorting out a new telecom law and general regulatory framework.

These market related, structural problems seem to affect most countries that present attractive conditions on paper such as Colombia, Argentina, Mexico and, to a certain extent, Brazil. And disciplined towercos often refrain to compete for BTS at unsustainable conditions, preferring to grow at a slower pace, building good towers, with all the right paper, at a fair price.

Talking about paperwork, the United States have been dealing with a tough permitting landscape for years and panelists noted that over time it has only gotten worse. So it shouldn’t come as a surprise that CALA countries aren’t equipped to deal with permits for telecom infrastructure yet and are just as behind in understanding the model and creating a favourable regulatory environment.

In countries like Guatemala, Nicaragua and Mexico, the regulation is essentially non-existent and towercos often visit municipalities with drawings of towers to literally showcase the final product. So in a way, it’s up to towercos to drive the change and improve the state of things but this is a complicated and expensive proposition both in terms of man-hours and fees. “This remains the most time consuming and expensive part of the deployment process” panelists agreed.

But this isn’t the case everywhere in the CALA region and countries like Peru have a solid regulation and very clear set of documents each municipality requires. In Peru, new towers will meet the resistance of local communities more than anything, indeed the Not In My BackYard (NIMBY) mentality remains a crucial inhibitor to rollout almost everywhere in CALA.

Consumers sometimes don’t understand how mobile services work or how an internet connection reaches their device. It could be worth for carriers, whose brands are often highly recognisable to subscribers, to help the educational process with informative handouts literally explaining the importance of infrastructure in enabling mobile phones to function.

In the case of Entel Peru, the carrier does work with schools and local communities to educate final consumers and ensure NIMBY issues don’t cause delays in deployment. Local carriers and towercos should be creative when building sites and come up with solutions to secure the desired location and avoid the discontent of the community. TowerXchange has collected examples in the past of towercos giving out tablets to a school that was finally reached by signal… A practical and effective way to demonstrate the benefits of coverage!

And on a final note, panelists stressed that “towers built in the middle of the night”, without the painful but necessary process of community acceptance and obviously permitting, hurts the industry as a whole, and don’t contribute to the acceptance of new infrastructure by local populations.

In conclusion, the panel offered a candid overview of the challenges being faced by carriers and towercos in their day to day activities. The discussion brought the attention to the real problems of negotiations, rural sites, tough competition, and permitting and showed that the traditional towerco business model is indeed evolving, although the change will take quite some time.

It is encouraging to witness the openness and candour of TowerXchange’s panelists on stage, enabling the sharing of information and best practices across the industry and deepening the level of communications among different but complementary stakeholders in the same industry, which sometimes struggle to understand each other - so special thanks are due to Maria, José, Mariano and Fernando!