What is a towerco? What is its mission in the telecom infrastructure ecosystem? Are towercos in the real estate business? Or should they take their game one (or three) steps further into the worlds of small cells, data centres and fibre? According to Marc Ganzi, CEO of infrastructure enterprise Digital Bridge, and his inspirational speech at the fourth TowerXchange Meetup Americas, towercos are much more than their real estate. Here is a summary of his progressive vision for the industry.
If the traditional towerco model is one of steel and grass, then Digital Bridge, Marc Ganzi’s infrastructure enterprise, has evolved far beyond the definition. Now a global communications infrastructure company, Digital Bridge has committed capital of US$6.7bn and six businesses spanning all core pillars of the mobile and wireless industries: towers, small cells/fibre and data centres.
Expanding beyond towercos
We all know what’s great about towers. They are a “unique asset class delivering both stable yields and capital appreciation.” But, as the mobile industry swiftly changes while shifting to the cloud, the issue becomes what the role of towercos should be, and whether they should open up to new products and move upstream to different - yet complementary - segments of the industry.
Digital Bridge shaped its own response to this question and in 2013, began branching out to the tower industry through Vertical Bridge, Mexico Tower Partners and Andean Tower Partners in the United States, Mexico, Colombia and Peru, respectively; as well as in the small cells and fibre world through ExteNet Systems; and, lastly, data centres via Data Bank and Vantage.
What do towers, small cells, data centres and fibre have in common? While pure-play towercos may argue that the underlying financials differ, the entire wireless ecosystem is actually based on a relatively similar leasing model.
Ganzi stressed that, while “we all understand macro-towers,” not everyone really grasps the similarities and crucial differences across the other components of the ecosystem.
< Small cells and DAS are fibre-fed antenna systems used for indoor and outdoor deployments. The majority of costs come from building the fibre infrastructure for the initial tenant, and revenue comes from the lease of actual network infrastructure to mobile network and cable operators.
< Data centres are powered and cooled buildings that house computer servers and offer co-location, fibre connectivity and managed services to both hyper-scale, large IT loads as well as enterprise. Their highest operational expenses, which are either passed on or marked up to consumers, are the utilities to provide power and cooling. Customers come from the technology world, governments and healthcare.
< Fibre optic cables consist of bundled glass strands that transmit data, offering high bandwidth network capacity through individual fibre strands (dark fibre) or lit services, which they lease to telecom providers, governments, healthcare businesses and other enterprises. The fibre business model is less predictable than those of towers and small cells, mainly due to shorter contracts which lack escalators.
The telecom infrastructure industry in figures
Recreate the “Tower Magic”
While everyone loves towers for their high barriers to entry and the perfect union between telecoms and real estate, many have yet to realise that data centres, fibre and small cells have similar characteristics, and that they are part of a premium asset class that drives attractive returns for investors. In fact, the total market cap of the 60+ public companies operating in the mobile and infrastructure industries reaches US$350bn.
Data centres, small cells and fibre can recreate the “tower magic,” Ganzi highlighted, by allowing the addition of incremental customers, without the cost of new capabilities. The magic is reinforced by increased outsourcing that pushes mobile network operators to divest their non-core assets – not only towers, but also enterprise data centres and small cells.
High growth expectations
The growth pattern of the sector is compelling, with an estimated five-year CAGR at 10% for data centres, 6.4% for towers and 4.9% for fibre. Additionally, the number of enterprise buildings with 20+ employees connected to fibre in the United States increased from 36% in 2012 to 46% in 2015 (source: Vertical Systems Group).
In the data centre industry, there are 401.7MW of data centre capacity under construction, the equivalent of over 400,000 homes (Ganzi clarified that 1MW equates to powering approximately 1,000 homes). However, 47% of it is already pre-leased, against the historical trend of pre-leases remaining consistently under 30%.
The main driver behind the high level of growth in these sectors is the surge in mobile data traffic – ranging from 44% in North America and 52% in Western Europe, to over 60% in Eastern Europe and Latin America, 71% in Asia Pacific and 96% in the Middle East.
So, the core of this “transformative moment” is the increasing need to store data. In fact, around 90% of the world’s digital data in existence today has been created over the past two years, and the expected CAGR for global multi-tenant data centres between 2015 and 2020 is 12.4%.
the core of this “transformative moment” is the increasing need to store data. In fact, around 90% of the world’s digital data in existence today has been created over the past two years
The power of convergence and 5G
Ganzi noted that the step function of 5G “may be the most relevant since the transformation from analogue to digital in the mid-nineties, when we thought that 200 new build towers was the biggest thing ever!”
Trends – Ganzi mentioned Multiple-Input Multiple-Output (MiMo), which will drive 5G and push towercos to rethink their current tower model. Ganzi also anticipates Software Defined Networking (SDN) and the virtualisation of the network will push the industry to create fibre-fed access points and light base stations.
Implications – Ganzi went on to stress that towercos must evolve to understand and embrace fibre as the connectivity tissue of the industry, while also grasping the principles of network virtualisation and working to create macro-towers serving as hubs and RAR - Radio Access Rooms - not RAN. The future of the infrastructure industry depends on it.
“The convergence of all aspects of communications infrastructure is happening now,” Ganzi added and, with that, all segments of the ecosystem – from towercos to fibre companies – are entering the “bandwidth delivery business.”
Some companies have begun to understand and act on the power of convergence by entering other fields. Examples include Crown Castle, whose business encompasses towers, small cells and fibre, and ZAYO, who has expanded its traditional fibre business to include small cells.
While the passive infrastructure business has been relatively stable and safe for most companies in the TowerXchange community, Ganzi claims it’s time for companies to realise towers aren’t the only “arrows in the quiver.”
The customer is always right
Towercos should listen to the needs of the carriers and focus on customer-centric offerings. Mobile network operators don’t necessarily like the high-rent tower model offered by towercos, and will happily embrace effective and cheaper solutions for their 5G deployments. So, in today’s converged world, towercos should offer diverse types of site solutions and understand how the different pieces of infrastructure and network interact with each other.
As technology evolves, the language of today’s industry is changing and towercos must balance their macro-towers while becoming acquainted with MiMo, C-RAN, SDN and beyond.
Change is happening – Fast
Marc Ganzi offered a new take on the evolution of the tower model in the context of convergence and the imminence of 5G deployment. Not all towercos will embrace this vision, given the complex and interdependent segments, each governed by distinct business models and financials. But for those that look at this with curiosity and wonder what is in it for them, one thing should be clear: change is happening, and it’s happening fast.
