Moderated by Gonzalo Cornejo, now CFO at Mexico Tower Partners, the Mexico roundtable at the TowerXchange Meetup 2018 focused on future tower market growth expectations related to the continuing rollout of wholesale 4G network ALTÁN Redes, as well as AT&T deployment plans, permitting challenges and currency volatility, all in the light of the recent Presidential elections.
The impact of the Presidential elections
While the round of CALA Presidential elections is creating uncertainty in Mexico and elsewhere, the newly elected leftist candidate Lopez Obrador (who hadn’t been appointed at the time of the TowerXchange Meetup Americas) is an advocate of expanding mobile coverage beyond urban centres, into rural and semi-rural areas. Hopefully this will lead to another wave of new deployments, especially since Mexico still lags behind compared to the rest of the region in terms of coverage.
There is hope that the newly elected President won’t change the direction of reform of the telecom sector and will keep moving in the current direction. At present, telecom policies have contributed to reducing the cost of telecom services and increasing coverage across Mexico.
While some agreed that the elections might bring the Mexican peso back up to its 2017 value, they also noted how currency fluctuation is irrelevant as long as they have long term (ten plus years) contracts in local currency, linked to inflation. Volatility increases if you negotiate contracts with less than five years duration.
Rationality returning to Mexican tower market
The entrance of AT&T heavily disrupted the Mexican market and not for the right reasons. In fact, the country saw a sharp increase in the number of towercos entering Mexico and some behaved in rather irrational ways, deviating from long-term contracts, not adjusting them to inflation or accepting risky cancellation terms. While the market overreacted to the perceived opportunity, only a few hundred sites were built following AT&T initial RFPs and some small towercos have subsequently decided to exit after selling the few towers they had built.
That consolidation phase led to a more rational shape of the market as it appears now. And the positive market restructuring is further corroborated by the activities of ALTÁN Redes…
ALTÁN Redes: co-lo today, BTS tomorrow?
For the second consecutive year, towerco participants at the Mexican roundtable confirmed that ALTÁN represented their primary source of co-location growth. While several towercos reported that they had been negotiating terms for BTS with ALTÁN over the past six months, no-one reported actually starting any build-to-suit for the wholesale operator.
To some towercos, ALTÁN is just another company leasing space to mount their equipment on their towers, albeit with a different financial risk profile. Others see ALTÁN as a prospective competitor of towercos. ALTÁN operates a RANsharing model, which means an MNO wanting to use an ALTÁN 4G site can use ALTÁN’s antenna instead of mounting their own equipment – it doesn’t replace their legacy 2G and 3G technologies though. “If ALTÁN are taking my co-location they’re a competitor – so I’m building for a competitor,” said one towerco. “Although I’m betting that carriers using ALTÁN will eventually generate enough traffic that they need to take their own tenancy.”
If ALTÁN are taking my co-location they’re a competitor – so I’m building for a competitor. Although I’m betting that carriers using ALTÁN will eventually generate enough traffic that they need to take their own tenancy.
ALTÁN has to achieve 92% population coverage by 2022, which is going to draw them beyond urban and suburban co-location and into building new rural sites. Most roundtable participants anticipated that only Telcel would follow ALTÁN into rural areas, albeit unlikely to actually use the ALTÁN service themselves. “Telcel doesn’t need ALTÁN infrastructure or towers,” said one participant. “So if Telcel needs coverage in a third or fourth tier city, they will build their own sites through Telesites, they won’t use ALTÁN.”
Observers were similarly sceptical that AT&T would use ALTÁN nor that Telefónica would invest in significant rural expansion.
With finite potential to lease future rural ALTÁN sites to second tenants, will the economics add up for towercos? The prevailing view was that the lease rate for a rural site would have to be higher than for urban.
“If ALTÁN does achieve 92% population coverage, those last towers being built before the 2022 deadline may not be economic – or at least they will take a long time to mature,” suggested one participant.
“Those 2022 rural BTS sites will clearly have less co-location potential,” agreed another.
ALTÁN may attract more operator interest in using their services as they approach that 92% coverage mark – it’s unsurprising that Telcel, AT&T and Telefónica aren’t using ALTÁN whilst they are building parallel networks. The key to success for ALTÁN may be less predicated on attracting incumbent MNOs to use their services, more on enabling MVNOs and OTT players.
Interestingly, participants observed that ALTÁN was seeking sites often in close proximity to existing American Tower and Telesites sites – “no-one wants to build a single tenant tower 100m from an existing Telesites or American Tower site!” Exclaimed one participant.
AT&T were similarly rumoured to be commissioning some small sites in proximity with existing sites – while savvy towercos knew better than to build such sites, new entrants often proved willing, and rarely encountered zoning restrictions preventing them from doing so.
Backup power and other efficiency concerns
To date, each operator in Mexico takes care of their own backup power requirements but some group members agreed that this might change when deployments reach rural areas with limited energy provision. In that instance, towercos could get involved to rationalise energy management.
Site typologies: macro towers still most prevalent
The majority of new build sites in Mexico remain macro towers. Smaller lamppost sites can be challenging to secure, particularly as municipally owned street furniture may only be available on three year contracts, if permits can be attained at all. For this reason, there are few small cells in Mexico. “Only AT&T is talking about densification,” commented one towerco. “That and fibre is all they have budget for this year.”
Mexican municipalities would appear to remain reluctant to partner with the telecom industry to create smart cities, accelerating the deployment of urban sites and transforming them into smart sites.
“It will be challenging to rollout 5G in Mexico whilst it remains so difficult to get permits for infill sites and fibre from municipalities,” concluded another towerco.
Permitting in Mexico
When it comes to permitting, practitioners noted how the process hasn’t improved in over five years and while the Federal government has been discussing ways to enhance the involvement of municipalities in granting permits, no real change has occurred yet.
Some highlighted that if a mega project like ALTÁN, with its aggressive deployment targets, hasn’t been able to push the government to work with municipalities to simplify and accelerate permitting, then this suggests that change isn’t in the cards anytime soon.
Carriers need to enhance their networks and deploy sites, driven by consumer demand, but there isn’t a platform yet to create a constructive dialogue on how to develop a proper permitting structure.
Making a comparison with the U.S., towercos co-operated with their customers and created a platform to work and have a dialogue with municipalities. It took some time to shift from the idea that a tower devalues a property to the current mind-set of “no coverage, no value” and it in the U.S. it took a well resourced, professional association (the WIA) and plenty of discussions to identify a common ground with the municipalities.
What would help to improve the permitting process in Mexico is a “shot clock” rule, similar to that which was implemented in the U.S, requiring state and local authorities to review completed applications within 90 days for co-locations and 150 days for all other applications – in the absence of feedback to such applications, sites can be considered permitted, if they abide by mutually agreed conditions.
Some Mexican carriers still expect an unreasonable deployment timeframe from towercos. So how can towercos deal with it? In the U.S., carriers simply won’t lease space on an unpermitted tower, so Mexican operators must be wary of effectively encouraging towercos to shortcut the process as this can lead to legal costs as high as the construction of a tower.
In Mexico, the current state of legacy towers is quite complex in terms of permitting, and reportedly the sites acquired by AT&T upon its entrance in the market were only half permitted. AT&T are not alone in having a significant number of unpermitted sites in their portfolio, but the overall percentage of permitted sites is increasing.
It is not rare in Mexico for municipalities to ask towercos to go ahead and build a tower without permits, only to grant them after the deployment. This poses the risk of the tower actually being shut down and the group agreed that in such cases, one often finds that carriers are better placed to fight for the tower to be licensed.
“Mexico needs a lot of structures, and at some point we’ll break through the permitting barrier,” concluded one towerco. “We have huge pent up demand in the country, but we need a platform to speak to Federal and Municipal stakeholders. We’ve spent money working through existing associations or trying to create a new one, but we need the carriers to join the debate. We made some progress when government properties were supposedly made available for cell sites, but even that didn’t really work. From five years ago to today, the number of permitted towers has increased – and we’re 80% permitted now – but it needs to increase faster.”
“With 3,000 municipalities in Mexico, we need to lobby at a Federal level, educate at a municipal level,” agreed another towerco.
Conclusions
Between the FX situation and the growth stimulated by ALTÁN Redes, now is a good time to buy towers in Mexico and there are still some opportunities with small developers looking to divest their assets.
A significant infrastructure gap remains to be filled in Mexico, and data growth is widening that gap faster than network investment is closing it. On the other hand, build-to-suit volumes haven’t been impressive, with Telefónica not increasing their new build requirements, Telcel primarily utilising Telesites for their rollout, and ALTÁN’s focus remaining on co-location as opposed to new sites, with some uncertainty continuing about their long term viability.
In fact, while ALTÁN is progressing in its coverage targets, for now it has only been able to attract three small customers. However, participants were unanimous in their view that even if ALTÁN failed, another entity would be awarded the ~US$1bn worth of 700Mhz spectrum they owned, and that entity would still need the sites… perhaps the risk that ALTÁN ultimately becomes a carrier competitive with Telcel explains why Telesites might be reluctant to lease sites to them?
