NetCos may provide a clever way to jump start 5G deployment across MENA/GCC

The large capex and opex requirements for rolling out 5G mobile networks across the Middle East markets are giving MNOs and regulators reason to rethink their strategies, and discussions are taking place about the possibility of forming a NetCo as a means to enable 5G network build-out on a more reasonable cost basis.

NetCos can be viewed as a natural extension of the already-established towercos, which have been increasing in popularity over the past few years. The difference is that towercos share passive infrastructure elements across all MNOs in a given market, while a NetCo aims at sharing active elements as well. An interesting stepping stone between the towerco and NetCo is the newly introduced concept of a National Broadband Network (NBN), recently seen in Bahrain – BNET was formed in May 2019.

Aimed at accelerating deployment of Fixed Broadband infrastructure (GPON/FTTH) in a market, NBNs consolidate all fibre infrastructure under a new licensed operator that then sells wholesale infrastructure services to all licensed operators.

The Telecommunications Regulatory Authority of Bahrain (TRA) has been careful not to specify whether they are encouraging the entry of an independent towerco into the market, a joint venture between the MNOs, or another ‘feasible business model’, but the recent formation of the NBN NetCo BNET can be seen as a first step towards mobile network infrastructure sharing for 5G deployment; something that would be truly pioneering in the region, and which may be of great interest to other telecom stakeholders in the region. 

TowerXchange speaks with Batelco’s former Group Chief Wholesale Officer Ahmed Abdel-Latif, who thinks the region’s regulators’ experience with various NBN models and operators’ openness to explore more active network sharing will both be key factors in the region’s 5G rollout race. 

TowerXchange: Please tells us about the creation of Batelco NBN and why it was split from Batelco Retail.

In May 2019 Batelco Bahrain was broken into two separate businesses, Batelco (a RetailCo), and BNET (the Bahrain NBN – the NetCo in charge of the National Broadband Network). This was implemented in accordance with Bahrain TRA’s stipulated separation of national fixed broadband assets (Gigabit Passive Optical Networks (GPON) and mobile backhaul fibre) to establish a National Broadband Network, as captured in the fourth version of the TRA’s National Telecommunications Plan (NTP4).

With the national GPON infrastructure now under a separate company (BNET), with its own separate board of directors, managed separately from Batelco, all the ISPs and MNOs in Bahrain (collectively called OLOs; or Other Licensed Operators) can procure fibre-based high-speed internet infrastructure services from the BNET at standard regulated rates.

This provides a level playing field in the retail and enterprise markets, compared with an effective monopoly for Batelco had those infrastructure assets remained under its sole control. This structural separation is unique in the MENA and GCC region; the results of which - I am certain - will be closely monitored by the region’s regulators over the next few quarters.

TowerXchange: Can you tell us a bit more about the status of tower companies in the MENA region; in the current light of new carve-out business models what pressures are they facing?

As they face increased competitive pressures from their in-country rivals and in many cases even from their Telecoms Regulator, MNOs in some MENA markets have moved to consolidate their passive infrastructure – mainly consisting of telecom towers – into a separate entity that is then able to serve all operators across their footprint.

The model has already been implemented in the biggest MENA markets such as Egypt and the Kingdom of Saudi Arabia, and some smaller markets like Oman. MENA’s remaining markets are likely to move towards that setup at various speeds.

TowerXchange: Other than the valuation arbitrage benefit of removing assets from its balance sheet, what do you see as the main drivers and benefits for the MNO in carving-out the Towerco?

It makes financial sense for an MNO to spin-off its towers into a separate towerco and then lease it back. The towerco is able to leverage the redundancy and duplication of tower locations across the MNOs’ operating footprint and offer the single best location to all MNOs, while retiring the least optimal locations. Besides getting a sizeable one-off revenue from the sale transaction, the MNO also saves on the opex associated with tower O&M (staff costs, spares, logistics, et cetera.) and it also saves the depreciation cost of the towers on its balance sheet (though that cost saving can have an adverse effect on the tax front, if there are taxes applicable on the MNO’s profits in that market, of course).

The MNO can fix the amount it pays the towerco on an annual basis, allowing for predictability of a substantial and previously variable opex line item over time. Additionally, as it has a service level agreement (SLA) in place with the towerco, it is assured of a minimum acceptable service level. Most importantly, the MNO can eliminate all capex related to telecom towers, which is not an insignificant amount over the 10-20 years lease contract they commit to with the towerco.

The towerco is capitalised through the aggregation of all (or most, depending on scope and other technical considerations) of the legacy MNOs’ 2G/3G/4G tower assets across the footprint. The towerco commits to a service level agreement (SLA) for the operations and maintenance (O&M) of its towers. Depending on the market dynamics, a towerco can absorb some or all of the MNO’s existing towers and O&M teams. The towerco would then have a steady revenue stream over the lifetime of its contracts with its MNO customers.

Furthermore, following the spin-off of its passive infrastructure, each MNO still retains control of its own active infrastructure elements, including their valuable spectrum and base stations. As a useful abstraction, one could argue that the towerco is providing a “Towers as a Service” or TaaS to the MNOs.

TowerXchange: How do you see the role of regulators as game changers for the MENA tower market?

Telecom regulators have started to view the creation of towercos favorably as it maintains the number of MNO players in the market, and is effectively transparent to the customer. More recently, regulators regard towercos as critical enablers for achieving key environmental benefits.

However, very few regulators – if any – have built tower companies into their market regulation plans in a proactive manner. When an opportunity presents itself, it is usually the MNOs approaching the regulator, rather than the other way around. This passive role for regulators may need to be re-examined as the industry moves from its current 2G/3G/4G environment to 5G networks. There is surely a critical industry leadership role that only the telecom regulators are able to play.

TowerXchange: What do you see are the challenges for MNOs surrounding the rollout of 5G networks, and are we likely to see any increase in infrastructure sharing?

5G uses much higher frequencies (typically ~3.4 GHz), therefore the radio propagation characteristics for 5G signals are more challenging to manage. As these signals cannot penetrate walls or concrete in general, a much higher number of cell sites is needed (estimated to be up to 10x that of 4G).

At the moment, there are generally two to three MNOs per market across MENA. The question that regulators have yet to answer is “what is the practical probability of having two to three independent 5G networks rolled out nationally across each MENA market, when each 5G network can have 10k-20k cells, if not more?”

Because of this sheer number of sites and the associated supporting infrastructure in terms of power, backhaul et cetera, it is clear that a higher level of sharing is needed to make 5G successful and profitable for MNOs, as mere tower sharing won’t be enough in a 5G environment.

TowerXchange: Will the formation of an NBN in a specific market act as a catalyst to the creation of a 5G NetCo at the national level?

The concept of “5G Network Sharing” can be seen as taking forward the lessons from NBN, and moving the model from the fixed to the wireless segment.

Instead of awarding MNOs new 5G licenses and then setting up separate 5G networks at great expense, of course, or letting MNOs pool their resources together in an ad-hoc manner and at their own pace (thereby possibly delaying 5G network rollout and risking vendor mismatch down the line), the regulator could award 5G frequency spectrum and coverage rights to a NetCo (or two NetCos to maintain competitive market forces, but that can be debated separately). In turn the NetCo could rollout a unified 5G across the designated coverage areas and can then support two or more MNOs on its network.

The NetCo would effectively be providing a “Network as a Service” or NaaS to the MNOs, who then can compete not on an infrastructure basis but on a service basis (bundles, value added services, platform services, specialised industry solutions, IoT services, security, and others).

TowerXchange: What is benefit of a NetCo model as a carrier of 5G spectrum?

This can be regarded as a necessity both from the financial and operational standpoints.  As both governments and regulators plan in many cases to sell 5G spectrum via auctions, this entails a huge capex upfront on the MNO’s part even before the network rollout commences. If regulators opt to award the spectrum to NetCos (or allow two or more MNOs to form a NetCo that bids in the auction) then the financial burden per MNO can be halved or reduced even further.

The fundamental and major market architecture decision that faces all regulators when it comes to 5G deployment is the separation of infrastructure from services in the mobile space. Network ownership and customer ownership are essentially two different sets of activities in this model. Through a NetCo, infrastructure becomes available to multiple operators at the same time under a specific SLA, so it no longer becomes a source of competitive advantage in the consumer or enterprise markets. NetCos would have a higher incentive to provide a better coverage in their designated areas, because they have multiple revenue streams from their MNO customers. Also, in some cases where you have more than one NetCo, MNOs would be able to tender NetCos against each other seeking out the best deal allowing their infrastructure costs to be continually optimised.

TowerXchange: How should regulators apply the lessons of NBN implementation to the challenges of rolling out 5G?

It should be said here that the case of a 5G NetCo is much simpler to implement than that of an NBN NetCo, like Bahrain’s case. This is because there is no separation aspect in the 5G case and you are basically building a new entity from scratch, whereas the Batelco NBN (BNET) case needed three years of careful planning to carve-out an existing business and set it up as a separate company.

The key point to consider here is that 5G is radically different from any mobile technology that preceded it, and it will need to co-exist in the market with 4G as a base-layer for many years to come. Regulators therefore need to take that uniqueness into account as they contemplate proposed market structures to ensure this technology delivers on its promise. On the plus side, regulators already have all the learnings from the tower sharing (towercos) and fixed broadband sharing (NBN NetCos) to tap into as they design the new 5G Network Sharing companies/licenses for 5G NetCos.

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There are four accepted models for establishing a national broadband network in a given competitive market with multiple operators:

A. No new NBN licensee: In this model the regulator encourages all licensed operators to ramp up their fibre infrastructure deployment independently. No new licenses are awarded and no new companies are set up. The UAE is the closest example of this model.

B. A new NBN licensee: The regulator opts to set up a new company (shareholding structure may vary) and awards that new company a new wholesale license to become the NBN in that market. Qatar NBN (qnbn) is an example of such an approach.

C. Functional Separation of the NBN from the incumbent: Here the regulator orders the incumbent operator (with FTTX already deployed or under deployment) to internally treat that Business Unit as a separate entity, meaning it treats the incumbent’s own retail division as it would treat any other competing retail services provider, selling the same infrastructure service to all retail channels while still being owned by the incumbent. BT’s Openreach (in its early days) is the primary example for this implementation.

D. Structural/Legal Separation of the NBN from the incumbent: In this model, the regulator essentially orders the incumbent to “carve-out” its broadband fibre unit and sets it up as a new company with separate legal structure, which is then awarded a new wholesale infrastructure services provider (meaning they only sell infrastructure services at regulated rates to licensed operators, not end customers). The case of BNET in Bahrain (which was carved out of Batelco) is the most recent example.

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