Several contracts regulating the relationship between towercos and their mobile network operator (MNO) customers are expected to expire in the next five years. Analysys Mason’s suggestion to towercos is not to wait for the natural expiration of the contracts but to start preparing for the renegotiations in advance.
The relationship between towercos and MNOs is regulated through master service agreements (MSAs) or master lease agreements (MLAs) that typically have a duration of ten years, although longer contracts have also been noted.
The first sale-and-leaseback (SLB) deals outside the USA took place in the late 2000s and early 2010s (see figure one). Co-location agreements with third-party MNOs may have been signed by the towerco shortly after the acquisition of a portfolio.
The arrival of 5G is triggering a new wave of active radio access network (RAN)-sharing deals, which is also likely to force the parties to radically re-think their relationship and terms of engagement.
Figure one: A non-comprehensive selection of the initial SLB deals outside the USA
Old contracts are unlikely to be able to fulfil the current needs of both MNOs and towercos
The mobile industry landscape has radically changed in the last 5–10 years. Relevant industry changes that would impact the terms of the contracts between towercos and MNOs would include:
New technologies/applications (e.g. multi-band antennas, mMIMO antennas, single-RAN, C-RAN, edge computing, IoT/LPWA networks)[1]: To list all changes that occurred to the RAN technology in the last decade would be an impossible exercise. Those who have worked in the industry for long enough will recall that a separate antenna was required for each frequency band deployed and that MNOs needed to install separate base stations for each technology. Telecoms vendors are often credited for the remarkable improvement in the performance of mobile networks. However, a significant effort was also made to reduce the amount of equipment required to deploy new technologies in order to make these upgrades operationally feasible. The deployment of 5G mMIMO antennas with their power and tower loading requirements, along with all future applications related to new RAN technology, will present challenges to MNOs (and not just due to wind-loading); these challenges will need to be solved together with towercos. Increasing adoption of active RAN sharing: The type of network sharing varies based on the assets that the MNOs decide to hold in common. Historically, network sharing was limited to the passive elements of the network, but active sharing has become more and more popular as a result of pressure on the MNOs to optimise capex spend and the need to reduce the amount of equipment on towers to make space for 5G. The sharing of traditional passive antennas could also make space for 5G antennas. Towercos rightly see a threat in MNOs sharing equipment at the site, but, depending on the context, this could also offer opportunities that towercos could exploit.
Evolved regulatory frameworks: Infrastructure sharing is being systematically encouraged by regulators across different geographies. Universal service funds and coverage obligations are pushing the boundaries of mobile networks towards more and more rural settings to ensure ubiquitous coverage in areas where MNOs would not deploy their networks for commercial purposes.
Demand for non-traditional structures: As the roll-out in developed economies has moved from coverage to urban densification, the demand for rooftops has significantly increased at the expense of ground-based towers. The focus is shifting again, this time from rooftops towards non-traditional structures like street furniture (e.g. billboards, lampposts, street manholes) that will support future small-cell roll-out. These non-traditional structures require towercos to adopt a less traditional approach to site commercialisation.
Presence of new business models: The extension of mobile networks into the most remote areas of the country is forcing MNOs and towercos to look at more cost-effective deployment methodologies. This could involve the addition of light structures and/or of ‘coverage-as-a-service’ business models, where the MNO would no longer buy passive co-location but instead would purchase a fully-fledged network access service.
As a result of the above-mentioned industry changes, the original contracts between towercos and MNOs may no longer be best suited to future needs.
The contract renegotiation should focus on achieving a ‘win-win’ situation between the towerco and the MNO customer
The renegotiation between towercos and MNO customers does not have to be ‘win-lose’: a ‘win-win’ situation is possible. A contentious relationship is likely to result in a reduced volume of business for the towerco – either in terms of new sites, tenancies or amendments – and higher network capex for the MNO customer.
To achieve a win-win dynamic, it may be necessary for the towercos to take a more proactive role rather than waiting for MNOs to knock at their doors asking for changes. The negotiation strategy should not centre around defending the status quo, but rather on maximising the value of the contract with the MNO.
Analysys Mason had the opportunity to moderate a roundtable on the topic of MSA renegotiation at the latest TowerXchange Meetup in Johannesburg, South Africa[2]. There was a good mix of towercos and MNOs present at the discussion. They agreed on the importance of keeping the communication channels open during renegotiations, noting that both parties have an interest in operating in a healthy environment that does not constrain either party’s growth. Participants provided examples of positive negotiations that had taken place in the past. The common characteristic of these negotiations was that pricing was not the exclusive focus; instead there was an emphasis on finding common ground that involved a ‘more-for-less’ approach. In the context of MSA renegotiations, such an approach means that the towerco has the opportunity to contract larger volumes (or more services) from the MNO customer in exchange for lower revenue per co-location. At the roundtable, towercos and MNOs were asked what they could offer to – or would like to be offered by – the other party and a number of options were discussed. These are listed in Figure two. Figure two: Negotiation levers for towercos and MNOs
The list of examples shown in Figure two is probably the tip of the iceberg and some further discussions and a mutually creative approach could help to develop more options.
The renegotiation could be the right opportunity for towercos to re-think their business model and upgrade it
Towercos can take the opportunity to expand into new areas of business outside co-location and upgrade the traditional ‘steel and grass’ business model. Upgrading the business model typically implies offering new network services to existing MNO customers, which can include fibre backhaul, energy equipment, antennas, BTS hotels, in-building solutions, outdoor small cells, base stations (hardware and/or software), spectrum and data centres. Many towercos have already started moving in this direction through initiatives that are at different levels of maturity.
One of the reasons the traditional towerco business worked so well is that towercos signed contracts with strong anchor tenants. The next round of contract renegotiations will offer towercos the opportunity to replicate this success in the context of new businesses. A growing number of MNOs are agreeing to outsource further network functions, and this will lead to more towercos transforming themselves into netcos. Notably, many MNOs are still reluctant to embrace the idea of outsourcing network functions – they perceive these functions as a part of their core business, and a way to differentiate themselves from the competition. To convince them otherwise, it is important for towercos to be perceived as reliable, long-term partners. Towercos should not merely be seen as simple suppliers of passive infrastructure, and the next round of negotiations can help them cement this role.
This strategic shift is not risk-free and towercos may need to acquire new skills and adopt differentiated business models (including changed pricing and margins) that are more suited to these new areas. However, updating the positioning is likely to make the relationship between MNOs and towercos more future-proof and generate long-term benefits.
Towercos will need a clear negotiation strategy…
The first step for the towerco is to understand its ambitions and the strategic priorities. These should be consistent with the resources that are available and the interest of the shareholders (especially where the towerco is not a public company). The towerco’s strategy should then be developed in a long-term business plan.
The second step is to understand the MNOs’ network strategy. Analysis of MNO strategy provides towercos with a view of MNO priorities and of the range of outcomes the counterparty may seek during the renegotiation (e.g. network expansion, indoor coverage/in-building solutions, additional capacity, antenna upgrades, and urban densification through macro or small cells). This will help the towerco to position itself as the strategic partner that MNOs are looking for to support their future network rollout and upgrade.
The third step is to develop a list of commercial and technical scenarios and simulate the financial impact of these scenarios through the business plan. The latter must be deliberately designed to compare different outcomes. These scenarios will allow the business plan to be a decision-making tool, which becomes even more powerful when coupled with a tower model that is able to capture the impact of more technical aspects of the tower business (e.g. structural and wind-load constraints).
The fourth step is to design a negotiation strategy that aims to maximise the enterprise value leveraging on the findings of the scenarios analysis.
… and should be flexible in adjusting their positions while always trying to maximise the enterprise value of the company
The range of possible MNO technology and network rollout strategies that will be adopted depends, to some extent, on what the towercos are able to offer. We expect that, in practice, the negotiation will be iterative, with both parties required to examine new options or propose new terms. The ability to evaluate the impact of the proposed terms on the towerco’s valuation in an equally flexible manner will save time and give the towercos assistance during the negotiations, increasing the likelihood of an efficient process and a satisfactory outcome for both parties.
Analysys Mason has a strong track record of working for towercos and their shareholders, having completed ~100 tower-industry-related assignments in the last five years. This includes work across the five continents, in both developed and emerging markets. Analysys Mason has a 360-degree view of the towerco industry and in-depth knowledge of the commercial, technological, operational and regulatory aspects of the business. This unique positioning makes Analysys Mason the ideal partner for towercos
[1] C-RAN = Cloud-RAN or centralised RAN; IoT = Internet of Things; LPWA = low-power wide area
[2] TowerXchange Meetup Africa, 8–9 October 2019, Johannesburg.
