With around 80% of mobile traffic originating indoors, and higher frequency 5G spectrum struggling to penetrate buildings (which in turn are becoming increasingly impenetrable due to the use of new building materials) the demand for indoor coverage solutions is growing.
Historically, in-building systems were provided to large, high footfall buildings by the MNOs for their own customers.
Mobile operator funding is however limited to the prime buildings with large corporate customers and this model left many buildings unserved, and even then it’s unlikely they’d have multi-operator systems. With the current flight to quality in commercial real estate and for landlords wanting to fill their buildings with long-term tenants, multi-operator mobile connectivity is essential, not a nice to have. The party that pays for in-building connectivity is the one who derives value from the connection. It can be a developer, landlord, tenant, or the public sector – whoever can build a business case for coverage.
In venues such as stadiums or conference halls, previously one MNO would lead the project with the other MNOs then paying the lead MNO to join the system. Now, again due to MNO funding constraints, there’s a move to neutral hosts providing multi-operator connectivity funded by venue owners because it is important for the customer experience within their venue.
For neutral hosts, such as towercos, the in-building market presents an interesting growth opportunity. Certain observers opine that there is insufficient long-term growth in the macro market for towercos to satisfy investors, plus tapping into building owners offers an alternative customer base stream from increasingly capex constrained MNOs. For building owners, the proposition of a multi-tenanted solution is attractive, cutting down on parallel infrastructure and better serving tenants and visitors.
Yet, whilst the traditional “steel + concrete” towerco business model is well known and well loved by investors, there is often a lack of understanding about the in-building system (IBS) model and how its economics, risks and growth opportunities compare to other digital infrastructure assets.
To address this knowledge gap, TowerXchange spoke to Simon Frumkin, the CEO of Freshwave - one of the UK’s leading providers of in-building solutions. Part of the DigitalBridge group of companies, Freshwave has installed and provides an on-going managed service for in-building solutions at over 350 buildings in the UK, and has been an active participant driving the Small Cell Forum Hosted RAN Design Framework.
The fundamentals of the IBS model: Long-term contracts and low churn
“Similar to the towerco model, Freshwave deploy the upfront capex to install the in-building system (sometimes with the customer making an upfront capital contribution), and then charge a monthly managed service fee which provides the bulk of the capital investment recovery” explains Frumkin.
“Our flexible commercial models mean our customers can opt for an approach that suits them - for example “pay as you occupy” or “pay as you let” - and they enjoy our service as an ongoing managed service fee. In turn, we generate monthly recurring revenue for our investors.
The length of the contract varies and depends on the size of the facility and the type of customer (with the public sector for example having limits on contract length). As a minimum, the contract length is 5 years, but more commonly we have 15-year contracts in place.”
Frumkin adds “In the same way, however, that once you build a mast it’s unusual for it to be dismantled or moved, once a building has an IBS it’s incredibly unlikely that it would ever be removed. The building occupants would simply not accept going from being connected to losing this service. The customer churn rate is very low and although there is some risk from property redevelopment or from enterprises failing or re-locating, this poses less risk than the tower industry is currently facing from MNO consolidation.”
Whilst Freshwave were unable to disclose exact payback periods and margins, being part of the DigitalBridge group of companies, their multiple targets are understood to be closely aligned with those of their towerco peers within the group.
Counterparty risk equal to or lower than for towers; significant growth opportunities
“Towercos enjoy strong counterparties in the MNOs. And our IBS customers are also strong counterparties as we provide a premium product and managed service to enterprises in large buildings, meaning our customers have premium credit ratings (equivalent or even better than MNOs). We also work across central government, the NHS and other parts of the public sector which are of course reliable customers” explained Frumkin
“Whilst the customer base is understandably more fragmented than in the macro-tower market, this means there is huge growth potential for IBS providers. This gives IBS providers an exciting growth trajectory, as evidenced by Freshwave being nearly three times bigger than when we were first established at the start of 2020.”
Significant passive components and low levels of concern about active equipment
“Don’t be intimidated by active equipment” cautions Frumkin
“With DAS, MNO base stations are housed in an equipment room (which can be either within the building or off-site) and then fibre is run to a system of passive antennas throughout the building. DAS rarely goes wrong; it is a system of antennas and fibre with very little maintenance and software upgrades required.
When a customer’s system goes down, 99 times out of 100 this is due to an issue with the MNO network rather than the in-building system in place. The contracts we have in place clearly state that we can’t accept responsibility for such issues, however, one of the key value adds that we bring in our managed service offering for customers is the relationship into an MNO Network Operations Centre (NOC). We are able to get quick feedback and resolution on any issues rather than a customer waiting on an MNO customer service helpline to have a problem addressed.
Small cells are more involved when it comes to set up and configuration, but they don’t require a huge amount of operations and maintenance. What’s more, a lot of the diagnosis and issue resolution can be handled remotely.
Whilst most small cells that have been deployed are 4G small cells and will need to be upgraded at some point to 5G, 4G is a very strong technology with a significant life span still ahead of it. There is a large base of connected devices, and customers are happy with the technology without a pressing urge to upgrade to 5G. Investors can often be overly pessimistic when looking at the shelf life of technologies, but if we look at the reality, 2G macro-networks that were deployed 25 years ago are still in use today. When it does come to upgrading to 5G, this is an upsell opportunity for us.
When drilling down into IBS, much of the equipment deployed, such as fibre being run round the building for DAS, is passive and reusable. Even the DAS antenna access points are frequency specific and so can be easily updated by switching a radio in the main equipment room.
Whilst a degree of maintenance is required for IBS, this is true for the macro tower market. Looking at the UK as an example, a lot of tower structures are starting to get to the end of their life. In many instances, insufficient maintenance capex has been provisioned to deal with issues such as concrete fatigue.
Plus, the cost of active equipment is coming down as the market continues to move to solutions such as Open RAN and neutral host designs which enable the neutral host provider to use their preferred products. In the UK this is fully supported by the MNOs via the JOTs NHIB Specification and internationally recommended by the Small Cell Forum Hosted RAN Design Framework. Traditionally, MNOs have each required their own small cell which then connects directly to their own core network. Under the new specifications and framework, multi-operator small cells (selected by the neutral host) are connected to a neutral host’s core in their data centre, which is then in turn connected to the MNO’s network via a secure link. Such methods reduce the requirement for parallel infrastructure and bring down the cost of in-building connectivity.”
Market maturity varied across Europe; technical expertise varied between actors
There is a relatively mature IBS market in the UK with both small and larger competitors, in Europe however the landscape is underdeveloped with most systems still being deployed by MNOs.
Lots of companies are trying to get in to the in-building space but there are barriers to being effective. Many companies do not possess the technical capabilities or the relationships with the MNOs. In deploying an in-building solution, you are extending MNO networks and taking on security and compliance requirements. Often you may see companies coming in with an inferior solution which they are mis-selling to customers. You see companies deploying repeaters for example, which are fine if companies know that is what they are getting, but as they only amplify the external signal, if that external signal isn’t great, then the result isn’t great. Repeaters can also create issues for MNOs, generating interference with their networks.
Speaking on Freshwave’s positioning and ambitions in the market, Frumkin explained “Freshwave are the only company able to provide in-building connectivity for all four UK MNOs via small cells, are pioneers in using neutral host “shared” equipment, and guarantee to deliver full multi-operator 4G and 5G connectivity to large buildings and stadiums via DAS. With a range of innovative and flexible commercial models for customers to select from, we’re predicting continued high demand for all our in-building services as multi-operator mobile connectivity increases in importance. We’re also expanding into European markets which are less developed from the in-building point of view, especially in terms of the multi-operator, enterprise pays service that neutral hosts are better suited to provide.”
