Network sharing has been touted as an attractive way to save capital and operational expenses. George Malim examines the potential savings and assesses the pitfalls
Chris Lennartz, Airwide Solutions: Will help operators
counter demand for bandwidth
Jean-Pierre Bienaimé, UMTS Forum: Reviving in
emerging and developed markets
Azfar Aslam, Alcatel-Lucent: Regulations forcing sharing for environmental reasons
Infrastructure sharing has been under consideration for many years. At its extremes, new companies, such as MBNL a joint venture organisation established to manage the shared infrastructure of 3 and T-Mobile in the UK, have been set up and nationwide networks of independently-owned tower portfolios have been built. There are many models in operation dependent on the nature of the telecoms markets they serve.
“Infrastructure sharing has been analysed and observed by operators since 2002 or 2003,” says Jean-Pierre Bienaimé, chairman of the UMTS Forum.
“Attempts have been made but at this stage, it hasn’t had great success. Earlier, operators were more keen to establish commercial differentiation and were not so keen to share networks.
“Nevertheless, we can see in both emerging and developed markets it has become a little more implemented over the last one or two years. It will become important for the business plans of operators first to share costs of infrastructure and then for environmental reasons.”
The rationale behind sharing is as simple as it is self-evident, for Richard Brandon, head of strategy and chief marketing officer at MLL Telecom.
“Any operator sharing an asset that benefits from economy of scale will have a competitive cost advantage over those that aren’t. Conversely any operator that is constrained in its ability to differentiate, because it uses the same lowest common denominator shared service as its competitors, is also at a disadvantage,” he says.
“The challenge is to identify which parts of the network benefits from economy of scale, and work out ways to operate those whilst maintaining differentiation. For example, it makes sense to share radio access network and backhaul capacity at some level. This could be achieved through multi-operator agreements or through outsourcing the service to a common provider.”
And operators are engaging more frequently in at least some form of sharing. “The financial benefits are illustrated by Telefónica and Vodafone’s announcement, covering 2G, 3G and future deployments,” says Andrea Casini, vice president of sales and marketing at Andrew Solutions. “By consolidating network and sharing financial outlay, both companies anticipate savings of hundreds of millions of pounds over the ten year contract.”
Both passive and active infrastructure sharing have merits. “Passive infrastructure sharing is much easier for operators to deal with and massive moves are underway globally,” says Ricky Watts, chief technology officer of Aircom.
“The belief that you can differentiate your service by coverage is probably becoming old hat and for that reason passive infrastructure sharing is simple, reliable, economic and, when you look at the business case for 4G, becomes absolutely imperative.”
Bienaimé thinks passive sharing offers the most likely avenue for success. “Let’s not be blind, sharing will mainly work in terms of passive site sharing,” he says. “More active infrastructure sharing will become an issue but passive sharing will become more and more popular because data rates and service platforms are becoming sensitive competitive differentiation areas for operators.”
Azfar Aslam at Alcatel-Lucent shares this view. “Passive infrastructure is still the preferred way for mobile network operators,” he says.
“Active sharing is mainly for operators that don’t have significant market share — typically tier 2 or 3 operators that find it difficult to compete. Passive sharing is increasing in Europe and we’re seeing regulations coming up that are forcing operators into passive sharing because of environmental issues.”
Aslam cites Switzerland’s strict regulations on the construction of mobile infrastructure and protection from radiation.
However, there is another side to regulation which may have limited the uptake of sharing. Casini feels those kinds of restrictions have been a barrier but operator caution has been more of an issue.
“Local legislation may have prohibited sharing in some cases,” he says, “but it is the operators’ reluctance to commit themselves that has been the major reason.”
When it comes to active sharing, he thinks many operators’ reluctance can be addressed, although significant issues remain. “Many radio access network-sharing concerns can be alleviated by management systems or having third parties manage sites,” says Aslam, “but the bigger concern is sharing of information on operators’ activities. Even simple things like information on how many subscribers are using a specific site can be highly sensitive.”
The growth of 3G and LTE are at the source of new interest in network sharing. “For the moment there are not many reflections to share concerning LTE,” adds Bienaimé.
“It is developing but the focus is on 3G. Five years ago it was considered only in developed markets such as with Orange and Vodafone in Spain or network sharing in the UK and in emerging markets like India with Vodafone, Bharti Airtel and Reliance. That stage signalled the beginning of the renaissance of network sharing.”
For Brandon that renaissance is critical for the success of 4G. “The financial success of 3G and consequently the funding of 4G or LTE depends on finding a more economical way to deliver the services than we have seen in the past. Network sharing is an essential part of this mix, but it's not a standalone answer.”
Aslam is less convinced that 4G is the major problem. “There’s no umbrella answer to 4G/LTE deployment,” he says. “It will depend on the spectrum used. For instance, the 2600 megahertz band requires effectively a lot of small cells to form hotspots and a lot of new sites will be deployed. Perhaps 1,000-1,500 will be required at an operator that has a total of 13,000 cell sites. However in the 2,100, 1,800 or 900 megahertz spectrum, re-farming of existing spectrum without needing new sites is most likely, with only upgrades required.”
Chris Lennartz, vice president of product marketing at Airwide Solutions, agrees: “From an operator perspective, effective infrastructure sharing is not crucial but it will help operators counter the huge demand for bandwidth in a cost-effective way,” he says.
“It will also enable operators to start small when there is low 4G penetration in the beginning, so operators can share risk of network build-out in the early stages.”
Thinking further ahead, Stephen Lacey, director in the chief technology officers’s unit at Comptel, thinks sharing will become inevitable.
“There is so much investment needed for LTE networks that the market has to go towards infrastructure sharing,” he says. “Operators have to be able to cut costs somewhere.”
Careful reading of the regulations is required, according to Aslam who gives the example of the German regulator requiring 99% deployment in the 800 megahertz spectrum.
“The operator has to deploy a lot of cell sites because of that,” he says. “But the regulator is not stating that each operator has to deploy sites individually, so it needs to be established whether network sharing is possible.”
There’s a vast array of approaches to site sharing but it is important that the portfolios put together remain manageable and enable competitive differentiation for the operator.
“Tower ownership is quite fragmented,” explains Brandon. “An operator needs to work with a small number of vendors, otherwise the cost benefits of sharing become countered by the complexity of multiple operating environments.”
Bienaimé has another example from France which has recently awarded a licence to a fourth 3G operator, Iliad, which will use the brand Free.
Under the terms of its licence, Free is obligated to build infrastructure covering 25% of the French population before it will be allowed to share infrastructure with other operators, roam or sign interconnect contracts.
While that appears to be an initiative by the French regulator to enforce construction of new capacity, it also demonstrates how the regulator regards ability to share as fundamental to operator’s business plans.
Although infrastructure sharing appears complex to manage in terms of apportionment of costs among sharers, billing for capacity used and site maintenance, the potential cost savings are now being recognised as attractive.
Aslam says new sites can cost millions of dollars to establish in terms of their purchase and legal and planning services. That figure is borne out if one accepts the figures — not provided by Aslam — that were recently revealed by American Tower’s purchase of 196 towers from Cincinnati Bell for $100 million.
Those towers, primarily in Ohio and Kentucky, have an average of 2.1 tenants a tower and the sale achieved an average valuation of about $500,000 a tower. Aslam reckons towers in general are valued at 20 times ebitda, suggesting that the Cincinnati towers generate around $100,000 a tower a year.
As part of that deal, Cincinnati Bell will remain a tenant on all 196 towers pursuant to a long-term master lease agreement, potentially helping to justify the price achieved. Nevertheless, an estimated rent of $50,000 a year seems a very attractive proposition when stacked up against a multi-million dollar bill to set up a new site and the ongoing operational expenditure associated with site operations.
Aslam also states that around 50% of network operator expenditure is site related and gives the example of two operators that share no sites switching to 40% site sharing.
In that case, assuming each operator is a large player with more than 10,000 sites such as operators in the UK, Germany or Spain, they could generate savings of €130 million a year. That goes a long way in accounting for the sharing renaissance that Bienaimé describes. GTB