|When mobile goes broadband – sharing towers
Andrew Doyle is Development Director, Technology & Communications Consulting at Mott MacDonald. As the Development Director at Mott MacDonald, Mr Doyle is responsible for leading international telecom projects in the UK, Europe, Australasia and Africa. This includes consulting and operational services to telecom operators & service providers, regulators, new media companies, utilities investors, developers and end users – public & private. After joining Mott MacDonald in 2004, he relocated to Johannesburg, South Africa, where he led the technology and communications consulting team’s expansion into Africa.
Prior to joining Mott MacDonald, Mr Doyle managed a marketing consulting practice in Australia (IDC) and was involved in a Telco start-up with financial services firm Capital One, having previously worked at Coopers & Lybrand (Management Consulting) within their telecoms strategy & policy group.
Andrew Doyle holds an MBA in Strategy from the University Strathclyde Graduate School of Business (USGSB).
Mobile broadband in Africa is an essential vehicle for trade and livelihood improvement, not for games and social networks. As usage is set to rise but ARPU is still constraint, carriers look to reduce costs. They can do this with sharing infrastructure, whether through no-cash reciprocal agreement, outsourcing or lease-back arrangements. Although eliminating aspects of ‘reach’ and signal availability as a competitive edge makes it tougher for the mobile operator to differentiate, this model of sharing towers is gaining popularity in Africa, allowing faster Internet to be offered to consumers more efficiently.
Mobile broadband is the Internet in Africa. In the more mature markets of Europe and the US, a mobile device is just one of a growing number of means through which we interact with applications and the internet each day. In these markets our primary interaction with the internet remains largely through a laptop or desktop computer – although this is changing too.
For the vast majority of people in Africa, mobile devices are the only point of access to data and the Internet. The latest figures show that mobile subscriptions in Africa have surpassed the 500 million mark, and it has been predicted that by 2015, the number of mobile broadband users across the continent could reach 265 million (According to a research conducted by Informa Telecoms and Media in September 2010). So Africa represents a potentially huge market for mobile operators, larger than the traditional Voice and SMS subscriptions market that has been the mainstay up until now. The general absence of traditional fixed access infrastructure in Africa means that the mobile phone is the primary communication device which has opened up new vistas of social and economic possibilities as well as driving the astonishingly quick adoption of mobile on the continent.
To that end, the introduction of mobile broadband will consolidate the mobile devices position as the primary means of access within Africa. In other words, the adoption of (affordable) smartphones and data subscriptions is driven by more than just a need to check Facebook . In this region, the ability to locate employment, find prices, address buyers and sellers etc. on a mobile phone is a key driver for adoption, because it is a fundamental tool for enhancement in economic flexibility and productivity.
New services and initiatives have begun to transform daily lives. Services in public health are pioneers in the field. For example, Phones-for-Health extends the ability of Ministries of Health to create national health information networks that reach all communities, most particularly in the treatment and support of people affected by HIV/AIDS. The money transfer service Mukuru is another example of such a facility, enabling people in the UK to send funds back to family and friends in their native country.
Today’s broadband outlook
Mobile broadband services have had, and will continue to have, a significant impact on day-to-day lives in Africa. The availability of true mobile broadband is still limited in many regions, and 3G coverage is limited to urban and strategic locations, such as airports. However, as the demand for data has grown significantly (especially in countries such as South Africa) broadband coverage is predicted to grow rapidly over the next decade, and mobile broadband is likely to take the lion’s share of capacity, given the existing coverage and scarcity of fixed infrastructure in most African countries.
However, operators in Africa face the same kind of problem faced by other operators in mature markets where growth in data and broadband infrastructure fails to produce a proportional increase in revenue – that is to say, the overall impact on ARPUs (average revenue per user – a key industry metric) is incremental at best. Most acutely in Africa, people are consuming more data but still have a limited amount of disposable income to spend on communications. African operators have always needed to be fairly lean given the generally lower ARPUs in their markets, but roll-out of 3G + places even greater pressure on margins. Increasingly affordable smart devices will be developed and the clamour for data will only increase.
Drivers towards infrastructure sharing
There is a shift in the nature of mobile operators within Africa. From the pioneering spirit of five to ten years ago where networks could be built and subscribers would come, operators now are beset with concerns of cost-reduction and improvements in efficiency. As in the early days of mobile voice, coverage for mobile broadband will be seen as a key differentiator in this burgeoning market – except there simply isn’t enough capital to go round each operator to build their own 3G+ infrastructure.
At present a good deal of capital is flowing toward third party tower sharing companies, who are becoming an increasingly important part of the mobile value chain in Africa. Operators, keen to lower operating costs and/or release capital for other investments, are increasingly turning to these tower companies (TowerCos) as an obvious source of efficiency.
Other forces are also in play. Planners and regulators, who are fed up with the proliferation of unsightly towers (some only a stone’s throw away from each other) and alarmed at the scarcity of capital for multiple network roll-outs, are increasingly mandating that new towers cannot be built without first checking to see if an existing tower is available for sharing. In short, a ‘perfect storm’ is building up in Africa to enable TowerCos to take on a significant role within mobile. Without exception, all of the major mobile groups in Africa have either entered into a substantial sharing/outsourcing agreement or are strongly considering doing so.
Our view of this evolution is presented below, and broadly mirrors that which we’ve seen in developed markets around the world.
Options for sharing infrastructure and resources
There are a number of different options for infrastructure sharing.
• Ad-hoc or formal arrangements between operators. Sharing on low volume and ad-hoc basis is already quite common in Africa and often involves a non-cash based barter arrangement where two operators come to a mutual arrangement of convenience. More formal attempts to share en masse have been attempted in certain markets but typically run into difficulties due to competitive tensions;
• Outsourcing. This is where the operator maintains ownership but transfers management to the outsourcer (usually a TowerCo). Although the operator does not raise any capital, it will expect to generate substantial reductions in OPEX. The TowerCo will secure rental from the anchor tenant and have the upside of attracting further tenants onto its sites (which is really where its margin growth will come from); and
• Sale and Leaseback. Where an operator sells its tower assets for capital sum, but leases the towers back from the TowerCo. This releases significant amounts of capital into the operator and can (but not always) reduce operating costs also. The TowerCo takes the assets onto its balance sheet, has the upside of additional tenant rental but will also have a capital sum to repay to its funders.
The chosen model will probably depend on the circumstances of the operator in question. Well funded operators with good coverage may wish only to outsource and reduce OPEX, while others, e.g. a third entrant looking to expand coverage, may need to sell its existing towers to fund further roll-out.
How this shapes up in the long term is uncertain. As coverage diminishes as a differentiator, operators will be left to focus on service and experience. Managing churn and trying to increase ARPU, in this case, is a tough call especially in a largely pre-paid market with many users having multiple SIMs. For companies like TowerCos, there is the possibility to move further into the operator business, perhaps managing the active radio network, or becoming wholesale networks selling to multiple operators and Service providers, though this still seems some way off in the African market.
Investor interest for sharing
For now investors are attracted to the TowerCo model as it can provide relatively stable long term revenue and the market conditions appear to favour the sharing model – for once operator strategies are somewhat aligned with regulatory and planning priorities.
Industry giants such as the South African group MTN, Indian operator Bharti Airtel, France Telecom’s Orange unit, and the UK’s Vodafone (trading as Vodacom in southern Africa) as well as smaller firms like South Africa’s unlisted Cell C, are ramping up investment to win the new battleground of high-speed internet via mobile phones. As technology evolves to 4G and beyond and users require faster speeds, operators need to think differently about their financing and operations to avoid being stuck in a zero-sum game of increasing network investment without a proportionate increase in revenue. Investors and mobile operators alike are looking carefully at this growing trend in tower sharing, which paves the way for a leaner, more competitive infrastructure.