Why network sharing is good business

T-Mobile and 3UK have announced that they have reached a network sharing agreement for their 3G networks in the UK. Following nine months of discussions, the two companies are going ahead with three objectives:

- to save capex - £2 billion ($4.1 billion) over 10 years for the two companies

- to improve network coverage for rural areas and indoor use

- to improve the quality of the network

 

The consolidation of the two networks will start in early 2008 and will initially focus on extending wide area coverage to rural areas, partly by moving 5,000 base stations from places where their current networks overlap. Then, in 2009, the focus will shift to improving indoor coverage in dense urban areas.

 

The two operators will set up a management company, Mobile Broadband Network Ltd, as a 50:50 joint venture. Its remit runs to the end of 2021.

 

This agreement, reported by the financial press in mid-September, follows announcements by Vodafone and Orange in the UK and Spain earlier this year, and Vodafone and others in India in the last few weeks.

 

In our view it makes good business sense to share the infrastructure costs for the 3G access network. For some time most 3G network operators have been in a difficult cycle of:

- modest investment in the network because of a difficult business case

- inadequate user experience because of modest investment

- low take-up because of the inadequate user experience

- continued modest investment because of low take-up

 

The arrival of HSDPA over the last 18 months, together with flat-rate data plans, has broken the cycle. HSDPA at last provides a user experience close to users' expectations of broadband, and flat-rate pricing gives users more confidence in their bill. As a result USB modems for 3G are selling fast in many countries and data traffic is rising very quickly on the networks.

 

This, in turn, encourages operators to push on with building out their networks

 

T-Mobile and 3UK aim to build the best 3G network in the country, with coverage close to the 2G networks and serving "high "˜90s% of the population". Both companies will continue to own their spectrum and compete on services, and there is provision in the agreement for differing levels of investment if one company wishes to launch very demanding services, but the other does not. There is also provision in the agreement for sharing as the operators upgrade the network to LTE (the next major step in the W-CDMA evolution path), although neither operator is obliged to take part in the upgrades at this stage.

 

This agreement makes business sense, partly because 3G networks are expensive to build out and partly because, although 3G networks should be more efficient than 2G networks, the efficiencies only really come through at higher levels of network loading (where pooling of capacity and network resources is significant). Clearly that is easier to achieve with two sets of users on the same network.

 

There are also environmental benefits from the deal, in terms of having fewer masts and towers.

 

A beneficiary of this deal is Ericsson, which manages 3 UK's network and some of T-Mobile's network functions. It will continue in those roles for the new venture, but will be required to produce greater efficiencies for having a combined network. Contracts for future expansions and services will be handled by the venture.

 

One question mark exists for O2, the only one of the UK operators now not in a network sharing deal.  T-Mobile and 3 UK have said that there could be further savings and benefits if a 3rd partner joined the venture and that, after a set-up period, the door will be open for discussions.

 

Martin Garner, Ovum

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