Industry Voices — Barnell: Network sharing signals a path to the future

Brian Barnell Industry Voices

As the communications infrastructure landscape evolves, network sharing strategies will become a defining element in the next generation of wireless business models.

Wireless players, from tower companies to mobile network operators (MNOs), are re-evaluating their role and value proposition within an evolving communications infrastructure landscape, driven by several sector developments such as the emergence of 5G, continuing consolidation, and technological shifts.

Sector Development #1: De-coupling of Network Assets and Service Delivery

Operators are de-coupling network assets and service delivery. Faced with increased competition from OTT and technology players, operators are departing from their legacy infrastructure–heavy focus and aspiring to become digital and content services providers. They are realizing that their network assets are not the primary source of value in today’s market of stagnating ARPUs, where OTT providers are taking the lion’s share of revenue through content services. Furthermore, InfraCos, often with private equity backing, are eagerly stepping in as outsourced infrastructure partners or as a source of liquidity for MNOs seeking to divest network assets.

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Key wireless players and landscape

Sector Development #2: Gearing up for 5G

The emergence of 5G promises high broadband speeds and new use cases such as private enterprise networks, the internet of things and smart cities. However, 5G rollouts require sizable capital expenditures across all network domains – spectrum, RAN equipment, and mobile backhaul, among other core network components. Network investments are expected to increase up to 60% to address 5G with a significant increase in operating expenses, doubling total costs from 2020 to 2025, according to Mckinsey. Operators are having a tough time coping with this level of network investment due to capital constraints and uncertainty surrounding revenue models for 5G applications.

Sector Development #3: Capital Constrained MNOs

Operators are capital constrained primarily due to low and/or declining ARPUs from their legacy business. As an example, MNOs in emerging markets are often burdened by regulatory pressures to modernize networks even though low ARPUs do not support such investment.

Several MNOs have also recently undergone sizable acquisitions, further limiting their financial ability to undertake material network upgrades. AT&T’s acquisition of Time Warner, Verizon’s acquisition of Straight Path, and the pending T-Mobile merger with Sprint, are a few examples of sizable mergers limiting the wherewithal of key MNOs.

As a result, operators are exploring alternative network financing strategies while continuing the shift to an asset-light business model. They are increasingly relying on third party infrastructure providers such as TowerCos and InfraCos, as well as exploring network sharing strategies to curb the costs of network upgrades.

Sector Development #4: Rise of Pure Play TowerCos and InfraCos

The gradual shift of the operator to an asset-light business model has contributed to the rise of TowerCos and InfraCos. Independent TowerCos and InfraCos today account for approximately 70% of capital flowing into towers and rooftops, according to TowerXchange. These players typically deploy a passive infrastructure model in the form of a long-term lease on the network asset that avoids the complexity and risk of service delivery offered by operators.

The growth in TowerCos and InfraCos is further supported by a growing funding appetite from the private equity community, specifically Infrastructure funds. These funds gravitate to pure play telecom assets like towers due to the minimum secured return from long term lease contracts. The continued funding outlook for this sector remains bright, as evidenced by the $85 billion in aggregate capital raised for Infrastructure funds in 2018, according to Preqin.

Emergence of network sharing

Network sharing models are materializing in response to recent wireless sector developments and are expected to curb the costs associated with 5G, while accelerating rollout of upgraded networks. These models involve the sharing of tower infrastructure, equipment (RAN/DAS/small cells), backhaul, and spectrum and will be a key component of the next generation of wireless networks.

While network sharing has become a standard practice for mobile operators, the trend is accelerating as operators cope with daunting 5G build-out costs. As an example, Vodafone has entered into several network sharing agreements over the last 12 months across Europe in response to 5G, including:

  • O2 and Vodafone UK (Jan 2019): Extension of network sharing agreement in the UK to cover 5G rollout costs. Benefits include faster 5G deployment and broader reach at lower costs.
  • TIM and Vodafone Italia (Feb 2019): Network sharing agreement to extend 4G services and aid in 5G rollout in Italy. Includes the possibility of combining respective tower units (22,000 towers) in Italy.
  • Orange and Vodafone Spain (Apr 2019): Network sharing agreement to include joint use of 5G sites in Spain. Includes active network sharing of mobile infrastructure (14,800 masts) and backhaul.

Network-as-a-Service Model
The emergence of TowerCo/InfraCo network sharing in a Network-as-a-Service (NaaS) model will bring significant change to the existing wireless landscape. In this model TowerCos manage more of the network beyond the tower (e.g., power, RAN equipment, backhaul, fiber, small cells, and even spectrum) through turn-key cell site solutions often shared with more than one operator.

As operators shift to asset-light models, TowerCos and InfraCos are set to be the largest beneficiaries of 5G network builds utilizing NaaS strategies.

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Tower companies as NaaS providers

Next generation wireless models

Q Advisors has already witnessed innovative business models emerge that embrace network sharing strategies. One of these is the neutral host/wholesale network model deployed by Altán Redes in Mexico and Chorus in New Zealand. These specific projects were policy-driven to support connectivity to underserved regions and to build out 5G or nationwide networks.

Ultimately, adoption of network sharing strategies will drive the next generation of wireless business models. It could transform TowerCos and InfraCos into outsourced wholesale providers that resemble a “one stop shop” for 5G infrastructure.  It could also transform operators into neutral host/wholesale network providers or into asset-light, content service providers.

Brian Barnell is managing director at the boutique investment bank Q Advisors. Jordan Rupar, vice president at Q Advisors, contributed to this article.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceWireless staff. They do not represent the opinions of FierceWireless.