Thought leadership from our experts

Considerations across developed and emerging telecom markets

Introduction

Many facts, one truth: mobile network operators' profit margins and average revenue per user shrink year on year at a global level. In mature markets, differentiation is now made on the quality, diversity and technological advancement of services along with data bandwidth. In emerging markets, differentiation is made on how quickly networks are rolled out to meet pressing demand. The layer that sits on top is the existence of regulatory licenses obligations imposing, among other things, network coverage obligations in potentially unprofitable areas in terms of investments, or limitations in high density areas where stringent electromagnetic fields emission limits prevail. In this context, control by mobile network operators over their cost base tends to be a matter of survival (and success).

One way of achieving an efficient cost base management can consist in taking a stance at perhaps the most critical issue for any telecommunications operator: share (with competitors) or dispose of 1 (and lease back) all or part of the largest item on their expenditure, i.e. their network elements.

Sharing mobile network elements, whether active or passive, is one of the hottest topics in the mouth of stakeholders having an interest in the telecommunications industry from far or near, in developed and perhaps to a greater extent, in emerging markets in the past five years. The recent approval by the European Parliament of the EU Regulation on "a Connected Continent" (its proposals for a single market for telecoms in Europe) stresses - at least in the European Union - the urge to provide legal and regulatory certainty to this trend, recognising the potential that this can give to a hugely competitive and challenging telecoms market. It is a model that is equally encouraged (and in a few cases mandated) by the majority of national regulatory bodies outside of Europe: provided that it is not detrimental to competition, the benefits range from the efficient use of resources, coverage requirements and health and environmental issues.

Scoping the sharing

Passive sharing and active sharing require consideration of different realities, as well of course of different network elements. When passive, the objects of the sharing are the non-active elements of the network, i.e. devices not participating in the transmission of signals. These elements are mainly composed of sites where towers are installed, towers masts, cables, easements, ducts, base transceiver stations shelters, power units (generators and batteries) and air conditioning systems. Passive sharing can mean mast sharing or site sharing.

On the other hand, active sharing, which is gaining commercial traction globally, commonly implies that an operator will give access rights to all or parts of its radio access network2 (RAN) to one - or several, sharing doesn't just mean one - third party network operator(s). RAN sharing can extend to joint management systems, combined maintenance arrangements and single backhaul, to the point of connection with the core network and keeping the logical part of the network, the intelligence discrete at all times. In case a deeper level of active sharing is contemplated, an operator can confer access to its mobile switching centres (MSS) and/or to its packet-switched core network to other operators, thus defined by the industry as backhaul sharing. In addition, active sharing can, to a certain extent, lead to the common operation of radio frequencies, i.e. spectrum sharing.

In general, the deeper the sharing the more complex the arrangements and - depending on the size of the players involved - the greater the risk of competition scrutiny.

Why share?

Even if mobile network operators are sometimes faced with a Cornelian dilemma, the decision to share all or part of their passive or active infrastructures tends to be sensible and, provided the right legal and business model is chosen, a rewarding one to achieve the more profitable rolling out of a network. There are many drivers that can lead to such a decision; we outline the significant ones below:

Capex and Opex reduction – Industry sources cite that passive infrastructure sharing can potentially yield overall cost savings3 as much as between 15% and 30%, with clear cost savings on yearly site capital expenditure of up to 60% (notably due to less investment duplications) in addition to significant savings in operational expenditure (mainly costs of renting the sites, site maintenance, personnel and power, air conditioning and fuel expenses). Rationalising capex also reduces the "pay-back time" of investments, depending on the elements shared and the surrounding arrangements.

Speed and coverage – by combining resources and reducing individual infrastructure needs, mobile network operators can get to deploy newer technologies quicker (3G being a drive in emerging markets, LTE being a key driver for sharing in more developed markets). Sharing can give mobile network operators greater leverage with landlords, reducing time for negotiations of access rights. Together with a more efficient and rapid deployment of newer technologies comes the ability to improve coverage and/or build out high capacity sites at the outset in greenfield sites; indeed some national regulatory bodies (the telecom regulatory authority of India being one such example) have supported sharing exactly because of the improved coverage. Ultimately, in line with the consumer led mantra of all national regulatory authorities, improved coverage, improved quality of service and faster service roll out all result in a big tick in the consumer benefit box.

Strategic refocusing – The cost savings to be made from infrastructure sharing enables mobile network operators to reallocate their capacities and capital on the development of their core business, i.e. services and technical innovation, this being key to success in a competitive and cost conscious market. This is particularly important for more mature markets, where core businesses are well established and the initial core capital investments already made.

Optimising scarce resource – the simple truth is that spectrum is a finite resource, and as such national regulatory bodies feel duty-bound to enshrine requirements for efficient use in licence conditions. Sharing is a means – whether as a direct effect or a helpful secondary consequence whether in a developed, maturing or emerging jurisdiction, – of achieving such efficiency, particularly in the context of spectrum sharing or frequency re-use.

It is not only the spectrum itself that is scarce and therefore, particularly so in densely populated areas in emerging markets, sharing can also support efficient use of other difficult to procure national resources such as rights of way and occupation rights of private properties (e.g, rooftop sites, which are usually set-up in high density areas, are of limited number due to environmental and health regulatory issues).

Rewards (tower company's side) – Taking the view point of the tower companies, passive sharing deals can come with generous financial rewards. Such tower companies to which passive infrastructures are outsourced or sold can derive regular income for a significant period of time (depending on the term of master tower agreements, which can be as long as thirty years) and improve bottom line profitability thanks to escalation mechanisms allowing tower companies to amortise investments. The upside of outsourcing to a towerco takes the headache and "open chequebook" approach away from the operators, enabling them to improve the quality of transmission services they provide.

Structuring the sharing

Types of infrastructure sharing structures and agreements differ in each jurisdiction. The choice of structure depends largely on a certain number of factors among which are legal and regulatory obligations, the level of maturity of the market, planning and network architecture approaches as well as the deployed technology are critical to influence which structure fits . Whilst there is no one size that fits all, there are many sizes to choose from.

Initial structures: The initial structures supporting infrastructure sharing in the early stages of network development are commonly roaming and inter-operator site-sharing agreements, allowing incumbent operators to obtain an additional source of revenues from their assets (if the agreement is not cash-neutral, i.e if the value of sites of one of the operators or the portfolio of sites is greater) while potentially fostering new entrants' penetration of the market.

Inter operator site sharing: Infrastructure sharing structures have since moved on. Inter-operator site-sharing, be these unilateral or bilateral, - can adapt to the differing financing and strategic needs of mobile network operators. The nub is always on exit and how to deal with this in the arrangements. Sharing is too important and too co-dependant for silence to be a good option: exit issues have to be carefully anticipated and drafted, particularly with the risk that one of the operators takes the decision to monetise all or part of its assets, through a sale and leaseback or active sharing deal, once the portfolio is effectively "shared".

Joint ventures – in the context of passive sharing, a joint venture model is very common, perhaps more so in developed markets where the maturity of the operators makes them more conscious of control than in emerging destinations. As markets and networks mature operators' focus shifts from deployment to service innovation and quality. Such market conditions can naturally lead to two or more (incumbent) operators creating a joint venture to join their assets and to build out additional coverage in a unified but objectively controlled manner.

Active sharing: Typically arrangements for an active sharing are contractually separated from any passive sharing element, the rationale being that passive infrastructure can be dealt with in a number of more common ways and are likely to involve a more tried and tested path, but active sharing is more sensitive, requires a higher level of collaborative planning between the participants and is more likely to be impacted by innovation (e.g. the rise of virtual base stations). Dependant on the model adopted there could also be some element of sharing of the spectrum in the active arrangements which in turn gives rise to issues around the sharing of information and mechanisms to ensure that the operators' regulatory obligations and commitments are not compromised. Issues such as exclusivity, service performance levels and (realistic) remedies for failure, rights to terminate, all vary in terms of form and importance when comparing passive to active.

Case Study on an Africa Sale and leaseback – Mobile network operators may decide to outsource the operation and maintenance of their portfolio of towers, or, as a substitute, transfer and leaseback their passive infrastructures to a specialised tower company. This type of structure is usually based on three types of agreements:

  • An Asset Purchase Agreement (APA), setting out the terms and conditions pursuant to which the assets are transferred in accordance with key milestones (conditions precedent) and phases triggering the effective transfer of leases and property over sites and the subsequent transfer of risks;
  • A Master Tower Agreement (MTA), pursuant to which the tower company is entrusted to provide site management services (including power management, site security, maintenance, investment in equipment replacement, refurbishment and modernisation) on the existing sites transferred pursuant to the Asset Purchase Agreement. Given the duration of such agreements, advisers should take utmost care in anticipating legal, regulatory and technical evolutions that may occur during the term of the MTA (e.g active sharing right of first refusal except if mandated by a local regulatory body, as active sharing is one of the greatest enemy of tower companies, miniaturisation of network elements). The provision of these business critical outsourced services is generally linked to detailed service level obligations (e.g with respect to power availability and power downtime) which, when breached, lead to the triggering of significant service credits and/or liquidated damages (generally capped) allocated according to each site's importance in the network. The MTA generally also provides for an exclusive licence granted to the selling operator allowing it to occupy a certain amount of space on towers, with a possibility of extension of the licence and preferential rights, such as a paramount position on the towers and rights of first refusal on exclusive sites and space already used on existing sites. Warranties, indemnities, termination causes, triggers and consequences (e.g whether the anchor-operator has rights to buy-back the assets he sold or exercise a call option on the tower company's shares, anticipate the handover conditions) are essential to this type of agreement.
  • A Build-to-Suit Agreement under which the tower company and the operator lay down ordering commitments and process to scope the contracting operator's requirements and carry out the design, build, commissioning and acceptance of new sites (sites not existing as of the purchase date) for future network rollout, and naturally sets out consequences of failure to do so within the agreed milestones and time periods.

A final word

The different stages of liberalisation in developed and emerging global telecoms markets mean that there will continue to be a range of models adopted for infrastructure sharing. In emerging markets new entrants can take established models – at both a passive and active level – and use these in their initial network build and roll-out thus reducing time and cost to get to market and taking them a step forward to future proofing their network. In developed markets the historical worry about active sharing and deeper sharing models is diminishing, operators are more open to innovation around sharing and extending this to the new technologies on the market.

In the infamous words of Ralph Waldo Emerson (1803-1882, American essayist, lecturer and poet): "Unless you try to do something beyond what you have already mastered, you will never grow".


1 http://ec.europa.eu/digital-agenda/en/connected-continent-legislative-package

2 Radio access network notably includes base stations, radio network controllers and backhauls to the base stations and radio network controllers.

3 Sources such as Ericsson, Successful network sharing – A structured approach, September 2010; BEREC-RSPG report on infrastructure and spectrum sharing in mobile/wireless networks, June 2011; GSMA, mobile Infrastructure Sharing, September 2012.

This article was written by Purvi Parekh (Partner and co-head international telecoms group, Olswang), Sylvie Rousseau (Partner and Head of telecoms at Olswang Brussels/Paris) and Thibault Soyer (Associate, Olswang Paris). If you would like more information please contact any of the authors at www.olswang.com

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