Intelligence Brief: How is 5G changing network ownership? - Mobile World Live

Intelligence Brief: How is 5G changing network ownership?

12 FEB 2020

In November 2018 we looked at the implications of a growing shift among operators to share or divest tower assets. Two clear takeaways emerged:

  • 5G necessitates a different network strategy. Unlike previous generations, 5G deployment is not only about adding more sites and increasing backhaul capacity. In fact, it is more about rethinking the whole network architecture to make it agile. The high capacity requirements of 5G will necessitate the use of small cells in cities and areas of high footfall (such as airports) to complement national macro networks. Private networks (for example to sell into enterprise customers) and the concept of a neutral host (such as for sports stadiums) are further examples of diversification.
  • Decoupling. The traditional vertically integrated model of network ownership in which operators own and control all passive (sites and towers) and active (radio access) infrastructure is being joined by a decoupled approach where parts are owned and operated by a third-party (such as a tower company)

With the 5G becoming commonplace, operators are under constant pressure to address deepening financial and market pressures, as required infrastructure funding increases dramatically in the face of the investment-heavy evolution toward 5G. How much will this all cost? A report published in 2019 by GSMA Intelligence predicted an outlay of about $1 trillion alone on 5G between 2019 and 2025.

This represents a massive cost pressure, particularly given low revenue growth. As a result, the industry has been driven to look at multiple ways of keeping costs in check. Most discussed and perused so far are voluntary network sharing, virtualisation and the shift to open RAN. But, as 5G opens up new network infrastructure models, new operations models need to be considered as well: small cells sharing (or partnerships with municipal authorities); private network launches; and creating neutral hosts. While, to date, infrastructure sale and leaseback deals are more common (where an operator sells towers to a TowerCo or other third-party on the proviso it will be able to lease access), the structural separation of assets is another option worth consideration.

Yet, as much as we might call these new models for a 5G era there are examples to look to in terms of guidance going forward.

O2 Czechia
In 2014, PPF Group, a local private equity fund, bought O2 Czech Republic from Telefonica and separated the network (privately held and known as Cetin) from the retail business (publically listed). The deal not only benefitted the new owners: the country received a significant infrastructure upgrade as well. The creation of a pure network infrastructure player lowered borrowing costs and improved capital access such that Cetin increased its network capital expenditures by 40 per cent a year after separation. From there on, capital expenditures increased by 13 per cent annually. This led to a jump in fibre coverage and broadband speeds at a level rarely seen in Europe.

Reliance Jio
Reliance Industries demerged its telecom infrastructure, including tower and fibre assets, into a separate company, which has been monetised through a deal with private equity company Brookfield Asset Management. Following the separation, Reliance Jio has become asset light, having a balance sheet size of $33 billion. Now, by putting all the digital entities under a new company, Reliance Industries is readying the services arm for a better customer experience and deeper penetration, eventually converting into better valuation. The company already made it clear that it will list Reliance Jio’s shares in the market. The new arrangement makes the operator, almost debt-free, thus improving its valuation.

Spun out its infrastructure assets into a new business called Telstra InfraCo, which managed approximately $11 billion in network infrastructure assets. Telstra started recognising internal access charges in its fiscal 2019 (the year to end-June 2019), the fees Telstra essentially pays itself for accessing its own infrastructure. With these charges included, InfraCo’s revenue rose 51.6 per cent to $4.95 billion. Telstra is now planning on transferring all of its mobile infrastructure into the business, which is now a semi-autonomous unit.

TDC Group
The Danish operator was acquired by a Macquarie-led consortium of buyers at a 34 per cent premium to the market price with a structural separation initiative as one of the core pillars of value creation justifying the takeover.

These examples might make network disintegration look lucrative, but it is not a simple copy-paste framework. It is a very complex and unique call to make for each operator; it can never be generalised. However, we can certainly look at some basic factors critical to be assessed while thinking about spinning off network operations:

  1. Regulation on access and control.
  2. Quality and scale of infrastructure already in place.
  3. Level of site fibre and network sharing.
  4. Lack of modularity and complexity in operations.
  5. Regulation on wholesale pricing.

Obviously, lower pressure on any of these fronts drives better odds of success. Regardless, as we move into fuller 5G deployments from operators large and small, we can imagine these considerations may not always be top of mind, particularly where high-profile examples lead to a copy-paste mentality.

In the process, we will see new failures, new successes, and might even see new models develop.

– Aryan Jain – research manager, strategy, GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.