Diversification seems the way forward
Technology evolution poses new requirements for infrastructure such as small cells, fiber-to-the-site, and edge data centers. It also opens new opportunities for passive and active infrastructure sharing. TowerCos may explore new business models such as small-cell-as-a-service or even the creation of rural and national NetCos.
Globally, TowerCos have mainly explored ways to evolve their businesses by diversifying asset class (e.g. fiber and small cells) and migrating into services. The most common asset class diversification has been fiber rollout, while diversification into services has centered on DAS, power optimization and passive infrastructure optimization.
Asset class diversification
Asset class diversification focuses on fiber, small cells and, to a lesser extent, data centers.
Fibre may increase the value of towers by either improving co-location economics, enabling decommissioning of microwaves or increasing co-location opportunities. Fiber will be key to allow TowerCos to achieve a solid return on small cells. There are also operational efficiencies that may be captured in O&M and asset management.
Small cells come in multiple forms and locations. TowerCos prefer to own masts that allow for the traditional tenancy business.
DAS is a focus area in markets such as the US, Europe and Indonesia. DAS has also been typically the first inroad of TowerCos into asset class diversification. Developing these capabilities organically, like Wireless Infrastructure Group’s strategic push to become leading British DAS operator, or inorganically, such as Cellnex’s acquisition of Commscon to expand DAS business and gain capabilities.
Fiber-to-the-small-cell is in high demand for operators outsourcing small cell deployment. Typically, it can represent the largest cost component of the solution and one which may command longest lead time to deliver if not ready.
For example, for the past three years, Crown Castle in the US has acquired many fibercos – including Lightower, FiberNet, and NextG – to provide a network of inter-city fiber and small cell sites in urban and suburban cities. When demand surged last year, Crown Castle sold many co-locations in bulk and continues to win additional contracts. Other infracos and contractors failed to meet telco provisioning SLAs.
Diversification into services
TowerCos also possess the capability to develop a strong service business. Although it’s time-consuming for TowerCos to transition from a traditional real estate business into a service-based one, TowerCos already have several capabilities. Knowledge to establish carrier neutral win-win agreements with operators; ability to manage all process to secure sites and obtain permits; ability to negotiate win-win landlord agreements for ground-based towers and rooftops, which may involve land acquisition or pre-payments; high level of operation automation and passive NOC; and ability to provision efficient field services in the passive space are very relevant.
An increasing number of TowerCos are leveraging these capabilities to provide services such as rental optimization (for operator-owned sites), managed connectivity for macro backhaul and, more importantly, small cell deployment and management.
Capturing the small cell opportunity
Small cells are being explored across many TowerCo-centric markets. As data traffic grows and operators face challenges to densify their networks with macro sites, the demand for small cells has increased. Also, operators are considering how to build capabilities and partnerships to deploy small cells ahead of 5G’s full introduction by 2021. There is a major small cell hype. The US case study helps to clarify the hype. There are around 120,000 towers and estimates for small cells reach 1 million. It is expected that by 2021 the US small cell market should account for around 400,000 sites, which is three times greater than the tower market. However, Crown Castle expects to generate as much revenue from small cells as it generates from towers.
Business models to address small cell opportunity
There are three business models of small cells, which TowerCos can explore, infrastructure landlord; neutral host-passive; and neutral host active.
The infrastructure landlord model requires building or managing a portfolio of sites and availing them to operators. This is like the traditional TowerCos business model of charging for space. The TowerCos may find some challenges in achieving significant multi-tenancy rates in these sites.
In a neutral host passive model, the company proactively builds a portfolio of small cell sites and markets them to multinational operators (MNOs). The company is responsible for upfront investment in site acquisition and conditioning, including building or leasing inter-city fiber or high capacity microwave links. Neutral hosts will also typically provide O&M managed services. Infracos will usually charge recurrent fees to MNOs for using the company’s infrastructure.
In the neutral host active model, the infraco invests and deploys both the passive and active elements of the small cell solution and provides connectivity-as-a-service to MNOs. The spectrum used for the solution can be leased from the MNO renting the site, owned spectrum from the infraco or unlicensed spectrum. Typically, an active small cell-as-a-service provider will command higher recurring service fees than the other models.
The three different models could allow companies to secure EBITDA margins greater than 30 percent with recurring revenue.
Despite significant deployment plans, the reality is that operators in developed markets are struggling to deploy small cells at their desired pace. This is primarily because of the strict municipality and RF licensing and permitting requirements; high site acquisition and backhaul; and lack of internal capacity to coordinate the rollout of several sites quickly.
Operators deploying small cells require a different skillset versus traditional macro deployments. Operators will take time to build these capabilities organically. This means more business for infracos that are willing to take it. Experience shows that to be successful in small cells, TowerCos need to develop a value proposition to the operators that offer time to market and adequate network economics.
Achieving both fast time to market and competitive cost is difficult as, operationally, the TowerCos will face many challenges. This may include finding a site that matches the needs of several operators, allows for the adequate total cost of ownership for the operator, as well as securing permits and landlord approval for the small cell deployment.
Technological evolution poses several challenges for operators, TowerCos and InfraCos. InfraCos and TowerCos are well positioned to be the net beneficiaries. Some operators have been financially challenged with the sale and leaseback of assets, but industry financials are forcing operators to share network and infrastructure.
To fully capture the opportunity, TowerCos must: diversify their business by exploring opportunities in fiber and small cells; establish long term sustainable win-win agreements with operators, which may imply adjusting existing agreements and develop operational capabilities to offer best in classes SLAs at a very competitive cost against self-provisioning by operators (under stand-alone models or sharing agreements). The Delta Perspective, Delta Partners & Tower Xchange.
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