Is network sharing the new wholesale?
via Flickr © GotCredit (CC BY 2.0)
In telecoms, wholesale relationships don’t tend to work that well - and maybe for obvious reasons. Which may be one explanation as to why the concept of network sharing seems to be on the rise. That and the fact that regulators won’t let carriers merge businesses, so network sharing is seen as the next best thing and something that may lead to a full merger in the longer run once the regulator is harried and lobbied into submission
That ‘wholesale’ often doesn’t (and can’t) work in any important way is fairly obvious. News just in includes dispatches from the Czech Republic where Vodafone is seeking damages from telecoms company O2 Czech Republic for what it says is the company's abuse of a dominant position in the fixed broadband market - it doesn’t feel it’s being offered the right wholesale price and that sort of scuffle is happening all over. In the UK BT is being lambasted by its competitors/wholesale customers for squeezing their margins by BT maintaining to high a wholesale price for broadband and too low a retail price for its own services, making a profit for anyone else hard to find.
In parallel IT industries this little problem is undercut by so-called ‘second-sourcing’, but the natural monopoly characteristics of the telecoms market mean second sourcing isn’t really a viable option in many cases. Regulated wholesale tends to be a relationship without trust, but even wholesale arrangements without regulation gingering it along, tends to be seen as something to be avoided.
Network sharing, on the other hand, is on a steep rise. According to consultancy Coleago, which is running a database documenting all the arrangements, Mobile Network Infrastructure Sharing has grown by 280 per cent over the past 5 years and, it claims, this has lead those operators entering such arrangements to save between 25 and 40 per cent of network costs
Coleago predicts further cost saving opportunities for operators are there for the taking and it maps current and future network sharing trends on its site (on its website and detailed in a full white paper, the database details passive and active sharing deals between Mobile Network Operators (MNOs), as well as tower sale-and-leaseback deals between MNOs and TowerCos.)
Network sharing and its clear trends
Here’s the main points of Coleago’s analysis of the sharing market. It says three clear trends for network sharing have emerged since the millennium, and it predicts the onset of a fourth trend in the next five years:
- Network sharing JVs between MNOs. Whereas site sharing started off in many markets as a mutual exchange involving a small percentage of sites, a JV can go much further to maximise the number of shared sites and cost savings, typically 25-40% of the in-scope costs. Furthermore the scope of radio access network (RAN) sharing has been extending from passive to active (MORAN) and, in some cases, to spectrum sharing (MOCN), with further cost implications.
- “TowerCo” deals where an operator sells its towers to a third party, or forms a JV, and leases them back. The majority of these transactions have been in Africa, where almost 40 percent of all towers had been sold by the end of 2014, but similar deals are now taking place in other regions. Given their long-term secure cash flows and growth prospects, TowerCos are attracting considerable Private Equity investment thereby facilitating further deals. Moreover, we are starting to see that operators who have completed tower sale-and-leasebacks now need to consider active network sharing, and vice versa.
- In-market consolidation of MNOs. Discussions about network sharing are leading some shareholders to be more radical and consider consolidation, as in the Danish market example between Telenor and TeliaSonera. Not only that, but infrastructure sharing does not necessarily preclude consolidation with a different partner, as in the UK with 3’s proposed acquisition of O2, which is in an active network sharing JV with Vodafone, while 3 has a similar arrangement with EE. Coleago forecasts that within the next five years most markets will end up with only three mobile operators and two (shared) RANs.
In future though, it can see disruptive new technology actually kicking the process along, perhaps into the core.
- Network Functions Virtualisation (NFV) and Software-Defined Networking (SDN) are emerging technology developments that might enable and encourage core network sharing in the future, depending on how standards and OEM products/services evolve.
It's all to do with the costs
All this activity stems from an overriding need to reduce costs dramatically and maximise the savings as the industry is driven by data traffic growth - a dynamic we all understand. But why haven’t telcos chased the same sort of cost savings by offering and/or buying capacity from each other on a wholesale basis. From the outside looking in, such arrangements would offer a cleaner/clearer commercial interface, but industry experience seems to show that operators give these arrangements a wide birth.
Perhaps it’s because wholesale relationships, right across the telecoms landscape, are often shotgun or arranged marriages rather than love matches - often being brought into being for regulatory reasons, such as virtual unbundling or MVNO establishment (both just forms of wholesale capacity buying).
“The big problem with wholesale deals is that, usually, one of the parties ultimately has no control.” says Chris Buist, director at consultancy Colegeo. “There is always a suspicion that they’re not getting the rock-bottom price. With sharing you can set things up so that you know you’re both sharing equally, be that in pain or gain.”
So is sharing really on the up and up?
“If you go back 5 or 6 years some operators were starting to think about it… now people are still either thinking about or they’re actually doing it!”
Isn’t it tricky to engineer the actual deal, to think through all the implications and issues?
Yes, but we find that sharing is about what are you going to include - for instance, very often partners exclude small cells as these are a basis for competitive advantage. And they often exclude the metropolitan areas as well. As of today the scope of the deals vary quite a bit - people don’t throw everything into it and you could share with more than one player. “
So could sharing could be part of a settlement which prevented two mobile operators from consolidating? “It could,” agrees Chris, “although some regulators will be wary of this since what’s happening in Denmark - there you had two operators who created a shared network and a few years’ later have come back saying they want to merge!”
So it’s not as if network sharing deals are easier to engineer. According to Chris up to 20 to 30 per cent of all mooted sharing deals either don’t progress or fail.
Why? “Cultural clashing is the big one. Large operators talking to a small operators always think they’re going to lose competitive advantage. And sometimes the stronger partner starts to lose its nerve, thinking that it’s giving away too much.”
“People often believe that their coverage is so much better than the other guy - but that’s rubbish. We point out that it can be matched,” it’s just a matter of time.