The business of sharing
Mobile phone towers across Africa are being sold en masse by the continent’s telecoms operators, as they try to reduce costs amid falling voice revenues.
Telecom operators’ sale of their mobile towers to infrastructure leasing companies has been happening in developed nations, such as the US, since the late 1990s and early 2000s. In 1996, the US congress passed a telecommunications Act that introduced competition in its mobile and fixed-line markets; this, in turn, sparked off the deregulation and sharing of infrastructure, such as cell towers.
And African telcos are now trying to replicate their Western counterparts, as the number of mobile towers on the continent has grown to approximately to 100 000, according to Rob Gelderloos, chief commercial officer at Nigeria-based IHS Africa, a telecoms infrastructure leasing company. Gelderloos says that about 10 000 of Africa’s towers are currently leased.
Conditions promoting tower sharing
Operators seeking leaner business models are among the market conditions that make tower sharing more likely to occur, according to a KPMG 2011 report entitled “Passive Sharing Infrastructure in Telecommunications”. Other conditions, according to the report, include the following factors:
* Network maturity drives tower sharing. Operators are less likely to share towers in countries where telcos are competing on the basis of better network coverage. Sharing assets, in this instance, could mean giving away the advantage of a wider or better network.
* Growing markets result in a need on the part of operators to expand networks. If operators have the ability to share towers, they will typically be able to roll networks out much faster, according to KPMG researchers.
* High costs of rolling out regional or rural area networks. Operators could have to make several unprofitable investments in establishing coverage in rural areas, as part of their licence agreements. Tower sharing could be a good option for such rollouts, as all operators rely on a single set of infrastructure for their networks.
* New entrants looking to build scale. Towers take time to build but new entrants could increase their speed of network rollout by sharing towers with existing operators.
* Cost pressures in an increasingly competitive market. Low costs are the key to profitability, and operators can save on capex and opex by sharing towers.
Last week, Eaton Towers announced that it is buying 400 towers in Uganda from UAE operator Warid Telecom. The UK leasing tower firm plans to manage and rent out the infrastructure to Warid and other mobile operators, a move that comes after Eaton also bought 300 towers in Uganda from Orange Telecom earlier this month.
In February this year, another UAE-based telco, Etisalat, said it may sell 4 500 of its towers in African markets such as Sudan, Tanzania and Nigeria. The sale of this infrastructure, according to reports, could raise $500 million for Etisalat.
Meanwhile, late last year, SA’s MTN sold 2 000 cell towers in Ghana to telecoms infrastructure sharing company American Tower: a deal worth $470 million, according to the operator.
Wider network coverage in Africa means that selling towers is becoming an attractive option to telcos seeking to cut their operating costs and raise additional cash, especially as voice revenues come under pressure in parts of the continent.
Pyramid Research, for instance, has forecast that a market such as Egypt – which has 80 million people, an almost 100% mobile penetration rate and three operators – is to experience flat revenue growth in terms of voice services between 2011 and 2016.
Pressures on revenues are therefore forcing operators doing business on the continent to reconsider putting up new towers to lower costs. Frost & Sullivan research last year found that African operators could save $2 billion over the next 10 years if they choose to lease rather than build towers.
“In certain countries, we would look to lease if there is the potential to do so instead of building,” said Khumo Shuenyane, group chief strategy mergers and acquisitions officer for MTN, which operates across markets in Africa and the Middle East.
“It is clear that there is no massive competitive advantage any longer in owning your own passive infrastructure, so, therefore, it makes more sense to let somebody who does that for a living do that for you,” Shuenyane added.
It is clear that there is no massive competitive advantage any longer in owning your own passive infrastructure, so, therefore, it makes more sense to let somebody who does that for a living do that for you
Retaining a stake in towers that have been sold has also been part of MTN’s strategy. Shuenyane says MTN retains a 49% share in its Ugandan towers, while American Tower has a 51% share.
“It’s still something that’s important and strategic to us,” said Shuenyane.
“We think it’s important to have an independent tower company coming in and manage the process, and, therefore, they have full control at an operational level, but we retain an ongoing interest,” he noted.
Cost to company
Pros and Cons:
Falling profit margins for telecoms operators in emerging markets have made tower sharing an attractive proposition, continues the KPMG 2011 report, entitled “Passive Sharing Infrastructure in Telecommunications”. The report goes on to say that benefits of sharing passive infrastructure for operators include:
*Infrastructure spending: Operators cut down on capital expenditure as infrastructure costs for operators could decline by 16% to 20%, says KPMG. Tower sharing could be instrumental in also allowing a number of operators to enter remote regions that would normally have high rollout costs. Reduced costs of infrastructure could also allow more money to be spent on enhancing infrastructure, such as establishing, for example, next-generation networks such as 3G, Wimax and long term evolution (LTE).
* Network operation costs: Sharing site rent, power and fuel expenses means that telcos pay less for these costs as compared to owning a tower.
* Enhanced focus on service innovation: Pressures to roll out a network and manage its costs are diminished, allowing operators to focus on customer service.
* Lower barrier to entry: Smaller players could enter the market, thanks to the lower costs.
KPMG researchers say that “although, tower sharing enables new entrants to scale-up faster, it exposes established players to the risk of market share loss.”
The report also went on to say that “the challenges of monitoring network performance and quality will increase as control over network rollout and equipment maintenance decreases.”
Prices of towers range from $30 000 to $240 000 each, depending on the underlying revenue value of the base station, says Keith Boyd, business development director for Eaton Towers.
Factors such as the tower’s current or potential number of tenants, its underlying signal strength, and even the number of microwave digital antennas it has, determine prices, Boyd adds. He further says that a tower could have a maximum of four to five tenants.
“I think if you had to say to operators, what would they prefer: would they prefer to spend $100 000 or $200 000 building a new tower and then putting in equipment?” says Boyd. “Or would they prefer to hire a space on somebody else’s tower at a reasonable monthly rate?
“They don’t have to worry about the complexities of diesel management, power management – that’s up to a third party. They can focus on brand, sales, distribution, coverage, and so on, and their customers,” Boyd adds.
Telecoms infrastructure sharing in Africa, though, is still limited to countries that meet leasing companies’ requirements. Boyd says Eaton Towers only operates in African nations where there are more than three operators. He further says that Eaton typically looks to lease out 600 towers to at least 1 000 tenants in a country, in order for it to have sustainable business.
Boyd also believes Africa still needs more base stations.
“There are areas now which just now need more and more towers, and they need to be built,” he says.
And leasing tower companies are not just renting out towers.
Tower company Helios, for example, built its own towers in Nigeria, and, since then, has acquired towers from mobile operator Millicom (branded Tigo) in Ghana, Tanzania and the Democratic Republic of Congo.
“These tower companies have built up portfolios of towers by either building them (the towers) themselves, or by buying towers from operators,” said Matthew Reed, a Middle East and Africa analyst for Informa Media and Telecoms.
Nigeria versus South Africa
Africa’s two largest economies, SA and Nigeria, each present unique opportunities for telecoms infrastructure leasing companies owing to these nations’ different mobile penetration rates.
SA has the continent’s highest mobile phone penetration rate at 113%, amounting to 56 million subscribers in 2011, according to BMI research.
I think, if you had to say to operators what would they prefer: would they prefer to spend $100 000 or $200 000 building a new tower and then putting in equipment? Or would they prefer to hire a space on somebody else’s tower at a reasonable monthly rate?
Boyd adds that SA, which has wide area network coverage, is set to have 15 000 points of service added to its telecoms infrastructure landscape in 2012. Only 30% of these points of service could consist of additional towers, while the rest is to be co-locations, such as telcos bolting on their own communications equipment to existing towers that they are leasing, Boyd says.
On the other hand, Nigeria has the continent’s highest number of mobile subscribers, amounting to 90 million, according to Budde Comm research. But Nigeria only has a 60% mobile penetration rate, as its population is 150 million. And Boyd says that, as the Nigerian economy is forecast to grow 7% this year, this means that demand for additional towers and even leased points of service are to be much higher than in SA.
“So how many new points of service do they need: 50 000 or 60 000?” he says.
A new lease on telecoms life
The rush among telcos to build Africa’s mobile towers came as a result of a surging mobile market in the last decade.
The continent’s mobile operators experienced “super growth” in the last 10 years as subscriptions reached 500 million, according to a Booz & Company report. The research firm further said that handsets as cheap as $10, wider network coverage and more operators bolstered mobile penetration rates from just 2% in 2002 to 51% in 2010.
More towers have to be built. But big profits are also to be made, and the trend of sharing infrastructure to lower costs is here to stay. Africa has three mobile tower leasing firms operating on the continent: African Tower, IHS Africa and Helios, and business could be good for them in years to come.
Frost & Sullivan researchers last year said tower and infrastructure sharing among telecoms providers will become the preferred business model in Africa as companies attempt to cut costs and as mobile penetration rates increase.
“It is something that makes sense, it is going to happen increasingly across the continent, and it’s obviously happened in other parts of the world earlier,” said Shuenyane.