Sharing Mobile Infrastructure: Need of the hour

Pravin Prashant

Infrastructure sharing was introduced by Tata Teleservices way back in FY 2003-04 when the company announced plans to use Bharti's long distance network and also other operator networks for its second phase expansion in the country. Presently, Tata Teleservices has the highest ratio of shared towers in the country. Presently, service providers also do some sharing with other operators, which is more on a bilateral basis.

The model got a further boost with the IT Ministry's MOST (Mobile Operators Shared Tower) project launched on July 5, 2006 by Dayanidhi Maran, minister for communications and IT, government of India. Till date MOST is still in single digits whereas it had a potential of around 1,800 towers in 3-4 years. Though the project was a failure it helped in establishing infrastructure sharing as a model in the country.

India is the third largest in terms of subscriber base and number one in terms of mobile growth. It has overtaken China in terms of subscriber acquisition and is adding around 6-7 mn lines every month. But we still have a long way to go, as vast geography is still not covered. Right now, we are present in more than 5,000 towns and cities and one lakh plus villages across the country. In terms of tele-density there is a wide gap-with metros at around 40 and rural areas at 2.5.

So a lot needs to be done for the rural population. Presently, 80% of the towers are located in urban areas, with rural India having around 20%. We are seeing a shift and it is expected that in couple of years it would be 60% in urban and 40% in rural areas-as 70% of the population resides there and a lot of coverage is yet to happen; unlike China where the majority lives in urban areas.

Indian market is also unique as it has the lowest call tariff in the world, lowest ARPU, and highest minutes of usage. It makes all the more sense to go for infrastructure sharing if plans are to connect 500 mn people by 2010. Service providers are exploring all possibilities of reducing cost and time to rollout services in rural areas. Creation of infrastructure like erecting towers, backhaul connectivity account for about 50-60% of cost and infrastructure sharing helps in reducing capex by around 25 to 40%. And in rural areas it is all the more important as the majority of towers are ground based and per tower costs are high.

The need of the hour is to rollout telecom services at an affordable price to ensure higher penetration of telecom services in rural areas. Hence, it is all the more important to share infrastructure. Infrastructure sharing helps in reducing capex, opex, and the time required to rollout services.

The Business Model
In the US, infrastructure sharing is an established industry and after twelve years of existence the average tenancy ratio is at around 2.5 plus. Just some statistics: in the US, 87% of towers are outsourced, with only 13% owned by operators. American Towers, the pioneer in this field, started in 1995 and presently has around 30,000 towers and has a marcap of around $19 bn whereas, on the other hand, Crown Castle with 15,000 towers has a marcap of $14 bn.

Infrastructure sharing has been there from the last one and a half to two years and is not a new concept. It has been used by operators to get rid of their non-core activities, so that they can focus on their core business. The only concern service providers have is that their EBITDA should not be hit and opex should go down. Not only does it help in reduction of capex as well as opex, it also helps in reducing management bandwidth for non-core activities as the operation is now taken up by IP-1 players. IP-1 players, for whom this is a core area, have to focus on doing all things right, right from RF planning, site acquisition, site preparation, soil survey, municipal clearances, pollution clearance, site construction, power connection, battery back up, air conditioning, shelter, cable tray, and others. And the company charges a monthly fee from the operator, which includes infrastructure usage and operations and maintenance charges on a monthly basis.

On the other hand, service providers are hiving off their towers into a separate subsidiary as they plan to unlock shareholder value and also focus on core competencies. It will take around 3-6 months to put the structure in place before the rollout begins. Hiving off also helps the subsidiary as they can start with a sizable number from day one.

One does not see a lot of competition between third party and service providers, subsidiary as companies have not built majority of towers on the sharing model. The shelter cannot accommodate more than two operators, tower loading also does not allow more than two operators. Some of the operators are not planning to share their towers as they plan to use it for 3G services as well as 2G. And so the built up is not large.

Arun Kapur, group CEO & executive director, Quipo Infrastructure Equipment said, "Service providers should unlock shareholders value by not bringing financial investors but strategic investors like IP-1 players who can take the asset, reinforce the asset, and offer sharing, providing win-win to both service providers as well as the IP-1 players."

According to a government directive, companies planning to hive off their tower business before March 31, 2007 can avail of tax benefits. There have been a lot of announcements in this regard, for eg those from Bharti and Reliance of forming a separate subsidiary called Bharti Infratel and Reliance Communications Infrastructure, respectively. The benefit is not only to operators but also the government as it helps in eliminating digital divide by through mobile, says Arun Kapur.

According to Ajay Madan, CEO, Essar Telecom Infrastructure, "Infrastructure sharing is based on the BOOL (build, own, operate and lease) model. So, we own the site, build the site, lease the site to operators on a sharing basis. And on a day-to-day basis operations and maintenance of all sites are undertaken."

Challenges for sharing

Till March 2007, there were around 100,000-120,000 towers in the country of which around 15-18% were shared. Over the next two years, all operators put together will add around 160,000-170,000 towers; even if 35% of these are shared, one is looking at 56,000-59,500 sites. Site sharing is not only limited to mobile, IP-1 players can target users in wireless broadband, broadcasting, DTH, FM radios and WiMax operators.

In the next one year one can expect full fledged competition between service providers and third party players like Essar, GIL, and Quipo. Presently everybody is putting their strategies in place, deploying manpower, and rolling out towers. Once the industry has a sizable number, say of 15,000—20,000 towers operator one can expect a lot of consolidation in this space.

Over the next two years, all operators put together will add to around 160,000-170,000 towers; even if 35% of these are shared, one is looking at 56,000-59,500 shared sites
The Players
Formed in 2005, Quipo Telecom Infrastructure is a 100% subsidiary of Quipo Infrastructure Equipment and claims to be the first to pioneer infrastructure sharing in the country. Quipo is a subsidiary of SREI and is focusing on leasing of infrastructure equipment. GIL is part of GTL and has been focusing on the telecom turnkey space for a long time. GIL has an experience of executing 16,000 sites connecting 16 mn subscribers. The company is planning to create a symbiotic relationship with the operator by providing a single window, one stop, shared infrastructure services whereas Essar Telecom infrastructure is a year old company and plans to leverage on telecom activities of the Essar Group.

Presently, Quipo is focusing on contiguous circles like Punjab, Haryana, Delhi, UP(E), UP (W), MP and non-contiguous states like Karnataka. Going forward, in FY 2007-08, the company is planning to expand in Gujarat, Rajasthan, Andhra Pradesh, Tamil Nadu, Bihar and West Bengal. On the other hand, Essar Telecom Infrastructure has so far focused on circles like TN, Kerala, Maharashtra, and Mumbai and has now commenced operations in AP, Karnataka, Chennai, MP, UP (E), and UP (W), and will commence operations in Bihar, Orissa and Rajasthan in April 2007 whereas GTL is focusing on 6 circles of Maharashtra, Gujarat, Goa, MP, Karnataka, UP (E), Rajasthan, Punjab, Delhi and Mumbai and plans are to expand in 20 circles within 6 months.

Essar has completed more than 600 sites till date, and work for 200 sites is in progress. "We plan to close FY 2006-07 with 750 sites and plans are on for adding another 6,000 sites next year so as to close the year with an installed base of 6,750 sites by FY 2007-08," says Ajay Madan. On the other hand, GIL is planning to rollout 1,200 sites by March 2007 and 6,700 by March 2008. Quipo's vision is to be the largest infrastructure service provider globally and plans are for 40,000 towers by 2011. It has till date installed around 1,000 sites.

 

In terms of contract, Essar has signed agreements with Idea, Bharti, Hutch, Tata and BPL and is in discussions with Aircel, Spice and Reliance. Quipo has signed anchor agreements with Bharti, Idea and Spice and is very soon planning to sign a co-locator agreement with other operators. The company has signed master service contracts with Spice, Bharti, and Idea and plans are on to achieve tenancy ratio of 1.9 users per tower.

Today, sharing is at around 1.3 tenants per tower and plans are to increase it to 1.7-1.8 tenants per tower by March 2008, says Ajay Madan. We see an increase in sharing with the coming of new players and release of additional spectrum, he adds.

GIL's strategy involves a mix of greenfield rollouts, acquisitions, and client centric alliances. Quipo is focusing on customer centricity and continuous innovation whereas Essar is focusing on providing delivery on time, quality of service and guaranteed uptime.

In order to have an edge, Quipo is focusing on sourcing, reverse auctioning, green eco based shelters, and renewable source of energy for reducing capex and opex. For improving sourcing, Quipo's R&D team is sitting in China and the Western countries. For supply chain management,
the company has deployed Microsoft Dynavision.

On the other hand, Essar has opted for a project management software called PRIMAVERA. And has taken initiatives to build towers and shelter manufacturing through its sister concern, says Ajay Madan.

In terms of investment, Quipo has invested in excess of around Rs 250 crore by March 2007. GIL has invested around Rs 1,000 crore and plans are on to invest Rs 2,030 crore by March 2008. Till date, Essar has invested around Rs 150-200 crore and is planning for a further investment of Rs 1,200 crore by March 2008. The company has got project approval for 3,000 sites by IDFC and is willing to fund part of the project.

According to Arun Kapur, "The critical success factors will be the cost of capital availability, continuous availability to bring down capex as well as opex through innovation, and the sheer capability to scale up and rollout with right processes and right automation to help meet customer SLAs."

Service providers have to work more in a partnership model and not as a customer vendor relationship, as success and failure of the infrastructure sharing player will have an impact on operators' provider success
It will depend on the speed of execution, right project management and supply chain management skill sets, meeting service provider SLAs, and the ability to get multiple shares, says Ajay Madan.

The Challenges
Being a nascent industry, infrastructure sharing players need a lot of support from service providers as well as the government. Service providers have to work more in a partnership model and not as a customer vendor relationship, as success and failure of the infrastructure sharing player will have an impact on service provider success.

First, infrastructure sharing players do not fall under infrastructure or telecom player so they do not get any tax benefit under Section 10 23 (G) and 80 (i). They can't even avail any tax holiday as these companies don't fall under infrastructure category and were not formed before 2005. Since they don't fall under 'infrastructure player', they do not get long term funding at a lower rate of interest.

Second, TRAI should extend infrastructure sharing benefit also for backhaul ie fiber and microwave connectivity between MSC and BTS, as it helps in optimum utilization of existing fiber and microwave capacity. And later TRAI can think of extending it even for passive infrastructure, at least for rural areas initially.

Third, single window clearance will help in setting up towers at a fast pace and also common directive or guidance for all states can help in smooth flow of erecting towers.

So, infrastructure sharing players have to focus on expansion and automation. There is enough for all three players plus others as and when they plan to enter the market as cellular services has been growing at the rate of 57% in revenue and 74% in subscription terms.

Source: Voice&Data