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02 January 2020
The outsourcing of tower management by operators in Western countries to third party tower companies (towercos) became something of a trend in the last decade, or even before that.
Of course, every industry embraces outsourcing in one way or another. However, most companies do it because they are either unable to or just not good enough at carrying out the job themselves.
The telecom industry would appear to be slightly different to say car manufacturers, because operators are not looking to get their parts made more cheaply. They are asking a third party to do exactly what they do – deliver connectivity.
However, the trend has not slowed down, but it continues to gather pace. No longer the preserve of a select group of wealthier nations, Africa has since been inspired by the efforts of players in the US, Europe and Asia and followed suit.
So, if an operator is equipped and has the wherewithal to do it themselves, why do they bother outsourcing?
Samantha Naidoo, SAP industry value advisor for services and telco industries for EMEA south says that historically African telecom companies have seen benefits outsourcing to tower companies. “For example, Aviat Networks in South Africa; Eaton Towers, Helios Towers and IHS Holding in Africa etc,” she says. “Globally, this trend has extended to some large telcos such as Bharti Airtel, Vodafone, France Telecom – Orange, Etisalat Nigeria etc.” Naidoo adds that telco tower outsourcing started around 2013 initially in Europe, then Africa before expanding globally.
“This was due to the intense competition amongst telco companies with an even stronger drive to reduce costs,” she continues. “Opportunities arose to convert capex to opex through infrastructure outsourcing and through shared towers amongst operators.”
French giant Orange is one of the largest operators in Africa and so who better to ask about the rationale behind it and the real benefit from a provider’s point of view?
“Most of the sites across the Orange footprint are operated by Orange and its subcontractor (e.g Ericsson) or by the partner operator in case of a shared site,” says Yves Bellego, director of network strategy at Orange. “There are various contracts and partnerships possible. Using a tower company is a way to facilitate the hosting of several operators on a single pylon. Keeping ownership of towers ensures more flexibility to evolve the site, as to introduce 5G for example.”
Orange is a bigger operator than most. If you look at the footprint the Paris-based firm has, you’ll see it operates in close to 20 countries across Europe, Africa and the Middle East. It’s fair to say, it’s in a better position than most when it comes to explaining the set up.
“We have various types of configurations, depending on countries,” adds Bellego. “As such, we operate our own radio sites in France for example, but in most of the other European countries, we outsource the operation of radio sites. In Africa, we also have cases where radio operation is done in-house and others where it is outsourced.”
Bellego is coy when asked who Orange shares its towers with other than saying the operator’s strategy is to share with its local competitors. “They have the same needs as us in terms of savings, and are also willing to deploy the network innovations,” he adds.
Caroline Gabriel, principal analyst, wireless at Analysis Mason, also points to the financial benefits. “There is greater predictability of cost, based on regular contract fees rather than unpredictable bills for maintaining your own towers,” she says. “There is lower upfront investment when opening up a new site or expanding a network into a rural or remote area where the ROI is uncertain as well as the ability to reduce staff and other operational costs.”
In addition, Gabriel highlights greater efficiencies through shared infrastructure, such as sharing a location with another operator rather than competing for it, as well as the fact it can reduce time to deploy a network by outsourcing legal work, site contract negotiation etc. to a company with scale and established processes in these areas.
In theory it sounds like a positive step to take, but surely there must be disadvantages?
“Loss of control e.g. of quality of maintenance of tower (there are SLAs but they can be hard to enforce in some regions),” says Gabriel. “You also lose the ability to keep a particularly good site exclusive. Also, where there is limited towerco competition, price negotiations may be tough for the MNO once it has surrendered its towers.”
Naidoo says outsourcing also offers access to remote areas in Africa where skilled resources are scarce. “[There is also] access to latest technology and innovation that promise on demand access to connectivity, guaranteed service level agreements and set service management processes all for a fixed managed services fee versus paying a fixed amount to setup a tower which can range from US$200,000 per tower plus on-going operational costs,” she adds. “In addition, country permits, IFRS16 Real Estate and Lease Management policies, etc. can delay the process causing unnecessary costs. The risk would be that of operator information security and adherence to compliance regulations such as GDPR, POPI, etc.”
Daryl Schoolar, practice leader next generation infrastructure at independent analyst and consultancy firm Ovum, is of the belief that not only can it help the operator’s overall costs as the expense for base stations site can be shared, but if the operator had previously owned its towers and then sold to a third-party, sales of that asset will only provide it with more capital to spend on network equipment or any other areas the operator deems fit.
“However, the downside is the operator loses control over site location and construction,’ he warns. “Also, if the operator had an advantage over a competitor based on-site location, going to a shared tower arrangement means the operator could lose this advantage.”
With that in mind, are operators better off owning a tower and then sharing it with another company/rival? That way they know the tower company has to up its game as it’s providing for more than one operator.
“There is no one right answer for this,” he adds. “It is based on an operator-by-operator situation.”
Gabriel says that it depends on how far the operator wants to offload the cost and hassle of maintaining the tower. “If it believes ownership is still valuable for other reasons, sharing of course reduces its overall costs,” she says. “But in many ways it seems that sharing with a rival is the worst of both worlds – keeping the cost and responsibility but losing exclusive rights to a good location.”
Naidoo says some firms are saving up to 30% in operational expenses by outsourcing towers (which can be leased to multiple companies at once). “This includes a standard fee that can be charged to competitors for sharing space on the towers thereby subsidising part of the cost of maintenance,” she says. “That said, the onus would still lie with the operator to provide the skillset, geographic reach and technology capability to support this versus outsourcing this to an external company.”
Bellego adds that the “commonality between all the countries we operate in” (it’s a group-wide strategy) is to share radio sites with its local competitors. “Globally, at a group level, we share more than 53% of our radio sites,” he continues. “Roughly, half is passive sharing (a common pylon hosting radio from Orange and from a competitor) and half is active sharing where we share not only the pylon but also the radio equipment.”
Still, it’s a major step moving from your own towers and base stations so one would imagine maintaining a high quality is paramount otherwise it defeats the object.
“Most operators in Africa have outsourced passive infra – towers, roofs etc – but not active base stations,” says Gabriel. “That is often prevented by regulators and even when it is allowed, it removes a great deal of control of network quality, timing of network upgrades and other key decisions from the MNO.”
Naidoo adds that over the years, the cost of maintaining these towers have forced operators to pursue other cost efficiency initiatives. “In terms of economics and quality, the SLAs guaranteed by these outsourced companies allow the operators to focus on their core capability of delivering premium connectivity to customers without compromising on cost and quality,” she adds and says that 2019 has seen increased pressure from regulators for improved quality with penalties to operators for poor customer service. ”The benefits of consolidating tower companies promises an opex reduction as well as extended access to remote areas where connectivity is already an issue,” she adds. “This in turn will make competition from other telco entrants difficult.”
Clearly the trend is growing because it tends to be working. However, what are the chances of it reversing and tower management coming back in house?
“The question is more around efficiencies created,” says Naidoo. “Whether it’s outsourced or in-house, how do you guarantee the quality of service provided for your end customer?
The latest trend with base station monitoring by drones as well as predictive maintenance through solutions such as SAP Asset Intelligence Networks require an additional upfront and ongoing investment in these Intelligent technologies,” she adds. “Are telcos able to invest in developing the right skillset and tools necessary to sustain the on demand economy?”
Bellego adds that the need to benefit from economies of scale, to be cost effective while mastering quality of service and deployment of new services (such as mobile IoT and 5G) will remain the same. “Whether it is in-house or not, having a greater amount of managed networks will matter even more than today,” he says.
Schoolar says: “I see no sign of this trend reversing” while Gabriel believes there will be more outsourcing of towers especially as African operators expand their 4G coverage and capacity. “It is especially valuable to have a towerco which supports power systems in areas of unreliable or absent grid power,” he adds. “More generally, operators are increasingly differentiating more on their core network (scalability, range of services supported) and the quality of their RAN signal more than their passive sites. So, outsourcing makes sense at a time when margins are falling – more data to deliver, falling ARPUs etc. Those trends will only intensify in Africa and elsewhere. Markets which are opening up to more competition, like Ethiopia, are often starting to consider licensing towercos as part of that process as it may improve the business case for new entrant MNOs, if they don’t have to invest in sites or rent from competitors.”
Gabriel says she expects there to be “more active RAN sharing too”, where regulators will allow it, to reduce costs and to help meet government targets e.g. for coverage of rural areas which are not highly profitable.
We’ve heard the pros and the cons from an operator and analysts (sadly no towerco was willing to comment), but if this is a growing trend and competition amongst towercos increases, what will happen if consolidation occurs?
“Having limited usage of towerco services, we have no view on this question,” says Bellego.
However, Schoolar says it can lead to eventually higher site rentals and possibly fewer site solutions. “By this, I mean, if there are fewer third-party tower companies there might be less innovation in how and where to deploy sites as there is less competition to drive innovation,” he adds.
Gabriel says it benefits operators “when they can just deal with one towerco” to cover many sites across a whole country or several countries. “However, it weakens their negotiating position (although MNOs are consolidating too),” she continues. “Many MNOs are looking to work with one large towerco but also add other smaller providers to the mix – e.g. cities and governments who own sites – so that they are not over-reliant on one partner.”
So, weighing up the pros, cons and of course, the costs, is it worth it? Schoolar certainly thinks it is: “As these arrangements appear to be increasing, not decreasing, the general answer appears to be yes.”
The problems caused by theft
Theft of power sources is a major problem in Africa. Here is what some have said on the subject:
“The problem with both solar and wind power is how to store the energy. Batteries are still expensive and subject to theft the same way as diesel. As long as the cost of batteries remains high, they will be the target of theft. A hybrid solution helps with power issues when there is no sun or wind, but it doesn’t solve the theft problem. And, the operator needs to have fuel cost savings of the hybrid system outweigh cost of diesel, generator, and solar equipment costs.” – Daryl Schoolar, practice leader at Ovum
“That too is part of mobile operators’ opex, including fences with barbered wires, human guards and patrols.” – Stéphane Téral, director, IHS Markit
“I don’t know if theft of diesel generators is increasing because it has always been there. There is enhanced security now with CCTV, which of course is an investment. As business models involve they have to continue to address this issue.” – Alessandro Ravagnolo, principal, Analysys Mason
“HIMOINSA generators are fitted with anti-theft devices. We also offer remote monitoring that can disable a unit automatically if the unit is moved beyond specific parameters.” – HIMOINSA
“This is one of the biggest headache of the telecom players and many solutions to prevent and avoid fuel and battery theft are being tested now and some already approved and deployed on site. The interest towards the use of Lithium batteries @48V is also fed by this issue, as the thieves cannot use them to power their 12V home appliances.” – Giuseppe Taranto, telecom business leader, Ausonia
“Fuel, battery and asset theft is a huge problem in Africa. By blending fuels, eliminating batteries (or severely reducing the need for batteries on site) helps reduce the theft risk. Furthermore, our microturbine genset does not have any reusable parts that can be put into a regular diesel generator too.“ – Stuart Kelly VP market development Bladon Micro Turbine