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Network Deployment: Current status, key trends and future growth areas

March 21, 2013

Infrastructure development plays a crucial role in building a robust telecom network. The telecom infrastructure industry has made a significant contribution in enabling as well as supporting the unprecedented telecom success in India. The telecom infrastructure segment’s growth has been driven largely by the expanding subscriber base, increased focus on urban and rural roll-outs, introduction of new technologies and the surging demand for data services. Consequently, the tower base has quadrupled since 2007 to reach over 400,000 towers in 2012, while the optic fibre network has almost doubled to reach 1 million route km.

Over the past few years, the infrastructure space has undergone a strategic shift. Tower roll-outs have given way to increased tenancies on existing towers while fixed line infrastructure received a major boost as operators geared up to launch bandwidth-intensive applications. Operators that initially used their tower bases for a competitive advantage are now opting to share it with others, resulting in a higher tenancy ratio. Infrastructure sharing has resulted in estimated savings of Rs 600 billion due to a reduction in infrastructure provisioning fees as well as energy, capital and interest costs.

The launch of 3G and broadband wireless access (BWA) technologies has also opened up new opportunities for the passive infrastructure industry, leading to a significant increase in the number of base transceiver stations (BTSs).

Rural telephony has taken centre stage as urban markets are nearing saturation. Besides, the high rural penetration targets set under the National Telecom Policy, 2012 can be achieved only through robust infrastructure development.

That said, there still exist several challenges like high roll-out costs, inadequate power for running tower sites and lack of a detailed regulatory framework for the infrastructure segment. Further, the 2G spectrum and licence controversies have slowed down the pace of growth in this segment over the past year. Consequently, infrastructure providers have stalled their tower roll-outs, and have put their ambitious fibre roll-out and backhaul upgradation plans on hold.

tele.net takes stock of the growth, key trends, issues and challenges in the telecom infrastructure space…

Tower industry

Faced with a need to manage their debt-laden balance sheets and reduce the cost of operations, service providers started separating infrastructure management operations from core services in 2004-05 (installation of towers was proving to be extremely expensive as it involved costs of Rs 2 million-Rs 4 million per tower). Operators that owned tower sites formed dedicated tower companies for the same, while others resorted to infrastructure sharing.

Reliance Communications (RCOM) formed Reliance Infratel in 2001. RCOM and Reliance Telecom Limited transferred their towers and related assets to Reliance Infratel in April 2007. Similarly, Bharti Airtel established Bharti Infratel in 2007. Currently, Bharti Infratel and Reliance Infratel have a tower base of around 50,000 towers and 35,000 towers respectively.

However, a major milestone in the tower sharing space was achieved in November 2007, when the country’s three largest operators – Bharti Airtel, Idea Cellular and Vodafone India (erstwhile Vodafone Essar) – joined hands and merged a portion of their tower assets into a separate venture called Indus Towers. At present, Indus Towers is the largest telecom tower company in the world, with a portfolio of over 112,000 towers. It is operational across 16 telecom circles in India. These primarily constitute Metro, Category A and Category B circles, and comprise over 86 per cent of the total cellular subscriber market.

The tower sharing model also prompted the emergence of independent tower companies such as Viom (with around 50,000 towers), GTL Infrastructure Limited (35,000 towers) and American Tower Corporation (10,000 towers). Tower sharing gained further momentum with the entry of six pan-Indian operators in the telecom market in 2008. Declining ARPUs and relatively higher minutes of usage fuelled tower sharing amongst operators.

However, over the past two years, the valuation of these tower companies, which had peaked in 2009-10, has dipped significantly. The early signs of a downturn in growth were registered with the unravelling of the 2G spectrum-related controversy. In January 2010, GTL acquired 17,000 towers from Aircel for Rs 84 billion, a deal that was largely funded through debt, under the assumption that GTL would be able to sell shares and repay part of the debt. The business rationale made perfect sense as eight new players had received telecom licences, which would lead to a surge in demand for telecom towers. However, the 2G controversy put a spanner in the growth plans of these players and with the subsequent licence cancellation, GTL has been struggling to source operating cash, let alone repay the high interest and debt. It recently undertook a major corporate debt restructuring to manage its operational losses. Several other tower companies have been hit hard similarly with their clients exiting the telecom space in India.

The high debt accumulated on operators’ books post the 3G and BWA spectrum payouts also impacted their expansion plans, which, in turn, affected tower companies’ business. Thus, very few greenfield towers were being rolled out and the focus was on upgrading and utilising the existing infrastructure. This resulted in a significant growth in tower tenancies over the past few years and, currently, the industry has close to 750,000-800,000 BTSs.

However, next-generation services do not ensure full-paying tenants and, instead, drive incremental tenancies on the revenue side. Besides, rising energy costs, rampant diesel pilferage, high taxes, and imposition of licence fees by state governments have left telecom tower companies cash-strapped. (Power, fuel and energy management constitute 30-35 per cent of total operational costs.) Further, issues pertaining to the stringent conditions imposed by various civic authorities for tower installation as well as compliance with radiation norms are serious concerns.

According to industry experts, the tower sector’s outstanding debt is currently estimated to be around Rs 1,000 billion. Acquiring funds through bank loans and equity is becoming increasingly challenging. For instance, Indus Towers and Viom Networks had to put their initial public offerings (IPOs) on hold owing to limited investor appetite, while players like Reliance Infratel reportedly had a hard time finding a strategic partner to offload stake in the company. Moreover, Bharti Infratel’s recently released IPO has witnessed only an average response.

Fibre and backhaul

Optic fibre has been mostly used by service providers for long-haul traffic. Currently, optic fibre connectivity is largely available up to district headquarters and block headquarters in rural areas. Of the total optic fibre cable (OFC) network in the country, Bharat Sanchar Nigam Limited (BSNL) owns around 646,000 route km, RCOM around 190,000 route km, Bharti Airtel 126,000 route km, Idea Cellular 71,600 km, Tata Teleservices Limited (TTSL) around 70,000 km and Mahanagar Telephone Nigam Limited (MTNL) 15,900 km. Infrastructure providers such as RailTel, Powergrid Corporation of India Limited and GailTel have also deployed their own fibre networks, but these exist along railway and main utility lines, and are not yet fully optimised to cover remote rural areas. Moreover, these networks are mostly required for the companies’ captive use and are not being fully leased out for enterprise usage.

The wireline access networks of operators in the country mostly comprise copper loops. There are about 40 million copper loops in the country, which are primarily owned by BSNL and MTNL. Further, BSNL has a capacity of over 45 million basic telephony lines. Among private operators, Bharti Airtel has around 3 million lines. It is in the process of converting its voice-only wireline connections into DSL lines. RCOM and TTSL also have small-scale wireline access networks.

The high costs involved in obtaining right-of-way and multiple approvals is the key reason that has prevented operators from rolling out adequate wireline access networks. However, the demand for high speed and bandwidth-hungry applications will make optic fibre-based transmission inevitable in future. As a result, almost all telecom players have started investing in laying OFC networks across the country to successfully launch 3G and 4G services. OFCs are also being deployed for backhaul and last mile connectivity. Due to inadequate spectrum allocation, operators are looking at fibre deployments to strengthen their backbone.

Key trends and developments

Infrastructure status: The government recently accorded infrastructure status to the telecom tower industry. The move has made tower providers eligible for viability gap funding, higher limit on external commercial borrowings, lower import duties, and excise duty exemptions on telecom infrastructure equipment.

Increasing focus on energy management: A major operational challenge for tower companies is the unavailability of continuous and abundant power supply. As a result, companies have to rely on diesel to run their towers, which, besides being an expensive option, results in high levels of carbon dioxide emissions. Thus, over the years, these players have turned to various alternative energy options to power their sites and reduce diesel usage significantly. These include electric batteries, free cooling units, and solar- and wind-based electricity to run towers. For instance, Indus Towers has been able to cut down its diesel consumption by 60 million litres over the past two years. It has already made 9,000 sites diesel-free, and plans to take this number to 20,000 by mid-2013.

Further, the government’s Green Telecommunications norms, and the Tower and Infrastructure Providers Association’s renewable energy service company model will ensure that telecom infrastructure is increasingly powered by renewable sources.

Innovative solutions and business models: Tower companies have started reinventing their business models, and broadening their product portfolio by including indoor solutions and fibre backhaul. There also exists a significant opportunity for tower operators in the active infrastructure space as telecom operators are cash-strapped after having paid huge licence fees and are unlikely to make large investments in rolling out new services.

Multi-tenancies: Increasing tenancies has become the norm rather than the exception. Several tower sites still have single tenants and thus, there exists tremendous opportunity for increasing tenancies. Currently, the average tenancy ratio in the industry stands at around 1.75x. This is not enough to sustain profitability in the long run, given the declining trend in tower rentals. The industry is expected to reach a tenancy level of 2.25x in the next three-four years.

Consolidation and collaboration: There is a strong ongoing push towards consolidation and collaboration in the industry. BSNL and MTNL have started leasing their towers to other operators.  Reliance Industries Limited-owned Infotel Broadband has been in talks with RCOM to share the latter’s towers for facilitating 4G roll-out. Players in the telecom tower space are also looking to enter international markets like Africa and East Asia.

Rural infrastructure

As of September 2012, the country’s rural teledensity stood at 40.36 per cent, signifying a major opportunity for operators and, consequently, increased business for tower companies. Currently, Bharti Airtel, Vodafone India, Idea Cellular and BSNL are the top four players in terms of rural coverage. As it is, the business case for private players in rural areas is not very lucrative given the infrastructure costs owing to low customer density, difficult geographic terrain and the lack of supporting infrastructure like power supply. Further, private operators’ rural aspirations have taken a hit due to high outgo on spectrum charges as well as the prevailing regulatory uncertainty.

However, the government’s initiatives through its programmes and schemes under the Universal Service Obligation Fund have played a key role in rural infrastructure development. As of September 2012, about 7,353 towers have been installed across the country. Of these, 99 per cent have already been commissioned. Other initiatives on the government’s part include establishing wide area networks in all states and union territories across the country at a total cost of Rs 33.34 billion.

Further, the government has recently initiated the implementation of the Rs 200 billion National Optical Fibre Network, which will extend the existing OFC network from the district level to the village level by connecting around 250,000 gram panchayats. Non-discriminatory access to the network will be provided to all service providers, which, in turn, will give a major boost to rural internet and broadband services, particularly e-education, e-health and e-banking.

The way forward

The next wave of growth in the telecom infrastructure segment will be fuelled by the increased uptake of 3G and 4G services, and the resulting demand for data. Greenfield tower roll-outs will continue to see limited expansion while the number of tenancies on existing towers will grow manyfold. Increasing rural telecom penetration would become a key focus area for private operators, which, in turn, would drive the demand for a robust network in such areas. However, the segment’s poor finances, overall regulatory uncertainty, and high roll-out and energy costs will continue to be major deterrents to growth in the short run.


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