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Savings Strategy - Business models for infrastructure sharing

February 15, 2010

With the global economic climate still on an unsteady footing, operators across the world, and particularly in developing markets, are under increasing pressure to maintain healthy profit margins and reduce cost levels while concurrently improving service levels, launching new services and managing a bewildering array of technologies. This, in turn, has sparked an aggressive pursuit of lean business models. Operators have taken a number of cost-cutting measures such as trimming their workforce, outsourcing network operations, investing in network business information and infrastructure sharing.

With the network representing the single largest capex for operators and accounting for a large portion of their opex, service providers are taking the infrastructure-sharing route to run welloiled, cost-efficient operations. Network sharing has, in fact, emerged as a strategy for new revenue generation and cost optimisation for operators grappling with the best ways to achieve affordable access to communications. It also leads to innovation as it enables operators to increase rollout speed, provide broader coverage and introduce new applications.

Over the past few years, sharing infrastructure among telecom service providers has become a requirement and a norm.Infrastructure sharing can benefit fixed and mobile operators alike. While mobile operators are the frontrunners in sharing, fixed line operators are restructuring their operations to leverage the sharing model (UK and Sweden).

Operators in the developed markets of western Europe are opting for advanced active infrastructure sharing and outsourcing; operators in developing markets like India are increasingly realising the potential of passive infrastructure sharing and outsourcing.

Rationale for sharing

With the traditional model of single ownership of all network layers and elements being challenged, network sharing is increasingly becoming imperative to ensure future cost competitiveness in the industry. The ability to share parts of mobile networks with competitors allows sharing operators to reduce their capex spending as active and passive infrastructure elements are jointly utilised. It also enables them to cut opex as the underlying operations are performed together.

Apart from direct cost savings, infrastructure sharing releases the needed capital for strategic investments and shifts the focus to service innovation.

For incumbents with totally or almost totally depreciated and amortised costs of existing infrastructure, a new source of generating revenues is created. Based on worldwide statistics, it could be as high as 15 per cent of the turnover.

Infrastructure sharing is also beneficial at the initial stages of network rollout when the operators' main concern is extending coverage and competing with the incumbent operators. It also permits new operators to start operations in a much shorter time-frame over a wide area.

Meanwhile, with rollout costs for new sites being far from inexpensive, a new operator can share another company's assets and reduce capex on erecting new towers. According to a report "Mobile Tower Sharing and Outsourcing" by consulting firm Capgemini, tower sharing could help operators in India and the Middle East achieve total savings of $4 billion and $8 billion respectively in the next five years. In the Middle East and Africa region, it is estimated that tower sharing with a tenancy ratio of two would enable operators to achieve an annual tower opex reduction of 12-15 per cent. In India, where tower sharing has gained significanttraction, some operators have been able to bring down the cost of network operations by over 40 per cent through sharing arrangements, mainly in urban areas.

The move to long term evolution will take the network sharing activity up a notch. The race will be to extend the services that take advantage of the enhanced network to as much of their subscriber base as possible and as quickly as possible, as opposed to simply trying to compete on network coverage and performance.

Clearly, infrastructure sharing opens up a number of possibilities for operators; savings translate into more capital to reinvest on building new sites and innovations, save companies from slimming down the workforce and help them stay competitive, among others. The customers benefit too, as the healthy competition promotes better quality of service and lower costs.

Forms of sharing

There are several infrastructure-sharing options that companies can avail of, limited only by the telecom regulation and legislation in different countries. Also, the options of sharing depend on what electronic and non-electronic infrastructure companies are willing to share or lease.

Different forms of infrastructure sharing include basic unbundling in the case of fixed line infrastructure, and passive and active infrastructure sharing in the case of mobile networks.

Passive infrastructure sharing

This is the most commonly used option by telecom companies around the world. In cell sites, "passive" equipment, which accounts for 60 to 70 per cent of the total capital cost of a mobile network, comprises the tower itself, electrical supply, air-conditioning equipment, right of way, ducts, pylons, masts, trenches, towers, poles, equipment rooms and their related power supply, air-conditioning and security.Sharing obviously reduces this burden.Also, setting up passive infrastructure is time-consuming and sharing such networks greatly reduces the time-frame. It also helps in ecological preservation.Effective passive network sharing can reduce the number of new masts that operators need to deploy while also spreading the cost of any new sites that need to be created among multiple companies.

A tower infrastructure company provides passive infrastructure on a sharing basis to telecom operators and is responsible for site planning and acquisition, obtaining necessary regulatory approvals, commissioning towers and providing support services such as back-up power, airconditioning and security. It normally enters into separate master service agreements (MSAs) with its occupants/tenants (telecom operators), clearly spelling out the overall tower requirements of the tenants, the pricing terms as well as other binding terms and conditions between the two parties. As sharing increases, tower infrastructure companies usually pass on a percentage of the cost saving to their tenants. In India, where passive infrastructure sharing has become the industry norm, the discounts range from 10 to 20 per cent for twin sharing and from 20 to 30 per cent for triple sharing. Tower companies may also offer discounts on standard rentals, which range from 2 to 5 per cent, depending on the number of sites to be rolled out in accordance with the MSA.So, a larger number of sites may mean higher discounts for the telecom operator.Conversely, in the case of strategically located sites (congested areas, city centres, highways) and in hilly terrain, tower infrastructure companies may charge a premium over the standard rentals.

Active infrastructure sharing

Active sharing involves the shared use of electronic infrastructure in a cell site, including the base tower station, switches, antennas, transmission, signal processing transceivers and microwave radio equipment. According to an ABI Research study, the worldwide combined opex and capex savings from active infrastructure sharing could amount to as much as $60 billion over the next five years. Operators could enjoy at least 40 per cent cost savings in addition to those available from passive site sharing. Vendors such as Nokia Siemens Networks and Huawei offer solutions allowing for two-way (and in the future, more than two-way) sharing of RAN equipment, thereby enabling a single site to be linked to multiple operator core networks. Currently, two-way sharing between two operators is the standard. Nevertheless, more ambitious models that would potentially bring together all operators in a country to create a single RAN national network are being explored in some countries, particularly for 3G build-outs.

Not surprisingly, passive sharing is seen as a safer alternative, as many operators are reluctant to share site electronics due to issues of competition, scalability and accountability. However, the cost-saving rewards of active sharing are much greater. Passive sharing is quite common, even mandatory, in some regions. However, active sharing has seen limited uptake and is a phenomenon mostly in mature markets. The first network-sharing deals, such as those in Sweden or Australia, focused on sharing the 3G RAN build-out between operators. However, as operators are looking to achieve greater cost effectiveness, the newest discussions go beyond joint 3G build-out and actually consolidate existing 2G RAN legacy networks into one joint network. Some active sharing agreements include T-Mobile and 3 in the UK, Telstra/3 and Vodafone/ Optus in Australia, and Tele2 with Telia and with Telenor in Sweden. Going forward, active infrastructure sharing will gain significant traction in emerging markets like India, driven primarily by rural expansion and 3G services.

Spectrum sharing

Spectrum sharing is basically a lease agreement between two companies. With spectrum sharing, a company can lease a part of another company's spectrum, which enables both companies to provide service to the same customer. It promotes better service at competitive prices and benefits customers. This type of infrastructure sharing iis utilised in some parts of the world. 

Fixed wireline network sharing

Usually, the incumbent owns most of the wireline infrastructure in the form of buried cables. For a new operator, it is too expensive to lay fresh copper cables. Local loops are particularly required for providing broadband connections which are usually on a hybrid optic fibre-copper cable combination. Fixed line networks could be shared through unbundling of the local loop.

Unbundling of the local loop

The unbundling of network elements allows competing operators to enter the market and roll out services with considerably less sunk investment in some or all components of a competing network. For example, a new entrant might initially install switches in central business districts only, and lease those components of the incumbent carrier's network that are needed to directly serve customers in other areas. Alternatively, an entrant might lease just those network elements that are needed to offer competing retail services such as DSL. In this way, the entrant can offer competing services to customers without duplicating all components of the incumbent carrier's infrastructure, and without simply reselling the incumbent's service offering.

Unbundling is possible in three ways: full unbundling, line sharing and bit stream access. In the case of full unbundling, the entire copper local loop is assigned to the leasing operator. New entrants then install their own broadband equipment and collocate, that is, the new entrants place all the equipment inside or outside the incumbent's premises, depending on which collocation model is most appropriate.

Line sharing is where the incumbent and other licensed operators share the same line. From the main distribution frame, the wires are connected to a splitter (which separates the frequencies for voice telephony and for higher bandwidth services). The incumbent provides voice telephony over the lower frequency portion of the line, while another operator provides DSL services over the high frequency portion of the same line.

Bit stream access provides access to the bit stream on the network side of the digital subscriber line access multiplexer (DSLAM). Bit stream access is a virtual form of local loop unbundling (LLU); the new entrant does not obtain access to actual network infrastructure elements.In this case, the DSLAM is installed and operated by the incumbent who also configures the DSLAM and sets up the required technical parameters (speed and quality of service attributes) of each user's DSL access link. The output of the DSLAMs on the network side is configured as an asynchronous transfer mode transmission system.

The European Commission's Regulation on Local Loop Unbundling came into force as early as January 2001, requiring incumbent operators to offer unbundled access to their local loops upon reasonable request. Several developing countries –­ South Africa, for example –­ are also examining LLU as an option to increase competition in their markets.Some, such as Morocco, are already seeing significant gains from LLU.

Until the present, unbundling has primarily been offered on copper networks.However, the range of unbundling options currently provided on copper networks (raw copper, bit stream, line sharing, etc.) can also be applied to a fibre environment.However, slightly different considerations may arise from the much higher bandwidth capabilities. But if the fibre is deployed within a next-generation network –­ with new intelligence and guaranteed quality of service built in –­ software-based unbundling solutions can be explored in addition to providing access to physical network elements. These intelligent solutions would boost initial access until competitive options are available to resellers.

With respect to fibre backhaul for broadband wireless networks in developing countries, some backhaul is replicable, dependent upon geographical and population density variables. Implementing this option might include the regulator applying the principles of a standard interconnection access regime as interconnection issues would remain pertinent.

Execution challenges

According to the Capgemini report, the biggest challenge for operators in striking sharing and outsourcing deals is to find the right balance between competition and cooperation. Sharing a network could lead to significant losses in opportunity to compete on the basis of network quality and coverage for incumbents whereas a stand-alone approach may prove detrimental to the cost structure in the long run. For instance, in Canada, despite the regulator mandating tower sharing under reasonable circumstances, the incumbents have been extremely reluctant to share their towers with a new entrant in the market primarily due to the fear of erosion of competitive advantage.

The report also stated that the longterm nature of sharing agreements is another key impediment as it may lead to a loss in operational and financial flexibility. The typical tenure for agreements in India is 15 years, as in the case of Etisalat and Reliance Telecom Infrastructure. In some cases, it could be as long as 20 years (Telenor with the Quippo-Wireless-TT Infoservices combine). Such long lock-in periods may heighten tenant risks in terms of restricting the companies' ability to adapt to changing market and regulatory conditions.

In addition, in the case of active infrastructure sharing, a consolidation situation arises when either 2G or 3G networks that have already been built out by each of the sharing operators need to be consolidated into one jointly shared network. While this type of active network sharing usually holds significant cost advantages, it also presents substantial design challenges.

Clearly, network sharing holds enormous promise. But it also demands a significant change in traditional operator thinking. Some mobile industry leaders even believe that network sharing will become indispensable for future competitiveness.Either way, given the promise of cost savings, network sharing is sure to be seriously considered and implemented by more and more operators around the world.


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