The Indian telecom sector has witnessed an exponential growth in wireless data traffic driven by the increase in mobile broadband penetration and data usage per user, which rose from 2.6 GB per month during the quarter ended June 2017 to 6.4 GB during the quarter ended March 2018. The number of data subscribers increased from 62.6 million to 78.8 million during the same period. This growth in data usage is expected to continue with the declining cost of per GB data. The total data traffic in India is estimated to reach 7.7 billion GB per month in 2021-22, up by 250 per cent from the 2.2 billion GB per month recorded in 2017-18.

This surge in data demand can be attributed to the proliferation of 3G/4G networks, increasing availability of affordable 3G/4G handsets, declining mobile broadband tariffs and improved access to locally relevant content. To cater to this multifold growth in data demand, there is an urgent need to fiberise towers and deploy small cells. Therefore, mobile network operators (MNOs) and other industry players are strategically positioning themselves to monetise this opportunity. A look at the industry’s recent moves in response to the emerging demand for fibre…

Operators hive off fibre assets

Globally, operators are hiving off their fibre assets into separate entities. This allows for better monetisation of existing fibre assets and makes the company more efficient for new deployments. The business case for such separation rests on top­line growth, reduced complexity and capex for the mobile business, and higher valuation of the company.

The separated entity can actively pursue growth opportunities in the industry in a focused manner. Besides, these entities can provide services to other operators apart from their parent MNO, and incorporate third-party assets. As tower companies trade at higher valuation multiples than MNOs, there is a possibility for operators to generate cash flow from the sale of stake at a potentially higher valuation, after hiving off their tower and fibre business.

Tapering revenues of tower companies 

In light of recent market developments such as the consolidation of telecom operators and the increasing demand for small cells and Wi-Fi hotspots, as well as abundance of spectrum, core revenues for tower companies are not expected to grow at historical rates. The merger between Vodafone and Idea Cellular, Bharti Airtel’s acquisition of Tata Teleservices Limited and Telenor India, the exit of Reliance Communications along with Aircel’s financial instability have led to a significant overlap of tenancy sites across operators and a decline in overall tenancy de­mand. This has also left abundant 4G spectrum for leading operators.

Tower companies’ transformation to holistic network service providers

Tower companies are diversifying beyond their traditional tower tenancy business to tap growth in areas such as fibre backhaul, small cells and distributed antenna system (DAS) deployments to deal with their declining revenues. In order to revive their revenue growth, tower companies need to become holistic network service providers. This diversification of operations is being driven by developments in the mobile market and the evolving needs of operators. The deployment of fibre and small cells led by tower companies can benefit both MNOs and tower companies. MNOs can avoid high capex by converting it into opex. Tower companies can allow sharing of fibre backhaul among multiple operators, thus improving their top line and reducing the duplication of assets in the industry. They can also allow sharing of small cell equipment.

Globally, tower companies are already reaping the benefits of such deployments and are looking to expand aggressively in this space. For instance, in Indonesian tower company STP, the share of revenue from small cells, DAS and fibre network increased from 6.2 per cent in 2014 to 10.2 per cent in 2017. Meanwhile, in US-based Crown Castle, this share increased from 7.8 per cent in the second quarter of 2015 to 16 per cent in the corresponding quarter of 2017. Italy-based Inwit, which has deployed around 4,000 small cells till 2017-18, plans to increase its base to 10,000 by 2019-20.

In India too, telecom operators have shown interest in small cells and DAS deployment. As of October 2017, incumbent operators Bharti Airtel, Vodafone India and Idea Cellular had deployed a total of 1,000 small cells in the country. Al­though operator-led deployment is prevalent in India, it has its limitations such as capex constraints.

Deployments led by tower companies can offer economies by having multiple tenants. The value proposition can be strengthened by deploying fibre backhaul and developing partnerships with real es­tate developers. The deployment of small cells is highly dependent on the availability of backhaul to connect the small cell base transceiver stations to the core network. This opportunity can be leveraged by tower companies, given their ability to build fibre infrastructure that can help operators address backhaul issues for small cells. In India, the initial focus will be on dense urban areas and high capacity locations in the top 10-15 cities such as business hubs, high-rise residential buildings, malls, airports and railway stations.

Tower companies are diversifying beyond their traditional tower tenancy business to tap growth in areas such as fibre backhaul, small cells and distributed antenna system deployments to deal with their declining revenues.

Challenges and the way forward

While the Indian market looks attractive, both tower companies and operators face regulatory challenges that can delay the deployment of fibre. IP-1 licence holders (tower companies) are not included in the recent right-of-way (RoW) rules, which facilitate expedited fibre roll-out through the provision of single-window clearance and the rationalisation of administrative expenses across the country.

Even in the case of operators, RoW rules for fibre roll-out are not strictly en­forced by the state governments and local bodies since they are not aware of the benefits of an effective RoW policy. Further, the rules do not provide clear guidelines on the restoration costs incurred by companies. In urban areas, local bodies use this as a revenue generating mechanism.

On the positive side, fibre-to-the-tower (FTTT) providers in global markets realise more than 70 per cent earnings before interest, taxes, depreciation and amortisation (EBITDA) margins on dark fibre and mobile network infrastructure, the highest among segments such as colocation, transport and enterprise networks. Such high margins provide a clear opportunity for companies to diversify. Further, the availability of multiple fragmented fibre assets in India allows the development of independent fibre companies. Go­ing forward, operators will increasingly focus on providing a seamless user experience, particularly in dense urban areas where the deployment of small cells and Wi-Fi hotspots is crucial.

Based on presentations by Puja Goel, Engagement Manager, Capitel and Ashwinder Sethi, Senior Manager, Analysys Mason.