Indian telecom sector is the third largest sector in the world and second largest among the Asian emerging economies. Telecom industry is one of the most important contributors to a country?s gross domestic product (GDP) and the telecommunication sector in India has been the major contributor to the country?s growth, poised to account for around three per cent of the total GDP. Multiple researches have proved that high adoption of mobile services is tantamount to rapid economic development. The release of New Telecom Policy (NTP) is proof enough of Indian government?s seriousness in supporting the growth of the telecom industry. Government?s support, growing adoption of data services (3G and 4G) and increasing teledensity in rural market has necessitated growth of telecom infrastructure in India.
Telecom infrastructure has been making news in the recent past for efforts in consolidation, divestment and raising capital. The creation of the National Broadband initiative like setting up Bharat Broadband Network Limited BBNL also is a significant step in potentially rolling out services needing high bandwidth to the rural areas.
Notwithstanding the high growth of mobile subscribers, the economics of the telecom industry as a whole remains under intense pressure due to immense competition and saturation of voice market in urban segment of the country. The revenue pressures on the telecom operators have had a cascading effect on the financials for the infrastructure vendors and this has in turn led to three key developments for the sector:
Innovations in operations around cost optimization, especially the energy costs which account for easily 30 per cent of operating costs of a tower
Move towards multi tenancy and better leveraging the installed capacity of tower assets
Expanding to international markets
2013 promises to be an exciting year for Telecom Infrastructure Industry with the expected implementation of NTP, uptake of data services and expansion of telecom services to rural segment.
Globally, the industry sector is seeing a lot of innovations as the Mobile network operators are investing into newer technologies to increase their network effectiveness and economies. Some of the latest trends include deployment of pico cells, advanced antenna solutions and traffic offload to wi-fi networks. There is a parallel attempt to improve the yield of the existing spectrums or augment new spectrums for deployment of more advanced solutions such as 4G long-term-evolution ? all of which have a cascading effect on the need for more robust and scalable telecom infrastructure.
With more than 10 players providing passive infrastructure and operating close to 400,000 towers, the industry needs to consolidate further and infrastructure sharing needs to increase. Such intense competition entails each tower to have at least two tenants to stay profitable. The current tenancy ratio at 1.7 is 32 per cent lower than the global average of 2.5 and won?t be able to sustain profitability as the rentals experience downward pressure. Further, infrastructure sharing needs to be balanced and optimized. Viom Networks, with one of the highest tenancy ratio of 2.4, has fairly unbalanced tenancy ratio across the country. Some towers are occupied by up to four tenants, some struggle to have even a single one. Deployment of data services (3G and 4G) and expansion in rural market will be key drivers in expediting infrastructure sharing as operators compete to roll out services faster.
The government policies around higher rural penetration, as enshrined in NTP are likely to be another key growth driver. While Bharat Sanchar Nigam Limited (BSNL) has a large footprint and an installed base of hitherto solely used towers, there is a good chance of other players either approaching BSNL for tenancy or setting up shared infra to serve the hinterland. The geographic expansion notwithstanding, the economics of such deals needs to make sense however for this to be a driver of top line and bottom line growth.
There is a strong ongoing push towards consolidation and collaboration in the Industry and after a few false starts and failed attempts, one would expect closed deals in the near future. Some of the peripheral players are looking at exiting this business and subject to valuations, this may become a reality as the industry consolidates. The telecom industry has been a pioneer in the Managed services business model and this trend is likely to extend to the tower industry. The industry is looking for its foray into the international markets in Africa and East Asia and there may be excitement in store if these moves fructify.
But the biggest thrust in the industry can come with the government policy support, especially in the areas of essential industry status and tax breaks. The telecom infrastructure industry has grown largely as an ?Ancillary? industry so far. It is perhaps time to recognize its importance in the telecom eco-system and grant it a policy framework support that it lacks today.
With the uncertainty on 3G/2G spectrum sharing hopefully coming to a decision point and the upcoming re-auctions of 4G licenses, it is perhaps the right time for establishing a regulatory framework for the telecom infrastructure industry. NTP 2012 has recognised the importance of large scale telecom infrastructure network as a sine qua non for social and economic development of the country. Active infrastructure sharing is an irreversible trend and multi tenancy of towers is now more of a norm than exception. The rural expansion targets for the sector would lead to a burgeoning of infrastructure ? but more importantly it may lead to newer models for sharing assets and better leverage of towers.
Challenges
The telecom infrastructure industry has moved on to fixed energy models with several companies even using renewable sources of energy. The industry needs further cost optimiSation of energy spends by efficient energy management. Besides high cost of energy, some of the common issues faced by tower companies relate to Right of Way (RoW) and asset life cycle management. Automation is another key area that needs to be looked upon in order to ensure better and efficient control systems.
Regulatory environment will also play a key role in shaping the future of the industry. Imposition of uniform license fees based on regulator?s initiative to bring the telecom sector under the unified licensing regime will hit tower firms.
Some of the policies and issues which will impact the sector and infrastructure industry are policy on Foreign Direct Investment , policies on import of Telecom equipment, evolution and expansion of emerging telecom technologies like next generation network, long-term-evolution, cloud computing etc, effective security system for protection of telecom infrastructure, need for evolving uniform policy for addressing RoW issues, availability of adequate power for telecom infrastructure, and addressing various issues related to EMF radiation.
Likely future roadmap
Technology innovation, specifically 4G/3G is likely to usher in a new epoch in the tower business. 3G and 4G services are expected to bring in substantial data traffic, necessitating additional base transceiver stations (BTS). And as 3G and 4G spectrum operates on higher frequency and its reach is limited, operators will have to set up additional towers.
4G is likely to lead to a revolution in the access ease and quantum of data and high speed internet services. This in turn will have a domino effect on the backbone infrastructure including towers. The critical question that needs to be addressed will be the eagerness of the subscriber base to adopt 3G/4G and willingness to open their purse strings for such premium services. The level of discontent on network quality in most metros is a sore point with most telecom operators. There will have to be a re-purposing of the quality of service parameters and increased assurance of call quality before network upgradations are successful. This may lead to more Base stations and more tower space demands in the immediate future, even before the 4G juggernaut rolls out.
The financials of the infrastructure companies need to support the ability to roll out more assets in a regime of diminishing rentals. The ability to invest more will be a function of their ability to balance the operating costs to drive investible surplus in their profit and loss account.
A recent PwC study on Global Telecom Infrastructure shows that telecom operators across the world will spend close to $45 billion by 2015. The developed countries have been at the forefront of this growth, with the developing economies largely trying to complete their 3G rollouts and get sustainable return on investment on the installed capacity. Reaching out to rural segment and increasing uptake of data services (3G and 4G) will place the infrastructure industry in the forefront with the need of more base stations for better coverage and better quality of services. To live up to the demands and needs of the telecom industry the infrastructure industry needs to have higher tenancy ratio (by increased sharing), adopt non-conventional energy sources to optimise cost and innovate its underlying business models.
