The Indian telecom industry has around 600 million subscribers, with about 15 million subscribers being added every month. Currently, 12-14 telecom operators are competing for customer mindshare and market share. This notwithstanding, a large market continues to remain underserved and untapped, particularly in the rural areas.
Meanwhile, the exponential growth in the industry has been accompanied by large-scale network expansion by operators, thus driving the demand for telecom infrastructure. Telecom infrastructure has three main components: passive infrastructure (steel towers or antenna-mounting structures, base transceiver station shelters, etc.); active infrastructure (spectrum, base tower stations, etc.); and backhaul (comprising intermediate links between the core of the network and various sub-networks).
Intense industry competition and the high cost of setting up and operating the infrastructure provide a strong business case for infrastructure sharing. Moreover, several benefits are associated with infrastructure sharing. For example, it helps in reducing capital and operating expenditure, and in achieving speed-to-market. It also allows operators to offer mobile services when their own network signal is not available as well as ensures optimum usage of scarce national resources and access to areas where it is difficult to acquire sites.
Given these benefits, a large number of infrastructure players have entered the market with different business models.These can be grouped into four categories: captive, operator-subsidiary, pool and share, and independent tower companies.Under the first category, the operator invests in towers, which are managed internally with maintenance activities outsourced to small vendors. These typically have single tenancy, resulting in higher capex and opex.
In the operator-subsidiary model, tower infrastructure is consolidated and transferred to a separate operator-owned entity.This allows the operator to unlock value.
Under the pool-and-share model, operators jointly set up an independent company where each operator contributes infrastructure to the joint entity or venture. The owner-operators enjoy rights to the shared infrastructure as well as entity benefits as they have the right of first refusal for towers with the holding operator companies.
In the independent tower company model, an operator-independent company builds and manages the tower infrastructure. Towers are leased to operators under long-term contracts and such companies normally seek multiple tenants to increase profitability.
In spite of being a relatively nascent industry, the infrastructure industry has witnessed strong growth. It is a consolidated industry with seven to eight players controlling more than 95 per cent of the total tower base in the country. The leading players in this space include Indus Towers (pool and share), Reliance Infratel (subsidiary), Bharat Sanchar Nigam Limited (captive), Quippo-WTTIL (independent), GTL-Aircel (independent) and Bharti Infratel (captive).
Typically in this industry, operators enter into long-duration contracts (10-year lease) with tower companies, which ensure stable revenues. The Indian infrastructure industry is a capital-intensive one, where the payback for a tower is dependent largely on tenancy. The average tenancy per tower is estimated to be 1.6-1.7.
The business drivers for infrastructure companies fall under two categories: revenue and cost. The revenue drivers include the installed base (where economies of scale are critical for achieving profitability), tenancy (a tenancy per tower of 1.7-1.9 is required) and the rental per site (the payout is on a monthly basis and the contracts are long term).
The cost drivers include capital expenditure (each tower requires an expenditure of about Rs 4 million), personnel (mostly in maintenance and project management), real estate rental (important to acquire a site for a long-term period), power and fuel (usually pass-through costs for a tower company, which are borne by the mobile operator) and site maintenance (includes expenditure on consumables and other repair activities).
Several trends are expected to emerge in infrastructure sharing in the future.Until now, infrastructure companies have been focusing on attaining scale and rapidly setting up towers to meet the operators’ fast-paced growth requirements. Such companies have differentiated themselves on parameters such as adherence to project schedule and tower portfolio size but are now looking at various other ways to differentiate and pass on the benefits to operators.
These initiatives include expanding their solutions portfolio to include integrated solutions, innovating site designs, expanding the scope of services offered, providing power and fuel on a fixed cost model, deploying renewable energy sources, monitoring faults in real time, and joint radio frequency planning with operators.
Jaideep Ghosh, Executive Director, KPMG Advisory Services
