The government’s policy of allowing infrastructure sharing is proving beneficial for telecom operators, especially the new licensees who are striving to meet their rollout obligations. A rapidly increasing mobile subscriber base, falling average revenue per user and increasing minutes of usage, all make a compelling business case for infrastructure sharing in India.

The ongoing liquidity crunch is another factor that has influenced the new operators’ decision to lease towers from other companies. A new player needs about 60,000 towers ?? costing between Rs 2 million and Rs 3 million each ?? for panIndian operations. Raising sufficient funds in the current market is a tough task.

While active infrastructure sharing is still in its infancy, passive infrastructure sharing, especially sharing of towers, has caught on rapidly. “The requirement of towers is huge, as the new companies are looking at commencing operations as soon as possible. Owing to the difficulties in raising funds, companies are increasingly opting for sharing rather than setting up their own towers,” says a top executive at Quippo Telecom Infrastructure Limited (QTIL).

Leasing towers is a key part of the rollout strategies of several new players including Unitech Wireless, Sistema Shyam TeleServices, S Tel and Etisalat DB (previously called Swan Telecom). These operators are aiming to launch services in at least 10 per cent of the districts in a circle within one year of getting the licence. Within three years, they need to cover 50 per cent of the districts, failing which they will be penalised.

Tower sharing is not restricted to the new operators. Existing players including Aircel and Idea Cellular are leasing passive infrastructure to expand their footprint across circles. “Out of the 20,000 towers being used by Aircel, 50 per cent are on lease,” says Sandip Das, CEO, Maxis Communications. (Malaysia-based Maxis owns majority stake in Aircel.)

Recent developments
 Etisalat DB and Reliance Infratel have recently entered into a 10-year tower sharing agreement. While the financial details have not been disclosed, the deal is estimated to be worth around Rs 100 billion. According to reports, Reliance Infratel will initially provide Etisalat DB 13,000 tenancy slots, which is expected to go up to 45,000 in five years. Etisalat DB has mobile licences in 15 out of the 22 telecom circles in the country, and Reliance Infratel has a tower base of about 50,000. The agreement is expected to provide both companies with large cost optimisation benefits.

The new joint venture (JV) tower company between QTIL and Tata Teleservices Limited (TTSL) has lost no time in making its presence felt. It has signed a 20-year deal with Unitech Wireless according to which the latter will gain access to 40,000 tower slots. The JV will provide 14,000 slots to Unitech Wireless by August 2009, after which the rest of the towers will be built by 2010 as per the operator’s requirement.

The company is also on the verge of signing 20-year passive infrastructure sharing deals with Etisalat DB and S Tel. The former’s tower requirements will be split equally between the two tower firms, Reliance Infratel and the QTIL-TTSL JV. S Tel requires around 6,000 slots in six circles for which it has received startup spectrum.

The incumbents are also showing interest in this space. Bharat Sanchar Nigam Limited (BSNL) is in talks with several new and existing operators for sharing its infrastructure, and is planning to set up a separate division for infrastructure sharing. “We are holding talks with several new telecom operators like Unitech for sharing our pan-Indian telecom infrastructure including mobile towers. This will also result in extra revenue for the company,” says Kuldeep Goyal, chairman and managing director, BSNL. He adds that the deals are expected to materialise by September 2009, resulting in additional revenue of Rs 1 billion. This would help the operator to arrest the downturn in revenues.

Several operators are also exploring tower sharing and optimisation models like zoning and co-location. According to Prem Pradeep, CEO, Bharti Infratel, “In the long term, zoning would make sense, both in terms of non-availability of sites and to carry forward our business.”

“If you look at the small cities and towns, an average of 30 towers will be there for a population of 10,000 or 15,000. In such a scenario, an approach like zoning will surely make a business case,” explains T.K. Basu, president and CEO, India Telecom Infrastructure Limited.

Tenancy ratio: A key parameter
While there is no denying the immense potential of infrastructure sharing, there are several issues. For example, the tenancy ratios are still low and there is a tremendous pressure on the infrastructure companies in terms of taxes and levies. There is also a lack of synergy between the companies.

For a successful business case, a tenancy of two per tower is required. However, the current tenancy ratio in India is between 1.2 and 1.7 for most companies, as compared to 2.6 per tower in mature markets such as the US. As new companies establish their presence and ink integrated tower deals, the overall tenancy ratio is expected to increase to about two per tower by mid-2010.

Operator-owned tower firms such as Indus Towers, Reliance Infratel and Bharti Infratel account for over 90 per cent of the tower infrastructure market. These co panies enjoy the advantage of having at least one anchor tenant (the parent operator). “An anchor tenant gives a tenancy ratio of at least one right at the start, while independent tower firms have to start with a tenancy ratio of zero,” says Harit Shah, telecom analyst at Angel Broking.

Indus Towers has three anchor tenants and is best placed amongst all the tower companies. It has over 70,000 towers, and expects 40 per cent of its business to come from new operators and the rest from its stakeholders. Next are independent players such as the American Tower Corporation (ATC), QTIL and GTL Infrastructure. These companies have managed to grab a substantial chunk of business from the new operators.

According to industry estimates, independent tower companies will build at least 60 per cent of the 100,000-150,000 towers that the telecom operators are expected to need over the next three to four years.

To cater to the demand, these companies are rapidly expanding their operations. For instance, GTL, which currently owns 9,000 towers across the country, is investing $1.8 billion to expand its tower base to 25,000 by the end of 201112. Prakash Ranjalkar, chief operating officer, GTL, says, “We expect our average tenancy to go up to 2.2, with business coming from at least three of the new telecom licensees.”

Similarly, in April 2009, ATC bought infrastructure provider Xcel Telecom ?? which had around 1,700 towers ?? for Rs 7 billion to gain a stronger foothold in the Indian market. At the time of the deal, ATC had already tied up with a new mobile operator to provide tower services. The company is now looking to buy the 12,000-plus towers owned by Aircel.

There is a mixed opinion regarding the choice between independent tower companies and operator-controlled players. On the one hand, it is argued that the new operators would opt for independent tower companies as they provide services based on the client’s specific requirements. The operator-owned entities, however, would consider catering to the parent company’s requirements as the first priority.

Operator-owned tower companies, on the other hand, claim to offer better coverage (about 60-70 per cent of India). These companies also argue that the built-to-suit model offered by the independent tower companies is too expensive and not viable.

All in all, the strategy of the telecom operators has changed from tower building to sharing. As the competition intensifies, there will be more deals between infrastructure providers and telecom operators, and new trends like co-location, zoning and grouping will emerge for both active and passive sharing.