The telecom infrastructure space has been in much news in recent past due to different reasons ? more so for efforts and failed attempts at consolidation or divestitures. The industry has evolved over the last decade driven by the necessity and business need. While there are close to 400,000 towers in India and CAGR of 44 per cent over the last five years, the economics of the Industry as a whole remains under intense pressure.  The revenue pressures on the subscription has 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 containment, 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 internationally markets

The Infrastructure Industry is likely to see a fairly exciting year in 2012 with the ushering in of National Telecom Policy (NTP).

Broadly, telecom infrastructure refers to an eco-system of the following components:

Globally, the industry sector is seeing a lot of innovations as the Mobile network operators (MNOs) 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.

Growth drivers: The infrastructure industry has seen a significant growth of 4x in last five years, but the year-on-year growth rate is slowing down. The key growth driver is likely to come in from increased tenancy ratios per tower, rather than from any large scale Greenfield roll out. The average tenancy of around 1.6x is not enough to sustain profitability in long run as the rentals experience the downward pressure. There are some players with 2.5x and clearly multi tenancy will be a driver for future growth.

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.

The point of inflection: Technology innovation, specifically broadband wireless access (BWA)/3G is likely to usher in a new epoch in the tower business.

BWA 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 telcos. 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 BWA juggernaut rolls out.

Having said that, 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 industry has seen disappointing trends in 2009-2010, but 2011 results are promising enough with a 9 per cent growth, albeit on flat baseline. This was driven largely by LTE equipment growth (330 per cent in the third quarter of 2011) and the trends continue. 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.

Expected trends: 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 recognise 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 3G licences, 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 may lead to newer models for sharing assets and better leverage of towers.

Way Forward: It is evident that telecom infrastructure will be a key driver for the NTP to be effective. The ambitious rural expansion programmes envisaged in the NTP can succeed only if the backbone lives up to the agenda. Over the years, this sector has been a silent contributor to the telecom revolution in India, yet not been appreciated enough either in terms of contributions, or regulatory help to overcome structural challenges. It is now high time that the industry gets its due share of attention. The focus on next generation of telecom growth is likely to lead to a boom in the demand for infrastructure. But given the current economics of the industry, the need of the hour is to innovate solutions that can serve this demand in an economically sustainable way. That is the challenge that this industry needs to rise up to and that is where the unfinished agenda needs to finally find a happy ending.