The Towerco Model: A success story of value creation through shared infrastructure

The telecom sector’s journey has been eventful and remarkable, reminiscent of a roller-coaster ride in the past two decades. It is in these years that the towerco industry came into existence and has contributed significantly to India’s telecom growth story.

Today, while acknowledging the country’s economic progress enabled by the telecom revolution, it is pertinent to rewind and recollect the evolution of the towerco industry and the path it has taken over the years, as well as review its progression with a fair focus on value analysis lessons (rather than policy issues).

Way back in 1994, the Department of Telecommunications (DoT) had issued two licences for wireless telephony per telecom circle (state or metro). With two more licences issued, by 2004, there were four telco licensees operational in each circle. At that time, wireless teledensity had reached 20 per cent and was growing fast, but telcos started experiencing cost pressures for setting up and operating their captive tower sites. Some telcos, therefore, experimented with sharing a few sites among themselves on a barter basis, but the primary attention remained one’s own business priority. That led to the genesis of a business model to exclusively focus on operating shared tower space, which has now been recognised as the towerco industry.

Thus, towerco companies began their operations in 2005 with the proposition of “value creation through shared infrastructure”. Incidentally, in the US, some companies based on this concept did exist, driven by real estate sharing.

Period from 2005 to 2010 

DoT had introduced a very simple process for infrastructure providers through registration for Infrastructure Provider-1 (IP-1) licenses.  IP-1 registered towercos, while preparing the scope of services for long-term master services agreements (MSAs) with telcos, proposed shared infrastructure of towers and air-conditioned shelter space and provision of power for telecom equipment. Notably, at that time, grid power availability and quality of supply were major challenges, with electricity outages of up to 10 hours taking place on a daily basis in many states. Telcos then were operating about 30 per cent of the towers off-grid, solely on diesel generators.

In the race to grab emerging business opportunities, the basic step of towercos taking responsibility for providing power was a significant relief for telco customers and it turned out to be a game changer in subsequent years. Power and fuel were initially treated as “pass-through costs” to telcos. Meanwhile, during that phase, DoT had also continued to issue more licenses for mobile and basic telephony.

Towercos sensed the opportunity of a funnel of multiple tenants per site and designed towers, shelters and power provisioning for three to four tenants per site. With a rule of thumb to provide 2 kW DC power per tenant (for base stations and microwave radios), they sized the power supply units accordingly, including battery backups, air-conditioning units and secondary source diesel generators.

The industry landscape had started to change rapidly. In the brewing competition, the towerco industry at that time already had independent towercos as well as telco-owned entities. The evolving towerco business had soon passed its initial phase and entered into a phase of rapid growth.

Coincidentally, telcos, with their financial burden and cost pressures, renegotiated MSA terms individually with each towerco and enhanced the scope and terms of service level agreements, and also sought a sharing of benefits upfront.

On the technology front, 3G was evolving and telcos purchased spectrum through an auction-driven process. At the end of this five-year period, the teledensity had surpassed 50 per cent. This was transformative for the telecom growth of India.

Period from 2011 to 2015

This period created disruptions in many ways for the country, and more so for the telecom sector. The scenario was such that the telecom industry was flooded with telecom licenses, policy changes, disturbances and challenges. On one side, the towerco model had gathered momentum with telcos engaged as tenants for towercos and on the other, major disruptions troubled the industry due to possible irregularities of licensing and the Supreme Court’s decision to cancel 122 licenses in various circles in February 2012. The direct consequences included lost tenancies, abrupt terminations of MSAs, large sums of outstanding receivables and severely affected cash flows with little recourse.

The affected telcos slowed down roll-outs and struggled to enhance their services for 3G co-locations. Towercos were constrained to accept additional provisioning of base transceiver station (BTS) cabinets, RF antennae and power provisioning terms to the “extent of loading”, which were not commensurate with the efforts and costs.

For reducing power and fuel costs for telco tenants, various methods were adopted, including operating sites for two to four hours on battery backup power during grid power outages. Innovative calculations of average power and fuel costs were implemented, rather than the original process of “pass-through costs”. This certainly resulted in substantial opex reductions for telcos and efficiency commitments of towercos. The premise of power provisioning led towercos to bear the recurring capex by wear and tear of batteries, power systems, etc. The value created by efficiencies was largely beneficial to telcos, but not necessarily so for towercos. The average tenancy revenue per tower stagnated and some towers, with a single or no tenant, were not viable to meet the fixed costs.

Period from 2016 to 2020 

This period started with added competition and new hope for telecom growth. The period was marked by the entry of a new telco, which launched 4G services with voice over LTE (VoLTE) calling, had complete internet protocol (IP) backhaul topology with superior features of efficient bandwidth utilisation, scalability and faster data speed, and had no legacy burden. The scale of roll-out was both a surprise and a shock for the stressed incumbent telcos, which were trying to recover their investments in 3G.

And so, the incumbent telcos’ challenge was not only to retain their subscriber base but also to cater to customer expectations of faster data speeds at very competitive data tariffs and free voice calls.

As might be expected, tenancy fees payable to towercos were further reduced with the advent of outdoor BTS, split BTS or outdoor unit-indoor unit configurations.

With the mounting financial burden, many telcos and towercos experienced tough times, resulting in consolidation around only three private telcos. Although the towercos had fully matured, their profitability projections had gone haywire.

Overall, subscribers had reasons to enjoy free voice calls and the cheapest data tariffs in the world. By early 2020, the average data consumption per user had reached 13 GB per month.

And then came the Covid-19 pandemic, which brought the world to a standstill for months together, with lockdowns and health challenges. Work from home (WFH) became the need of the hour and the Indian telecom industry quickly geared up to serve the subscriber requirements of higher data consumption. Telecom being an essential service, towercos and telecom ecosystem entities managed to rapidly mobilise their field teams to keep the telecom infrastructure up and running.

Period from 2021 onwards 

During this period, disruptions continued by way of consolidation among players as well as the exit of major towercos from India. However, subscriber data consumption growth continued and gave some respite to telcos with revenue growth. Discerning subscribers were accommodative of their higher spending to meet their expectations of faster data speeds for business or content consumption.

Telcos’ subscriber growth has since plateaued, but they have managed to improve their profitability. Meanwhile, towercos have reached a maturity phase, although with reduced tenancies and limited opportunities for growth with the existing investments.

At this stage, on a rational basis, one may be able to evaluate the developments in the past two decades of the industry and derive important lessons from a value analysis perspective. Some of the key takeaways are:

• The telecom industry, until 2010, grew in leaps and bounds and enabled India to leverage it for GDP growth, the benefits of which continue to accrue even today.
• The towerco business model accelerated the telecom network proliferation and greatly facilitated telcos’ profitability through a reduction in opex and freed up capex from passive infrastructure.
• The towerco business model was inspired by a reference case of US companies, with a fundamental difference being that power provisioning was an added offering.
• A business case can be robust and can bring better results for the parties involved if an adequate and detailed analysis of the actual conditions is carried out and historical learnings are transparently shared. This is extremely important to reduce cognitive bias.
• Risk assessment and risk management plans are essential steps in the initial phase of business development and should be reviewed from time to time.
• Value creation through successful business engagement is an outcome of multiple right actions with a win-win approach.