Booz & Company examine the imminent need for operators to enter network-sharing deals despite their longstanding – and often misguided – reluctance
Dubai, UAE, 27 November 2012: Today, operators could save 30 to 40 percent of the cost by joining forces with rivals in their markets to build, run, and maintain mobile networks. The truth is, operators have long been exploring the possibility of sharing their mobile network infrastructure. Yet, surprisingly, to date few arrangements have been made in this regard that aim to capture the full benefits from sharing. In private, operators offer a variety of reasons for not engaging in sharing deals, often fearing the operational complexity they may bring, the up-front transformation costs, and the potential loss of control over their own destinies. In line with this, an analysis by management consulting firm Booz & Company found that, in reality, these justifications reiterated by operators are often unfounded. In fact, sharing mobile networks can reap substantial benefits for operators – especially given the potential for cost savings, the flexibility on the scope of the sharing deal and the range of governance models that sharing parties can choose from.
THE RATIONALE FOR NETWORK-SHARING DEALS
With revenues under pressure, the ongoing explosion of data demanding that networks be upgraded, and next-generation LTE requiring further investments in networks, mobile network operators today are scrutinizing their cost structures more than ever before. As a result, they have been actively pursuing the potential of network sharing as a way to increase their returns on capital and reduce costs.
“In actuality, we estimate that mobile sharing offers the potential to save the European mobile industry €20 billion to €40 billion annually over the next five years, given its expected sales of around €150 billion in 2012,” explained Hilal Halaoui, a Partner with Booz & Company. “This translates to annual savings in the range of €1 billion to €2 billion for an individual large operator with revenues of €50 billion – no small drop in the bucket.”
Despite this hefty potential, and the relative technical and financial flexibility of sharing arrangements, few operators have actually taken the plunge. In Europe, many operators have engaged in limited cell site sharing, but so far only about 10 comprehensive, large-scale deals have been closed and implemented. Recently, Vodafone and Telefonica agreed to pool their network infrastructure in the UK under a joint-venture setup; by joining their combined 18,500 mast sites they aim to improve coverage and could each save between €1.2 billion and €1.5 billion according to analysts (1). “More network-sharing deals have been made in emerging markets, but that is because the larger number of ‘greenfield’ situations requiring entirely new networks make them ripe for collaboration among new entrants,” said Chady Smayra, a Principal with Booz & Company. “In developed markets, operators are also concerned about the significant tax implications of transferring assets to a new sharing entity and the subsequent impact on profits. However, given relatively low corporate tax rates in the Middle East, in most cases this is a lesser concern for regional operators.”
THE PROS OUTWEIGH THE CONS
In effect, the factors behind such hesitations generally fall into four categories – strategic, financial, technical, and transactional – and the solutions to them should provide a way for every mobile network operator to discover the benefits to be gained in sharing.
The Network – A strategic differentiator
Many operators – particularly mobile incumbents whose early entrance into their markets has given them the best coverage and network quality – assume that sharing their network with others would dilute their competitive advantage. Some even feel that they would not be able to control the direction that their network would take in the future, their rollout strategies, and their choices about hardware and vendors. Finally, they point to the regulatory risk: that their market share might become so large that regulators would impose a fully regulated new entity to run the entire market’s mobile network. The question remains: can an operator’s network really be a strategic differentiator?
“Not in the case of ordinary 2G and 3G networks,” said Dany Sammour, a Principal with Booz & Company. “Recent surveys have shown that their subscribers do not notice any difference between networks. Operators looking for strategic advantage through newer technologies, such as LTE, can still share their networks because each partner to a deal can decide which technology to deploy on their shared equipment, and the network footprint to be shared.”
As mobile networks of challengers in the Middle East have evolved, there is growing recognition amongst incumbents in the region that network coverage and quality is no longer a source of competitive advantage and that there are substantial benefits to infrastructure sharing. Accordingly, there is an increasing trend towards mobile infrastructure sharing as is already the case in KSA, with passive tower infrastructure being shared between STC, Mobily and Zain on selective basis.
“Moreover, the fear of losing control over the future direction of their networks is simply misguided – as operators can always keep independent control of selected strategically important sites and also of technology layers in their network where they can really differentiate from their competitors”. In addition, worries about regulators might render deals involving shared spectrum unrealistic at this stage. Yet, in several countries, operators whose joint market share exceeds 50 percent have already implemented other types of active sharing. Depending on the market’s regulatory context, clarifying the differences between a commercial merger and a technical sharing deal will likely help regulators appease any concerns.
The High Costs of Network Sharing
Some operators assume that network sharing doesn’t work for their particular case. Those with mature networks and few plans for future expansion argue that most of the potential savings eludes them and that their sunk costs are irrecoverable. Meanwhile, market leaders claim that they have no prospective partner of similar size and a deal with a smaller competitor will unfairly benefit the partner. “The initial cost of a network-sharing deal can also be daunting,” added Halaoui. “Despite these seeming setbacks, the overriding benefits of sharing are clear”; the initial costs involved in the transition stage typically range between €20,000 and €30,000 per site – about a third the cost of building a new site. And, even after the transformation cost is factored in, the business case typically remains attractive: the initial capital expenditures required will be gradually paid for through the savings generated over the life of the deal, and the ongoing reduction in operating expenses will guarantee a lasting benefit. Even if the partners enter negotiations with different assets, a deal can still be made, as long as they are willing to concede these initial differences and it is clear that the outcome benefits both.
Lastly, some operators are turning to outside investors to finance the initial costs involved in a network-sharing deal. Investors can then make further gains by offering other mobile operators the option to join in the network-sharing arrangement, and financing their up-front costs. This will provide the parties involved with a strong incentive to participate as well as mitigate potential regulatory concerns regarding the increased market power of the original deal.
Certain operations also believe that a combined network is riddled with too many technological and operational perils. Operators using different spectrum may view their networks as simply incompatible, while others may have competing visions of how and when to deploy LTE or on coverage requirements. And, some simply insist that their networks have special technical conditions that make it impossible to partner with anyone.
These hurdles, however, can be overcome. Sharing deals can very well be limited to passive equipment or to existing 2G, 3G and LTE sites without involving any new deployments, thus avoiding any technology constraints. All this obviously needs to be studied on a case by case basis. “The key to making the best deal possible lies in seeking out opportunities to maximize the cost savings everywhere,” said Smayra. “Any deal should give both parties the room to operate unilaterally within clear limits, modernizing and differentiating their networks when and where they choose and setting their own individual network performance targets.”
A Complex Process
A number of operators don’t feel confident that they can close a network-sharing deal, or adequately execute on it afterward. In truth, the process of entering into and carrying out these agreements can be eased by ensuring that each party clearly understands the terms. On the other hand, the managerial and technical complications can be transcended if the executive team is efficient, makes clear its determination and sets ambitious but realistic targets. “Even more so, the negotiations should include a framework that sets guidelines for the key elements of the deal – including the technological and geographic scope, the assets to be included, and the partnership setup,” said Sammour.
Once operators have recognized the immense opportunities that stem from network sharing, the next step is to take immediate action. After all, the conditions for making good deals will likely decline in most markets. Shareholders in mobile operators have a pivotal role to play here. Management teams should be actively encouraged to investigate the network-sharing possibilities in their markets – given their potential for improving the bottom line and ultimately the share price. In parallel, investors looking for low-risk opportunities to boost their returns should also consider investing in these arrangements. Simply put, the early movers will be in a better position to shape deals with partners of their choice, giving them a distinct cost advantage. And operators that have plans to implement long-term evolution (LTE) networks will soon find that these deployments can benefit significantly from well-planned network-sharing deals.
Thus, rather than shying away from such deals, it is vital for operators to pursue them albeit through the right deal structure and operating model to mitigates any strategic, technical, operational and financial risks.
(1) Source: Bernstein
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