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Tower Business
More mobile operators are spinning off their tower
infrastructures in search of growth, shareholder
value, and better margins. Now the questions are:
Will the growth continue? Is the value sustainable?
Can margins be improved?
But has it really been a success? Are tower companies creating value for their shareholders and
their mobile operator clients? In this paper, we answer these questions and examine what tower
companies and mobile operators can do to create a sustainable business and shareholder value.
The Indian telecom sector saw a joint venture. In 2009, Quippo market: It allowed operators
a dramatic growth phase from merged with Tata Teleservices’ to reduce costs considerably
the late 1990s to 2010. Because tower assets, creating Viom, and focus on core marketing
operators were focused on India’s largest independent activities while enabling new
acquiring customers and tower player. The next year saw operators to rollout networks in
expanding services in the midst a spate of inorganic activity, with record times. For example, Tata
of hyper-competitive pricing American Towers acquiring two DoCoMo rolled out 16,000 sites
pressures, they started smaller tower companies and within a year with Viom.
outsourcing network GTL Infrastructure acquiring
management, information 17,500 towers from Aircel in an However, hyper-competition in
technology, call centers, and all-cash deal. the mobile industry and the
then tower infrastructure— ongoing fallout from competitive
all previously seen as core Between 2007 and 2010, the and regulatory challenges over
strategic activities. number of towers rose from about the past 12 months have put cost
100,000 to 310,000, fueling an pressures on Indian tower
In 2008, Quippo, an independent increase in tenancy ratios to companies. With around
company with a small portfolio 1.6 per tower. From 2010 to 2012, 365,000 towers, there is now an
of towers shared by operators, there was aggressive growth of over-supply, and growth has
acquired 1,000 sites from Spice new operators, allowing private tapered off. As a result, Indian
Telecom, which later became players such as Viom to boost tower companies have begun
Idea Cellular. In the same year, their tenancy ratio to 2.4. to look for new growth avenues
Bharti Airtel, Vodafone, and Idea and focus more on operational
created the world’s largest tower Tower sharing created a strong improvements.
company, Indus Towers, through incentive in the Indian telecom
Crown Castle buys Vodafone Towers Australia 2008 $39 million 140 $278,571
Protelindo acquires Hutchison’s towers Indonesia 2009 $503 million 3,630 $138,606
American Tower Corporation and Ghana 2010 $428 million 1,876 $228,305
TowerCo Ghana buy MTN Towers
Blackstone and Carlyle reported valuation India 2012 $3-$4 billion 50,000 $60,000
of Reliance Infratel (did not go through) to $80,000
As early movers, Indian tower companies have become global industry leaders with Indus,
Reliance Infratel, and Viom managing 110,000, 50,000, and 41,000 towers each, respectively,
ahead of industry pioneers American Tower and Crown Castle with 49,000 and 22,000 towers
each (see figure 2). However, recent industry developments and regulations in India have raised
questions about the sustainability of independent tower businesses. In particular, the exit of some
of the newer operators, which were the primary engines of India’s tower growth, is affecting cash
flow and debt repayments and could even push some tower companies to the brink of bankruptcy.
Figure 2
India tower companies are among the global industry leaders
50 49
41
22
7
Indus Towers Reliance Infratel American Tower Viom Networks Crown Castle Protelindo
in India in India in North America in India in the United States in Indonesia
Several other factors are also fueling the need for operational excellence:
Preference for fixed costs. Increasingly, operators are pushing for fixed power and fuel cost
arrangements, rather than the traditional pass-through, to preempt pilferage and disputes. This
also works in favor of the tower company because it benefits directly from operational
improvements.
Demand for customized sites. One-size-fits-all designs are not working because customers are
increasingly demanding more specific solutions, be it for in-building or for rural areas.
Overlap in tower locations. In many markets, tower portfolios are heavily overlapping in urban
areas. Rationalization will be important to improve cost structures.
Green telecom requirements. There is more public and regulatory pressure to reduce telecom
towers’ energy consumption and pollution, especially from diesel generators. Alternative
solutions are being explored, including solar, biomass, and fuel cells, but their economic
viability is still not where it should be.
Another hot topic is energy-management companies that take over power and fuel supply at
a predictable cost per kilowatt hour (kWh). Although they offer clear advantages for mobile
operators and tower companies to avoid capital expenditures (capex), they are not always
beneficial for maintaining or improving earnings margins.1
Earnings in this paper refers to earnings before interest, taxes, depreciation, and amortization (EBITDA).
1
Figure 3
The starting point for improving operations is the typical profit and loss structure
($ million) Illustrative
46
100
18-20
146 12-15
7-10
8-10
20-25
45-55
20-25
5-8
Gross Power Net Rent O&M HR and Others EBITDA Depreci- Interest Profit
revenue and fuel revenue and security G&A ation after tax
pass-through
Notes: Others includes penalties, under-recovery in power and fuel costs, and provisions. O&M is operations and maintenance. HR is human resources.
G&A is general and administrative. EBITDA is earnings before interest, tax, depreciation, and amortization.
Source: A.T. Kearney analysis
Beyond the profit and loss structure, there are several other ways to improve performance:
Power and fuel. Energy costs are often treated as a pass-through to operators, leading to
limited incentives for tower companies to contain costs. Inefficiencies are typically found in
areas such as monitoring electricity and fuel consumption, equipment upkeep, and equipment
configuration, including overly powerful diesel generators. In areas with limited grid power,
these inefficiencies are compounded and lead to high pilferage and leaks. We often see too
much emphasis on technology solutions, such as using advanced batteries for longer backup
or installing cooling solutions to substitute for air conditioners, and not enough focus on
Operations and maintenance. Taking care of site infrastructure is crucial for controlling fuel costs
and avoiding unscheduled downtime. Thorough equipment checks and adherence to preventive
maintenance schedules are vital aspects of sound infrastructure performance. Leading tower
companies focus on improving their ability to track site-level performance and profitability.
Concepts such as tower operating centers (TOC) are rightly gaining ground in the industry.
Estate management and security. Landlords that pilfer power or fuel can be a big source of
problems. Some even resist control with unscheduled outages that result in penalties from
operators. Leading tower companies understand the need for good rapport with landlords but
are also prepared to use security or police to control abuse when necessary. Security costs can
be optimized by adopting a patrolling model instead of a stationed-at-site model. Naturally,
these options vary by location and environmental conditions.
New site designs. Innovative sites focus on reducing the total cost of ownership for tower
companies and operators. This requires not only building structurally lower-cost sites, but also
integrating active equipment components that reduce energy consumption. India, with its
frugal engineering capabilities (jugaad), is poised to drive such breakthrough designs; we are
already seeing some companies pushing in this direction. Similarly, capex can be significantly
reduced by tailoring site specifications to tenancy profiles. For example, a single tenant site in
an area with decent grid power can get the job done with just a monopole for an outdoor base
transceiver station (BTS) that has an advanced valve-regulated lead acid (VRLA) battery. No
diesel generator or shelter is necessary.
Existing sites. Sites are often designed for three to four tenants while the actual number
of tenants turns out to be just one or two. This results in over-configurations, such as a
30-kilovolt-amp (kVA) diesel generator for a single-tenant site. At the same time, tower
companies have under-configured sites, allowing for swapping of generators and batteries.
Bottom-up site opportunity analysis. Radio network planning capabilities are essential for
maximizing tenancies. Tower companies can map their tower portfolios to operator blind spots
and then approach operators to discuss sharing.
New technologies. When outlining service agreements with telecom operators, tower
companies often fail to charge adequately for new technologies such as 3G or 4G, which
means they do not share in the incremental revenues generated. This can be a significant
missed opportunity when operators deploy universal site cabinets for 2G, 3G, and 4G.
Asset utilization. Tower assets can be used for other tenancies that do not require much space,
such as Internet service providers (ISPs). Although revenues are generally lower than for a typical
operator tenant, the margins can be attractive. Also, the real estate at tower sites can be used for
new business opportunities, such as ATMs or Internet kiosks. The availability of power, air
conditioning, and security can be an appealing proposition for other service providers.
Vendor management. Many routine tasks such as diesel filling, maintenance, and security are
outsourced. As such, vendor management is a core competence for avoiding vendors dictating
terms or passing on their inefficiencies. Watertight contracts and stringent enforcement are
crucial to deriving value from of an outsourcing model.
Contract management. To deal effectively with both customers and vendors, contracts need
to be comprehensive and forward-thinking. Tower companies should not lose out on new
technology deployments, wholesale or active sharing arrangements, or when changing to
fixed-cost models. Renegotiations are challenging, so these issues require attention when
contracts are framed.
The economic reasons for mobile operators to spin off their tower operations will be difficult to
ignore, with operational improvements dictating partner choices and construct, whether
captive spinoff, management contract, or sale to a tower specialist or financial investors.
As the nature of the tower business shifts from growth to operational excellence, the opportunities
to improve shareholder value will flourish. And with data traffic accelerating, the tower growth
story is certainly not over.
Authors
The authors wish to thank their colleague Rajaganesh Sethupathi for his valuable contributions to this report.
For more information, permission to reprint or translate this work, and all other correspondence,
please email: insight@atkearney.com.
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