Mobile infrastructure sharing is on the rise, whether encouraged by regulators or adopted willingly to reduce costs. Probably the largest tower sharing deal in the world is now on the cards, between the three Chinese cellcos, and it could even be extended to base stations. This could accelerate LTE roll-out, but squeeze suppliers, which are looking to China’s 4G roll-outs as a rare source of wireless infrastructure growth in 2014.
China Mobile, China Unicom and China Telecom are in negotiations, though no agreement has yet been reached, according to filings by the three firms with the Hong Kong stock exchange. No details were provided, but the talks are understood to focus on reducing the cost of building out LTE, in particular, as the operators face a sharp upturn in mobile data usage in China, now the world’s largest smartphone market.
The likely outcome of the negotiations, say local analysts, is that the trio will agree to place their passive infrastructure, notably towers and power, into a state-owned company responsible for securing and managing these assets, and possibly also sites for smaller cells, such as tall buildings’ roofs. This model is seen in several emerging markets, notably India.
Government pressure is clear ‘ the Ministry of Industry and IT said on its website that the proposed venture would ‘promote environmental protection, cut costs and benefit users’. It is also possible, according to sources, that the firms will place their access networks into a similar structure, although this would be far more contentious. RAN sharing deals always face challenges in terms of ensuring differentiation and competition between different carriers’ services.
In the case of China, the picture would be complicated by the contrasting network strategies of the three majors. First-wave 4G is in TDD spectrum, as favored by Mobile, but the other two carriers want to focus on FDD, and are hoping to secure those frequencies this year before they kickstart their full LTE roll-outs. And Mobile is a great supporter of revolutionary Cloud-RAN architectures, which see most base station functionality virtualized on servers, while its rivals have been less enthusiastic.
Whatever the extent of the resulting venture, the driver will be to slash costs ‘ and the big infrastructure suppliers will be hoping this does not extend too far into the RAN, as they wait for the goldmine of three significant Chinese LTE deployments over the coming few years.
When the three operators launched 3G services in 2009, adoption was initially well below expectations, but that has been changing with the launch of more affordable smartphones and the rise in mobile usage of popular web services like Baidu’s. Now 4G is happening, with all three carriers gaining TD-LTE spectrum and commercial licences and Mobile, in particular, planning a massive roll-out to compensate for the disadvantages of its TD-SCDMA 3G technology, and accelerate the migration of its base to 4G.
But the three operators’ recent quarterly results have highlighted the pressure on profitability of rapid infrastructure upgrade costs, as well as subsidies for higher end devices like the iPhone (now offered by all the cellcos). This, together with government encouragement, since 2008, to engage in sharing, will be behind the new discussions.
According to Chinese magazine Caijing, the joint venture would have initial registered capital of tens of billions. The organization would first take responsibility for new sites and base stations and lease them out to the three telcos, and then, in a later stage, take over existing ‘base stations, towers and ducts’.
Morgan Stanley analysts Navin Killa, Gary Yu and Alvin Jiang assess that even a relatively simple towerco agreement would significantly reduce costs. They calculate that tower-related spending accounts for 15% to 25% of mobile capex, especially given the rapid build-out and density of 3G/4G in China, in high spectrum bands requiring many cells (2.1GHz, 2.3GHz, 2.6GHz). ‘We believe proactive tower sharing could reduce industry mobile capex over the next 2-3 years by as much as 10%-15% or CNY90bn to CNY140bn cumulatively over 2014-16,’ they wrote in a client note. And if the towerco were to go public in future, that would unlock asset value, calculated at around US$30bn for Mobile.
However, the benefits for the largest cellco are less clear than those for its rivals. Analysts at Bernstein estimate that China Mobile has up to 380,000 towers (based on an urban 4G roll-out of 500,000 sites and a 2G network totaling 880,000 sites). The other two have fewer towers, but would benefit through access to Mobile’s larger network, especially because there would be reduced need to build out sites in rural areas. Unicom and Telecom are significantly weaker than their larger competitor in rural regions, and have struggled with the economics of covering relatively sparse population, and a tower sharing deal could reduce this advantage for the leader.
Bernstein wrote in a research note: ‘Greater infrastructure sharing has been a government policy for a number of years. Whether this is good or bad for individual telcos will have a lot to do with the details ‘ at this point these are not clear. In the end we believe this entity would either need to be impossibly big (and would have a disruptive impact), or more likely relatively small and therefore have little impact on the competitive dynamic. We caution investors about getting too excited until the full details are clear.’