MNOs consolidate tower operators to slash costs in US and India

The tower industry worldwide is in a state of flux, with mobile operators looking to slash their infrastructure costs by offloading their own towers, or turning to non-traditional sources of sites. Meanwhile, towercos are extending their reach, either geographically, or into new types of networks such as small cells.

All these trends have been highlighted in the past week by events in the US, where Verizon and AT&T are collaborating with a new tower partner; and in India, where American Tower has acquired a major operator as it seeks to become a global force.

The US mobile operators have been putting intense pressure on their tower providers to offer them more flexible terms and lower rates, while at the same time investigating alternative partners – Sprint has been threatening to transfer some base stations to government land where it claims it would pay lower rates than to traditional towercos, for instance.

Both Verizon and AT&T are targeting significant operating cost reductions – Verizon CEO Lowell McAdam recently set a goal of cutting $10bn over the next four years. They are taking a two-pronged approach – converting their networks to be mainly software-driven and virtualized, which should, in the medium term, deliver lower opex and total cost of ownership; and slicing into infrastructure budgets by renegotiating tower and fiber deals; taking control of their own fiber for backhaul and fronthaul; and adopting small cell networks, which could support dense capacity at lower cost (if the various tensions with site owners such as city authorities can be allayed over the coming few years).

This week, AT&T and Verizon entered into an unusual joint arrangement, signing a deal with Tillman Infrastructure to build hundreds of new cell towers across the country using an alternative approach to the traditional leasing model.

Tillman, which already owns and operates towers, small cell sites and city infrastructure, is an example of a company which is smaller than the US giants – American Tower, Crown Castle and SBC – but aims to use the new approach to network roll-out to ease its way into their core customers. Increasingly, MNOs will need a combination of many different types of sites, from towers to roofs to lamp-posts to rural poles, often combined with fiber and even active small cell management. This has seen towercos acquiring small cell and fiber assets – Crown Castle, in particular, has done a string of deals, as have companies outside the US like Spain’s Cellnex and the UK’s Arqiva.

But while operators may favor a partner with a broad portfolio and added value services, the major cost element remains the traditional tower. Tillman will build these towers on a ‘to-suit’ basis geared to the needs of AT&T and Verizon, and in return they  have committed to leasing and co-anchoring the co-located sites for a period of time (unspecified).  In some cases they will support new coverage and capacity, but – in a clear signal to existing providers – the MNOs said they will also relocate some equipment from current towers.  Construction will begin in early 2018.

“We continue to focus on technology innovation and investing in the latest software platforms to provide the best possible customer experience on our network,” said Nicola Palmer, chief network officer of Verizon Wireless. “At the same time, it is imperative to reduce operating costs. We review all of our long term contracts as they come up for renewal and we are excited to develop new vendor partners to diversify our infrastructure providers.”

“We need more alternatives to the traditional tower leasing model with the large incumbents. It’s not cost-effective or sustainable. We’re creating a diverse community of suppliers and tower companies who will help increase market competition while reducing our overhead,” said Susan Johnson, SVP of global supply chain at AT&T. “We look forward to working with Verizon as we establish site locations and sign new lease agreements with additional suppliers in the coming years.”

The comments echo those which the MNOs have been making for over a year now, in very public ways, as they seek to put pressure on their tower partners. In September 2016, AT&T’s SVP for wireless architecture, Tom Keathley, formed an internal taskforce to develop alternatives to the traditional tower rental business model, warning that towercos’ current business practices “may not be sustainable”.

“There is a fair amount of frustration certainly with AT&T certainly with those business practices,” he told an investor event at the time. “The fundamentals are cost per megabyte, and we’ve got to get to a place where we can sustain cost per megabyte, moving into cost per gigabyte. So the current business models are likely not sustainable in that environment.” He said AT&T might consider relocating to nearby, cheaper towers, which will presumably now include some of the new Tillman ones.

An internal letter circulated within AT&T last year, saying the operator was “instituting a new program to evaluate terms and conditions of all leases coming up for renewal, explore advanced renegotiation options and consider possible alternative site locations. Our first choice is to create a new agreement that serves all parties well.”

It was pushing for a number of improvements including “fair” early termination rights, the ability to modify or upgrade tower equipment at no extra cost, reduced or eliminated price increases, and “rents reduced to competitive rates”, said the letter. “A ‘no’ or non-response will trigger AT&T’s review of alternate locations,” the carrier said.

Meanwhile, Sprint has been altering its cost structure through leaseback and other financing arrangements with its parent company Softbank, and recently Softbank set up a towerco of its own in the US, in partnership with Australian property firm Lendlease Group. The new venture, Lendlease Towers, sees each party committing an initial $200m to the initiative, to fund the acquisition of about 8,000 towers, including rooftops and poles, and the new firm is targeting $5bn of telecom infrastructure assets in the medium term. Sprint assets will be included in the portfolio.

Denis Hickey, CEO of Americas for Lendlease, said: “Consistent with our strategy of focusing on growing demand for infrastructure, we’ve identified the telco infrastructure sector as an opportunity to deploy our integrated business model.”

Part of Softbank’s agenda is likely to be to boost the effectiveness, and market value, of Sprint. Lendlease could provide a new, and more cost-effective source of sites for the operator. Additionally, it could expand its business model as the idea of a utility operator emerges – one which differentiates itself with superior infrastructure which not only supports its own retail services, but a significant wholesale business.

Cooperations on passive infrastructure, between rivals like AT&T and Verizon, are growing in popularity as MNOs round the world look to achieve an entirely new cost base. France Telecom and Deutsche Telekom are co-investing in various aspects of fixed and mobile platforms, while the UK’s four MNOs have placed many of their sites into two joint venture towercos (CTIL for Vodafone and O2, MBNL for BT/EE and Three).

In China, the three operators have placed many of their towers into a venture called China Tower. And consolidation of tower operations in India has been ongoing for several years, and has taken another step forward with the news that Vodafone India and Idea Cellular – which are in the process of merging – are to sell their sites to American Tower in a $1.2bn deal. This will strengthen the two MNOs’ balance sheets in advance of merger, and allow the US firm to continue the recent expansion of its footprint worldwide.

It currently operates about 149,000 towers globally and will now add 10,235 from Vodafone and and 9,900 from Idea. It will then lease capacity on those towers to the two operators. It believes the deal will generate about $320m in property revenues and $120m in gross margin during the first full year following completion of the deal, which is expected in the first half of 2018. It made $5.8bn in revenues and about $4bn in gross margin in its most recent fiscal year.

For Idea and Vodafone, the arrangement will reduce their direct costs and also improve operational cost efficiency because about 6,300 colocated tenancies on the combined tower business will be merged into a single tenancy. If the towers deal is concluded before the MNOs’ own merger, Vodafone will receive $592m and Idea $615m from American Tower.

In a separate potential transaction, Bharti Infratel, the infrastructure arm of leading Indian MNO Bharti Airtel, was reported to be planning to take full control of a tower partnership with Vodafone and Idea called Indus Towers, which operates about 40,000 sites. Infratel and Vodafone each owns of 42% in Indus, while Idea has 11.5%. The remaining shares are owned by Providence Equity Partners.