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Network sharing gets more extreme to address challenges in Italy and China

Network sharing, as we have analyzed several times this year, will be increasingly essential to making the economics of dense 5G networks work for operators. While sharing some neutral host infrastructure such as towers has become the norm, operators are starting to consider more extreme approaches to sharing, to make 5G deployment quicker and cheaper. These may include pooling resources in terms of sites, fiber and cloud systems, and increasingly the active RAN equipment (where regulators allow this).

Two good examples are seen in China and Italy, and both sets of partners offered more details of their plans over the past week.

After much negotiation and speculation, China’s second and third operators, China Telecom and China Unicom, have reached a tentative agreement to share passive infrastructure, but also to cooperate in building some aspects of the active 5G network. It is even possible that market leader China Mobile may join the alliance, mirroring the three telcos’ government-initiated joint venture, China Towers. By placing most of their masts in this JV, they created the world’s largest towerco and expect to save considerable costs in running their 5G networks, as well as having the option to generate cash via an IPO.

Now the three operators could build on that JV to extend cooperation to the base stations, a move that would leave the position of the new mobile entrant, China Broadcasting Network (CBN), rather tenuous if it is left in the cold. The company was allocated spectrum earlier this year, in 700 MHz and 3.5 GHz, to enable a fourth 5G provider, and introduce new services and competition, especially in areas such as TV over 5G. It had previously been reported that CBN was in active negotiations with China Mobile about a co-investment deal in which it would gain access to the leader’s sites and some of its RAN, in return for sharing its low band spectrum and content assets.

That idea was loudly opposed by Telecom and Unicom, but if they combine forces, there could be fewer regulatory barriers to a Mobile/CBN tie-up, creating two shared RANs on a single set of towers.

So far, only Telecom and Unicom have confirmed any plans. In a press conference, Telecom’s chairman said the collaborative approach would result in significant cost savings, and these have previously been estimated, by his counterpart at Unicom, at between $28bn and $38bn in capex alone over the build-out period of 5G, with additional savings on the opex side.

In China, the three established operators already share networks in rural areas and even some cities, and so the barriers of habit, as well as regulation, which often limit sharing in other countries, do not really exist. For instance, Unicom already has a three-year-old agreement with China Telecom to share 4G base stations and optical networks.

It is estimated that, between them, China’s three established MNOs will deploy about one million 5G base stations during the first 18 months of the build-out, and will end up spending as much as $400m. All three looked, in their most recent quarterly results, ill-equipped to meet these demands. Unicom reported a 60% year-on-year drop in free cashflow for the first half of 2019, to CNY15.8bn ($2.3bn), which it blamed on a near-doubling of capex, year-on-year, in the same period, to CNY22bn ($3.1bn). It plans to spend CBNY58bn ($8.3bn) in total this year, up from RMB44.9bn ($6.4bn) in 2018.

In addition, Unicom has been seeking market share by cutting prices for high speed data and that saw mobile service revenues falling by 6.6% year-on-year, in the first half, to CNY78.7bn ($11.2bn), though the telco increased its mobile user base by 9.32m to top 320m. Total revenues fell by 2.8%, to CNY145bn ($20.7bn), though net profit rose 16%, to CNY6.9bn ($980m), but mainly as a result of an aggressive cost-cutting strategy which will not be sustainable in the first years of 5G, unless Unicom can gain the investment and infrastructure partners it wants.

In Italy, there are also new entrants to add to the challenges of the established MNOs – TIM, Vodafone and newly merged Wind Tre. Iliad, which has sent the French market into a spin with its Free Mobile operation, was given a license as a condition of the Wind merger, while wireline operator Fastweb is also planning a 5G service. In such a crowded market, in which operators are also struggling with debt and falling ARPU, new and old players will have to rethink the economics of deploying a new network, and rely heavily on sharing.

Vodafone and TIM have already engaged in an extensive tower sharing deal and now two other operators are driving network sharing to the extreme. Fastweb and new market leader Wind Tre are combining spectrum and site equipment to build a single 5G network. Not only is this a still rare example of active, as well as passive, network sharing – the UK being a trailblazer in this respect – but the partners say they will use the emerging technique of network slicing to differentiate their separate retail services.

The two MNOs will support virtualized networks on common infrastructure – initially a single, hefty slice each to support different consumer and mobile broadband services; in the longer term, multiple slices to provide optimized connectivity for the industrial markets, or high performance applications, which either chooses to target.

If this approach delivers returns, it will be closely watched by other operators, especially in Europe, which are battling with the need to align 5G deployment costs with competitive markets and challenging consumer revenues.

The new deal, revealed last week, will effectively make each MNO a virtual operator on a shared infrastructure, which could prefigure future arrangements under which European, or other, telcos split their physical networks from their retail activities, or even choose just one of these business models, harnessing slicing to maximize the value they can deliver on their shared infrastructure. For Wind Tre, the deal will be sweetened by the ability to use Fastweb’s fiber to connect many of the shared macro and small cells.

The arrangement between Fastweb and Wind Tre is nationwide, and neither plans to build out any 5G equipment alone. The first commercial services should launch next year and the partners are targeting national coverage, including indoors, by 2024. This is a more aggressive timeline than Fastweb had previously indicated –  another benefit of sharing the build-out load. Earlier this year, the company said it was targeting 90% coverage of the population by 2026.

The sharing should greatly reduce the cost of 5G build-out for both players, while adopting a fully virtualized, sliceable platform from day one will give them added agility to launch new services, perhaps more quickly than the others, and without legacy networks to complicate matters. But the two companies have their challenges too, especially Wind Tre, which has had to back away from one of its main vendors, ZTE, because of US sanctions. ZTE is officially still part of its build-out, but it looks likely that its other supplier, Ericsson, will pick up the bulk of the shared deployment. Huawei and Samsung have also engaged in field trial with Wind Tre but Ericsson was added to its official 5G roster earlier in the year, along with ZTE, and these two suppliers provide the existing 4G network.

Wind Tre has also been losing market share to aggressive new entrant Iliad and it gained significantly less spectrum in the recent 3.5 GHz auction than its rivals – 20 MHz against 80 MHz each for TIM and Vodafone, another motivation to share spectrum with Fastweb, which has 40 MHz in 3.5 GHz (Iliad also has 20 MHz, while all five operators have 200 MHz of 26 GHz millimeter wave capacity).

Fastweb, which is owned by Swisscom, has 2.6m broadband customers and 1.6m mobile subscribers thanks to an existing MVNO deal with TIM.

There are risks to sharing, especially as networks densify – Vodafone, which has been a trailblazer for active sharing in the UK and now in Italy, has moved away from active sharing with O2 UK in large cities because this may limit capacity, and quality of experience, for high end users. The Italian regulator will need to be happy that common infrastructure plus slicing really will not restrict the variety and quality of services that will be available to the country’s consumers in the 5G era. The new partners still have less 3.5 GHz spectrum than TIM and Vodafone, though more than Iliad. And of course, vendors will not look kindly on RAN deals which reduce their addressable market.

Fastweb is placing considerable trust in slicing as the way to ensure optimal use of shared spectrum and equipment resources, and the flexibility to deliver the services the market requires. “Thanks to the slicing capabilities of 5G, both Fastweb and Wind Tre will have complete end-to-end control on our virtual networks,” said a spokesperson. “This agreement allows us to achieve the utmost level of synergies and efficiency in the deployment, without compromising on independence and control.”

Vodafone has already announced a network sharing deal with TIM in Italy, mirroring those it has in other highly competitive European markets – with Orange in Spain and Telefónica in the UK. The company is also unlocking value and moving costs off its balance sheet by moving its towers into a new operation across its European territories, and is likely to seek a buyer or new partner for this.

Cost-cutting will not neutralize the effect that Iliad has had on the older MNOs in its first year of operation – TIM has lost 1.2m mobile users and Vodafone 1.4m in the past year, while Wind Tre lost 2.4m in 2018.

But it may make it more viable for them to invest in 5G and start to build an alternative service proposition rather than continue to cut prices. Sharing deals can also help them to leverage their superior physical and spectrum assets to the maximum, mitigating the impact of the new players’ greater agility and lack of legacy. Iliad had signed up 3.3m customers as of the end of March 2019.

Meanwhile, TIM saw mobile service revenues fall by 9.7% year-on-year in the second quarter of this year, while Vodafone’s fell by 7.4%. The price wars saw ARPU fall by 8% in the same quarter, at TIM, to €12.5 ($13.9), and 2.2% at Vodafone, to €13.6 ($15.2). Wind Tre has stopped publishing these figures.

Sharing is the best route to improving these dismal results, since the regulators are hostile to consolidation and could surround any further merger deals with the kind of conditions that ushered Iliad in. TIM and Vodafone announced an expanded RAN sharing deal in July and will place their towers into a joint venture. Iliad has sold its own towers, including about 2,200 in Italy, to pure-play towerco Cellnex.

But as such alliances increasingly include active as well as passive infrastructure, they are not safe from regulatory disapproval either. For instance, earlier this month the European Commission objected to a network sharing deal between Deutsche Telekom and Telefónica in the Czech Republic, on the grounds that it “restricts competition in breach of EU antitrust rules” because the two operators involved are the biggest two in the market.

Fastweb – which is owned by Swisscom, itself a far more creative thinker in the 5G era than it has been in earlier generations – spent only $778m in capex last year and has just 2,500 staff. Compare that to Telecom Italia, which spent €5.6bn ($6.3bn), including spectrum acquisition, and has almost 48,000 people. Yet the incumbent is loaded down by debt, is in the midst of endless restructurings and shareholder feuds, and has consistently failed to reinvent itself as an agile MNO with a modern architecture, despite its interesting and extensive R&D in new platforms and its trials of Cloud-RAN and other key 5G enablers.

Fastweb has the advantage of a fiber network for backhaul and fronthaul, and a home broadband base. It is likely to use 5G initially to reduce the cost of getting fast broadband to each residence and to fill gaps in its fixed network with its millimeter wave spectrum. But soon enough, the value in such an offering will have to include full mobile services and quad play options too, at which point it will be competing with the MNOs, with a far lower cost base, thanks to its sharing deals and greenfield mobile network.

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