The passive infrastructure sharing deal between UK operators Vodafone and Telefónica O2 was a ground-breaking one, but last year it seemed it might fall apart because of the greater capacity and density demands of 5G. Vodafone had indicated that shared sites might not be enough to support its requirements in urban areas. But the operators have now announced an expanded relationship to prepare for 5G, though this may involve selling off some of the towers included in their joint venture, CTIL.
However, the partners expect to expand CTIL’s role to cover more aspects of passive infrastructure management; and to increase its ability to generate revenues from leasing tower space to third parties. The parent firms have been considering the potential to turn CTIL into a full towerco for some years, but have had to prioritize the task of finding and managing sites for their own 4G roll-outs.
But now, as operators come under intense competitive pressure in the saturated UK market, Vodafone and O2 are more interested in “potential monetization” of CTIL, once they have finalized their 5G infrastructure plans. This could just mean more third party leasing on CTIL towers, or the sale of some of those sites. Many operators have offloaded their towers in recent years, sometimes into fully owned JVs like CTIL, or China Tower; sometimes to independent, neutral host tower operators like American Tower (the operators generally retain access to the sites via leaseback deals, but the towers are moved off their books and just become an opex cost).
The announcement was made a few weeks after Vodafone said it planned to set up a “virtual internal tower company” across its European operations to reduce costs. This company will manage about 58,000 towers across Europe, with its own management team, whose primary KPI will be cost reduction.
“We are also conducting due diligence in order to determine the optimal strategic direction and financial direction of all our tower assets, including those held in joint ventures,” said Vodafone, in the statements which accompanied its interim results release.
Before any moves to offload or restructure CTIL, the UK priority will be to ensure the MNOs have the best site locations for 5G, at the most efficient price. To this end, the current network sharing deal will cover 5G services delivered from their joint sites, and the acquisition of some new sites (though Vodafone has indicated it will also do some of this process itself, particularly with regard to small cell sites for urban densification and smart cities).
Initially, the partners will roll out their 5G base stations at 2,500 sites, or 15% of those outside London. The exclusion of the capital from this statement suggests that Vodafone is following through with plans, discussed last year by its head of networks, Kye Prigg, to “unwind the relationship with Telefónica in London” to prepare for 5G.
There are also signs that the operators are pulling back on their separate alliance to share active equipment such as base stations. This was part of their Project Beacon effort, which saw Vodafone deploying a shared network in the western region of the UK, plus the southern half of London; and O2 doing the same in the eastern UK, and northern London.
They deploy their own base stations and each operator is responsible for upgrading masts in their ‘zones’ while duplicate sites have been eliminated. In total, 18,500 sites will have been upgraded by the end of 2018 – a process which involves replacing everything but the tower. This deal has helped the two operators to expand or upgrade their networks, and roll out new services, more quickly and cost-efficiently than going it alone. This has been important to keep them operationally competitive with BT/EE and Hutchison Three, which have their own network sharing venture called MBNL.
But for 5G, and even some 4G expansion, the MNOs will mainly be going it alone on base station roll-out, reflecting the higher capacity they expect to need, and possibly the greater need to differentiate each operator’s network to support targeted user groups, locations and enterprise use cases.
In June last year, Prigg said there were no commitments to include 5G in Project Beacon at all, saying: “We’re in discussions with Telefónica regarding 5G and whether to share or not. To unwind everything would be complicated. There could be sharing in rural and a different way forward in densely populated areas.” Prigg was clear that Vodafone and Telefónica would continue to share passive infrastructure in London and everywhere else.
Vodafone and O2 also hinted at plans to share transmission networks as a means of further reducing costs. They plan to upgrade these networks to support 5G and said they were targeting bigger economies of scale and an “improved choice of infrastructure partners” – presumably referring to introducing new vendors in order to increase price competition.
Vodafone plans to launch its first 5G services in the middle of this year and has carried out trials in the cities of London, Birmingham, Bristol, Cardiff, Glasgow, Liverpool and Manchester.
“We believe that these plans will generate significant benefits for our business and our customers as we move into the digital era of connected devices, appliances and systems on a mass scale. Customers will benefit from the best 5G experience available and we will deliver even faster speeds by using our spectrum holding more effectively,” said Nick Jeffery, CEO of Vodafone UK.
Tim Hatt, head of research at GSMA Intelligence , told Mobile Europe: “Vodafone and O2’s proposed extension of their network share agreement in the UK to include 5G … reflects the need to achieve scale economies in what will be a renewed cycle of network investment to underpin 5G (the last of which came in 2013-15 rolling out LTE). We forecast 5G to reach 43% of mobile connections by 2025 in the UK, well above the European average of 29%. To achieve this, the UK operators will need to spend £4bn in capex – and that doesn’t include new spectrum. The network sharing partnership means that the two companies can achieve sizeable cost savings by having a single backbone of towers, and through increased buying leverage with their network equipment suppliers.”
Vodafone and O2 UK were seen as trailblazers when they announced a network sharing venture, Cornerstone (now called CTIL), back in 2012, when most operators remained sceptical of such moves. The two MNOs placed their towers into the joint venture to create a single passive infrastructure network, and followed with Project Beacon, in which they have shared some active equipment and coordinated their programs to phase out legacy 2G and 3G systems and introduce 2G/3G/4G RANs.