Towercos weigh up new revenue opportunities

As the dust settles on the recent multi-billion-dollar spate of mergers and acquisitions in the towerco sector, the industry is focusing on improving operational efficiency. But there is also interest in growing new revenue streams in Europe, as senior tower company executives made clear during the recent TowerXchange Meetup Europe 2023 conference.

Current ambitions among the region's towercos include providing active network infrastructure, partnering on distributed antennae systems (DAS) to bring 5G indoors, and carving out a role in the mobile private network market. And the choices they make will have implications for their telco customers.

Not all towercos share the same aspirations. Cellnex’s CEO, Tobias Martinez, who is stepping down from his role in June, was not unusual in wanting “to extend our role in the value chain”. Where Cellnex stands out is in its publicly expressed interest in being “an augmented towerco” and providing shared active radio access network (RAN) infrastructure.

Providing infrastructure for two telcos sharing a RAN “is a fact today in the market”, according to Martinez: Cellnex gained experience of managing shared active infrastructure in Poland following its 2021 acquisition of Polkomtel Infrastruktura. In addition to 7,000 towers, the deal gave Cellnex voice and data transmission equipment, 11,300 km of fiber backbone and fiber-to-the-tower backhaul, and a network of microwave radio links.

“Some telcos are sharing [radio] network in rural areas...At a certain point of time, [the RAN] is not strategic,” said Martinez.

Attendees of the event pointed out that when there are three or four overlaid national mobile networks, and MNOs no longer differentiate on network coverage or quality of service, then the RAN becomes ripe for commoditization. And if towercos don’t seize the opportunity to host it, then another company, such as an equipment provider, might.

In addition, said Martinez, 5G offers “different performance through slicing or other technical features and…I think towercos or others [can] find an opportunity to outsource or be a partner in a new part of the value chain.”

Certainly, the move towards disaggregation – or the separation of RAN hardware and software – and the eventual deployment of Open RAN promise to make it more cost-effective and simpler to provide neutral hosting for shared RAN infrastructure while telcos continue to manage the core network.

Meanwhile, cash-strapped telcos, whose need for capital was an impetus to sell off their tower assets in the first place, might be attracted by neutrally hosted shared RANs if they provide cost benefits, particularly if their network ownership changes. In Italy, for example, Swedish private equity company, EQT, has acquired a 60% stake in Wind Tre’s mobile and fixed network infrastructure. The remaining 40% of the new company will belong to Wind Tre’s existing owner, CK Hutchison.

Regulatory evolution

Regulators may be open to market evolution. When it comes to the neutral host model, Brian Potterill, Director of Competition Policy at Ofcom, says the regulator “won’t stand in the way [of more network/infrastructure sharing]. We looked at two major network sharing arrangements and have not blocked them or stood in the way. We recognize that efficiency in sharing networks and competition comes in many forms.”

Potterill also discussed the difficulties the telco sector faces, following the announcement that Vodafone would be cutting 11,000 – around 10% – of its employees and that its return on capital employed (ROCE) in Europe's telecoms sector is lower than the cost of capital.

“If the go-to strategy is cost-cutting it is not a sign of a healthy industry,” said Potterill, adding that ongoing investment by telcos depends on the industry being sufficiently profitable.

Indeed, European telcos’ financial challenges combined with shifts in technology and business models raise questions about how the telco market could potentially evolve.

“If the RAN is commoditized, why does the neutral host not buy spectrum?” and have a single shared antenna, backhaul service and spectrum license, instead of three, commented one participant in a discussion about towercos offering network-as-a-service. (A neutral host leases infrastructure to multiple service providers on a shared-tenant basis.)

A towering challenge

Yet despite the opportunities, a step into hosting shared active RAN infrastructure presents operational, financial and commercial hurdles for towercos.

“It’s not the same when you have responsibility of the performance of the network and you manage network sharing with two customers,” said Martinez at Cellnex. “It is not as easy as the passive infrastructure outsourcing process.”

And towercos have to tread carefully with their MNO customers. “For Cellnex [we have] another opportunity [of] having two core tenants [in a] country; it is a natural evolution. We are always following the pace, we are not trying to accelerate when the customer is not ready,” he explained, adding that he is “seeing opportunities for 2023 or 2024”.

The other consideration for towercos is their financial valuation, which determines how readily and affordably they can access capital. Their current business model of making large initial investments in passive infrastructure, which they lease long-term at predictable rates of return, has given them much higher valuations than telcos. As several speakers noted at the event, whereas Deloitte calculates that towercos have valuation multipliers of around 20 to 24, the number drops to x5 or x6 for telcos.

Going private

Not every new business model need take towercos away from their comfort zone. Simon Frumkin, CEO of UK connectivity infrastructure-as-a-service provider, Freshwave, believes that “deploying mobile private networks directly to customer premises is the next logical extension of the towerco.” His neutral host company is working directly with venue and real estate owners and adopts the towerco model of investing in and hosting passive connectivity infrastructure that will be in place for a long time in a way that is “high on capex and low on opex”.

Cellnex is already playing in the mobile private network market, having bought the edge connectivity company, Edzcom, in 2020. “We sell direct to enterprises and it requires certain kinds of sales people, said Mikko Uusitalo, Director, Mission Critical & Private Networks, Cellnex, and founder of Edzcom, adding: “We see the market growing a lot.”

Cellnex’s Edzcom has deployed 40 to 45 networks to date, said Uusitalo, with the largest worth “10 million and the smallest under one million”. The market however, is still in its early stage and requires lots of investments to make it happen, he added. But the good news is that after three or five years the company “is seeing very high EBITDA – almost close to towercos.” In addition, the business model is familiar to towercos, says Uusitalo, because services have a 10-15 year lifeycle and customers tend to stick if they are happy. “Now is time to do the land grab. Once you deploy it if you do your job well they will not switch and you can do an upsell.”

But Europe is a very fragmented market and not every country offers the same opportunities. Phoenix Tower International is trialing an MPN in Europe. However, as Scott Lewis, Vice President at the company, says: “The MNO has the spectrum, where do we play?”

Vantage Tower’s Head of Product, Jaime Abril, pointed out Germany presents the biggest MPN opportunity for towercos in Europe because regulators have released spectrum for use by private enterprises. “Where there is no industrial spectrum you have to collaborate with MNOs who also have an offering – and you don’t want to compete with your anchor customers.”

Vantage Towers is already supporting MPNs with specific security requirements and is starting to explore campus use cases “to find where we as towercos can bring value and potential different financials – incorporate active equipment, devices, SIMs, applications. The economics are very different.”

Playing indoors

Another opportunity could lie indoors. One of the drawbacks of 5G is the relatively poor coverage it provides in buildings, particularly when networks are operating in higher frequency bands. Distributed antennae systems (DAS), help building owners overcome this.

Totem, which belongs to Orange, is one of the towercos offering DAS. It says 80% of mobile calls are received and sent within buildings and structures. It offers to support 5G calls either by installing a passive network of antennae inside a building, which connects externally via copper or fiber optic cables, or by installing an active DAS, which picks up a signal and amplifies and distributes it around the building. 

However, although Lewis of Phoenix Tower agreed that “DAS does offer three-way value to real estate, MNOs and the tower” he added: “It is very difficult in Europe to see opportunities to partner with MNOs to bring 5G inside buildings.”