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Tue 14 Jul 2009 04:00 AM

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Share deal

As margins are squeezed and ARPU falls, sharing cell sites is one way for operators to boost revenue during tough economic times.

Share deal
Ricky Watts, Aircom, says sharing will increase with 4G technology.
Share deal
Nuno Melo, Motorola, says operators need to look at EBITA levels.

As margins are squeezed and ARPU falls, sharing cell sites is one way for operators to boost revenue during tough economic times.

An operator's network has always been viewed as one of its most prized possessions, helping to differentiate it from a rival operator. But as coverage becomes more of a commodity it makes sense for operators to look at how they can extract some further value from their network.

According to a recent report from Delta Partners, the region of the Middle East and Africa has been relatively quiet with respect to infrastructure sharing deals, as operators have traditionally believed that coverage outweighs the benefits of sharing. But over the next twelve to eighteen months they expect that situation to change.

For Nuno Melo, Motorola Home and Networks Mobility's director of managed services for the EMEA and Asia Pacific region, operators will only seriously consider sharing when their earnings before income tax and amortisation (EBITA) levels get close to 20%.

Chris Lewis, group vice president, International Telecoms and Networking at IDC adds that operators suffering from declining margins cannot ignore them. "[Operators] might look at new markets, and some thought they could move into adjacent markets, like media on the consumer side, or IT services on the enterprise side, and they've all found it very difficult to do that," he says.

"There is still significant growth in some countries in the Middle East and Africa, and they are still growing their subscribers, albeit at a lower ARPU. If the majority of customers are going to be in the US$5-$10 dollar range an operator may question whether they can afford to build the network that supports [the growth]."

Du CEO Osman Sultan was last month reported to have said that the current economic climate was pushing UAE operators Du and Etisalat towards a further infrastructure share deal. Du declined to comment further, but director general of the UAE's TRA, Mohamed Naser Al Ghanim, told CommsMEA that there is a site sharing agreement between the current licensees.

"Most of the site sharing is passive, mainly the outdoor sites. However, there are some indoor sites that are actively shared. Currently the operators are working on an implementation plan." Analysts say that further cooperation is indicative of a change in attitude by operators in region.

Demanding more

While one of the catalysts for share deals may have been the worsening economic environment, Lewis says that the process of telcos moving away from being vertically fully integrated companies began many years ago, and it is a trend that is continuing, he says.

"Operators are no longer thinking about looking after the whole network. Instead, the emphasis is toward the customer; since customers are asking operators to do more, operators are asking, why shouldn't we ask the equipment guys and the suppliers to do more for us? If you take that as a trend within the market, site sharing is a part of that," he says.

The most prevalent type of sharing allows a rival operator to use the non-telecom related equipment such as the tower, power supply and security features. Passive sharing is the simplest way to for operators to combine their efforts. In such deals, operators give each other access in a ‘tower swap' deal, where operator ‘A' gives operator ‘B' access to a certain number of its towers in exchange for access to the same number of operator ‘B's towers, with each looking after its own sites.

These deals can reduce both capex and opex, but more money can be saved - and cash unlocked from a balance sheet - by carving out tower assets in order to form separate companies. Motorola's Melo says that in such cases, asset valuation is a fundamental challenge. "For me, it's the amount of cash these assets are able generate independently, and that is the most fair way to do it. However, if an operator has put a lot of money into an asset and it has not had the required return, it will not have the same view."

International tower companies are "hovering around the MEA region looking to expand their tower portfolios", according to Delta Partners. Debt and equity investors are also allocating "considerable funds" to invest in infrastructure deals, attracted by the opportunity to invest in start-ups with stable and guaranteed cash flow from long-term operator contracts.

Another option, which at the moment is less widespread, is known as active sharing where the transmission equipment is shared. Although network vendors are trying to encourage this, ABI Research senior analyst Aditya Kaul says that operators are still not comfortable with the idea, and Delta Partners say passive sharing will be first step for most operators in the region.For those operators that are able to overcome the perceived loss of control of the equipment that carries their customers, the returns can be much greater. Kaul says that in addition to savings from passive sharing operators can save 20%-30% on capex and opex with active share deals, with further gains if more than two operators share.

Future deals

Kaul says that if you look at the developed markets, most of the sharing has been on 3G networks which have not yet been built out across many of the emerging markets. "I think that there is more openness towards sharing 3G networks, for example in India there is a lot of activity going on behind the scenes at the moment where operators are trialing and testing solutions from various vendors which allow them to share base stations or active electronics," he says.

Ricky Watts, director of strategy and innovation at Aircom International, a firm that helps operators plan their networks, says that with 4G rollout on the horizon, the number of share deals will increase.

It is not just the cost of the infrastructure that will encourage operators, but the technology itself that will make it easier for operators to use each other's equipment. While 2G infrastructure was not designed for sharing, measures were put in place for operators to share the radio access in 3G networks, and this is set to be further improved upon for 4G technology LTE, Watts says.

"Inherent in the designs of 4G are the capability of sharing, and with the cost of rolling out 4G that is probably going to be a big push for the industry. The cost of LTE - especially if operators want to do the equivalent of what they have with today's network - is extraordinary, and they must have a very, very solid business plan to do that," he says.

Delta Partners says it expects active sharing to play a much more significant role in the near future, especially in countries such as India where spectrum availability is "a serious concern". Until last year, operators in India were not allowed to share telecoms equipment, but due to a change in regulation this is now possible.

Whether regulations permit them to or not, Watts thinks that operators in the Middle East will adopt a cautious approach towards active sharing. "They will watch what goes on in Europe and North America, and maybe then follow it," he says. "Operators in the Middle East will find it very hard to lose control of their network into a joint entity. But I think some of the other operational things that pre-empt going down a site sharing route they will start to actively look at."

One deal that operators in the Middle East and Africa cannot fail to have noticed is that between two European heavyweights, Vodafone and Telefonica. Three months ago the pair announced a deal to build new sites and consolidate existing sites in Germany, Spain, Ireland and the UK.

Chris Lewis of IDC describes Telefonica as "one of the most pragmatic telcos", and Vodafone as "a lot more realistic" about what it attempts to do alone.

"I think we are entering a period of pragmatism in the telecom market," he says. "We've had all the hype and now we're facing the reality that this is not a mega growth market, so we need to control costs while shifting the emphasis to service.Vodafone and Telefonica are not going to share everything everywhere and it will almost be on a case-by-case basis, but they are two of the biggest operators in the world. If they've come to this conclusion that they need to share, even with a direct competitor, that's pretty significant."

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