Asset monetization and regulatory actions create new infrastructure landscape

16 July 2020 |  Cindy Whelan, Principal Analyst, Wholesale Telecoms, Omdia

Traditionally, telecom service providers have prided themselves on infrastructure ownership. Owning network infrastructure gives providers control over service quality and delivery as well as costs, and network reach is considered an important differentiator. But with these assets comes heavy capital and operational expenditures for construction and ongoing upgrades and maintenance.

As the pace of technology accelerates and network access and compute capabilities are pushed closer to end points, debt-laden service providers face the dilemma of investing in new services even as revenues and margins are under considerable competitive pressure.

Debt-laden providers face the dilemma of investing in new services even as revenues and margins are facing competitive pressure.
 
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Service providers seek injections of funds by divesting infrastructure assets

Incumbents around the world are reorganizing their infrastructure ownership and management. Many are motivated to do this to separate the capital-intensive parts of their businesses, which are of necessity for the long term, from their service-based operations, which have much shorter time horizons to meet customer demands for greater responsiveness and flexibility.

Telefonica in 2016 moved its towers and submarine cable assets into a new infrastructure unit called Telxius, and subsequently sold a stake to private equity firm KKR. In 2019, Vodafone announced plans to spin off its tower assets into a standalone company which may eventually file for public offering. Vodafone and Telecom Italia also recently completed the merger of their Italian tower assets into neutral tower operator, Inwit. CK Hutchison too has announced plans to divest 28,500 tower interests in Europe into a wholly owned subsidiary of CK Hutchison Telecom.

In early 2020, Orange Business Services announced that it would separate its fiber and tower assets into two separate and neutral companies. Orange will retain a stake in these companies, but they will be free to sell to other providers.

However, in the US, the use of structural separation is rare. Most recently, mobile network operators (MNOs) AT&T and Verizon have divested tower assets to neutral third-party operators such as American Tower and Crown Castle, establishing lease agreements for ongoing operations.

These transactions bring service providers cash that is used to pay down debt loads or to invest in strategic initiatives such as 5G spectrum acquisition and network rollout. They also help providers improve balance sheets by reducing capital expenditures and shifting to more of an operational expenditure model. In some cases, providers have also used these transactions to not only gain cash, but to exit service areas that are no longer considered strategic. For example, in the early 2010s, AT&T, CenturyLink, Verizon, and Windstream all acquired data center assets to support cloud solutions. Within approximately five years, they had all sold these assets, deciding instead to work with carrier neutral providers such as Equinix.

Consolidation spurs growth of neutral players

These asset divestitures contribute towards the growth of existing neutral providers such as American Tower, Crown Castle, and Equinix. In addition, government regulatory directives and structural separations are creating a new crop of independent infrastructure companies. The asset separations of Orange and Vodafone will support new neutral fiber and tower operators in Europe.

In the US, telecom provider assets are being acquired by private equity firms to create standalone neutral providers, as was the case when AT&T and CenturyLink sold their data center assets, leading to the creation of Evoque Data Centers and Cyxtera, respectively.   

There are examples in the US and Europe of neutral tower operators working with municipalities to deploy fixed and wireless broadband services for broader reach and to provide the foundation for Smart City initiatives. Examples include Crown Castle’s collaboration with Salt Lake City (Utah) administrators to deploy small cells for improved wireless service, and with the US Forest Service and the National Parks Service to extend fiber along roadways in rural regions of the state to support cell phone service and public safety tools such as traffic cameras.

In Europe, American Tower’s French subsidiary, ATC France, is working with Parisian municipal authorities to support the Paris2connect urban shared network, which is a smart city solution.

Utility companies are also supporting neutral or open networks. Siro is an initiative between Vodafone and the Irish utility, ESB, to create a wholesale open access network within Ireland to support gigabit connectivity to consumers and businesses.

In the US, the steadily increasing demand for mobility, and the need for densification to support 5G and future edge computing requirements has given rise to new infrastructure players including CitySwitch, Extenet, and ZenFi to address regional and national fiber and wireless needs. These companies work with municipalities, utilities, and service providers to facilitate network expansion.

Infrastructure sharing supports a path to 5G 

Infrastructure sharing among providers is growing across the globe.
 
In addition to asset divestitures, infrastructure sharing among providers is growing across the globe. This shift is largely being driven by two needs: government desire for universal broadband connectivity that includes reach to rural service areas, and the network density needs of 5G. Service providers facing comparatively low revenue growth are faced with the challenge of financing the expansion to meet these needs.
Operators to review their capital structure and market position amidst falling prices and rising demand for 5G investment.
 
Indeed, in Omdia’s “2020 Trends to Watch: Asia,” published September 2019, we noted that the combination of falling prices and rising demand for 5G investment, along with growing demand for fixed broadband, will compel operators to review their capital structure and market position. Providers may consider mergers, acquisitions, or other arrangements to reduce the costs of 5G and fixed broadband network rollouts.

Providers may consider mergers, acquisitions, or other arrangements to reduce the costs of 5G and fixed broadband network rollouts.  

As service providers and national governments come to the realization of the scale and cost of 5G network expansion, infrastructure sharing is emerging as the most efficient path to deploy these networks. There are examples of service providers collaborating to share the costs and effort involved in deploying 5G and fixed broadband infrastructure. In Spain, Masmovil and Orange Espańa have agreed to share their fixed fiber and 5G networks. Vodafone UK and O2 UK have agreed to share 5G active equipment, such as radio antennas on joint network sites across the UK to accelerate 5G deployments. In Italy, Fastweb and Wind Tre have also struck a 5G network-sharing deal that reduces both companies’ costs while retaining control over investments and operations.

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While there are examples of service providers voluntarily partnering to share infrastructure, sharing is also being supported by national governments, either implicitly or through regulatory directives. This has been the case in Europe, where the European Union (EU) adopted the European Electronic Communications Code (EECC) directive in December 2018, creating a framework for communications regulation that promotes co-investment and wholesale-only networks but acknowledges the need for a sustainable business model to incent providers to participate. To that end, the directive seeks to balance opening access to incumbents’ networks against the need to incent those providers to invest in next generation networks by supporting reduced access regulations and limiting cost-oriented network access pricing for next generation networks. This framework is to be used in combination with individual EU member nations’ initiatives to facilitate competition and network sharing to advance infrastructure development and support for new communications technologies across Europe.

Wholesale only providers including CityFibre (UK), Open Fiber (Italy), and Siro (Ireland) launched prior to the EECC directive, but limited regulatory intervention is intended to lend support to these players. When it comes to wireless expansion and rural coverage, the UK government is sharing costs with the four main UK operators, EE, O2, Three, and Vodafone to build the UK Shared Rural Network, which is to deliver 4G services to 95% of the UK by 2025. In Germany, regulators conditioned a 2019 5G spectrum award on the requirement that Deutsche Telekom, Telefonica Deutschland, and Vodafone Germany create a national wireless network that includes rural service reach.

In September 2019 China Telecom and China Unicom announced that in order to save capital investment on 5G network deployment, they would share network assets including spectrum sharing (3.4 to 3.6GHz band), although they will build their own core networks and remain independent. Chinese providers are under the control of the Chinese central government, which has a clear policy of encouraging network sharing to optimize costs.

Infrastructure sharing remains less common when it comes to fiber assets. Service providers around the world spent billions of dollars deploying fiber networks for differentiation and cost management, and there are fewer examples of providers voluntarily opting to divest these assets under a leaseback arrangement or to make them available outside of traditional wholesale practices.

National governments in Singapore and Australia backed nationwide neutral networks through national broadband network (NBN) initiatives. While their approaches differed, the goal was the same: to create an open network to facilitate competition and to ensure national broadband coverage via wired and wireless solutions.

While there can be value in owning strategic infrastructure assets, it has become clear that providers must strike a balance between network ownership and alternative models depending on their short- and longer-term objectives. The intersection of these forces supports a compelling case for increased infrastructure sharing. 

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