Network sharing is the last chance for positive Telco economics
Disclaimer: I wrote a short version for our corporate publication. Given the tight space requirements, several aspects and some details are left out along with a more neutral view. I have lead several large scale engagements so I write from my practical experience. The text below reflects my personal opinion only.
Age of 5G: Infrastructure investments will surge, revenue growth is tbd.
Network sharing is a commonly known practice in the telco industry. First deal dates to 2001, yet it took almost a decade to institutionalize it as a strategy to cope with 4G network rollout costs. As more and more operators started to face the phenomenon labeled as “decoupling” (cost growing faster than revenues) they engaged to network sharing deal, striving to sustain ROI and shareholder value.
Today, a decade later, the industry faces a 5G rollout and a massive surge in investments for spectrum, site infrastructure, new active equipment, and fiber backhauling. However, investments into networks continue to still correlate poorly with revenue growth.
Between 2010 and 2018 industry revenues were down $27 billion, while telcos invested $250 billion in the network. Over 2019–2025, another $1.4 trillion would be spend by the industry, 70% of which would be on deploying 5G.
Strict regulation, prohibiting consolidation resulted into inefficient spending into for overlapping infrastructures of comparable quality. In Europe, 5G licenses were awarded to lateral entrants, making ROI into from a network infrastructure even more uncertain — in theory, OEM vendors and even clients themselves can secure a spectrum license (at fraction of telco cost) and deploy own private network, bypassing telcos and eroding B2B margins. TowerCo’s are are getting large (maybe even too large, as Cellnex Italy anti-trust probe may show) eroding value of owning infrastructure.
Sharing networks is often the most impactful option to improve economics
To deliver the euphoric promises of 5G operators are looking into all possibilities of examining all their options for the improvement of cost efficiency. Herein lies the appeal of network sharing: it is cheaper and faster to build and operate a joint infrastructure instead of competing with two or more overlapping networks that compete with one another. On the Capex side, savings of up to 35% percent are possible, mainly through because of lower spending on network equipment and site infrastructure. On the Opex side, savings from active sharing can bring reduction of be as high as 20-35% percent driven by relating to site rent and power reduction, as well as to savings in O&M and labor costs.
While most of synergies stem from joint greenfield rollout, network sharing can reduce legacy drag too. Many telcos managed to switch off one either GSM or UMTS network and refarming free-up spectrum to LTE. Yet they are still bound to regulation to keep the remaining old layer alive: be it to support emergency services or old devices (feature phones and old M2M modems). Adding legacy into a sharing deal could speed up technology sunset and free up valuable spectrum, particularly in lower bands that is critical for service coverage.
Even the emergence of new market players can be turned into a business opportunity through network sharing. Building a competitive greenfield network, even if on a smaller scale (as with industrial networks) alone from scratch requires not only significant upfront investment but specific skills and capabilities. New players will have to look for sharing partnership, particularly in the early stage of rollout, herein lies a chance for incumbent players.
Risks: lock-in vs. crowding out
Globally, there are two type of long-term strategic risks: Risk of lock-in and crowding out. First type of risks manifests generally if the partnership is unbalanced. Examples could be if one party is faced in high integration costs or unexpected write-offs. Even if initial settlement is balanced, operating payments may be unbalanced, e.g. if compensation pricing is too closely tights to certain traffic assumption. One of the parties may experience high churn and thus foregone revenues. Unbalanced scheme is when either one or both parties cannot realize the fair share of synergies. At the same time exit costs (“divorce”) could be prohibitively high (re-integration, early termination, etc.) so that there is lock-in.
The lock-in risk is the main reason why network sharing is viewed controversially among MNOs. However, given the highly uncertain payback for 5G (and in ten years, 6G?) I don’t see alternatives with similar impact. Wait-and-see is a tactic that can get painful too, e.g. if there is no-one left to partner with. Although there are exceptions mainstream sharing model is bilateral. Many market have only 3 MNOs — some get crowded out. In markets with more than 3 players the challenge is to deal with unequal partner (see risk #1).
Standalone strategy is effectively a bet that others sharing partnership will turn out unsuccessful
As any strategy is essentially a bet it is a valid assumption. What speaks against it is that number of sharing deal is growing steadily.
The risk of being crowed out can cost competitive edge in meeting 5G economics.
Choosing partnership design is complex but critical to extract most synergies
The bottom line is that network sharing as time foregoes the risk of missing out (similar to FOMO in trading) will outweigh the risk of getting locked-in. Just like in finance world, the risks cannot be fully anticipated, they have to be managed properly. In the case of network sharing it is all about the selecting and agreeing on the right model.
Here complexity starts. Network sharing has several design dimensions with a variety of options as shown below
Various combinations are feasible — there is no one-size-fits-all model: each deal is unique in its strategic intent, scope and operating model. Active sharing of complete network generates higher synergies, yet are difficult to negotiate, longer to execute and require more upfront investment into integration. Passive sharing, while easier to establish may not bring the required cost savings for positive 5G economics and most savings are generated through equipment sharing.
Out of all dimensions, technology solution is probably the easiest to determine, thanks to 3GPP, which standardizes network sharing since release 6. Defining geographical scope can get tricky in negotiations — the goal is to find a balanced split between parties.
Balance is the key theme of network sharing. Unbalanced relations intensify the lock-in risk. Balance is required in each dimension, be it scope, operating model and governance. Pivotal point is the discussion on corporate setup, or host-guest vs joint-venture. I will not go into details of each, there is no dominant approach, that latter model is better suited for larger scope in active sharing. JV allows a better control over synergy realization.
Poorly structured deal alleviates synergies and create friction costs. Agreeing on the right model is a fine balancing act between strategic intent, financial benefits, and business risk considerations. Most common reasons why parties walk away at MoU stage are:
- Internal resistance (primarily through fears of losing competitive advantage)
- Seemingly incompatible network strategy or operating models
- Unwillingness to share network control with a business competitor
- Inability to focus on perceived a win-win solution
A common mistake in network sharing I observed is that it is considered “a techie project”.
But as mentioned before, technology questions are in fact the easiest to resolve and what remains is to agree on the operating model and governance. That is more the domain of CEO — in fact, given the long-term impact its the role of the most senior top manager to decide. His commitment is key to overcoming particularly internal challenges.
As 5G network sharing interest spurs, fewer partnership opportunities remain
Experience shows that major network sharing agreements have occurred during the introduction of new technology, thus we expect a third wave of sharing deals to kick-off. New partnerships are being formed and existing deals are being extended to include 5G RAN sharing. Cost efficiency will remain one of the key topics for the next decade (and beyond) given the growing network investment requirements. Wait-and-see strategy, while justifiable today, maybe become risky overnight, when a sharing deal in own perimeter is announced.
Admittedly, network sharing is far more complex and uncertain than carving-out towers. Not all sharing deals deliver the synergies and integration can takes several months (if not years). Business case has a long-tail and synergies may not come in the desired amount. MNO will not generate cash out of sharing, unlike when selling to TowerCo (altough the Cellnex-Polkomtel deal gives some indications on how one can monetize active assets too). But very soon I see passive deals depleting and what will remain is active sharing.
The bottom line is that I do not see any other as impactful options to manage networks economics positively. What remains is to draft a sharing strategy which delivers synergies while minimizing risks. That is doable.
