The uncertain regulatory environment and poor financial health of telecom players have affected the operations of tower companies. There is a growing consensus among stakeholders to reduce energy costs, which can be achieved through partnerships. Going forward, an increase in data service adoption and in tariffs will improve the financial health of operators, which will drive the demand for base transceiver stations (BTSs). Infrastructure providers share their views on the emerging opportunities, challenges and the way forward for the industry…
What is the current status of the tower industry? What are the key emerging opportunities for tower companies?
Milind Bengali
Today, the business of tower companies is heavily dependent on operators. Regulations and policies that affect operators have a direct impact on tower companies. Similarly, a strong and stable tower company is important for the growth of operators. Therefore, tower companies need to consider business models that ensure sustainability of their operations.
The initial tower business models were based on several assumptions that are not valid today. For instance, under the initial model for 3G towers, pricing was based on a full-paying tenant. However, operators are paying for only 20-40 per cent of a full-paying tenant. Therefore, it has become necessary for tower companies to rework the economics for their sites.
Umang Das
The industry has several opportunities including infrastructure sharing. The focus of infrastructure providers will be on innovating business models, which cater to customer demand. For instance, if the smartphone penetration increases, there will be a surge in data traffic. Existing networks, which support voice services, will have to be upgraded to ensure the transmission of both voice and data services. This entails several issues that will need to be addressed through innovation. Infrastructure providers will have to prepare an integrated business model that covers all aspects of the industry. An integrated model will have to be supported through partnerships among companies operating in various segments of the telecom infrastructure business. The expertise of each company will enable infrastructure providers to offer comprehensive end-to-end solutions to operators. In the past, infrastructure providers deployed only towers for operators. Going forward, for 3G and LTE networks, they can provide in-building solutions, the distributed antenna system and Wi-Fi solutions through partnerships with active equipment providers. Therefore, there is a need for an equitable partnership among the key stakeholders in the tower industry. However, such partnerships will involve challenges because there is no precedent for the provision of end-to-end offerings for infrastructure requirements.
Sairam Prasad
Several opportunities are emerging for the infrastructure industry. An increase in smartphone penetration will drive data traffic growth, which will create the demand for BTSs. As the adoption of data services increases, operators will need to provide additional network capacity and ensure a quality user experience by offloading data traffic through in-building and Wi-Fi solutions. Also, the frequency bands allocated for 3G and 4G services require the installation of additional BTSs to ensure proper coverage.
Vendors can help the tower industry to achieve cost reductions through innovative models. They can reduce the cost of building towers or provide energy efficient products that result in overall cost reductions. The mobile field force application offers another major opportunity. With ground operations becoming more complex over time, there is a need for automation of tower operations through the software.
B.S. Shantharaju
In the past few years, the telecom industry has witnessed significant competition, which has led to a tariff war. This has been triggered by the need to reduce costs through tower sharing. This has impacted the profitability of operators and investments in the sector. As a result, there has been some consolidation with 85-90 per cent of overall revenues being shared by the top four operators. Consolidation would result in healthy competition among operators and limit the tariff war.
Data services would drive the growth of the tower industry. Currently, operators provide 3G services using the 2100 MHz band, which has low spectral efficiency and low propagation properties. This affects the 3G user experience. As a result, operators need to install additional BTSs to offer improved services. However, the deployment of additional BTSs will take time. Also, adoption of voice services will increase the demand for BTSs.
Amit Sharma
The operations of tower companies have been affected by the lack of cooperation among industry stakeholders. Although the tenancies of tower companies witnessed a compound annual growth rate of 25-30 per cent in 2009-11, it decreased to 10-12 per cent between 2011 and 2013 as Indian operators had to deploy multimode BTSs at tower sites to reduce costs, which reduced the demand for BTSs. In contrast, tenancies in international markets have been increasing as operators are deploying several BTSs at a tower site. High ARPUs allow these operators to install additional BTSs and avoid signal interference among different carriers.
Meanwhile, several opportunities will emerge for the Indian industry in the near future. Infrastructure providers can play a key role in the government’s Aadhar and National Optical Fibre Network projects. This will also help infrastructure providers to achieve their goal of offering cost-effective services to customers.
What are the challenges facing the tower industry? What strategies are being adopted to address them?
Milind Bengali
One of the major concerns for the industry is the poor financial health of operators. The government has imposed taxes and penalties of over Rs 200 billion on operators, while their debt has increased to over Rs 2 trillion. In this scenario, if operators decide to slow down network roll-out, the business of tower companies would be affected. The debt can be reduced through the sale of equity stake or by raising funds from international capital markets, which offer low-cost finance.
Umang Das
One of the major issues is that municipalities and states have come out with separate regulations and penalties for tower companies. Considering this, the central government has held discussions with all state bodies to prepare a uniform roll-out policy. Also, there have been discussions among the central government, infrastructure providers and state governments, which is a positive sign. These discussions will go a long way in providing clarity on the distinction between central and state regulations and their implementation.
Similarly, with regard to renewable energy targets, the central government has held a meeting with all stakeholders. They have taken into account issues related to capex and return on investments, and have decided to set up a committee to reconsider the approach that infrastructure providers need to follow to meet the targets.
Sairam Prasad
There are multiple regulations for the tower industry, including those on green telecom and radiation emissions. However, the lack of clarity on these regulations poses challenges. Also, the cost of compliance and adherence to these norms has been a key impediment. For instance, the regulation on radiation emissions requires tower companies to put signages near the sites, which, though creating awareness, results in protests by people living in the vicinity of tower sites. Also, tower companies are required to take measurements for site installation within a 20 metre radius of all rooftops. However, building owners do not allow tower companies to take measurements.
Costs have been increasing steadily due to the implementation of new regulations and increasing competition. In order to address the cost challenges, tower companies should develop low-cost tower sites, which entail low capex and opex. However, developing such sites also involves challenges because input costs, including diesel costs, are increasing and the resco (renewable energy service company) model has not matured. Rescos have been undertaking several pilot projects in rural areas to determine the most cost efficient and scalable model.
Tenancy rationalisation is another key issue. Operators are shutting down some of the low-utilisation or low- revenue sites.
B.S. Shantharaju
One of the major issues for the industry is the need to limit the overall cost of operations. This can be achieved through lower rentals and energy costs. The former would impact the operations of tower companies and, therefore, these players are looking to limit energy costs. In the past three years, Indus Towers has reduced its energy costs by 22 per cent, while diesel consumption has declined by 15 per cent despite a 35 per cent increase in the tower base. Energy cost optimisation has been achieved through the fixed cost model.
There is a growing need for operators, tower companies and equipment vendors to form partnerships to achieve cost efficiencies. However, a challenge associated with such alliances would be to ensure that the business of each stakeholder remains unaffected. Moreover, tower companies should not partner with several vendors as this creates complexities and cost inefficiencies. Interdependence in the industry will be the way forward.
Local and state governments imposed penalties to earn revenues as the sector began to witness growth. However, they are realising that such penalties impact the balance sheet of companies. Therefore, there is need for cooperation between the industry and the government.
Amit Sharma
There are three key stakeholders in the tower business – the government, operators and infrastructure providers – that need to work in tandem to deliver cost-effective services to subscribers. However, currently, all the three stakeholders are working independently.
The government has been levying penalties on the industry on several accounts. The state governments and municipalities are also imposing penalties for health hazards caused by towers. Moreover, there is a mandate to adopt green solutions. Although these policy initiatives are well intended, the mechanisms specified to achieve the targets are irrational.
Meanwhile, operators are under intense pressure due to the significant decline in their margins. Most of them have accumulated a huge debt and are facing challenges in servicing it. As a result, they are taking steps to reduce input costs. For instance, they have demanded a 50 per cent reduction in tower rentals. However, the infrastructure industry is not able to recover its capital costs even at the current rentals. Reducing rentals has become more difficult in the current scenario of high finance costs. Though the cost challenges have been recognised, neither infrastructure providers nor operators have been able to make concessions.
This calls for the three stakeholders to collaborate and provide cost effective services. The government should implement regulations that facilitate growth. Effective partnerships will result in a win-win situation for both operators and infrastructure providers.
What is the way forward for the industry?
Milind Bengali
The industry will witness consolidation with only two to three infrastructure providers operating in the country. Though small tower companies can also operate by providing services in select circles, they will face challenges related to the high cost of finance and high capex requirements.
Partnerships will be the way forward for tower companies. With regard to cost optimisation, infrastructure providers and operators need to cooperate in a way that leads to a win-win situation.
Umang Das
The worst phase for the industry is over and it is poised to witness steady growth in the short term. A total of 100,000-150,000 towers will be installed over the next two to three years.
Sairam Prasad
Tower companies should focus on the automation of its field force; innovation in products and the design of towers, which reduce installation costs; and energy optimisation with a gradual reduction in diesel consumption. The regulatory environment will evolve over time and these companies will need to ensure compliance with regulations at low costs.
B.S. Shantharaju
The government will need to implement policies that facilitate industry growth. Voice tariffs are expected to increase, which will strengthen the balance sheet of operators. Meanwhile, the data service segment could witness a tariff war, which will impact telecom operator margins. On the other hand, the reduction in tariffs will also drive the adoption of data services, thereby compensating for the decline in ARPUs.
Amit Sharma
Tenancies would remain constant over the next two years. From 2016-17, tenancies are expected to increase on account of the deployment of additional 3G BTSs to support data traffic growth. Also, 3G and 4G services are being offered in frequency bands that require a higher number of towers to provide wide coverage. Spectrum refarming in the 900 MHz band will also lead to an increase in tenancies. However, the demand for additional BTSs due to spectrum refarming will not be realised before 2015.