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The Rise of the

Tower Business
More mobile operators are spinning off their tower
infrastructures in search of growth, shareholder
value, and better margins. Now the questions are:
Will the growth continue? Is the value sustainable?
Can margins be improved?

The Rise of the Tower Business

Captive or independent tower companies are emerging like never before as more
telecommunications companies sell or spin off their tower holdings. Because towers make
up the bulk of their capital investments and, especially in emerging markets, most of their
operating costs, mobile operators are opting to share towersrenting them from other telcos
or tower companies instead of making ongoing financial investments in infrastructure. In the
process, mobile operators are searching to cut costs drastically and maximize profits.
But has it really been a success? Are tower companies creating value for their shareholders and
their mobile operator clients? In this paper, we answer these questions and examine what tower
companies and mobile operators can do to create a sustainable business and shareholder value.

Spinning Off Towers Is a Hot Topic for Telecoms


Inspired by the early success of tower companies in India, operators around the world are
contemplating selling or spinning off their towers (see sidebar: Tower Sharing in India). The
most recent examples include American Tower Corporations purchase of Cell Cs towers in
South Africa and Blackstones unsuccessful attempt to buy Reliance Infratels towers in India
(see figure 1 on page 3). Private equity investors, excited about opportunities to increase growth
and cash flow, have initiated tower spinoffs by leveraging debt. As a result, mobile operators
have realized significant value from tower asset deals.

Tower Sharing in India


The Indian telecom sector saw
a dramatic growth phase from
the late 1990s to 2010. Because
operators were focused on
acquiring customers and
expanding services in the midst
of hyper-competitive pricing
pressures, they started
outsourcing network
management, information
technology, call centers, and
then tower infrastructure
all previously seen as core
strategic activities.
In 2008, Quippo, an independent
company with a small portfolio
of towers shared by operators,
acquired 1,000 sites from Spice
Telecom, which later became
Idea Cellular. In the same year,
Bharti Airtel, Vodafone, and Idea
created the worlds largest tower
company, Indus Towers, through

a joint venture. In 2009, Quippo


merged with Tata Teleservices
tower assets, creating Viom,
Indias largest independent
tower player. The next year saw
a spate of inorganic activity, with
American Towers acquiring two
smaller tower companies and
GTL Infrastructure acquiring
17,500 towers from Aircel in an
all-cash deal.
Between 2007 and 2010, the
number of towers rose from about
100,000 to 310,000, fueling an
increase in tenancy ratios to
1.6 per tower. From 2010 to 2012,
there was aggressive growth of
new operators, allowing private
players such as Viom to boost
their tenancy ratio to 2.4.
Tower sharing created a strong
incentive in the Indian telecom

market: It allowed operators


to reduce costs considerably
and focus on core marketing
activities while enabling new
operators to rollout networks in
record times. For example, Tata
DoCoMo rolled out 16,000 sites
within a year with Viom.
However, hyper-competition in
the mobile industry and the
ongoing fallout from competitive
and regulatory challenges over
the past 12 months have put cost
pressures on Indian tower
companies. With around
365,000 towers, there is now an
over-supply, and growth has
tapered off. As a result, Indian
tower companies have begun
to look for new growth avenues
and focus more on operational
improvements.

The Rise of the Tower Business

Figure 1
Recent tower deals

Deals

Country

Year

Deal size

Number
of towers

Enterprise
value
per tower

Crown Castle buys Vodafone Towers

Australia

2008

$39 million

140

$278,571

Protelindo acquires Hutchisons towers

Indonesia

2009

$503 million

3,630

$138,606

American Tower Corporation


acquires XCEL Telecom

India

2009

$170 million

1,730

$98,266

GTL acquires Aircel

India

2010

$1.8 billion

17,500

$102,857

Macquarie SBI obtains


11 percent stake in Viom

India

2010

$304 million

37,500

$73,697

American Tower Corporation and


TowerCo Ghana buy MTN Towers

Ghana

2010

$428 million

1,876

$228,305

American Tower Corporation


buys Cell Cs towers

South
Africa

2010

$430 million

3,200

$134,375

Blackstone and Carlyle reported valuation


of Reliance Infratel (did not go through)

India

2012

$3-$4 billion

50,000

$60,000
to $80,000

Source: A.T. Kearney analysis

As early movers, Indian tower companies have become global industry leaders with Indus,
Reliance Infratel, and Viom managing 110,000, 50,000, and 41,000 towers each, respectively,
ahead of industry pioneers American Tower and Crown Castle with 49,000 and 22,000 towers
each (see figure 2). However, recent industry developments and regulations in India have raised
questions about the sustainability of independent tower businesses. In particular, the exit of some
of the newer operators, which were the primary engines of Indias tower growth, is affecting cash
flow and debt repayments and could even push some tower companies to the brink of bankruptcy.

Figure 2
India tower companies are among the global industry leaders
Number of towers, 2011
(thousands)
110

50

49

41
22
7

Indus Towers
in India

Reliance Infratel
in India

American Tower
in North America

Viom Networks
in India

Crown Castle
in the United States

Protelindo
in Indonesia

Sources: Company websites, media publications

The Rise of the Tower Business

While some of these developments are specific to Indias market and regulatory situation,
we believe it also heralds the changing nature of tower businesses around the world.

From Growth to Operational Excellence


Independent tower companies are on the rise, bolstered by two aspects of this emerging
industry: a strong focus on operational excellence and a fervent exploration of new business
models. Although voice growth is slowing in many markets, data traffic is exploding and driving
growth in additional 3G and 4G tenancies and is leading to more in-building solutions and smaller
cell sites. As such, it is unlikely we will see the end of the tower growth story anytime soon.
Nevertheless, tower businesses are undergoing a fundamental transformation. For years,
one dimensiontenancy ratiohas generally governed tower businesses. But as mobile
markets mature, the number of operators a tower company has is no longer a measure
of success and may even be risky. Slowing subscriber growth, technology-integrating
equipment, operator consolidation, and active network sharing are making it more difficult
to add revenue-bearing tenancies and are forcing companies to take another look at the
conventional tower business model.

Recent industry developments and


regulations in India have raised
questions about the sustainability
of independent tower businesses.
The new measure of success is site-level profitability. This means that operational excellence,
somewhat overlooked in the past, is now an essential skill. As with managed services, the
value of outsourcing is not just in sharing costs but in a specialist providers ability to manage
costs and quality.
Several other factors are also fueling the need for operational excellence:
Preference for fixed costs. Increasingly, operators are pushing for fixed power and fuel cost
arrangements, rather than the traditional pass-through, to preempt pilferage and disputes. This
also works in favor of the tower company because it benefits directly from operational
improvements.
Demand for customized sites. One-size-fits-all designs are not working because customers are
increasingly demanding more specific solutions, be it for in-building or for rural areas.
Overlap in tower locations. In many markets, tower portfolios are heavily overlapping in urban
areas. Rationalization will be important to improve cost structures.
Green telecom requirements. There is more public and regulatory pressure to reduce telecom
towers energy consumption and pollution, especially from diesel generators. Alternative
solutions are being explored, including solar, biomass, and fuel cells, but their economic
viability is still not where it should be.
The Rise of the Tower Business

Developing New Business Models


Tower companies are also exploring new opportunities and business models, with active
network sharing and managed capacity becoming topics of interest. Although enticing in
concept, it is not yet clear how these can be viable in the long term if provided by a third party
or how the financial risks can be shared equitably among all participants.
Another hot topic is energy-management companies that take over power and fuel supply at
a predictable cost per kilowatt hour (kWh). Although they offer clear advantages for mobile
operators and tower companies to avoid capital expenditures (capex), they are not always
beneficial for maintaining or improving earnings margins.1

Considering Different Market Contexts


Naturally, market context is important when evaluating tower companies business potential,
the nature of growth, and operational improvement opportunities. We believe the focus should
be on improving operations and site profitability and not just increasing tenancy rates. Our
reasons are illustrated by three examples out of South and Southeast Asia:
India. With high mobile penetration80 to 85 percent of the populationand operators
restricted financial capabilities, the growth phase for new towers is slowing down. In fact,
many regions have an oversupply of towers, and most tower companies already have a high
share of single tenancy sites. At the same time, power and fuel costs account for 30 to 40
percent of operator network costs, with rampant power leaks and diesel pilferages. Overall,
actual power and fuel costs could be 20 to 25 percent higher than should-cost. Focus on
operational excellence is the order of the day.

Data traffic is exploding, leading to more


in-building solutions and smaller cell sites.
As such, it is unlikely we will see the end of
the tower growth story anytime soon.
Indonesia. Population coverage outside of the island of Java is limited, and only the leading
operator, Telkomsel, has a strong footprint in these areas. Recent regulations have made
tower sharing mandatory, and we anticipate an increase in tenancies outside Java. Data traffic
is expected to grow by 50 percent per year for the next five years, fostering nationwide 3G
deployment. This will drive an increase in tenancy ratios and new infill requirements in Java,
and in some new sites outside of Java, provided they can be economically deployed to justify
this expansion.

Earnings in this paper refers to earnings before interest, taxes, depreciation, and amortization (EBITDA).

The Rise of the Tower Business

Malaysia. Population coverage has reached 95 percent, and operators have shared towers for
some time now, both formally and informally. As site acquisition in major cities becomes more
difficult, the focus is turning to mobile broadband and the required optimization of in-building
coverage and small cell networks. Infrastructure sharing, consolidation, and optimization are
the way leading operators are most likely to go.

Tower Operations Have Room to Create


Significant Value
Tower companies now have significant opportunities to improve their operations along several
dimensions. The starting point is the typical profit and loss structure (see figure 3). The key is
making existing sites profitable with concerted efforts to improve both the top and bottom lines.

Figure 3
The starting point for improving operations is the typical profit and loss structure
Illustrative

($ million)
46
100
18-20
12-15

146

7-10
8-10
20-25
45-55
20-25
5-8

Gross
revenue

Power
and fuel
pass-through

Net
revenue

Rent

O&M
HR and
and security G&A

Others

EBITDA

Depreciation

Interest

Profit
after tax

Notes: Others includes penalties, under-recovery in power and fuel costs, and provisions. O&M is operations and maintenance. HR is human resources.
G&A is general and administrative. EBITDA is earnings before interest, tax, depreciation, and amortization.
Source: A.T. Kearney analysis

Beyond the profit and loss structure, there are several other ways to improve performance:
Drive comprehensive operational improvements
Power and fuel. Energy costs are often treated as a pass-through to operators, leading to
limited incentives for tower companies to contain costs. Inefficiencies are typically found in
areas such as monitoring electricity and fuel consumption, equipment upkeep, and equipment
configuration, including overly powerful diesel generators. In areas with limited grid power,
these inefficiencies are compounded and lead to high pilferage and leaks. We often see too
much emphasis on technology solutions, such as using advanced batteries for longer backup
or installing cooling solutions to substitute for air conditioners, and not enough focus on
The Rise of the Tower Business

execution. However, significant savings can be realized through better execution by ensuring
correct temperature settings, properly maintaining equipment, and controlling vendor costs.
For example, some tower companies in India use prepaid petrol cards to control the diesel
filled by vendors and set limits based on each sites should-be consumption.
Operations and maintenance. Taking care of site infrastructure is crucial for controlling fuel costs
and avoiding unscheduled downtime. Thorough equipment checks and adherence to preventive
maintenance schedules are vital aspects of sound infrastructure performance. Leading tower
companies focus on improving their ability to track site-level performance and profitability.
Concepts such as tower operating centers (TOC) are rightly gaining ground in the industry.
Estate management and security. Landlords that pilfer power or fuel can be a big source of
problems. Some even resist control with unscheduled outages that result in penalties from
operators. Leading tower companies understand the need for good rapport with landlords but
are also prepared to use security or police to control abuse when necessary. Security costs can
be optimized by adopting a patrolling model instead of a stationed-at-site model. Naturally,
these options vary by location and environmental conditions.
Reduce cost structure of sites
New site designs. Innovative sites focus on reducing the total cost of ownership for tower
companies and operators. This requires not only building structurally lower-cost sites, but also
integrating active equipment components that reduce energy consumption. India, with its
frugal engineering capabilities (jugaad), is poised to drive such breakthrough designs; we are
already seeing some companies pushing in this direction. Similarly, capex can be significantly
reduced by tailoring site specifications to tenancy profiles. For example, a single tenant site in
an area with decent grid power can get the job done with just a monopole for an outdoor base
transceiver station (BTS) that has an advanced valve-regulated lead acid (VRLA) battery. No
diesel generator or shelter is necessary.
Existing sites. Sites are often designed for three to four tenants while the actual number
of tenants turns out to be just one or two. This results in over-configurations, such as a
30-kilovolt-amp (kVA) diesel generator for a single-tenant site. At the same time, tower
companies have under-configured sites, allowing for swapping of generators and batteries.
Identify incremental site, tenancy, and pricing opportunities
Bottom-up site opportunity analysis. Radio network planning capabilities are essential for
maximizing tenancies. Tower companies can map their tower portfolios to operator blind spots
and then approach operators to discuss sharing.
New technologies. When outlining service agreements with telecom operators, tower
companies often fail to charge adequately for new technologies such as 3G or 4G, which
means they do not share in the incremental revenues generated. This can be a significant
missed opportunity when operators deploy universal site cabinets for 2G, 3G, and 4G.
Asset utilization. Tower assets can be used for other tenancies that do not require much space,
such as Internet service providers (ISPs). Although revenues are generally lower than for a typical
operator tenant, the margins can be attractive. Also, the real estate at tower sites can be used for
new business opportunities, such as ATMs or Internet kiosks. The availability of power, air
conditioning, and security can be an appealing proposition for other service providers.

The Rise of the Tower Business

Capture other operational improvement opportunities


Vendor management. Many routine tasks such as diesel filling, maintenance, and security are
outsourced. As such, vendor management is a core competence for avoiding vendors dictating
terms or passing on their inefficiencies. Watertight contracts and stringent enforcement are
crucial to deriving value from of an outsourcing model.
Contract management. To deal effectively with both customers and vendors, contracts need
to be comprehensive and forward-thinking. Tower companies should not lose out on new
technology deployments, wholesale or active sharing arrangements, or when changing to
fixed-cost models. Renegotiations are challenging, so these issues require attention when
contracts are framed.
Collections. Working capital management can be another improvement areafor example,
reducing outstanding days for payment, automating billing to reduce errors, following up on
pending receivables, and enforcing contract terms.

Growth: No End in Sight


Tomorrows tower company will be more than a cost-sharing proposition; it will be a specialist
provider of telecom network services with operational skills in energy management, operations,
customized site planning, and low-cost design. These companies will offer operators a clear and
sustainable value propositionespecially attractive to companies with site rentals, power, and
fuel that can account for 70 to 80 percent of network costs.
The economic reasons for mobile operators to spin off their tower operations will be difficult to
ignore, with operational improvements dictating partner choices and construct, whether
captive spinoff, management contract, or sale to a tower specialist or financial investors.
As the nature of the tower business shifts from growth to operational excellence, the opportunities
to improve shareholder value will flourish. And with data traffic accelerating, the tower growth
story is certainly not over.

Authors
Nikolai Dobberstein, partner, Mumbai
nikolai.dobberstein@atkearney.com

Mohit Rana, partner, New Delhi


mohit.rana@atkearney.com

Ajay Gupta, principal, Mumbai


ajay.gupta@atkearney.com

Sridhar Narasimhan,
principal, Singapore
sridhar.narasimhan@atkearney.com

Saurabh Singh, consultant, New Delhi


saurabh.singh@atkearney.com

The authors wish to thank their colleague Rajaganesh Sethupathi for his valuable contributions to this report.

The Rise of the Tower Business

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