View from the T-top

A lot can be ascertained about the health and future of the telecom industry by looking at the tower ecosystem. Here is a bird’s eye view of what it looks like

By Pratima Harigunani

As strange as it may sound, there is a simple, and quick, way to check about a body’s health. Just look at its gut. There is so much that resides there – it is the seat of its immunity, it helps the body to digest its fuel well and it harbors all the good bacteria. And when something wrong happens in the body, the gut is the first one to feel it.

So when we look at the gut of the telecom industry, it is the first tell-tale sign of what’s good or what’s problematic about it. Towers say a lot about the profitability, degree of consolidation, competitive equations, ARPUs, network efficiency, and environmental impact of telcos in any market.

Right now they are telling something interesting through tenancy ratios, Capex investments, and technology innovations.

Let’s climb up higher and get a better peek into it.

Industry health – vital signs

How about starting with the most fundamental sign? It is called the Tenancy Ratio. It basically means the average number of tenants or operators that are sharing tower infrastructure. When an industry is expanding and growing, these ratios go upward too.

This signals available capacity and infrastructure utilization rate in the industry too. Also, after a major wave of consolidation, this ratio underwent an upheaval. Tower companies faced some crucial tenancy exits as the number of operators shrunk drastically to just four or three from a ten+ scenario before.

And mobile network operators or MNOs started coming under pressure more and more because of drop-in tariff prices, high spectrum fees, TCO optimization struggles, and capacity expansion imperatives. For instance, a recent ICRA reckoning pointed out that Vodafone Idea Limited (VIL) has been under financial stress as reflected by mounting losses, churn in the subscriber base, largely stagnant 4G user base, and pressure on ARPU levels and burgeoning debt levels.

Towers say a lot about the profitability, degree of consolidation, competitive equations, ARPUs, network efficiency and environmental impact of telcos.

Tower companies faced some crucial tenancy exits as the number of operators shrunk drastically to just four or three from a ten+ scenario before.

This is likely to have a bearing on towers too. And, in case of VIL exit, the tower industry would confront vacation of around 180,000 tenancies that are occupied by VIL currently. Just 40-50% of these tenancies are expected to be retained by the tower companies over a period of 18-24 months

For the ICRA sample of independent tower companies, VIL occupies a 35% tenancy share and 36% revenue share. So if VIL shuts down operations, tower companies will have to face a loss of these tenancies, which would be translating into revenue and EBITDA decline for the industry. As per ICRA’s expectations, existing telcos will gradually take up only 40-50% of VIL’s tenancies. The total tenancies for the industry by FY2024 are likely to remain lower than FY2021 levels.

ICRA also hints that the demand for loadings and high-power small cells is expected to remain elevated for the tower industry. It is not just tenancy loss that tower companies face as a concern. They might also bear the brunt of write-offs for VIL’s receivables, which have been witnessing a steady increase lately – ICRA added. However, relatively low debt levels and strong liquidity position of the tower companies, are likely to alleviate these concerns to some extent.

If we look at a CRISIL June 2019 report ‘Tower Signals, it explained that, “The consolidation wave has reduced the number of players to about five as of 2019, from about 15 players in 2012. With telecom operators divesting in tower assets, the towers industry is expected to see the shift to pure-play independent tower cos from the operator-led model.”

A good example is how the merger of Vodafone and Idea led to over 57,000 tenancy losses. And despite exit penalties that offset the revenue loss, the ripples of tenancy losses can continue in consequent years too.

Tower companies are not just concerned about tenancy loss. They might also bear the brunt of write-offs for VIL’s receivables, which have been increasing lately.

A newly-shaping oligopolistic structure has also squeezed rent revenue per tower because the number of tenants per tower tends to go down, also affecting tower valuations. This could, or should, lead to attempts at finding innovative models ahead. Also, after the COVID-19 hit many industries and consumers, the momentum of digital transformation has unlocked a new appetite for data and telco services.

The telecom industry has witnessed technology evolution from 2G to 3G and to 4G and is on the cusp of further evolution to 5G. The new technology would need denser networks and, thus, the demand for towers would remain buoyant, augurs Ankit Jain, Assistant Vice President, and Sector Head - Corporate Ratings, ICRA Limited. “While the initial expansion can be done using the installation of small cells, however, as demand on these sites increase, these have the potential to be converted to full tower sites. As far as the other alternatives are concerned, in particular satellite communications, which can be a disruptive technology, we expect that the penetration of the same would not be rampant, to begin with, and Satcom can actually complement the existing network and coexist in the ecosystem.”

So where does this weird mix of opportunities and challenges leaves tower companies? Would they be able to leverage their assets well? Would they be able to create a new industry direction, especially when industry-dynamic can adversely affect their tenancy metrics?

Switching to a better diet

Thankfully, not all is bleak about the state of the tower landscape in India.

Post the consolidation in the services industry, tower companies witnessed sizable tenancy losses resulting in a decline in tenancy ratios, but as Jain points out, with the healthy increase in data usage in the recent past, there has been an increase in the tower rollouts and tenancy numbers. “It is expected that if the telecom services industry structure remains intact, there will be a steady demand for towers, and the tenancy numbers are expected to increase steadily.”

Plus, the scenario is changing into a tech-savvy and green shade as companies start embracing new ideas. Like using virtualization, drone mapping, robotic field inspections, aerial imaging, 3D equipment modeling, analytics, etc. for better asset management. Digital twins are emerging as a plausible option for sharpening data management without indulging in risks, high costs, and capital-intensive processes. Sharper data leads to new revenue opportunities and higher margins in many ways.

The space can also start looking at new business models – like smaller cell sites, active network sharing, operator consolidation, ISP opportunity, ATM/kiosks, etc. Jain opines that while there are opportunities for the tower companies to graduate towards new revenue streams like smart cities, installation of EV charging points at tower sites, advertising at tower sites, active infrastructure sharing, etc, some of these are futuristic and their revenue share vis-a-vis the core revenues of the tower companies is likely to remain low in the near to medium term.

Many companies are showing interest and investments in trekking up to these new heights. One among many such step-ups is the shift towards green initiatives. They range from prudent usage of diesel, reduced OPEX, automated/remote management, to use of renewables and better asset-maintenance efforts. Also, tower companies are working on new models of revenue to monetise their real estate assets. There is already excitement about the advent of small cells, custom-made sites, hotspots, fiber backhaul, and 5G-oriented solutions.

If tower companies are able to steer some of these big shifts right, they can turn into something much more than a cost-sharing asset model for telcos. They can strengthen specialist solutions for telcos and enhance the industry’s profitability and green impact by investing in the right technologies and models. Just helping strongly on-site rentals, power, and fuel can be a big turning point for a telco where these areas account for 70-80% of network costs. And, thus, they help customers through better prices and services too.

And that’s a calculation that is based on solid precedents; not just gut-feel.

pratimah@cybermedia.co.in