BMI View: Over the last five years, mobile network operators have turned to infrastructure sharing or joint equipment procurement relationships in order to secure cost efficiencies in network rollout, to improve coverage in sparsely-populated and economically unviable areas and to ensure that next-generation services can be delivered affordably. However, the high cost of spectrum acquisition, of customer acquisition and retention and of next-generation access equipment is proving increasingly difficult to recoup in light of falling voice usage, greatly reduced mobile termination rates (MTRs) and consumers' substitution of operator-billed voice and messaging services with 'free' IP-based alternatives. For the near to medium term, we expect to see more infrastructure sharing agreements being struck around the world, along with mergers and acquisitions where sharing still proves to be insufficient. Meanwhile, a number of recent developments suggest that operators' long-term futures may depend on a radical overhaul of the traditional business models and in repositioning themselves as service, rather than infrastructure, businesses.
BMI forecasts global mobile subscriptions to rise from 6.845bn in 2013 to 7.982bn by 2017, of which the vast majority will come from Asia's most mature and several key emerging markets. New operators are entering these markets all the time, keen to bring their innovative services to increasingly affluent and content-hungry consumers and to usurp the existing players. Governments are also increasingly aware of the importance of telecommunications to economic growth - particularly where the sale of highly appealing digital dividend spectrum can raise billions of dollars for state coffers - and we therefore expect no let-up in growth, either in the number of subscriptions or in the creation of operators and service providers.
| Mobile Goes Global |
|Mobile Subscribers By Region ('000)|
New entrants typically use low-cost pricing and/or multi-service packages as a means of disrupting the status quo and ensuring they can attract many customers to their networks as quickly as possible. Existing players tend to respond with price reductions and promotions that, in some cases, can kick-start a downward destructive cycle in market value. Such a scenario has already played out in a number of African states, where new entrant Bharti Airtel significantly undercut existing players' offers and consistently used that same tactic when its rivals responded in kind. The African market is only slowly recovering from this ordeal and customers' by-now ingrained expectations for low-cost services and handsets are near impossible to break. Thus, despite Africa's huge potential in terms of unaddressed market, investment in a new mobile business represents a massive risk to prospective players.
The problem is not confined to emerging markets. In France, broadband operator Iliad launched its 3G mobile business, Free Mobile, in January 2012. In order to make an immediate impact and thus guarantee a rapid return on its investment in spectrum, infrastructure, roaming rights and marketing, Free chose to massively undercut rivals Orange, SFR and Bouygues Telecom on pricing and, furthermore, set no long-term contract commitments. When added to Iliad's already-compelling fixed broadband and telephony offering, Free Mobile proved to be an immediate hit. Within nine months of launching, it had acquired 10% of the French mobile market, making it out as one of the fastest-ever new entrants.
Rivals SFR and Bouygues Telecom - both small parts of sprawling and debt-burdened multi-sector conglomerates - quickly responded with lower pricing and innovative multi-service packages, but this did not prevent them losing customers to the new entrant. With profits threatened by customer defections - as well as ongoing revenue erosion caused by IP substitution and swingeing MTR reductions - on top of onerous network investment commitments, it was unsurprising that both resorted to cost reduction and containment measures. These measures include a tentative agreement to pool their respective network infrastructures, which should receive regulatory approval in early 2014. The terms of the deal have yet to be disclosed, but it seems likely they will include eliminating duplicated passive infrastructure, such as switches, routers and transmission towers, plus an increased focus on alternative backhauling solutions.
SFR and Bouygues are already working together - alongside incumbent Orange - to jointly build fibre-to-the-home (FTTH) networks across France, so the proposed mobile infrastructure sharing deal is a logical extension of previous work.
Free is demanding to be allowed into the infrastructure sharing partnership and has petitioned both the operators and the regulator for the right to be included in negotiations. Free has an agreement to roam its customers onto Orange's network in areas of France where its own network is not yet built out. That agreement runs until 2016 and is very expensive to uphold, although not as expensive as accelerating the build-out of its own network. Free implies that the key to its financial manoeuvrability will be securing an infrastructure sharing partnership with its rivals. Given its belligerence, it seems unlikely that accord will be easily achieved and legal action - which would delay movement for several years - could ensue.
Orange is no stranger to network sharing deals, having embarked on partnerships with rivals in many of its key European markets, including in the UK (where it owns part of the Everything Everywhere operator venture with T-Mobile), in Poland, and in Spain. The company claims that these deals and partnerships are significantly reducing operational and investment costs in challenging markets, although the benefits are unlikely to be realised for several years. Indeed, recent EBITDA and capex figures from Orange show that cash burn rates remain relatively high. However, it should be noted that Orange has been spending heavily on spectrum over the last 18 months, investments that weigh on its bottom line.
| Global Mobile Data Traffic By Device Type |
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Increased competition in Israel is forcing operators there to turn to infrastructure sharing, with Partner Communications on HOT Mobile teaming up in November 2013, forcing incumbent Pelephone to consider its options. HOT received a 3G concession in 2011, enabling it to become the fourth cellular operator in 2012, alongside fellow newcomer Golan Telecom and a host of mobile virtual network operators. Although increased consumer choice was welcomed by consumers, BMI feared that the market was too small to support more than three players. These fears have been borne out as price competition has undermined the three existing players' business and we increasingly believe that the market needs consolidation in order to protect investments in services.
Network equipment manufacturer Cisco Systems believes that global mobile data traffic volumes will grow from 884,906 terabytes (TB) per month in 2012 to 11,155,531TB per month by 2017. Although Cisco's predictions are rather bullish, it is clear from data produced by selected operators that mobile data consumption is growing rapidly as devices with limited data processing capabilities are replaced by more advanced multimedia devices such as smartphones, tablet computers and other portable connected devices such as cameras, handheld games consoles and machine-to-machine (M2M)-enabled devices.
Unsurprisingly, Cisco believes smartphones will be the primary driver of data traffic growth through to 2017, outpacing the contributions made by laptop and tablet PCs.
With this in mind, it is clear that bigger, faster and more efficient networks are needed to carry all this data. However, if cash-squeezed operators cannot realistically afford to invest to meet projected demand, then a capacity crunch is looming, one that will not be addressed by infrastructure sharing or even consolidation among operators.
Several recent developments point a possible way forward and BMI believes operators may use this as a template to ensure long-term survival and innovation in service delivery.
In late November 2013, Czech broadcasting infrastructure operator Ceske Radiokomunikace (CRa) confirmed that it was looking to buy the infrastructure of the three dominant Czech mobile network operators. The ambitious deal is well-timed, coming just days after the Czech operators successfully bid for expensive new spectrum concessions; they are more likely than ever to be tempted to offload their networks in order to address their mounting debt piles.
While Telefónica O2 Czech Republic confirms that an offer was made by CRa earlier in 2013, assessment of the proposal was deferred until after the business secured both a new owner ( PPF agreed to pay US$3.4bn for a 70% stake) and 4G-compliant spectrum (O2 secured digital dividend spectrum for CZK2.8bn) in November 2013. CRa is therefore keen to press its earlier offer while its new owner considers ways of moving O2 onto a more profitable standing. Rivals T -Mobile and Vodafone also face mounting investment demands at a time when service revenues are shrinking.
Meanwhile, in early December 2013, Alinda Capital Partners agreed to acquire Poland's national transmission infrastructure operator Emitel for an estimated PLN3bn (US$968mn). Alinda has yet to specify its post-acquisition strategy for Emitel but, with an established network of 377 radio and television transmission towers and expertise in establishing and managing in-building and exterior telecoms networks, BMI believes Alinda sees investment opportunities in the mobile towers sector. If so, this would mirror recent developments in the Czech Republic and, with the precedent set and mobile operators looking at any and all options to save costs and protect themselves from the over-the-top (OTT) threat, this is why BMI believes 2014 will mark the birth of a new mobile operator strategy with long-term implications: Operator-As-A-Service.
Data from the Polish Office of Electronic Communications (UKE) show that revenues generated from mobile services totalled PLN18.9bn in 2012, a decrease of around 1%. However, income from voice calls fell by 30.2% y-o-y as consumers made fewer calls, income from mobile termination services was reduced, price competition intensified and consumers switched to free or significantly cheaper network-agnostic IP-based services. Although mobile data revenues increased in 2012, by more than 23%, this was not enough to offset the contraction in the core business.
With Polish mobile ARPU falling by 16.4% during 2012 and leading operators indicating further significant ARPU erosion in 2013 (a trend BMI does not expect to let up over the next five years), it is clear that a radical change in operators' business models is required and that infrastructure specialists such as Emitel and CRa stand to benefit financially as a result. We expect investors in other markets across Europe - and beyond - to take note of this emerging trend, one that could profoundly reshape the structure of the telecoms market in 2014.
| Resource Sharing Does Not Protect ARPUs |
|Monthly Blended Mobile ARPU (US$)|
By relinquishing their dependence on infrastructure, operators would be better placed to focus investment on innovative new services and compete for customers on the basis of specific features and solutions, as well as content. The establishment of infrastructure-specific companies would appeal to infrastructure investment companies such as Alinda as they are better placed and more experienced in extracting additional value from key assets such as towers and fibre backbones; they will see opportunities in offering capacity on fibre networks to utilities and highways agencies, for example. This is something that mobile operators already do, but diverts them from the task of developing services that appeal to mass market consumers, which is where profits are to be found.
We believe operators would still need to invest in spectrum, or at least access rights to spectrum, and we are intrigued by recent suggestions by independent consultants in the UK that operators could pay for spectrum on an as-needed basis, scaling upwards or downwards according to their requirements over time. This would reduce the very high initial spending on spectrum caused by intense bidding wars and would help operators sustainably develop their businesses.
However, a very complex raft of regulations would be needed to police this environment and standard spectrum pricing would need to be adopted, a potential obstacle considering the importance of spectrum revenues to governments' budgets over the next decade. However, if a workable framework can ultimately be drawn up, we will be able to look back at 2014 and say that the age of the Operator-As-A-Service era began there.