The Rise of the Digital Tower company. Towerco Revolution

Today you will make and receive dozen of phone calls, chat with your friends and family via whatsapp and read several online newspapers on your smartphone. As you get water at home through pipes, your mobile communication is supported by wireless infrastructure as telecommunications towers, that are essential to everyday communication.

Telecoms towers used to be owned by mobile network operators (MNOs) as a key component of their network infrastructure but their financial challenges (need to reduce cost and debt), their search for growth, the look for efficiency and the need to accelerate rollouts are making them divest their tower asset, giving place to the creation of a new market, the Tower Companies (towercos).

Towercos, wholesale wireless infrastructure providers, are relatively new to the wireless industry (last couple of decades) becoming a consolidated market in the US (American Tower) but kicked off only a few years ago in Europe. They are infrastructure landlords providing the site, the site infrastructure and management to tenants (typically MNOs).

Moreover, Towercos will need to undergo a fundamental transformation to adapt their business to a changing digital environment and to deal with increasing market pressure. 5G rollout, new network technologies and new business models are building new market dynamics. Towercos need to respond fast to these changes by the digital transformation of their business that will demand new approaches, the need to be more agile, a redefinition of their role, will make them open up to new product and services and be more data-driven and to use new technologies to get differentiation from the competition generating new revenue streams.

This post focused on how Towercos should transform themselves to become digital players, leveraging digital technology and innovation, improving results through both operational excellence and new business models. e.g implementing smart management of infrastructure assets based on IoT, data management and analytics.

The telecom tower industry has a ‘top heavy’ structure with diversity in business models

TowerXchange organisation tracks 304 towercos that now own 3.37mn of the world’s 4.82mn investible towers and rooftops, representing 69.9% penetration into the industry’s addressable market. (source: TowerXchange, Q319)

To be honest, site management and mast building are not the most glamorous part of the mobile industry, despite being one of the most important. But this has changed recently and “entertainment” has met telecoms towers becoming one of the most exciting and active markets in the last year (acquisitions, carve-outs, joint ventures..).

There is quite a diversity in towerco business models but they could be categorised in two main groups:

1. Operator-led towerco, in which 50%+ of the equity is owned by the parent MNO. Usually as a result of MNO carving out and retaining ownership and control of their tower infrastructure. Examples are Telxius (Telefonica), Inwit (Telecom Italia) and China Tower (3 main MNOs in China).
   
2. Pureplay Independent towerco, own passive infrastructure on a site and lease space on it to MNOs to host their active equipment. They are independent TowerCos with no equity retained by MNOs. Examples are Cellnex and American Tower. The global market share of independent towercos is only 13.1% (with 15.4% in Europe and 64.3% in the US). (source: TowerXchange, Q319)
   
   Other categories are small segments in the market, e.g. Joint venture towerco, MNOs form JVs to share their passive infrastructure, usually into a third-party company that either manages or owns the assets. An example is CTIL (between Vodafone and Telefonica UK).

Towercos need to embrace innovation, going beyond the proven tower landlord business model

In principle, the conventional Towerco model is quite simple. They acquire wireless infrastructure assets as telecoms towers (mainly from MNOs) and lease them back to the MNOs, signing off long term contracts for the operation and maintenance of the site and its infrastructure. Additionally, towercos, in general, can build the infrastructure too (but the simple model consider just the acquisition).

This is a win-win model as the MNOs free up cash from their assets, enables them to focus on their core business (service to customers) and expand their network coverage in a more cost-effective way, at the same time that host their active assets on the passive infrastructure of the towerco. Nevertheless, there is a drawback in case that the MNO has not the main equity control of the towerco, the renegotiation of the lease contract after the initial phase could mean an unacceptable higher operating cost for the MNO (for the towers they sold to the towerco).

Despite some towercos have little desire to go beyond this conventional proven business model (building, acquiring and leasing up towers), I think that the longer they stay in the comfort zone the more they will regret in a few years. Towercos need to embrace innovation and diversification to grow and keep a profitable business in the coming years.

Main technologies, innovations and services that will help towercos to diversify their business models

To my mind, the following are the main technologies, innovations and services that will help towercos to diversify their business models beyond macro towers:

The first two complementary technologies relate to offering smaller antennas in locations (as in building or dense urban areas) where existing infrastructure (macrocells) doesn’t provide proper coverage or capacity to meet consumers’ data demand: DAS and small cells.

1. DAS (distributed antenna system) some towercos are already offering in building services as DAS (distributed antenna system), where multiple spatially distributed antennas provide better network performance in a building or area (open and closed environments with high densification of users such as stadiums, shopping malls, hospitals, airports, subways, roadway tunnels). This has been usually the first move of towercos regarding asset diversification.

2. Small cells, towercos providing small cells for the rising data capacity needs of MNOs to improve densification and data off-loading. Small cells differ from DAS both in the use case and the operating model as they are standalone radio access nodes, use low power radio elements and work for a single MNO. Designed to provide coverage over smaller areas can be deployed faster than DAS and with a lower upfront cost.
   Small cells demand has increased in developed markets and will surge with the deployment of 5G networks resulting in massive densification of networks.
   Small cells represent a great opportunity for towercos (some of them are offering them already) with a diversity of business models: the traditional infrastructure landlord model, the passive small cell model (generating a portfolio of small cell sites including power, backhaul to the site and O&M) ) and the small cell-as-a-service (investing and deploying the passive and active components for the small cell and offering connectivity as a service).

Besides, the following enablers are innovations that will transform the mobile business massively:

3. 5G. Mobile usage and data consumption has been increasing year by year, (global mobile data traffic is expected to multiply by 5 before the end of 2024, source: Ericsson) so the next-generation mobile network, 5G, is being roll-out to meet those needs (particularly in dense urban areas). 5G will bring faster (10x) speed (theoretical 10Gbps, real 400Mbps), lower latencies, higher network capacity and more spectrum and bandwidth for mobile, and higher densification (10-100x number of connected device per area).
   Although 5G has been advertised through futuristic use cases, the most certain use case for 5G will be fixed wireless access (FWA), i.e. enhanced mobile broadband access for households and business. Besides, 5G expects to take existing use cases to a new level such as massive IoT, connected vehicles and smart cities and it claims to enable new use cases as remote robotics, machine remote control or remote surgery.
   These 5G applications will demand a massive amount of data resulting in the need for more towers (most of them small cells as pointed out in the previous section). Additionally, the deployment of 5G new radio (NR) will increase the need for space in towers. So more towers, more space in towers seem an opportunity to be evaluated by towercos.
   On the other hand, the diversity of use cases will make 5G incorporate some technologies development (some already used in LTE) to get more adaptive and flexible networks. Let’s have a look at it…

4. Network slicing. A network slice is an independent end-to-end logical network that runs on shared physical infrastructure, capable of providing a negotiated service quality (GSMA), i.e each specific use case/business gets a specific network (logical that runs on a common physical network) to meet its specific needs. Network slicing is enabled by components of software such as SDN (software defined networks) and virtualisation (NFV) that will require new approaches to base station rollout and fibre, opening new opportunities for towercos.

5. Edge computing, that locates computing process close to where they are needed and will require data centres at the edge of the network. This could be expanded in medium-term to the site, opening the opportunity for towercos to become edge neutral data centres using their sites. Towercos are in a natural position to offer this service to MNOs, allowing them to adopt a diversity of business models again.

Nevertheless, I don’t see many towercos succeeding in short-term in most of the innovations/services above because of the complexity of deployments for those new technologies. Towercos will need some time to find the proper business model and to implement substantial changes in processes, capabilities and way of working.

On the other hand, in my view, there are two more technologies and innovations that will enable the revolution in short-term: Remote site management and Data analytics/AI.

Smart Remote site Management and data analytics capability are the next game-changer for Towercos

For years, the main metric for a towerco success has been the Tenancy ratio, i.e. the number of tenants per tower. The higher the number of tenants the better for towercos that boosts their revenues from almost the same cost. On average, towercos have an overall tenancy ratio of 2.4 (2.8 on ground-based towers and 1.5 on rooftop towers). In contrast, MNOs have an overall tenancy ratio of 1.3 (1.5 on ground-based towers and 1.1 on rooftop towers). (source, EY)

But this way of measuring success will no longer be sustainable in the coming years, forcing towercos to move to operational excellence as the key business indicator to differentiate from competitors and to diversify business model to survive, increase growth and get new revenue streams. Operational excellence is key to the revolution of towercos.

Most of MNOs have developed strong capabilities on data analytics, big data, business intelligence (BI) and data-driven Artificial Intelligence (AI) through machine learning. Most towercos are not there yet (still using an excel-based approach when dealing with data) because their focus so far has been footprint expansion, i.e more sites, more towers, more tenants per site, etc… Towercos need to develop a proper data strategy and invest in data collection and data analytics to track detailed and accurate data about their sites and assets and make decisions based on data intelligence. Actually, these are the initial steps for digitising the core of a towerco business.

The data strategy should consider: i) Data collection, IoT devices, locating sensor on-site providing new sets of enriched data that replace most of the staff site visits ii) Data analytics, using analytics tools to make decisions about site planning and assets. Note: a proper data storage system is needed in this stage. iii) Advanced analytics (predictive), using data-driven AI through machine learning for predictive maintenance.

Digitising the towerco core business means transforming site management through Remote monitoring solutions for telecom sites. Infrastructure assets and remote sites benefit from the automated, real-time collection of data to optimise operations and prevent failures.

These IoT management solutions basically comprise of: a) sensors deployment on-site such as door sensors, movement sensor, power and energy sensors, environmental sensors (e.g temperature and humidity) etc… b) communication gateway (LPWA preferred) c) site dashboard with real-time data d) alert system with automation for critical responses e) data intelligence, using predictive analytics.

The features of such management solutions may include:

• Security and access control: ensuring site visits are undertaken on a need to attend basis (rather than a routine visit) saving time and resources. Protecting assets from attacks or sabotage
• Energy and power management: providing energy utilisation insights, that allows engineers to monitor if loads are increasing due to failing equipment. Tracking the state of the power supply and trigger soft shutdowns to prevent critical failure
• Alarm management: Efficient alarm and incident management in real-time
• Equipment performance: Optimal performance, monitoring existing equipment data plus temperature, humidity, noise, CO2,  vibrations, etc.
• Preventive maintenance: Reducing the failure risk or performance degradation of the equipment

Implementing a remote monitoring solution for their sites will help towercos to achieve operational excellence and will save cost substantially. Benefits would include:

• Maintenance cost reduction due to optimisation of staff workload and site visits
• Improved operational efficiency
• Optimal energy management: real-time data for billing and optimal consumption
• Enhanced incident management and operation staff communication through alert management
• Added Intelligence to the TOC (tower operation centre) using analytics and data-driven AI
• Increased asset life through insights on equipment health status and asset management

In my view, the best remote monitoring solutions in the market could be found among the leading companies in the smart buildings sector. They apply their broad experience to digitise traditional building to telecom sites providing tools like a digital twin, creating a virtual site as a service image of the physical site including all the data about the site and its assets. The tower, the site, the small cells become the digital assets of the towerco.

In summary, it is time for towercos to start the digitisation of their business, creating new product and innovation units that implement some of the technologies, innovation and services pointed out above. Some of those innovations will become the new business models for the digital towerco generating the revenues streams of the future and consolidating their position in the market.

References
EY. The economic contribution of the European tower sector. A report for the European Wireless Infrastructure Association. April 2019.
Analysis Mason. Towerco data management: improving the relationship with MNOs. July 2019.