Report for edotco Group

Global trends for tower

markets
10 February 2016

Amrish Kacker

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 Global trends for tower markets | i

Contents

1 Executive summary 1

2 Introduction 1

3 Definition and identification of efficient tower markets 2

4 Tower ownership models in efficient tower markets 3

5 Foreign ownership of towercos in efficient tower markets 4

6 Initiatives in new areas undertaken by towercos with scale 5

7 Licencing of towercos in efficient tower markets 7

8 Competitive dynamics of towercos in efficient tower markets 8

9 Conclusions 10

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ii | Global trends for tower markets

Confidentiality Notice: This document and the information contained herein are strictly private
and confidential, and are solely for the use of edotco Group

Copyright © 2016. The information contained herein is the property of Analysys Mason Limited
and is provided on condition that it will not be reproduced, copied, lent or disclosed, directly or
indirectly, nor used for any purpose other than that for which it was specifically furnished.

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1 Executive summary

Analysys Mason has undertaken an independent study to investigate the structures and
characteristics of efficient tower markets, commissioned by edotco Group.

Through investigating a wide variety of tower markets, we have identified a subset which are
thought to be most efficient. We define efficient tower markets as markets where towercos have
achieved a high degree of tower sharing. Such markets are characterised by: 1) high proportion of
towers owned by towercos (instead of MNOs), and 2) high tenancy ratio of towers owned by
towercos.

Having benchmarked 20 countries where towercos are active, we identified six countries where
more than 50% of towers are owned by towercos and tenancy ratio of 1.5x and above for towers
owned by towercos, namely the United States, Nigeria, Ghana, India, Indonesia, and Germany.

We then analysed market structures and characteristics of the six efficient tower markets. Through
our analysis, we find three key conclusions, as shown in Figure 1:

 Tower market efficiency is not dependent on independent towerco ownership

 Open markets with fewer restrictions have proven to be the most efficient
 Scale, often through foreign ownership, increases towercos’ operational efficiency

Figure 1: Key trends and characteristics of efficient tower markets and key conclusions [Source: Analysys
Mason, 2016]

2 Introduction

Analysys Mason has undertaken an independent study to investigate the structures and
characteristics of efficient tower markets, commissioned by edotco Group.

Through investigating a wide variety of tower markets, we have identified markets which are
thought to be most efficient. Section 3 provides details on how we have defined and identified
efficient tower markets.
 By analysing the characteristics of efficient markets, we identify common traits and suggest global
best practices for encouraging efficient tower markets. In particular, we look into the following
market aspects:

Tower ownership models in efficient tower markets, as discussed in Section 4

 Foreign ownership of towercos in efficient tower markets, as discussed in Section 5

 Initiatives in new areas undertaken by towercos with scale, as discussed in Section 6
Licencing of towercos in efficient tower markets, as discussed in Section 7

 Competitive dynamics in efficient tower markets, as discussed in Section 8

Having identified common traits of these markets, we conclude our findings on best practices to
encourage formation of efficient tower markets in Section 9.

3 Definition and identification of efficient tower markets

Towercos traditionally improve the efficiency of mobile markets by increasing the sharing of
passive infrastructure between mobile network operators (“MNOs”). Thus, we define efficient
tower markets as markets where towercos have achieved a high degree of tower sharing. Such
markets are characterised by:

 High proportion of towers owned by towercos (instead of MNOs)

 High tenancy ratio of towers owned by towercos

We have benchmarked 20 countries where towercos are active. The markets are evaluated for the
share of towers owned by towercos and the tenancy ratio achieved by those towercos. This is
illustrated in Figure 2.
 Figure 2: Identification of efficient tower markets [Source: TowerXChange, tower company reports, press
releases, Analysys Mason, 2016]

We identified six countries where more than 50% of towers are owned by towercos and tenancy
ratio of 1.5x and above for towers owned by towercos, namely the United States, Nigeria, Ghana,
India, Indonesia, and Germany.

In the following sections, we will look at the tower market structure and regulations in these six
selected markets to understand common traits, based on which we will then suggest best practices
for encouraging the formation of efficient tower markets.

4 Tower ownership models in efficient tower markets

In the past, MNOs owned, built, and operated their towers. However, increasing competition and
declining mobile revenue have forced MNO to focus on its core business. Networks are often
viewed as non-core and non-differentiating, leading to more and more MNOs divesting their
towers. There are a few ways MNOs can divest its towers, including by spinning off to a
subsidiary, forming a towerco joint venture with other MNOs, or selling them to independent
towercos.

We have defined four key groups of tower owners:

 MNOs: MNOs which still own some or all of their towers

 MNO-owned towercos: Towercos which are wholly-owned subsidiaries of an MNO
 Towerco joint ventures (JVs): Towercos which are partly-owned by one or more MNOs
 Independent towercos: Towercos which are not affiliated to any MNO

Tower ownership models that are present in the six efficient markets are shown in Figure 3.
 Figure 3: Ownership models of towercos in efficient tower markets [Source: TowerXchange, tower company
reports, press releases, Analysys Mason, 2016]

The six efficient tower markets allow for different tower ownership models. In all six markets,
some MNOs still own some or all of their towers. MNOs which divested their towers do so by
forming a towerco subsidiary, forming a JV with other MNOs or third parties, or selling the towers
to independent towercos. All markets appear to have grown organically with towercos entering the
markets at a wide range of times and market circumstances, based on market opportunity.

All towerco ownership models can be efficient in promoting tower sharing. In India, for example,
Bharti Infratel (an MNO-owned towerco), Indus Towers (a towerco JV between 3 MNOs), and
Viom Networks (an independent towerco), all have tenancy ratio of above 2.0x.

Key finding: Markets have grown organically into a range of tower ownership models, all of
which can be efficient

5 Foreign ownership of towercos in efficient tower markets

Different markets adopt different policies regarding foreign ownership of towercos. Most of
efficient tower markets allow for 100% foreign ownership on towercos, as shown in the table in
Figure 4.
 Figure 4: Foreign
ownership of towercos
in efficient markets
[Source: Tower
company reports,
regulator websites,
press releases,
Analysys Mason, 2016]

In Nigeria, Ghana, India, and Germany, towercos such as American Tower Corporation, Eaton
Towers, and Helios Towers have full ownership of their subsidiaries. In Indonesia, it is possible
for foreign companies to hold full ownership of publicly-listed towercos and STP is estimated to
be majority foreign owned. The only partial exception would be in the United States, where the
Federal Communications Commission (FCC) restricts direct and indirect investments in telecom
infrastructure companies to 20 and 25% respectively. However, the US also permits this cap to be
waived should the FDI be coming from a country that typically permits similar investments in
their markets.

While towercos in large markets (e.g. India, Indonesia, and the United States) can easily achieve
scale without having the expand internationally, many towercos in smaller markets expand to other
markets to achieve scale. This is illustrated in the chart in Figure 5. For example, leading African
towercos, such as IHS, Helios Towers, and Eaton Towers, are all present in multiple African
markets. Markets which are open to foreign ownership can benefit from transfer of knowledge and
expertise from the world’s largest towercos.
 Figure 5: Leading
towercos by their
number of towers and
countries [Source:
Tower company
reports, press releases,
Analysys Mason, 2016]

Key finding: Most efficient markets allow 100% foreign ownership which lets towercos deliver
the advantages of scale even in smaller markets

6 Initiatives in new areas undertaken by towercos with scale

Leading towercos have evolved and extended their business models to undertake initiatives in new
areas beyond passive infrastructure sharing. The three key areas where towercos are expanding
into are:

 Energy management: Towercos can take over energy management by negotiating for a fixed
energy model with MNOs and invest in initiatives to reduce energy costs, particularly by
reducing or eliminating diesel and reducing energy usage
 ICT solutions: Towercos are well-positioned to offer MNOs, their existing customers,
solutions to help extend coverage and capacity such as network planning, small cells
(including in-building solutions), as well as fibre backhaul
 Network QoS management: Towercos can take over network QoS management, ensuring
high network uptime by offering remote monitoring solutions as well as disaster recovery
management

Local market conditions affect the type of initiatives that towercos undertake. Energy and network
QoS management are typically offered by towercos that are present in markets with poor grid
power, especially in less developed areas. Examples of these markets include India, Nigeria, and
Ghana. ICT solutions such as network planning, small cells, and fibre backhaul are typically
offered by towercos that are present in more developed markets where the above solutions are
 required to keep up with ever increasing demand for bandwidth, such as in the United States,
Germany, as well as urban areas in Indonesia.

Towercos that are most active in investing in these new areas, as well as their initiatives, are listed
in Figure 6.

Figure 6: Known initiatives by towercos in new areas [Source: Tower company reports, press releases,
Analysys Mason, 2016]

These initiatives tend to be undertaken by towercos with scale, i.e. towercos with a large number
of tower. To undertake the above initiatives, towercos often require a substantial investments.
Larger towercos typically have better ability to raise necessary funding for these initiatives than
smaller towercos. They are also better suited to trial new ideas and take longer-term decisions and
risks as compared to smaller towercos. They also have the scale to build in-house teams of
engineers to design, develop and implement their initiatives. Particularly for cost-saving
initiatives, a larger tower portfolio also allows for greater economies of scale.

Key finding: Towercos with scale are evolving to increase efficiency in other areas, such as
offering energy management, ICT solutions, and network QoS

7 Licencing of towercos in efficient tower markets

Different markets adopt different policies in awarding licences to towercos. We look into the
following aspects of licencing:

 Restriction in number of licences

 Requirement for pre-qualification of applicants
In awarding any type of telecommunications licence, there are broadly four different methods that
can be adopted:

 Open registration: No limit on number of licences, any party that registers will be awarded the
licence/ allowed to operate
 Competency-based licencing: No limit on number of licences, any party that meets pre-
qualifications will be awarded the licence
 Auction: Limited number of licences, parties that bid the highest will win the licences. An
auction may or may not have pre-qualification requirements.
 Beauty contest: Limited number of licences, parties that are most qualified will be awarded the
licences.

Efficient markets may or may not require pre-qualification, but none restricts the number of
licenses. Our findings are illustrated in Figure 7.

Figure 7: Approach to licencing of towercos in efficient tower markets [Source: Regulators’ websites, tower
company websites and reports, Analysys Mason, 2016]

There is no limit on number of licences for towercos in the six efficient tower markets. In fact, we
are not aware of any market which limit number of licences for towercos.

Limiting number of licences may be detrimental to both mobile and tower markets. In general,
numbers of licences are limited only when it concerns the use of a scarce resource, e.g. wireless
spectrum, for which licences are typically awarded via auction or beauty contest. This is not the
case for licences for towercos. Limiting the number of licences for towercos will thus create
artificial scarcity, which may lead to licensees being able to charge monopolistic pricing. This, in
turn, may lead to MNOs lowering their investment in improving their network coverage and
capacity and less tower sharing.
 Pre-qualifications are required in Nigeria, Ghana, and Indonesia. To obtain a licence in these
markets, parties are required to demonstrate financial and technical capabilities. In Nigeria, for
example, the Nigerian Communications Commission (NCC) require licence applicants to submit
their business plan, technical plan, and organizational plan along with relevant legal documents.
The NCC will evaluate these plans and award licence to applicants that it deems to be competent.

Pre-qualifications are not required in the United States, Germany, and India. In United States and
Germany, there is no separate licencing for towercos but there is a need to register certain types of
tower infrastructure. In India, towercos are required to register with the Department of
Telecommunications under the Infrastructure Provider Category-I (IP-I) category but no licence
will be issued.

Pre-qualification requirements ensure that licence holders have the technical and financial
capabilities to promote tower sharing based on global best practices, invest in increasing the
quantity and quality of its towers, and invest in initiatives in new areas (such as energy
management, ICT solutions, and network QoS management). While this requirement results in a
more complex process than open registration, it ensures that only competent towercos enter the
tower market.

There is no limit on number of towerco licences in efficient tower markets or in any market that
we are aware of. Limiting number of towerco licences may be detrimental to both mobile and
tower markets as it creates an artificial scarcity, leading to monopolistic pricing that deters MNOs’
network investment. Pre-qualifications are required in half of the efficient tower markets but not
required in the other half. Requiring pre-qualifications adds to the complexity of the process but
ensures that only competent towercos enter the market.

Key finding: Countries with efficient tower markets award network infrastructure licences to any
party that registers or meets qualifications

8 Competitive dynamics in efficient tower markets

We look at the current competitive dynamics of towercos that arise as a result of the licencing
policy in each of the efficient tower markets. In particular, we look at market share of towercos
based on their ownership model and the time of their entry into the market.

Lack of restriction in number of licences for towercos in all efficient tower markets has attracted
investment, with at least three towercos present in each market. We observe a range of competitive
dynamics across the six efficient tower markets, as shown in Figure 8.
 Figure 8: Market share of towercos in efficient tower markets [Source: TowerXchange, tower company
reports, press releases, Analysys Mason, 2016]

The presence of a towerco with a substantial market share does not seem to make it less attractive
for other towercos to enter the market. For instance, the presence of IHS, which started in Nigeria
in 2001, did not deter American Tower Corporation to enter much later in 2014. The creation of
Indus Towers, which was formed as a JV that combine towers from three large MNOs in India in
2007, did not deter Viom Networks from entering the market in 2009.

Towercos that entered early into the market do not always end up being the largest. For example,
American Tower Corporation is not the first entrant in most of its markets but it has managed to
gain larger market share than towercos that entered years earlier.

We observe a range of competitive dynamics in the six efficient markets, but differences in
competitive dynamics do not seem to have any correlation to the efficiency of tower market. In
addition, the presence of a towerco with substantial market share does not seem to make it less
attractive for other towercos to enter the market. There are towercos that entered a market late but
were able to capture a large share of towers than earlier entrants.

Key finding: A clear licencing policy which encourages investment will attract multiple towercos
and create a more competitive tower market

9 Conclusions

Having analysed market structures and characteristics of the six efficient tower markets, we find
three key conclusions, as shown in Figure 9:
 Tower market efficiency is not dependent on independent towerco ownership
 Scale, often through foreign ownership, increases towercos’ operational efficiency
 Open markets with fewer restrictions have proven to be the most efficient

Figure 9: Key trends and characteristics of efficient tower markets and key conclusions [Source: Analysys
Mason, 2016]

Tower market efficiency is not dependent on independent towerco ownership

All efficient tower markets have grown organically into a range of ownership models. Towers are
owned by MNOs, independent towercos and combinations of both in all markets. Towercos have
entered markets at a wide range of times and market circumstances, based on market opportunity.
All of these tower ownership models can be efficient in promoting tower sharing among MNOs.

Scale, often through foreign ownership, increases towercos’ operational efficiency in new areas

Towercos with scale are actively investing in new areas, offering energy management, ICT
solutions, and network QoS. Compared to smaller towercos, larger towercos are better able to raise
funding, conduct trials, and make long-term decisions and risks.

Most of the six efficient markets allow 100% foreign ownership on towercos, which lets foreign
towercos deliver the advantages of scale even in smaller markets.

Open markets with fewer restrictions have proven to be the most efficient

There is no limit on number of towerco licences in efficient tower markets or in any market that
we are aware of. Pre-qualifications are required in some of the efficient tower markets. While it
may add to the complexity of the licence award process, pre-qualifications requirement ensures
that only competent towercos enter the market. Clear and flexible licencing policy which
encourages investment will attract multiple towercos into the market, creating an efficient and
competitive tower market.