By Tomas Lamanauskas, Managing Partner, Envision Associates
Gone are the days when national telecoms markets were primarily defined by former monopoly incumbent telcos together with a handful of mobile operators (MNOs). New types of players have been emerging for a while, leveraging opportunities provided by market liberalization, competitive regulatory frameworks and the relaxation of licensing regimes.
Internet service providers (ISPs), mobile virtual network operators (MVNOs) and international voice service providers have been trying to find their niche in the market – generally, however, in the shadow of giant MNOs. Furthermore, cable TV companies have been trying to reinvent themselves as broadband providers with multi-play offerings. For a while already, independent tower companies or ‘towercos’ have also been emerging as an increasingly important element in the telecom industry landscape.
Forces of change
Lately, and accelerated by COVID-19 in recent months, several forces have converged to reshape the industry in a much more profound manner.
For quite some time now, the uninspiring financial states of telcos, with stagnating or even contracting revenues, are being further hit by the pandemic. Following a survey of global telecom executives, Delta Partners predicted that the pandemic may lead to operators’ annual revenues decreasing by up to 10 per cent.
Government pressures for CAPEX spending to expand broadband (including gigabit connectivity) and secure national leadership in 5G is another impetus for change. With the pandemic-induced dependence on the Internet connectivity for everything – from work to study to health to shopping – COVID-19 only made those pressures more pertinent, at the same time further constraining CAPEX for new or expanded networks by making operators spend on capacity upgrades and network resilience.
Thirdly, a changing financial landscape, shaped by the many economic stimulus programmes (which basically never stopped since the Great Recession) is leading to the availability of more money to invest or lend and lower interest rates, which, especially in the face of significant economic uncertainty, is creating a huge demand for assets promising stable returns – with infrastructure layers of the telecoms industry fitting that bill nicely.
Finally, the expanded ‘liberalization’ of regulatory regimes is resulting in regulators assigning (or planning to assign) spectrum directly to enterprises for localized industrial use, according to the European 5G Observatory.
New kids on the block
While operators were busy trying to reinvent themselves (largely unsuccessfully) as tech companies, the forces described above have been advancing a plethora of new players. These ‘new kids on the block’ are chipping away at operators’ role as infrastructure players, especially the further strengthening of independent tower companies, which have been taking over telcos’ tower assets and are now enjoying higher shareholder returns than telcos according to a BCG report, as well as positive responses from the financial markets. As FT reports, rapidly expanding European tower company, Cellnex — an ITU Member — currently has a stock price trajectory comparable with Big Tech.
Another trend to watch is the rapid growth of fiber-only providers, also known as ‘altnets’, which are being increasingly fueled by private equity. Recent examples include investments into and expansion of Community Fiber and CityFibre in the UK, as well as Deutsche Glasfaser in Germany. Further, open access wholesale fibre is emerging as a model, with the potential of limiting duplicated investments and increasing economies of scale while contributing to government universal broadband goals.
Similarly, ‘neutral host’ wholesale mobile networks are emerging as well, driven primarily by network densification needs, especially for mmWave 5G deployments. Small Cell Forum predicts that “by 2026, as many as 30 per cent of the installed base of outdoor small cell networks […] are likely to be operated by new entrants to the cellular segment.”
Finally, direct spectrum assignments to enterprise users are removing spectrum ownership as an advantage in telco offerings and opening operators to the increased competition from self-deployed networks and system integrators, with Small Cell Forum predicting a 71 per cent share of indoor enterprise systems for newcomers.
Operator response: adapt or perish
Operators are finally starting to fight back though and taking a stronger control for their future in several ways, including by:
- Separating tower companies, while retaining their control, to enable cash-out whether through private (as Telefonica through its partially KKR-owned Telxius venture) or public (as TIM and Vodafone through INWIT and the planned IPO of Vantage Towers) markets;
- Setting up fiber joint ventures with partners from infrastructure players (such as Bouygues with Cellnex in France) to private equity money (for example, T-Mobile with Primeinvest in the Netherlands or Iliad with InfraVia in France);
- Competing for enterprise contracts even when deployments are done on spectrum that is not owned by operators – as Vodafone is doing in the UK and Germany;
- Voluntarily separating out wholesale businesses to increase economies of scale and make a more regulatory-friendly case for higher market concentration at the network level – as CETIN is now doing across Eastern Europe, following a successful attempt in the Czech Republic;
- Finally increasing sharing directly among themselves rather than waiting for independent third parties to help out – especially in the deployment of rural networks, with shared rural network projects in the UK, Germany and Kazakhstan as good examples.
The key insight here is that the industry is changing drastically, with new players entering the fray and expanding their presence. However, operators are refusing to sit idle watching the world around them change and are finally trying to adapt. Their future will depend on the success of such efforts.
This article only covers the increasing separation of the telecoms industry into horizontal layers, each with their distinct investment needs, risks and returns, and financing profiles, – that is the transformations that are happening behind the scenes, invisible to customers. That doesn’t mean the industry is stagnating on the customer facing side, however. New product partnerships as well as an active M&A landscape are forming – but this is a topic for a future blog.
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