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B. Ramanand, COO, ATC

September 17, 2010
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Are we seeing the end of the boom time for the tower industry? Or the beginning of a new phase in the growth of the industry? Over the past few months, a number of major changes have taken place in the Indian telecom landscape, the first being the close of the 3G auctions, which resulted in huge payouts by telecom operators, forcing them to rethink their rollout strategy. The second was the steep decline in the average revenue per user (ARPU), which put a never-seen-before kind of pressure on margins. And if this was not enough, a ban on telecom equipment imports was imposed by the Government of India. Regulations permitting intra-circle roaming added yet another dimension to the slowing down of new builds, particularly for the new telecom licensees.

These multi-pronged pressures have resulted in a complete standstill in building new towers over this year, with operators' annual plans deferred, modified and in some cases, even shelved. Further, 3G will not lead to significant rollouts or additional revenues for tower companies as was earlier expected. While multiple scenarios appear to be evolving, there is no doubt that we are clearly seeing warning signals for the tower companies and that the era of large-scale rollouts of towers is gradually drawing to a close.

In the face of multiple pressures from both customers and the environment, it is time for tower companies to rethink their strategies and create a value proposition for their customers in the next adjacent space to new builds in the operations space. Operational excellence in customer service and service delivery will act as key differentiators among tower companies. While this may be true for any industry, it must be remembered that tower companies have equated excellence with the number of towers added to their portfolio. This was what was demanded in order to build the enterprise valuation of the company that has been driven by numbers and not by the quality of service delivery.

To change the paradigm of excellence (and, therefore, value) from number of towers to excellence in service delivery, a complete change in mindset across all sections of tower companies is required. Operations jobs were considered mundane and left to lower-level employees who were far removed from the strategic areas of tower valuation and enterprise value. Operations teams employed primitive technologies and almost no management techniques. They were supported by multiple small-time vendors whose main qualification was geographical presence rather than skill sets and strengths. To expect professional quality of operations from such low-skilled organisations would be clearly demanding too much. No large operations company has emerged and the tower industry has still not seen the benefits of working with larger organisations with superior professional skills. They are yet to understand on a total cost basis that such organisations will deliver greater value to them. This myopic view can be attributed perhaps to the short-term, new-build approach adopted hitherto.

The emergence of a few large service providers who would assist the tower companies with professional service offerings is the need of the hour. A parallel can be drawn with telcos that have outsourced their active infrastructure operations to managed services (MS) vendors who are also the equipment suppliers. The MS vendor has created a slot for itself as a policeman of the tower companies and not as a partner to deliver combined value to the common end-customer.

This situation has resulted in a duplication of efforts by the MS vendors and tower companies, both of whom now need to have a physical presence at every tower in the country. This, coupled with the lack of a combined approach towards a common goal, has added to the inefficiency and costs, the burden of which is being borne by the end-customers. The emergence of a combined active and passive infrastructure services offering would go a long way towards solving this problem. Whether the MS vendors would enter the operations space of the tower companies or vice versa is not the main question here. What is important is whether such a combined active-cum-passive offering can provide greater value to the customer through higher efficiencies and lower costs.

Yet another area of concern for both the service provider and the customer is the lack of efficient energy management.  The pass-through mechanism, in spite of all the good intent of its proponents, has failed miserably. And what is worse is that the end-customers have lost all control over their power and fuel expenditure. The tower companies today have no incentive to improve performance in energy management; moreover, the use of primitive management methods has often led to local-level, quick-fix solutions. After struggling to improve the pass-through model, both sides are now convinced that the only way forward is to make the pricing structure akin to the pricing of a hotel room, where the rental fee charged is inclusive of all services. The pressure on the bottom lines of operators and the recent slowdown have led to a shift in focus from building new towers to lower fixed power and fuel models. However, there have been limited experiments on fixed power and fuel models, and not much headway has been made with regard to this. Both sides have very rigid viewpoints but are in agreement that this is the only way forward. It is only a matter of time before some common ground is found. Some of the operators, especially the smaller tower companies, have come up with such offerings. However, the large tower companies are yet to attempt such offerings on a major scale.

The single price, all-inclusive combined energy offering appears to be the first step towards addressing this issue. Energy as a commercial venture would, therefore, be the next logical step supported by strong data and cost management. It will not be long before energy management profit ventures take root either within or outside the tower companies. Once this happens, the reluctance of the tower industry to invest in new technology solutions will automatically disappear, and the company with the best offering will emerge the winner.

The single price, low-cost combined energy offering will become another differentiator, which in turn will lead to a revision of relationships between captive tower companies and their owners. In fact, we are already witnessing some dilution in the relationships of owners with their captive tower companies. The owner-operators are now willing to make concessions and are going out of their way to accommodate a lower-cost, better operated tower even if it doesn't belong to their captive partner. Currently, the percentages are not very significant but are nevertheless an ominous sign for captive tower companies. The conflict between building a tower for adding enterprise value for their owners and building a profitable tower for themselves is taking deep root, forcing captive tower companies to revise their strategy of dealing with their owners.

Yet another dimension is the owner-service provider relationship between telecom companies and captive tower companies. Towers were considered a strategic asset in the early days and were not shared, even if there were towers belonging to competitors nearby. This approach continued for some time after the formation of tower companies, until the impact of the current pricing model, which envisages reducing rentals and energy costs with the addition of each tenant, was fully appreciated. Such tower companies will, however, have lower tenancies and will continue to be the beneficiaries for some time to come till tenancy ratios improve across portfolios. Apart from lower tenancies, these tower companies will also carry the burden of uneconomical single-tenant towers. Telcos now are seeking the best deals in spite of restrictive covenants of dealing with captive service providers even if it means making compromises. Such an approach is a welcome sign and perhaps we are seeing the end of the preferential treatment given to captive tower companies and the beginning of more healthy competition based on quality of customer service and satisfaction. Another area where the tower industry is yet to make significant progress is in the adoption of new technology. In spite of multi-directional efforts made by all sections of the industry towards this end, no worthwhile technology solutions have been found to address the key operational issues of cost optimisation and quality of service. For example, there is little use of technology while providing reliable power, and fuel data and solutions. What is being done is limited to pilots and there are no significant innovations that can be applied across the board. Nor has there been any significant reduction in the capital cost of building a tower. The changing telecom landscape will ring the death knell for cost-plus pricing and sooner or later, tower companies will be driven to invest in new technologies to bring down costs in line with their customers' expectations.

The days of large-scale new builds are over and tower companies now need to establish their competitive position in the marketplace through tailored offerings bolstered with a genuine concern for customer needs and excellence in operations. Within these terms of reference, multiple competitive offerings can be generated to the advantage of the end-customer. The changing landscape of Indian telecom will hasten the process of this redefinition, leading to a more mature Indian tower industry.

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