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Rising Infrastructure Spend: Strong demand for investment capital

February 17, 2011
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Continuously evolving fixed and mobile services demand advanced network solutions from the access layer through the transport, application and service delivery layers. Network vendors, in turn, need to  develop efficient research and development programmes, and innovative product road maps to meet customer requirements and remain competitive. As a result, investments in telecom infrastructure across the globe have regained momentum after the global economic slowdown, which, while not severely impacting the sector, had led to a contraction in investments.

Investments in 3.5G technologies such as high speed packet access (HSPA) and HSPA+ and the deployment of 4G long term evolution (LTE) networks by major operators like Verizon Wireless and Telia Sonera will drive this growth. Emerging markets like South America, India and China are likely to witness the fastest growth in capex. According to ABI Research, capex in South America’s telecom infrastructure is likely to witness a compound annual growth rate of 10 per cent between 2009 and 2015.

The level of expenditure on infrastructure equipment is an important metric for the health of the wireless industry. This is because infrastructure capex accounts for about 30 per cent of the total wireless outlay, with the rest spread between investments in software upgrades and maintenance, and capital costs for site procurement. These investments on active infrastructure will lead to a corresponding expenditure on associated passive infrastructure.

Also, with energy costs accounting for a big chunk of operating expenses for telecom operators in high-growth telecom markets like India and given the increasing focus on reducing the carbon footprint, the adoption of green energy solutions has become a key focus area for the industry. Vendors like Nokia Siemens Networks, Huawei Telecommunications, Ericsson and Alcatel-Lucent have taken rapid strides in this segment.

Active infrastructure 

On the network front, investments in LTE equipment are expected to increase rapidly in 2011 with wireless carriers in developed countries like Japan and the US as well as in European countries commencing 4G network deployment in order to achieve faster speeds and unclog the heavy data traffic generated by the exploding use of smartphones. This 4G-driven investment growth will continue  at least through 2014.

ABI Research estimates that investments in LTE equipment are likely to grow by 120 per cent in 2011 to reach $1 billion supported by more than 185 deployments and trials around the world. While LTE’s first soft launches have been in Europe, the US has witnessed the most aggressive 4G rollout. Verizon is planning to launch 10 LTE devices by mid-2011. AT&T is also moving ahead with its LTE plans.

The wireless infrastructure market will also continue to be dominated by 3G upgrades as well as 2G (GSM-EDGE) swap-outs and coverage build-outs, more and more, as operators in developing countries invest in 3G network enhancements.

In Latin America, China, India and other developing countries, where wireless coverage is yet to reach many rural areas, operators are expanding the geographical reach of their networks or are in the process of signing network sharing agreements with infrastructure providers to reduce costs.

China Mobile is concluding a major TD-SCDMA expansion programme to extend coverage and improve its quality of services. The country has spent over $22 billion on TD-SCDMA equipment so far. Similarly, in India, while 3G network deployment is gaining momentum, operators also continue to expand their 2G networks. In Thailand, AIS, the country’s largest mobile operator, plans to invest $323.1 million in mobile network expansion in 2011. About 75 per cent of this would be used to expand the operator’s 2G network, while the remaining amount will be invested in expanding its 3G network in the 900 MHz band.

While mobile voice service revenues are falling in many developed markets, investments in 2G equipment procurement have also continued. In fact, GSM/GPRS/ EDGE equipment costs would account for about 31 per cent of the total spend on wireless infrastructure (over $17.5 billion) in 2011. In many emerging markets, there is an urgent need to improve cell capacity not only for voice calls but also for data, as a considerable amount of messaging, both text and instant messaging, is carried over 2G bearer channels.

According to research firm iSuppli, capital spending on wireless infrastructure across the world is projected to reach $40.3 billion in 2011, 6.7 per cent more than the $37.8 billion in 2010. The upturn shows the seriousness of the wireless industry in moving on with expansion plans that have been delayed by the economic slowdown.

Tower industry 

The high cost of erecting and operating mobile towers has driven many operators towards leasing arrangements in recent years. The tower business witnesses a steady annual growth of 8-10 per cent, which is attractive for investors, especially in today’s post-recession, risk-averse market. Currently, about 17 per cent of all towers are leased and ABI Research expects this to rise to about 25 per cent in 2015.

This trend has witnessed the fastest growth in the US and India. The Indian telecom tower business has grown rapidly over the past few years. With a low mobile penetration in rural and semi-urban areas, operators have recognised the value of infrastructure sharing. Going forward, Latin America and Africa will offer the highest potential for the growth of this segment. International tower companies such as the American Tower Corporation, Helios and Eaton Telecom are capitalising on this opportunity, and have been buying towers from African operators and leasing them back.

In fact, the trend of network sharing is already visible in South Africa, Nigeria and Ghana. Vodafone Ghana, the country’s third largest operator, has recently signed a 10-year contract with Eaton Towers for taking over the operations and co-location management of 750 towers for the Ghanaian operator. During this period, Eaton would invest up to $80 million in upgrading tower operations and setting up towers as well as in improving Vodafone’s coverage in the country.

Eaton will sell co-location and shared infrastructure facilities to other mobile operators, thereby opening up future revenue streams from separate long-term contracts. Vodafone Ghana, on the other hand, expects to immediately benefit from the reduced capex.

However, this model has found limited acceptance. Regulatory authorities need to play a more proactive role in encouraging tower sharing agreements among operators.

While the trend of tower leasing is not new in the Asia-Pacific region, it is impeded by regulatory issues in China and Japan, the two key markets in the region. Active infrastructure sharing in the form of RAN sharing is an industry norm in Europe, especially in Sweden, but passive infrastructure (towers) sharing has been slow to take off as there are only a few tower operators and operators typically hesitate to share towers.

Energy 

Energy consumption accounts for a major part of opex for both fixed and mobile telecom network operators.  Reliable access to electricity is limited in many developing countries. At the same time, many operators have been taking corporate social responsibility initiatives with the goal of reducing their carbon footprint; and network infrastructure vendors are striving to gain a competitive advantage by reducing power consumption.

However, even as equipment vendors and service providers are developing green telecom solutions, the majority of telecom investments are still based on today’s business priorities rather than tomorrow’s environmental benefits. While renewable energy-based base stations can reduce or, in some cases, eliminate emissions (solar or wind), the adoption of these solutions is limited to an operator’s network and only to a few cell sites.

The adoption of new and more energy efficient network equipment, or low carbon solutions such as telepresence also faces similar issues. Very few global operators have actually been able to leverage these technologies.

However, there have been notable exceptions of operators committing investments to reduce emissions. These include BT’s commitment to build wind farms across the UK to meet 50 per cent of its power requirements; and AT&T’s purchase of hybrid vehicles for its fleet in the US as well as the numerous data centre consolidation and optimisation projects across the industry.

Given the focus on reducing carbon emissions and adoption of green energy solutions across the world, operators are expected to increasingly opt for energy efficient applications in the future. 

The telecom sector has maintained its growth momentum with operators rolling out high speed networks in order to keep pace with the exponential rise in network traffic. This has also resulted in increasing investment levels in the sector. Telecom infrastructure development would ride on the back of these trends, and is expected to lead to a strong demand for investment capital in the sector.

 
 
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