Ericsson: Business models for cooperation between operators, towercos and OEMs

As Ericsson’s Head of Engagement Practice in Sub-Saharan Africa (SSA), Lars Stuber’s role extends from traditional active and passive network managed services, to IT managed services and opex sharing business models. However, Lars believes the managed services model remains relatively immature in SSA, creating opportunities to develop innovative new business models. A good example is transformation from network managed services into customer centric managed services (see figure 1).

TowerXchange: Where does passive infrastructure management services fit into your role and into Ericsson’s priorities in SSA? And how has the entry of the independent towercos into Africa affected that business?

I spend most of my time covering network managed services, within which management of active equipment remains Ericsson’s core business. However, we also have several large-scale engagements in passive infrastructure management and maintenance for Africa’s leading operators such as Airtel and MTN.

Ericsson has over 100 customers across 43 countries in the SSA region. While most of our passive infrastructure management services contracts are in markets where towercos are not present yet, we feel that with the entry of towercos, the passive infrastructure segment gets even bigger for Ericsson. This includes power solutions and maintenance. We are currently seeking a suitable model for co-operation between the MNO, towerco and Ericsson to deploy resources most efficiently across active and passive infrastructure maintenance.

With the entry of independent towercos into a market, towers assets are typically spun off and transferred to the towerco, together with responsibility for maintenance of the passive infrastructure. We feel this represents and opportunity to change the relatively old-fashioned business model to a situation where OEMs can take responsibility for the entire network surveillance and create synergies for passive maintenance providers that could cover multi-operators in one country. Typically the towercos could work with such passive maintenance providers.

TowerXchange: Given the bifurcation of ownership of passive and active networks, with towercos increasingly acquiring Africa’s towers, does there have to be a bifurcation of the provision of managed services for the same?

Due to the nature of towerco deals, it is a given that responsibilities will be split between active and passive infrastructure management services.

Should active and passive infrastructure managed services be consolidated under the same supplier? For smaller scale operations, it might be better to have a split where an OEM such as Ericsson drives active infrastructure and another entity drives passive infrastructure services. Within larger scale operations like Nigeria, the ultimate benefit for the operator lies in encouraging the creation of scale for passive infrastructure providers, for example synergies related to field operations.

TowerXchange: How do you see the future of telecoms infrastructure outsourcing in SSA?

I believe that by the end of 2015, approximately 80% of the networks in SSA will be outsourced, whether to towercos or to OEMs.

Beyond 2015, the discussion will be about the power aspect of the network and evolving business models. Today, traditional power business models work around a fixed fee for power. Business models involving a price per kWh are widely discussed, but have not yet been implemented to the fullest extent. I drive a lot of discussions with private equity companies interested in various commercial power models.

Working with reputable power solutions vendors the towerco would then be able to focus solely on leasing out space. In Africa, towerco CEOs spend 50-70% of their time on operational issues instead of on increasing tenancy ratios.

Established emerging market towercos say that the market is providing sufficient capital to fund new acquisitions and BTS opportunities. Typically towercos are spending 15-25% of their available capital on power, which typically returns a lower yield than investing in assets and upgrades to increase tenancy ratios.

TowerXchange: What business models would you consider for OEM co-operation with towercos?

We are in favour of models that are related to existing cost structures. Where the cost of providing 24 hours of runtime is stable, in theory there is little difference between a kWh model or a fixed fee.

We are also in favour of risk sharing models with KPIs and SLAs governing power availability, so if you underperform there is a penalty, if you overperform, there is a reward.

Any form of revenue sharing attracts more and more interest in the telecoms industry – this is the ultimate form of risk sharing and participation in a towerco’s success. Revenue sharing is widely discussed, but requires a very entrepreneurial company that is not afraid of risks and genuine partnerships.

Towercos are ultimately real estate businesses; much of the attractiveness of their business model is based on minimising risk, passing on risk and operating within the optimal cost structure. As such, towerco’s DNA is not predisposed toward revenue sharing and ensuring partners participate in success. Some might say that OEMs don’t have best DNA either for revenue sharing model! For example, in Indonesia Ericsson’s commercial offer was based on a revenue sharing model which took the quarterly income statement as the source of the revenue share calculation and a revenue share percentage was applied. The scope covered active maintenance, passive maintenance and all the power (both diesel and grid).

TowerXchange: Let’s talk about Nigeria. Given that Airtel, MTN and Etisalat’s towers have all been sold or are in the process of being sold, by the end of 2014 80% of Nigeria’s towers could be owned and operated by independent towercos. Given Ericsson’s dominant position in managed services in Nigeria, what opportunities are there for partnerships between Ericsson and the towercos in Nigeria?

First let me say that I agree with TowerXchange’s forecast; whether it’s by the end of 2014 or Q2 2015, we believe all the Nigerian towers except Glo’s will be offloaded to towercos.

Ericsson has a strong position in Nigeria. Today we service around 50% of Nigeria’s towers, with the remaining 50% split between other OEMs and in-house by management by MNOs. Due to the scale of Ericsson in Nigeria, we provide the lowest possible cost base for passive infrastructure maintenance. So the towercos have all approached Ericsson to discuss forms of collaboration if and when they purchase all these towers.

I feel there are four options for the structure of partnerships between OEMs and towercos in Nigeria, or any other country for that matter. First you have a standard subcontractor relationship, secondly you could have what we call a ‘Joint Planning Setup’, thirdly you have an option for wholesale network sharing, and fourthly you have the option to decouple and have no relationship at all.

The pure subcontractor relationship is not an attractive option for OEMs. I’ve seen some maintenance and power service contracts offered by towercos that transfer all the risk to their service partners, but also drive down prices and margins, resulting in poor subcontractor relationships. Ericsson has exited such contracts in other countries where the only winner was the towerco.

We prefer a more mutually beneficial partnership structured as a “Joint Planning Setup”. Under a Joint Planning Setup, the OEM becomes the exclusive network design and network performance partner of the towerco. Ericsson would plan the network rollout, taking into account all of the towerco’s different tenants’ requirements in terms of coverage and capacity. We are able to develop sophisticated coverage and capacity forecasts, and consolidate all customers requirements together to plan the optimal network rollout and develop a capex deployment plan for the towerco that results in an optimised tenancy ratio.

From a Joint Planning Setup it would be easy to extend the partnership to wholesale network sharing. Wholesale network sharing doesn’t have to be a threat to towercos if the contract is structured to the benefit of all parties. My colleague Patrik Jakobson described Ericsson’s vision of Wholesale Network Sharing in a previous edition of the TowerXchange Journal, wherein all the stakeholders work together to plan coverage and capacity and as partners in providing wholesale capacity.

Of course the final option is no collaboration– you decouple the business and split the value chain so towercos escape SLAs related to power and just sell colocations, powercos sell power, OEMs sell and maintain active infrastructure and MNOs sell airtime. There still has to be some dialogue between stakeholders around network availability KPIs, but it can quickly degenerate into a culture of blame as parties try to avoid SLA penalties for service interruptions.

TowerXchange: How would your ‘Joint Planning Setup’ impact positively on capital deployment into build-to-suit programmes?

As well as acquiring towers, towercos typically also secure first refusal to lead their anchor tenant’s build-to-suit programmes. The towerco might build 100 sites for their anchor tenant, and if they’re lucky they get a second tenant, then they’re asked to build a further 100 sites for another operator, and again they’re lucky if they get a second tenant on some sites. Meanwhile, the towercos might acquire 300 sites at locations they think are attractive for co-location, which they hold until two tenants want a tower at a similar grid reference. Ultimately I think there’s a high degree of inefficiency in deploying capex in this manner.

As Africa from moves from 2G to 3G and 4G, there are a lot of radio network planning and technology development issues that influence coverage and capacity, and that is not a core competency of towercos. Network design and optimisation is dominated by OEMs, and there is no-one better than Ericsson at designing networks for optimum coverage and capacity. MNOs should insist on OEMs being involved in build-to-suit projects as it results in the most efficient allocation