2019 has been a vital year in the telecommunication sector in Saudi Arabia. The creation of an infrastructure player is a matter that the market has been working on for the past years, and that ended with the creation of one of the biggest towercos internationally –TAWAL, with more than 14,000 towers
that were carved-out from the incumbent operator Saudi Telecom Company (STC).
MNOs in Saudi Arabia have been contemplating the creation of a towerco for years, with potential additional tower transactions still in the pipeline
The three MNOs in the Saudi Arabian market, STC, Mobily and Zain, have been considering the selling or carve-out of their tower assets for the past several years. STC and Mobily had originally engaged in discussions for the creation of a joint venture, while Zain reached an agreement to sell its tower portfolio to IHS in November 2018, although the latter has not obtained regulatory approval yet, with a first rejection by the national regulator back in June this year. Following a lengthy series of developments and changes in the strategies of the three large MNOs, STC was the first to take an initiative by carving out the majority of its tower portfolio and establishing TAWAL, the first mobile passive infrastructure player of the country.
The market has positively reacted to the new potentials offered by TAWAL. In November of 2019, only few months after the launch of the new towerco in April, ITC secured a significant contract from TAWAL for co-location space on more than 150 existing sites, making it the first operator in the country to do so. The agreement will help ITC expand its network in a manner much quicker than what it would have been able to achieve on its own, thus giving concrete proof of the benefits that towercos can bring to mobile markets in the Middle East.
Figure 1: Major milestones in the creation of the first towerco in Saudi Arabia
Saudi Arabia is indeed a very promising market for towercos
1. Demand in the market for data and connectivity will trigger a new cycle of high investment for telcos
Mobile data traffic is expected to grow steadily in the next few years, especially with the adoption of 5G. The various concerned stakeholders in the telecommunications industry have already taken significant steps towards this evolution. On the forefront, MNOs in Saudi Arabia have already launched 5G services, offering generous data packages and unlimited plans. Only a handful of 5G handsets are available in the market today, but more devices are expected to be released later by all major manufacturers. In parallel, the National Regulatory Authority CITC, together with the Ministry of Communications and Information Technology are joining efforts to make the country 5G-ready and have imposed a roadmap of targets for 5G speed and coverage, with the first milestone set at the end of 2020.
To cater for the growing demand for data and service availability, operators will have to increase their points of presence (POPs) and densify their networks. This will be done not only by means of deploying traditional macro-cell sites but also by complementing the existing macro-cell networks with small cells and DAS, particularly in congested areas. By 2024, the total traffic carried on Saudi Arabian mobile networks is expected to grow by 21%. Despite the increase in spectrum efficiency brought by the deployment of new technologies such as 5G, massive MIMO and beam forming techniques, there will still be a need for an additional 2,000 POPs.
Figure 2: Total annual mobile traffic forecast and estimated new POPs from MNOs required to attend this increasing demand of data and connectivity
2. Operators are required to invest in both active equipment and passive infrastructure, thus need to be capable of support a significant pressure on their cash flows
Besides the need for new POPs, operators will also be required to upgrade their existing network in order to offer 5G services. Looking at the next 12 months solely, a large effort for a network upgrade is required in order to comply with the obligations given with the recent 3.5 GHz spectrum license, requesting operators to cover 35% of the population in the five largest cities by September 2020 and 50% in the eighteen largest cities by 2025.
For operators to meet these obligations, no new sites will be needed, but rather existing sites will have to be quickly upgraded. What implications does that have on operators’ capex plans? The upgrade will require a significant amount of capex for new active equipment such as new radios and new massive MIMO antennae, but also significant investments in the existing passive infrastructure in order to accommodate this equipment, which will require additional space and additional power supply. Many of the existing towers will have to be strengthened, modified, or substituted, with the vast majority requiring their power systems to be upgraded.
Will operators be able to support heavy investments in both passive infrastructure and active equipment with the looming expectations on the revenue upside of 5G and with demand still not mature enough to ensure quick return on these investments?
Figure 3: Where can towercos help to relief operators from financial burden?
3. Under this financial pressure, operators may find in towercos the right partners to achieve quick expansion and upgrade of their networks, allowing them to invest only in the active equipment
Passive infrastructure sharing already exists in Saudi Arabia as a site-swapping concept between operators. However, this model has not yet witnessed exceptional success since operators in the Middle East have not been historically financially constrained to the same extent as operators in other geographies.
As discussed earlier, when upgrading their networks to 5G, operators are now required to invest on two fronts: upgrading their existing sites and expanding their networks by adding new sites. Both fronts will put additional pressure on operators’ cash flows. Within this, lies towercos’ opportunity to ease the financial burden and ensure a faster implementation of operators’ expansion plans.
Towercos can help rapidly add new network sites without the need for upfront capex disbursement or to deal with cumbersome site acquisition processes. Additionally, towercos can help operators achieve Opex savings by allowing them to share the space on a site. This is particularly fitting for the new sites needed by the three operators in case they are located in overlapping areas.
Can towercos help at all with the upgrade of operators’ existing sites? The benefits in this case are not as straightforward as the benefits for newly built sites and would require a more attentive cost-benefits analysis. However, operators might find it beneficial in the specific cases when an existing site cannot support the upgrades and needs to be relocated, or when most of the site equipment needs to be substituted – in some cases even the mast would require to be substituted and rebuilt. In such instances, an operator is right to wonder whether it makes sense to rebuild the site or relocate to a towerco.
4. Large and ambitious mega projects will represent a big opportunity for towercos to provide greenfield, state-of-the-art infrastructure – will they be able to do it? A future, forward-looking mindset will be the key
A recently popular topic of discussion is the launch of Neom project, the 26,500 sq. km mega city to be entirely powered by renewable energy and served by driverless vehicles. However, Neom is just one of the several mega projects currently underway throughout the Kingdom. Other examples include King Abdullah Financial District (a massive complex composed of nearly 60 towers in the city of Riyadh), King Abdallah Economic District (a newly built city on the west coast near Jeddah) and the Red Sea touristic project among many others.
The scale and number of these projects are ambitious and unprecedented. Adequate infrastructure represents the key enabler for any and all of the digital services at the core of the projects’ strategies. Therefore, a large effort is required from all the players in the telecom industry to efficiently supply these projects with greenfield, state-of-the-art infrastructure, technologies and services.
Will operators follow the old school model of building their own overlapping, competing infrastructure, or will they collaborate to share it? Will infrastructure providers be able to offer a compelling product to operators and capture all their infrastructure needs? The value at stake is of incredibly large proportions. Towercos have their chance to grab a good share of it, but only if they will be able to adapt their mindsets to the futuristic ambitions of Neom & Co. A future, forward-looking mindset will be towercos’ key to success.
Figure 4: The six most important mega projects announced in Saudi Arabia
Establishing operations in Saudi Arabia would give any towerco the critical mass to operate subsidiaries in other smaller countries in the region, without incurring excessive overhead costs
The paradox that tower companies need to win over is that by establishing their own organisations, they need to be able to offer operators services with an attractive price while helping them reduce their total cost of ownership of a mobile site.
When a tower company is initially created, its critical functions are established by hiring new staff. The size of certain teams in a towerco are dependent on the number of towers, whilst that of some other teams do not necessarily change as the number of towers increases. This means that a large tower company can largely benefit from economies of scale, while a small tower company can hardly operate in an efficient manner, especially when its strategy is to provide services to operators with an established large tower portfolio up and running.
Within the Middle Eastern context, this is the fundamental reason for which establishing towercos in markets other than Saudi Arabia would prove challenging, whilst the size of the Saudi Arabian market allows towercos to reach the critical mass needed to operate efficiently. Moreover, establishing operations first in Saudi Arabia allows towercos to expand to other smaller regional markets without the need to re-establish a local core team, but rather to leverage the synergies between a smaller local team and the Saudi Arabian one. Towercos could then start operating in those other markets at much lower marginal costs than in Saudi Arabia, and potentially at lower marginal costs than operators.
That’s why 2019 has been a pivotal year for the tower industry in the Middle East, and why Saudi Arabia has the potential of being the birthplace of the regional tower revolution.
About Analysys Mason’s tower experience
Analysys Mason is a leading commercial and technical advisor with exclusive focus on telecoms, media and technology (TMT) and has supported over 350 transaction support assignments in the industry worldwide during the last 5 years, of which more than 100 were tower-related assignments, including the support to STC with the carve-out of their tower portfolio and subsequent creation of TAWAL, the first towerco in Saudi Arabia. Analysys Mason has a 360-degree view of the towerco industry and an in-depth knowledge of the commercial, technological, operational and regulatory aspects of the business. This unique positioning makes Analysys Mason the ideal partner for towercos.
