This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
This article is an extract from our Annual Review 2015.
Strategic collaboration between direct competitors is allowing telecoms companies to build advantage and meet demand.
By Sylvie Rousseau, Christophe Gaschin, Purvi Parekh
'Fast-moving' and 'competitive' are terms that are synonymous with the telecoms industry. Yet this is the sector that is recognising that collaboration with competitors is key to coping with pressure on profit margins and building strategic advantage.
Telecoms operators face immense pressure. Increased competition continues to reduce margins, while consumers demand more sophisticated services at lower-than-ever prices. Meanwhile, these operators must comply with regulatory licences that impose, among other things, network coverage obligations in unprofitable areas.
To combat these pressures, operators are focusing on infrastructure costs and looking to share with competitors. The trend is to share all or part of their largest expenditure - their network elements - whether sharing the non-active parts of the network, such as towers, cables, power units or air-conditioning units ('passive sharing'), or access rights to their radio access network, up to and including the common operation of radio frequencies, i.e. spectrum sharing ('active sharing').
Industry sources say that passive infrastructure sharing could deliver annual capital expenditure savings of up to 60%, in addition to significant operational expenditure savings in areas such as site maintenance, personnel and power. These savings mean that capital can be reallocated to the development of services and innovative technology. By combining resources and reducing individual infrastructure needs, mobile network operators can improve coverage and deploy newer technologies more quickly. Sharing may in fact become essential. Radio frequency, or spectrum, is a finite resource, while rights of way and rights to erect dishes on private property such as rooftops can be difficult to obtain.
A marriage of necessity is not a decision that is taken lightly, and for operators the conditions have to be right. Mature markets are a good fit. The battle for customers has moved from better network coverage to value-added services, meaning that infrastructure offers little competitive advantage. Growing markets also foster cooperation. Operators tend to have a rollout obligation as part of their licence, which has, in the main, been met in Europe. However, in Africa there are currently 15,000 towers and that number is set to double in the next five years. Sharing towers enables operators to roll out networks much more quickly - particularly into more remote areas.
Turning theory into practice
Operators can start by outsourcing tower management to a tower company or service provider. Once they are confident of the arrangement, part of the tower may be sold to the tower company and leased back. Interoperator site-sharing is common in the early stages, and joint ventures between operators are more common in developed markets. As markets continue to evolve, operators in Europe are turning to active sharing, which adds complexity. Operators that have built relationships with tower companies are keen to progress. But tower companies are reluctant to include active sharing within a contract: involving transmission equipment brings a higher risk of regulation.
A sound contract is crucial to the success of collaboration, and some of the key clauses focus on future considerations. If, for example, two operators have a tower, can either be prevented from selling its share to a tower company that may then rent space to a third operator not party to the original agreement? It is a likely scenario, given the need for tower companies to increase profits through a replacement tenant, but it is difficult to control due to the restraints of competition issues. Clauses should also consider future technology and performance and quality issues.
Confidentiality, control and regulatory issues have prevented a boom, but the EU's Connected Continent legislation will encourage regulators to support these arrangements, proposing "appropriate compensations for timely freeing up of spectrum, infrastructure and spectrum sharing". There is government recognition of a greater need for bandwidth, and the competition is being fought over value added services rather than infrastructure.
Given the various challenges, the move towards closer cooperation will not be a revolution but an evolution. To many, the idea of collaborating with a competitor is revolutionary in itself, and it may take time for some to grasp that collaboration is the new competition.
Click here to view an electronic copy of our Annual Review 2015.