Today, operators could save 30 to 40 per cent of the cost by joining forces with rivals in their markets to build, run, and maintain mobile networks. The truth is, operators have long been exploring the possibility of sharing their mobile network infrastructure.

Yet, surprisingly, to date few arrangements have been made in this regard that aim to capture the full benefits from sharing.

In private, operators offer a variety of reasons for not engaging in sharing deals, often fearing the operational complexity they may bring, the up-front transformation costs, and the potential loss of control over their own destinies.

In line with this, an analysis by management consulting firm Booz & Company found that, in reality, these justifications reiterated by operators are often unfounded. In fact, sharing mobile networks can reap substantial benefits for operators – especially given the potential for cost savings, the flexibility on the scope of the sharing deal and the range of governance models that sharing parties can choose from.

The rationale

With revenues under pressure, the ongoing explosion of data demanding that networks be upgraded, and next-generation LTE requiring further investments in networks, mobile network operators today are scrutinizing their cost structures more than ever before. As a result, they have been actively pursuing the potential of network sharing as a way to increase their returns on capital and reduce costs.

“In actuality, we estimate that mobile sharing offers the potential to save the European mobile industry 20 billion euros ($25.9 billion) to 40 billion euros annually over the next five years, given its expected sales of around 150 billion euros in 2012,” explained Hilal Halaoui, a Partner with Booz & Company.

“This translates to annual savings in the range of €1 billion to 2 billion euros for an individual large operator with revenues of 50 billion euros – no small drop in the bucket.”

“More network-sharing deals have been made in emerging markets, but that is because the larger number of ‘greenfield’ situations requiring entirely new networks make them ripe for collaboration among new entrants,” said Chady Smayra, a Principal with Booz & Company.

“In developed markets, operators are also concerned about the significant tax implications of transferring assets to a new sharing entity and the subsequent impact on profits. However, given relatively low corporate tax rates in the Middle East, in most cases this is a lesser concern for regional operators.”

Many operators – particularly mobile incumbents whose early entrance into their markets has given them the best coverage and network quality – assume that sharing their network with others would dilute their competitive advantage.

“Not in the case of ordinary 2G and 3G networks,” said Dany Sammour, a principal with Booz & Company. “Recent surveys have shown that their subscribers do not notice any difference between networks. Operators looking for strategic advantage through newer technologies, such as LTE, can still share their networks because each partner to a deal can decide which technology to deploy on their shared equipment, and the network footprint to be shared.”

As mobile networks of challengers in the Middle East have evolved, there is growing recognition amongst incumbents in the region that network coverage and quality is no longer a source of competitive advantage and that there are substantial benefits to infrastructure sharing.

Accordingly, there is an increasing trend towards mobile infrastructure sharing as is already the case in Saudi Arabia, with passive tower infrastructure being shared between STC, Mobily and Zain on selective basis.

“Moreover, the fear of losing control over the future direction of their networks is simply misguided – as operators can always keep independent control of selected strategically important sites and also of technology layers in their network where they can really differentiate from their competitors.”

The high costs of network sharing

“The initial cost of a network-sharing deal can also be daunting,” added Halaoui. “Despite these seeming setbacks, the overriding benefits of sharing are clear”; the initial costs involved in the transition stage typically range between 20,000 euros and 30,000 euros per site – about a third the cost of building a new site.

“And, even after the transformation cost is factored in, the business case typically remains attractive: the initial capital expenditures required will be gradually paid for through the savings generated over the life of the deal, and the ongoing reduction in operating expenses will guarantee a lasting benefit. Even if the partners enter negotiations with different assets, a deal can still be made, as long as they are willing to concede these initial differences and it is clear that the outcome benefits both,” he said.

A complex process

A number of operators don’t feel confident that they can close a network-sharing deal, or adequately execute on it afterward. In truth, the process of entering into and carrying out these agreements can be eased by ensuring that each party clearly understands the terms.

“Even more so, the negotiations should include a framework that sets guidelines for the key elements of the deal – including the technological and geographic scope, the assets to be included, and the partnership setup,” said Sammour.

Investors looking for low-risk opportunities to boost their returns should also consider investing in these arrangements. Simply put, the early movers will be in a better position to shape deals with partners of their choice, giving them a distinct cost advantage. And operators that have plans to implement long-term evolution (LTE) networks will soon find that these deployments can benefit significantly from well-planned network-sharing deals.

Thus, rather than shying away from such deals, it is vital for operators to pursue them albeit through the right deal structure and operating model to mitigates any strategic, technical, operational and financial risks. – TradeArabia News Service