The Rise of the TowerCo

In a year where American Tower bought €7.7 billion worth of cell masts from Telefonica, Nicole Capella investigates these new network challengers and how they came to be

Over the past several years, a trend has emerged – of companies purchasing cell towers, often from the large telcos that originally built them. These infrastructure-focused companies are known as TowerCos.

The most surprising part of this trend is not that companies are interested in purchasing cell towers, but that large telcos are interested in selling them. From the 1990s through the 2000s, cell towers represented a significant chunk of telco portfolios and corresponding valuations – and were not considered a sellable asset.

In 2014, Cellnex (formerly Abertis) began acquiring tower subsidiaries of telcos throughout Europe, starting in Italy with Atlantia’s TowerCo. Now, Cellnex is the largest independent wireless infrastructure company in Europe, with over 70,000 sites.

Why did TowerCos emerge?

The shift in telecommunications infrastructure management has been influenced by a number of different circumstances. Changes in the financial needs of the large telco providers, technological advancements, and consumer demand have all been driving forces in the emergence of TowerCos.

Financial

To remain competitive, telecommunications service providers must make large-scale investments. These investments may cover upgrading networks to accommodate 5G technology; or expanding high-speed coverage to reach millions of jobs and students that made a sudden change to operating remotely due to the pandemic.

A McKinsey study found that a change to 5G could double the total cost of ownership (TCO) for telecommunications infrastructure from 2020-2025. This supports the sale of cell towers for two reasons. First, selling off assets can help a company raise the capital necessary for new investments; and second, shifting expenditures from CAPEX to OPEX improves the balance sheet and makes it easier to raise funds.

Another financial factor springs from the rise of on-demand streaming services. Over the top services like Netflix and Spotify are siphoning money that previously went into pay-TV services, therefore squeezing telco revenue.

Technological

Tech innovations have also fundamentally transformed telco services, forcing telecoms to rethink business models. Network function virtualization (NFV), for instance, allows companies to decouple services, breaking down monolithic architecture into smaller pieces that can be distributed individually.

This has opened the door for telecom companies to offload expensive-to-maintain cell networks and lease back the only the services they need – improving efficiency while transferring expenses from CAPEX to OPEX.

Similarly, the development of CloudRAN supports not only decoupling bundled services but also remote access; making it feasible for an international company to purchase cell towers outside of their own geographic area.

Customer demand

Finally, changes in customer demand made selling off cell towers an attractive option for telecommunications companies. The widespread use of big data by companies of all sizes, as well as IoT, autonomous vehicles, smart cities – all of these things have increased demand for bandwidth and network optimization.

As a result, telecommunications companies have changed the ways that they value and evaluate their own businesses. Rather than basing valuation on physical equipment and existing customers, telecom providers began to explore valuation by potential customers instead. This reduced the focus on hardware and equipment, opening the door to selling equipment and leasing it back under the TowerCo model.

Who are the big players?

The largest companies in the TowerCo sector include:

Cellnex

Cellnex is the largest independent TowerCo in Europe, with more than 70,000 sites in its portfolio. It has a significant presence in Spain, Italy, Netherlands, UK, France, Switzerland, Ireland, Portugal, Austria, Denmark and Sweden. Among its priorities are creating a foundation for IoT, and supporting Public Protection and Disaster Relief (PPDRs).

American Tower

American Tower has a portfolio that encompasses the U.S., Africa, Latin America and India; but they have recently been making inroads into the European market as well. American Tower is beginning to compet with Cellnex, joining them in the French market with 2,500 sites and another 2,000 in Germany, where Cellnex doesn’t currently have a presence.

Another significant emerger is actually a spinoff of Vodafone. Vodafone received several offers for their network of cell towers, “which highlighted that its tower assets would command an attractive valuation.” In 2019, the company announced that it was using its assets to create a subsidiary, confusingly named TowerCo.

Data centre business model

The rise of tower companies has been made easier by the fact that there was an existing infrastructure business model to follow: the colocation data centre model.

With this structure, telecommunications sell off data centre infrastructure to specialist operators and leaseback only the capacity required. This helps them to reduce costs and improve efficiency, eliminating waste with a usage-based model.

Data centre specialists benefit from the colocation model by leasing capacity to multiple tenants, ensuring high operating efficiencies and taking advantage of economies of scale.

As noted above, selling off infrastructure and leasing it back allows a telecom company to transfer expenses from CAPEX to OPEX. This also allows them to reduce overall costs, including maintenance and site upgrade expenses.

Following the data centre colocation model, TowerCos purchase the cell infrastructure from telecom companies and lease the space back to them, or to many customers, at a profit.

TowerCo Infrastructure & Technology

In order to remain competitive, TowerCos must diversify and innovate. Some advancements include:

IoT for Remote Management

Employing IoT to manage wireless sites remotely is of growing importance to TowerCos. IoT sensors with real-time data reporting can help an operator to manage security, power, equipment and upkeep from any location.

Distributed Antenna System (DAS)

The connectivity service provided to the end-user can be improved with the addition of a distributed antenna system (DAS). The DAS is a system of signal boosters that are integrated into a tower system, to boost the signal.

Network Slicing

Software-defined networking (SDN) and network function virtualization (NFV) allow customers to build their own network on a shared physical infrastructure. Each telecom provider can negotiate their own service level and offerings – effectively carving out a piece of the shared infrastructure for each customer.

Rising up

The rise of the TowerCo represents a shift in the way that large telecommunications companies operate, and how they are moving forward. By re-evaluating infrastructure, such as their network of wireless towers, and exploring options to change cost structures and improve efficiency, telecom providers made room for a new set of operators.

TowerCos offer scalable, flexible, efficient connectivity services to telecom companies, while improving tower operations by narrowing their focus to site acquisition, management, and improvement.

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