M Webb

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February 20, 2016

By Malcolm Webb

The difficulties of network sharing

We review the relatively small number of network sharing deals internationally over the last 5 years and examine some of the potential reasons why it doesn’t occur more often.

From a review of the Telegeography site news reports to the end of 2015, we can see that 24 network sharing deals were entered into in the period from the beginning of 2011 to the end of 2015 (many more were said to be in negotiations but abandoned). While acknowledging that some deals may not have been captured in this analysis, this is less than we expected. It is a bit surprising that, despite the apparent benefits to operators of network sharing in terms of cost reductions and reduced demand risk, it doesn’t occur more often, or in other circumstances.

A summary of these deals is set out at the end of this paper.

One pattern that can be discerned is that, when one sharing deal is entered into in a market, it will often be followed shortly afterwards by others in that market (e.g., Malaysia, Ireland, Bangladesh, Israel and Thailand). We also see certain groups are quite active in sharing (e.g., Vodafone, Telefonica, Orange, Axiata), reflecting perhaps their growing comfort with this type of arrangement.

A critical reason why network sharing doesn’t occur more often is the loss of independence that comes with having to share with another operator. A sharing operator will no longer have full control over network strategy and investment, without the unfettered ability to dictate the direction that its network will take, its rollout strategies and vendor choices.

Sharing involves compromise with a competitor, who will rarely have complete alignment on network evolution and deployment and investment plans and strategies, and who may look to frustrate new competitive developments in the shared network that the other operator wishes to make.

This means that neutral or independent governance can be important in network sharing transactions. This is one reason why separate joint venture structures are used and can be an added benefit of third party involvement (e.g., as an investor, an outsourced provider or independent JV management). The success of the towerco model is partly due to the neutrality that an unrelated third party management company can provide.

Another issue that is coming to the fore in recent times is the potential complications that a network sharing deal can have over industry consolidation. Operators in a number of markets are pressing for consolidation to spur on incentives to invest in new broadband infrastructure, among other things. However, potential network sharing deals may limit consolidation options in the market.

In the UK, Three and O2 are proposing to merge. Three and EE have a network sharing deal, as do O2 and Vodafone. Three is proposing to maintain these arrangements after the merger, allowing it to partner with EE and Vodafone. With BT acquiring EE, Vodafone wishes to maintain its agreement with O2 and has said that two contracts are incompatible.

This illustrates the constraints that can arise from existing sharing arrangements, not only commercially but also from a regulatory perspective. The UK regulator, Ofcom, has expressed its reservations in relation to the proposed merger^[1], when the Ofcom CEO warned about industry disruption and the scale economies of sharing being threatened by the merger.

We remain optimistic about network sharing, where sharing operators are able to compete effectively through service differentiation. But clearly the commercial imperatives of sharing can be outweighed by the commercial and regulatory obstacles. The involvement of third parties can certainly assist in getting through some of these difficulties and may be the key to the future evolution of this business model.

The Telegeography reported deals entered into were:

Year	Country	Parties (month)
2015	Tunisia	Ooredoo Tunisia and Tunisie Telecom RAN share (October)
2015	Thailand	DTAC and AIS tower share (August)
2014	Brazil	Nextel and Vivo (December)
	Thailand	TRUEGIF and DTAC (October)
	Ireland	3 Ireland and Eircom (September)
	Israel	Cellcom and Golan Telecom (May)
	Czech Republic	Telefonica O2 CR and T-Mobile CR RAN share (May)
	United Kingdom	EE and Hutchison 3G UK (February)
	Spain	Vodafone Spain and Orange Espana (January)
2013	Israel	Cellcom, Pelephone and Golan Telecom (December)
	Iceland	Vodafone Iceland and Nova (November)
	Israel	Partner Communications and HOT Mobile (November)
	Romania	Orange Romania and Vodafone Romania (August)
	Greece	Vodafone Greece and Wind Hellas (June)
	Canada	Rogers Communications and Videotron (May)
	Bangladesh	Robi Axiata and Teletalk (January)
2012	Bangladesh	Robi Axiata and Ranks Telecom (December)
	Ireland	Vodafone and 3 Ireland (July)
	Malaysia	Maxis Communications and REDtone (July)
2011	Poland	T-Mobile Poland and Orange Poland (July)
	USA	LightSquared and Sprint Nextel (June)
	Denmark	Telenor and Telia Denmark (June)
	Ireland	Eircom and O2 Ireland (April)
	Czech Republic	Telefonica O2 CR and T-Mobile CR (February)
	Malaysia	Celcom Axiata and DiGi (January)

Source: Telegeography, M Webb analysis

1. http://media.ofcom.org.uk/comment/2016/three-and-O2-merger/

Disclaimer

This article is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this article.

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