Network densification becomes a matter of survival for mobile market participants
Moscow. November 27. INTERFAX — Russian Towers CJSC plans to increase the number of its infrastructure facilities to 5 thousand based on 2019 results, which is almost 25% higher than last year. There was a similar increment a year earlier, and the annual revenue increase has been 25% or higher for several years running.
In his interview with Interfax, the Russian Towers president Alexander Chub told about the company's further prospects, its plans with respect to purchases of cellular operators' infrastructure (previously, Russian Towers was negotiating Vimpelcom infrastructure purchasing, but the parties didn't reach agreement on the price) and the challenges which the market will face when launching 5G.
— You were demonstrating stable revenue increases for a few years now. Will this momentum be retained according to 2019 results as well?
— The year hasn't ended yet, so it would be premature to be ahead of time and speak about results. But our business is peculiar in that the effect of actions that we take today will be fully realized only next year. Therefore, regarding revenues, we are now to a large extent reaping the fruits of last year and early this year, we are within the plan and even have some margin.
— What are your plans with respect to the number of facilities?
— We expect to pass the 5 thousand mark by end of this year (based on 2018 results, the company's portfolio amounted to 4 thousand facilities — IF), while retaining the tenancy ratio (average number of operator base stations per tower — IF) close to 1.8. By year’s end, we will have 9 thousand deployments, and this is very significant growth because the market average annual increment amounts to 300-450 facilities, and the tenancy ratio is 1.5.
Also, we've come up with new solutions this year, we are implementing whole city coverage projects now. We now have ongoing projects in Kronstadt and Nizhny Tagil, and they won't be our last ones.
— Will the tenancy ratio indicator be applicable to your performance in 5G?
— As I see it, its relevance will change. How would it be possible to evaluate from the tenancy ratio perspective, for example, our Yekaterinburg congress center equipment project, where we prepared a 5G-ready infrastructure for 5 operators? Our task was to assure peak load speed for at least 10 thousand users at the level of 100 Mbps and 180 Mbps during non-peak periods. We built all that, and without any vertical carriers, i. e., we set up a distributed network. How about such a ratio? You could say it's 5, but that wouldn't be quite right... The significance of the tenancy ratio we are all accustomed to will be getting fuzzier as time goes by.
But the current indicator of 1.8 is a very good one for a company with such an organic growth rate. Usually, the attraction of additional tenants takes one to one and a half years, and that's with efficient development. Whereas with our growth rates, retention of the 1.8 ratio means that our performance is better than for the industry as a whole.
— Is there a value at which you would be ready to suspend organic growth?
— There is a specific logic here: more time is required to attract second, third and so on tenants than to create the first and original mast. Therefore, if we will see a drop — it won't be a disaster for us down to some certain levels. As of today, our development is dynamic — the operators have aggressive network improvement plans, and this is true not only for the development of 4G on new territories but for densification in places where, it would seem, it has all been already accomplished. For example, Moscow and Moscow Region received 4G coverage a long time ago, but now this service is in such demand that network densification becomes a matter of survival for all mobile market participants without exception. Therefore, we don't see any reason to lower our growth rate targets, we should have a high readiness level for the nearest future.
— Is buying passive infrastructure from operators currently important for you?
— I can't say that we have abandoned these ideas for good. But we live in the real world and are not waiting for a fairy tale prince by the window, we are watchfully looking around. As of today, however, the issue of scale hasn't been resolved yet even in its first approximation.
Taking into account our growth rates, our desire to acquire operators' infrastructure portfolios may vanish completely at some point in time. This is not related to some egocentric position of ours, but rather to our understanding of circumstances in which acquisition becomes inefficient.
Let's ask ourselves a question: what can operators offer today? A system that was created for 2G, 3G and, partially, 4G communications. So, from the point of view of further development, we are first of all interested in things that belong to 4G, and things that were made before it don't have any additional commercial prospects. Why should we be paying for it then? And the further away we are moving on the time scale, the less attractive it becomes to buy that "tail" which we'll have to maintain without earning any additional money from it. Because the lease price that this facility receives will, in any case, be included in the sale price. So where is that point of intersection — reduction of our interest and growth of our own capabilities? So far, it's still in the future, but that future is getting nearer fast and our interest is waning as it comes closer.
— Based on 2018 results, AC&M Consulting analysts put you in the 6th place by a number of facilities after the four largest Russian cellular operators and Rostelecom, with Vertical and Service-Telecom right behind you. How do you view your competitors?
— Our competitors are significantly falling behind us, and that gap is growing bigger all the time. There are more and more emerging participants in our market. What do many of them think? We'll put up towers and start receiving profits. But 99% of these businessmen simply don't understand what they are getting into; this business is for decades. You won't see quick returns in this business, and therefore the investor who comes to this market must not only see the development results for the previous 10 years but the prospects for the next 10 years as well. That's why many players make fatal mistakes right from the beginning; for example, they start playing price wars and thus killing the very essence of the infrastructure business.
— New things in your business — what are they?
— It's exactly the projects that I spoke about earlier — whole city coverage, as we are doing in Kronstadt and Tagil. We were taking a risk with those projects because we were the first ones and we didn't know who to compare ourselves with, who to look at. But, after making that decision, we found ourselves with no competition — no one else is doing that. It was quite simple previously: operators needed towers in a specific place and they selected someone with the best offer. Now, however, the paradigm of our relations with the operators has changed, now we come and say: here's a city with 350 thousand residents, and here's the network that we've designed and built. As a result, companies save tons of time and resources by receiving a ready solution and doing just what they do best — services for their subscribers.
To offer a single standard product, competing with other offers only in price, is a road to nowhere. We cannot just be witnesses to how our market is being destroyed. And we are also not going to take part in these price games, because it's harmful to the company's long-term development. But such solutions with a high added value are the basis of our development.
— Are you thinking about buying some of the smaller companies?
— In my view, market consolidation is an inevitable process and it's happening all the time. On the one hand, we see appearing dozens of companies that weren't on the map, and if we see opportunities for consolidation, we are taking them.
— Over the term of the next five years, how many players will there be in your market?
— China Tower, for example, takes up 97% of the local market; as for the remaining 3%, there are 200 more companies conducting business in China one way or another. To be a single player means too much responsibility and, besides, it's also destructive, any exclusivity is bad, there must be competition.
— Are you giving any thought to an IPO?
— If we retain our current growth rates, I think that in two or three years we'll be a wonderfully attractive asset for an IPO.
— Many are saying now that the development of the fifth-generation communications in Russia may be delayed due to the absence of consent on the frequency issue. The band required by the operators is occupied, and companies deem it inexpedient to develop the band offered by a regulator. And there's another layer of problems besides frequencies — preparation of the required infrastructure.
— What do you think about this problem and are you preparing your business for 5G?
— We are in a more privileged position because we don't depend on what frequency band will be allocated. Everything is already more or less clear with the part of the infrastructure that we undertake to be responsible for. This is to say that a) it will be urban and transportation environment, b) the number of cells will drastically increase in order to provide the required speed and volume of data transmission.
Now, to increase drastically the number of base stations in an urban environment is no simple task at all. We are applying significant efforts in order to understand how this development will be occurring, by what solutions, who will be approving them. We are taking a separate look at the composition of the site itself, which is also going to get dramatically more complicated. As of today, the site constitutes a vertical structure with equipment, antennas, etc., deployed on it, with electricity supplied to it. There will be more sites, and they should become less visible in the urban environment, from the purely physical point of view, they will be deployed on lower supports, on 9-10 meter tall supports rather than the 29-meter ones that are used now. And the second thing is electricity connection to each of such sites: the higher number of facilities will significantly increase electricity requirement. This will be a completely different approach to energy consumption and to supplying this electricity to the site.
That means that, in essence, we are getting completely new forms of equipment, a huge number of sites, reconstruction of the very essence of these supports. And, most importantly — who will own all that? Quite obviously, it won't belong to a single operator who would be putting other players in a dependent position. That means that there a gigantic engineering task is emerging: someone needs to create this, own it and control its development, and, most importantly, pay for all that. After all, it's a matter of some mind-boggling investments. I reckon we are ready for this challenge not only theoretically. We are not facing the frequency band problem, but, so far, we are limited by the understanding of who will be using 5G, will it be frequency users or, more likely, industrial sites, highways and industry.
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