Is Infrastructure Sharing a Trend in the Telecommunications Market?
By: Gabriel E. Levy B.
www.galevy.com
Recently, the Spanish company Telefonica, owner of Movistar, announced the sale of more than 30 thousand telecommunications sites or towers to the company American Tower, for a value of more than 7.7 billion Euros [1].
Telefonica’s unprecedented transaction, which ultimately seeks to reduce its indebtedness and increase its cash flow, not only involves the disposal of one of the company’s most valuable assets, but implicitly all this infrastructure becomes a Neutral network support that any operator will be able to contract from now on, i.e. even Movistar’s competitors will be able to provide their services in the same towers they operate [2].
Telefonica’s chairman, José María Álvarez-Pallete, said that “this is a deal that makes strategic sense within our roadmap. American Towers was our second supplier after Telxius”.
“After this great operation we will continue to focus on our most ambitious objectives: the integration of O2 with Virgin in the United Kingdom, the purchase of Oi mobile in Brazil and the reduction of debt”, he added [3].
Although for some unsuspecting analysts, Movistar’s decision might be a mistake, by releasing one of its greatest competitive advantages and market barriers, the decision of the European communications giant is not an isolated fact, but is part of a new trend in the sector, which advocates a drastic reduction in infrastructure costs, popularly known as CAPEX[4], in search of a greater investment in OPEX[5], which allows greater coverage in less time to obtain much more acceptable profit margins in a very volatile industry where technology reaches a very high equity detriment in a very short period of time, due to the natural evolution of the sector and the innovation that is part of its own DNA.
In much simpler terms, the high costs in capital expenses (CAPEX), or infrastructure in the telecommunications sector prevent companies from having sufficient cash flow to provide coverage and adequate service in a wide or extensive geographical area; thus, if a telecommunications operator manages to free itself from the fixed costs of investment in infrastructure, it will be able to use the same resources to achieve a much wider coverage and service while maintaining the investment schemes, and in this way, the volume of reached users will pay monthly for the rental that will be in charge of a third party, as a totally independent business unit. This means seeking to obtain greater coverage and number of users, while maintaining the same investment capital projection.
In the same way that Telefonica made the decision to operate its telecommunications services on a neutral antenna network, some projects around the world are advancing in the design of multiple mechanisms that allow the strengthening and consolidation of neutral networks at various levels, including mainly fiber optic networks and equipment.
From Net Neutrality to Neutral Networks
The concept of Net Neutrality, as old as the Internet itself, refers to an implicit agreement between the agents that make up the Internet value chain, so that all IP connections are valued as equal, without allowing telecommunications service providers to qualify, much less sanction or privilege, one service over another. This principle has allowed the network to be open, plural, democratic and participatory, so that Net Neutrality clearly has social, economic, cultural, political and ethical implications [6].
A good way to illustrate Neutrality is to compare the Internet to a large highway, where the vehicles are the content (Facebook, Google, Netflix, Twitter, websites, etc.) and Neutrality is the traffic rule that guarantees that all vehicles can use any of the roadways. Thus, they can all travel at the same speed, without any of them being prohibited from traveling on that highway, regardless of the amount of cargo they are carrying. When neutrality is broken, on any of the lanes of this highway, a private operator could prohibit any of the vehicles to transit or limit their load capacity or restrict their speed, favoring some or harming others [7].
Neutral Networks
Based on the same principle of Network Neutrality, the so-called Neutral Networks arise, referring to the interconnection infrastructure itself in any of its stages and levels, which may be rented by companies interested in providing telecommunication services, paying a monthly lease fee for its use, guaranteeing that the infrastructure will be the same for all customers while maintaining the principle of Neutrality.
One of the most novel and interesting cases of Neutral Networks that is being developed in the world is the ASTURCÓN network (Asturian Network of Neutral Optical Communications) in Asturias [8], which is mostly formed by fiber optic cabling, although it also uses some copper parts and composes a network of hybrid technological equipment, mainly composed of GPON (Gigabit PON) systems [9].
The project is managed by the Principality of Asturias and aims to allow any Internet operator wishing to provide network services in the region to use this public infrastructure offering up to 100mbps symmetrical and paying a very low fee for the use of this [10].
In turn, the Societat i Telecos 2015 report, by the engineering society of Catalonia, proposes infrastructure sharing as the best strategy for coverage growth, avoiding duplication of costs and investment: “the existence of a neutral network that all operators would work with in order to guarantee access to the network and avoid duplication”[11].
The above cases are part of a large number of “Neutral Networks” projects in Europe and first world countries, but they are not necessarily replicable in developing countries.
The Latin American Utopia
Although theoretically the “Neutral Network” concept is very powerful and could be developed equally throughout the world, in the case of Latin America, although there are regulations that allow infrastructure sharing[12], most fixed telecommunications operators, especially the largest ones, perceive this model as a gateway for many players to compete in a market that is limited by its very nature, which is aggravated by the low service quality perception indexes of the users of these companies, whose loyalty is low and the likelihood of migration to other potential operators is very high.
In simpler terms, the big telecommunications players in Latin America, especially Claro, Tigo and Movistar, are afraid to allow new players to enter the current markets, partly because of the immaturity of the market itself and partly because of the generally low service quality indexes, which is why they try to maintain the CAPEX component of their own infrastructure deployment as a containment barrier to prevent the arrival of new players in the ecosystem, especially in the fixed Internet and home segment.
For all of the above reasons, governmental efforts for the implementation of Neutral Networks in Latin America have not been successful.
A very interesting case study of governmentally promoted Neutral models in Latin America is the Vive Digital fiber optic backbone network promoted by the government of Juan Manuel Santos at the beginning of the last decade in Colombia, which was deployed by the Mexican operator Azteca Comunicaciones, which won the bidding process at the time.
The network of Azteca Comunicaciones, one of the most extensive in the country with coverage in 769 municipalities at the beginning and 1. 075 to date[12], promised to become the main connectivity highway for many Internet providers in remote regions, operating as a sort of “Neutral Network” in many aspects; however, this model failed to succeed and the companies that might have been the main users, such as Claro, Movistar or Tigo, preferred to deploy their own infrastructure in parallel, duplicating efforts, before sharing the technological resource, duplicating efforts, rather than sharing technological resources, which in the absence of greater demands from real users by the government, ended up converting all this infrastructure into practically a network at the service of a single operator, which is ultimately a very small player in the market with a colossally large infrastructure, which was financed with public money [13].
This same scenario was repeated in Mexico, where large market players have preferred to duplicate efforts before sharing resources over the network infrastructure deployed by the government, and although the promoters of both projects have tried to sell them as very successful, the statistics in this regard leave more doubts than certainties. [14] [15] [16].
It is for all of the above reasons that the current Colombian ICT Ministry decided to abandon any commitment to “Neutral Networks” models, concentrating its efforts mainly on the payment of subsidies per user effectively connected, leaving operators to decide on their own whether they wish to build their own infrastructure or seek alliances for the development of Neutral Networks, under the premise that the possible intervention by the state in network infrastructure may result in a market distortion that affects competition and may cause detriment to public resources [17].
IRU scheme as a private alternative:
The business model: IRU, mainly massified by Claro, Movistar and TIGO, is a scheme whereby the company signs with the network provider an “Irrevocable Right of Use” of the infrastructure for a determined period of time, generally on the so-called “Dark Fiber” wires, including in the contract costs an entry feed for infrastructure and a monthly lease fee, which includes maintenance by the owner of the infrastructure, with a service availability generally above 99%.
This model is mainly used in last-mile networks in remote towns and has allowed the Mexican company to grow exponentially throughout the continent, allowing the owner of the fiber to commercially exploit the remaining infrastructure.
The IRU model, like many outsourcing schemes by large operators, arises mainly from the impossibility for Internet providers to deploy and maintain last mile sections in remote regions, i.e., keeping the capillarized distribution network operating to end users in a large geographical area is a colossal task in terms of personnel and resources, which is why it is more efficient to hire and fragment many operators to be responsible for ensuring the optimal operation of the so-called “Last Mile” universe, especially in remote regions.
IRU, although strictly speaking it outsources part of the CAPEX of the companies that acquire it, is not considered a “Neutral Network” model, since the outsourced component becomes the exclusive operation of whoever contracts it and in most cases does not include the other network or infrastructure components.
In conclusion, although the concept and models of Neutral Networks are gaining more strength in highly developed economies, these models are only viable if the agents that make up the value chain of Internet provision are willing to engage in real competition in the market, since otherwise, any government effort in this direction will end up becoming a waste of economic resources, given the duplicity of infrastructure of the large players who will not be willing to sacrifice technology as a barrier to market contention.
Therefore, it could be said that the greatest threat to “Neutral Networks” is neither the lack of public resources, nor the lack of regulation or viable market schemes, but the lack of an organizational culture of free competition in the companies that provide Internet services in Latin America, which are opting for other alternatives in the outsourcing of infrastructure deployment, without losing the market barriers that keep them distant and protected from new players.
[1] La República article on the sale of Telefónica’s antennas
[2] News article in Vanguardia on the sale of Telefónica’s Antennas
[3] La República article on the sale of Telefónica’s antennas
[4] Economipedia article on Capex
[5] Wikipedia article on OPEX
[6] Encyclopedic article on Net Neutrality
[7] Net Neutrality Legal Issues Article
[8] ADZ Zone article on neutral networks and the case of Asturcon
[9] Encyclopedic article on GIPON
[10] Europa Press article on the Asturcon Network
[11] Report of the Society of Engineers of Catalonia
[12] Banamericas Report on Vive Digital Network
[12] CRC infrastructure sharing conditions
[13] National Fiber Optic Network Project Mintic 2015
[14] Academic analysis USC – Peña Rendón, on scope and deployment of Vive Digital Network
[15] Banamericas Report on Vive Digital Network
[16] Official Mintic figures on national Vive Digital fiber optic project
[17] Current Internet Subsidies Scheme Mintic Colombia – Strata 1, 2 and 3
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