Towersharing (Part 4.2): The TowerCo Operational Models (Towersharing Operational Models)

Disclaimer: This article (and the series following) is purely for educational purposes and aims to provide an understanding of the Towersharing Industry, its origins and the TowerCo Model. It is intended for consumption by individuals and/or organizations to gather an intermediate understanding of the dynamics of the Towersharing Sector and how it seeks to add value in the global society. Material presented in this article (and the series following) represents a culmination of information sourced from public sources (properly cited wherever relevant) and my own personal experience. I have (to the best of my knowledge) not utilized nor disseminated data originating from non-public sources and have (to the best of my knowledge) managed to maintain the confidentiality of material and sensitive information available to me as part of my profession. If there is any feedback regarding any aspect of this article with respect to confidentiality, I would highly appreciate if the concerned party reach out to me directly.

After having reviewed the core components of a communication site (ref. Towersharing 4.1 – Understanding Communication Sites and Assets), it will now be easy to understand the different operational models that a TowerCo offers (or has at its disposal) to market to ComCos. So far there have been three models (two main and one slightly limited) a TowerCo markets. Bear in mind that there have been certain variations to these models whereby, TowerCos have customized their range of services to cater to the need of the ComCos. These three models are the Traditional (or “Pureplay”) Model, a Complete Passive Infrastructure Solutions (or “Value Added Services” - VAS) Model and a Managed Services Model.

The Pureplay Model deals with the provision of steel and grass services to a ComCo. Simply put, a TowerCo offers the ComCo space on the tower to install its Active Equipment and space on the ground to house the ComCo's Auxiliary Active Equipment. The TowerCo functioning according to this model can be assumed close to a Real Estate Investment Trust (“REIT”), in that, a REIT, essentially, only provides real estate to the tenant and in return receives a rent from the tenant for the occupation of said space. As mentioned in the previous article (Towersharing Part 3: History of TowerCos), the Pureplay Model was implemented (and was, for long, the status quo model) by the first TowerCos operating in the US and CALA region.

The Pureplay Model entails that a ComCo intending to board its equipment on a communication site is responsible for managing and on-boarding all the passive elements of the communication site (other than the Tower Asset and Ground Space) to function its Active Equipment. Therefore, all of the power concerns, Active Equipment Maintenance/Passive Equipment Maintenance concerns, and security concerns (which many a time the TowerCo adds onto its scope of operations) is the responsibility of the ComCo. This option, although limits the responsibility of a TowerCo in the engagement with a ComCo (thereby reducing the operational hassle of a TowerCo), it however, eventually leads to duplication of resources housed on a communication site.

For example, if a site houses equipment (both passive and active) of multiple ComCos, it would lead to duplication of passive elements such as gensets, batteries and/or rectifiers (considering each ComCo brings its own equipment) on the site. Ideally, ComCos can reach a sharing agreement on the use of common Passive Equipment amongst themselves, however, certain issues may arise under this arrangement (e.g. extent of power sharing, which ComCo’s Active Equipment gets priority on back-up power supply in case of power failure, CAPEX to be incurred on the different elements in terms of quality of equipment purchased, quantity of equipment purchased and CAPEX sharing etc).

To distance themselves from these (sometimes) difficult discussions, ComCos normally outsource these operational considerations to a TowerCo and in-return negotiate an agreement (with the TowerCo) to determine minimum levels of services that are to be provided to the ComCo’s Active Equipment. All this is governed under the Master Tower Service Agreement (or “MTSA”) and a subset of the MTSA relevant to the provision of the pre-agreed Service Levels is covered under a Service Level Agreement (or “SLA”, normally defined under several clauses and supported by annexures).

One of the major reasons why TowerCos initially adopted the Pureplay Model has a major link to the geographical region where TowerCos first established their base of operations. The US is an economy that is (ideally) not plagued with issues such as recurring power outages (due to the failure of the Grid), maintenance concerns relating to installation of heavy auxiliary power equipment (due to the wide availability of the Grid) and general theft/vandalism. Therefore, the need for a TowerCo to provide passive equipment in its engagement was not considered a necessity. However, once TowerCos started expanding their operations into less progressive economies, plagued by issues such as recurring power outage, heavy wear and tear of Passive Equipment and/or theft/security concerns, the need for another entity to assume responsibility for these services became a reality.

The scope of specifics considered under a Service Level Agreement vary from engagement to engagement (depending on the parties involved in a Sale and Leaseback Transaction). However, there are some general categories that are considered (almost) as part of every Sale and Leaseback Agreement:

• Service Levels (i.e. “Uptime”):?ComCos require that their Active Equipment functions round the clock to ensure communication services are being provided to the end consumer. Any stoppage/blockage in service leads to a loss of potential revenue (which otherwise would have been earned had the Active Equipment functioned as intended). Whereas correction efforts arising from Active Equipment breakage, defect and failure fall under the domain of the ComCo (since TowerCos look after the passive elements only), ComCos expect that TowerCos provide the ComCo Active Equipment a seamless and constant supply of power to enable the Active Equipment to function properly. This directly translates in to the level of Uptime (or the amount of time in a prespecified period – in terms of percentage) an Active Equipment benefits from during its operations. Consider a hypotehtical example, where the prespecified period is one month (i.e. 30 days) and Active Equipment receives seamless, quality power supply for the first 29 days. On the 30th day, there is a power failure (owing to the collapse of the regional Grid and/or gensets and batteries). The applicable Uptime (owing specifically to the provision of power to the Active Equipment) would be calculated as:

Ideally, a ComCo would expect power supply from the TowerCo 100% of the time. However, in reality, this is not possible. Therefore, ComCos and TowerCos agree on an acceptable minimum threshold of Uptime to be maintained throughout, as part of the SLA. If the threshold is breached, a ComCo may penalize a TowerCo (most likely in terms of monetary compensation) for the levels of (or lack of) service provision.

Note here that the disruption of communication service as a result of Active Equipment failure, is not included in the definition of Uptime. This is because Active Equipment failure falls outside the realm of TowerCo responsibility.

• Site Access:?There may be certain instances that a ComCo might have to access the site to conduct maintenance of its Active Equipment or tend to an Active Equipment failure. Therefore, optimal Site Access controls need to be in place to enable the ComCo to service any Active Equipment related issued on a communication site. Access to the communication site may be required as per routine or in emergency cases and the TowerCo has to serve as a bridge between a ComCo and the Ground Space landlord. The SLA is put in place to highlight the specifics of Site Access controls, procedures and allowances (both under standard and emergency circumstances).
• Security:?As detailed previously, site and site equipment security considerations are of prime importance to both ComCos and TowerCos. Therefore, the SLA (many a times) also captures specific security considerations to be deployed on a communication site at all times (be it CCTV Cameras and Feed, Security Guards etc.).

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As the name suggest, a TowerCo functioning under this model aims to provide a complete passive infrastructure solutions package to a ComCo as part of the Sale and Leaseback engagement. This extends from the traditional provision of tower space and ground space to the provision of power supply, security, Passive Equipment Maintenance, passive infrastructure insurance etc.

The need for the VAS Model arose in regions where managing the issues of Passive Telecom Infrastructure Operations became as challenging (if not more) as managing the Active Equipment on a communication site. Since, managing Passive Telecom Infrastructure was of second priority to a ComCo (as opposed to the provision of communication services to the end consumer), TowerCos were perceived to be in a better position to handle the issues arising from Passive Telecom Infrastructure Management (considering the first priority nature of managing Passive Telecom Infrastructure for TowerCos).

The first few instances where the VAS Model was implemented globally was in the CALA and SSA region. In these regions, issues relating to power outages, grid unavailability (resulting in upfront CAPEX to purchase and install gensets and batteries), remoteness of communication sites (in terms of transport and accessibility), security concerns (i.e. theft of fuel, equipment, vandalism etc.) etc. were rampant and required specific focus of an entity to cater to these issues. As a result, TowerCos had to expand their scope of engagement (in contrast to the scope of engagement under the Pureplay Model) in return for a higher monthly Lease Fee (or monthly Leaseback consideration).

Today, the VAS Model is considered the predominant model for TowerCos globally. TowerCos spanning from the Far East to the American continent (and everything in between) follow this model to provide services to ComCos.

A/an (slightly) overlapping model with the VAS Model, the Managed Services Model refers to a TowerCo assuming responsibility of managing the passive infrastructure component of a communication site without assuming ownership of the communication site and its equipment. This is different from the VAS Model, in the sense that under a VAS Model, the TowerCo purchases the Passive Telecom Infrastructure from the ComCo and leases it back (in exchange for a Lease Fee, hence the Sale and Leaseback Model). The Managed Services Model entails a TowerCo to charge a Managed Services Fee (normally monthly or quarterly and on a cost-plus margin basis) plus an agreed percentage of the benefits arising from collocating a particular site. By collocation benefits, I mean a percentage of revenues/benefits realized from on-boarding another ComCo onto a particular communication site (one that will pay a Lease Fee for renting the space on the tower). The reason why a TowerCo charges a percentage of the additional benefits arising from collocation is because a TowerCo actively seeks out opportunities in the market to optimize a particular communication site (both in terms of revenues and costs). Therefore, whereas, the communication site is actually under the ownership of a ComCo, the efforts of a TowerCo to enable collocation on the site leading to the eventual realization of collocation benefits is something that a TowerCo aims to benefit from as well.

There are a few reasons why a ComCo may want to opt for a Managed Service Model as opposed to the Sale and Leaseback Model. However, these reasons will be discussed in the following series of articles.

In the following article, we will take a breather from the focus of this series and I will aim to apprise the readers with few key terms and terminologies used in the Towersharing/TowerCo hemisphere. These concepts will be key to understanding the TowerCo Business Plan and the Mergers & Acquisitions activities that take place to enable the Sale and Leaseback nature of transactions.