Given the size of the prize, we fully expect that network sharing will be replicated in other markets in the future.
It was not so long ago that network sharing was deemed to be the saviour of 3G. Mobile operators had paid billions of euros for European 3G licences (over EUR80 billion in the UK and Germany alone), and would have needed to spend billions more to build the networks. The solution appeared to lie in network sharing, which would enable operators to share the costs of building and operating networks.
In Analysys’s report Evaluating the Business Case for 3G Network Sharing (2001), we estimated that savings on network build could be as much as 38% of overall capex. A number of agreements were announced, including O2 (then BT Wireless) and T-Mobile in the UK and Germany, and KPN and Telefonica/Sonera in Germany. However, few of these deals actually appeared (e.g. Telefonica/Sonera handed back its German licence). The issue of network sharing had faded away.
On 8 February 2007, network sharing was in the headlines once again. Vodafone and Orange announced their intention to share their 3G radio access networks (RANs) across the UK. They also stated that they would explore the potential for sharing their 2G RANs. This followed an earlier announcement in November 2006, by the same two operators, stating they would share their future, rural, 3G roll-out in Spain.
Like the fundamental economics of network sharing, Analysys’s position remains unchanged. The benefits justify the return of network sharing to the agenda of mobile operators. Below, we examine the details of the recent announcement and discuss its implications.
Firstly, Vodafone and Orange announced that they would share their RANs, the part of the network that includes the base stations (BTSs). Depending on the preferred extent of sharing, this could potentially involve using the same physical sites, antennae and backhaul transmission. However, most critically, by enabling a feature referred to as ‘RAN sharing’, the operators could share the BTS electronics (the Node B for 3G networks and BTS for 2G networks). The ‘RAN sharing’ feature enables a logical separation of the operators’ traffic within a single BTS. Secondly, the two operators announced that they would jointly manage and maintain their combined networks.
The financial benefits for both operators could be large, allowing them to rationalise their current plans for the ongoing roll-out of their 3G networks, and to avoid the cost of upgrading thousands of overlapping sites to 3G. They could also consolidate their existing site portfolios. With the annual rent, maintenance and transmission costs totalling tens of thousands of pounds for each site, the benefits could soon mount up. The savings could be even more significant if the operators decide to share their 2G as well as 3G networks, allowing them to decommission many more sites. Finally, by combining the teams that operate and maintain these networks, economies of scale and the elimination of duplicate functions could yield yet further benefits.
Of course, the benefits accrued may extend beyond simple cost savings for the operators. When combining the networks in a given area, it may be possible to retain those sites with better coverage, resulting in improved overall coverage for the customer. The operators could choose to reinvest the savings in their ongoing 3G/HSDPA roll-out, resulting in a faster roll-out and/or deeper coverage. Indeed, as forecast in 2001, the cost savings from network sharing could stimulate 3G roll-out throughout the industry. The environmental benefit of removing masts from the landscape should also not be overlooked.
There are obstacles to overcome before the benefits can be realised. The restructuring of the networks is likely to be a large and complex task. Deriving the full benefit is likely to require very close integration of the two organisations, which may well present significant logistical and cultural challenges. Furthermore, regulatory compliance will need to be fully considered in the plans. However, given the size of the prize, we fully expect that this move will be replicated in other markets in the future.