Telco economics: Network sharing in a 5G world

Executive Briefing Service, Network Futures

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Passive network sharing is a well-established practice, but 5G may force telcos to consider more active network sharing to overcome financial, technological and physical constraints. We explore 5G network sharing options and cost structures, drawing lessons from existing agreements.

Introduction

Network sharing is well established

Network sharing has become well established as a useful means of reducing capital and operating expenditure by mobile network operators and sharing of passive infrastructure such as towers has become commonplace. The main reasons for sharing are a need or desire to:

  • reduce capital expenditure
  • reduce operating expenditure
  • achieve faster rollout or upgrade
  • extend coverage at a lower cost
  • improve operational and/or organisational efficiency
  • more efficient use of spectrum efficiency
  • as a precursor for possible merger or acquisition.

The speed at which operators wish to roll out their 5G networks will depend on a number of factors, including their need for additional capacity to meet market demand, respond to or pre-empt competitive actions by other operators, and their overall business strategy. Minimising the costs of doing so will be important, although some dominant and well-funded operators, such as Verizon, may choose to avoid sharing to put pressure on weaker competitors. Operators choosing to share have several options which may include mergers or acquisitions.

Where are the largest current costs?

Analysis of data from mobile operators in both developed and developing countries shows that network operating costs are split between three main areas:

  • the radio access network (RAN)
  • the core network
  • IT systems and service platforms.

While the proportions of the total operating costs taken by each of the three areas vary between operators, the overall pattern is the same for all. Typically, the RAN accounts for over half of operating costs, and the core network from one eighth to a quarter. IT and platforms account for the rest.  Average operating cost splits for mobile operators are shown in Figure 4. Most operators find that around half of the RAN cell sites generate insufficient revenue from the traffic they carry to cover their operating costs, although such a simple measure does not take account of the benefit that wide coverage brings to overall business revenues. Nevertheless, it is important to manage the costs of the RAN effectively to ensure that resources are used in the most efficient manner. Typical cost splits are shown below.

Typical top-level split of network opex costs

Source: STL Partners

5G is bringing changes

5G is designed to cater for the rapidly growing demand for mobile broadband and for new use cases that require higher speeds and lower latency while at the same time minimising capital and operating costs. To cater for these requirements the use of higher frequency bands is being introduced, together with network slicing and wherever possible the use of standard computing equipment. The use of mid band frequencies of 3.5GHz and above and millimetre wave (mmWave) will enable much higher speeds, but these frequencies have shorter range and are less able to penetrate most buildings. The impact of the poorer propagation will depend on several factors.

Where very high levels of traffic are concentrated in a small area the extra bandwidth provided may permit the replacement of a number of low frequency base stations by a single mid-band or mmWave base station. In other cases where traffic is more thinly spread but still heavy enough to warrant the use of and investment in high capacity high frequency base stations then it is likely that more base stations will be required to provide equivalent coverage, placing greater demands on the availability of suitable sites and provision of associated infrastructure for backhaul and power.

In more remote areas use of low frequencies will be required to provide wide area coverage, but their use may place limits on the bandwidths that can be economically delivered.

In-building coverage may well prove more difficult to provide, and although some tests suggest the problem may be less severe than initially feared, in many cases it will require the provision of alternative means of delivering in-building coverage. Options include the provision of indoor base stations, potentially meaning multiple installations to support different carriers, the use of neutral hosts or increased reliance on Wi-Fi. The requirements of different industries, large and small businesses and individual householders or tenants will vary enormously, and means will need to be found to meet a wide variety of situations in an economic manner. Neutral hosts for 4G already exist in some venues and products are appearing that connect an internal network to an antenna installed externally.

With rollout of the first 5G networks beginning soon, operators need to ensure that they can deploy their networks fast enough to meet market demand and any regulatory targets whilst at the same time containing costs to a level consistent with their revenues. However, in some cases plans for sharing, especially active and spectrum sharing, may result in delays caused by the time required to reach agreements with prospective partners and to gain any necessary regulatory approvals. They will also wish to ensure that they at least maintain or preferably improve their position relative to their competitors.

Technical changes that can be expected to affect the need for and viability of sharing therefore include:

  • Use of spectrum in higher frequency bands:
    • shorter range of higher frequencies
    • densification and the availability of sites and backhaul links – and ease of access.
    • availability of sufficient low frequency spectrum for rural areas
    • spectrum sharing
    • regulatory factors
  • Changes in architecture for:
    • slicing
    • NFV, cloud
    • use of off-the-shelf IT components and their reliability and availability.

 

Contents:

  • Executive Summary
  • Introduction
  • Network sharing is well established
  • 5G is bringing changes
  • Obstacles: MNO fear of sharing
  • Other Issues
  • Structure of report
  • How will 5G drive demand for sharing?
  • Overview
  • Spectrum: Use of higher frequency bands
  • Options for sharing
  • How will 5G affect costs of sharing?
  • Current costs
  • How will networks costs be split in the future?
  • NFV, Cloud and Slicing
  • How soon does the market need 5G?
  • Other options for MNOs
  • Neutral host
  • Implementation: Lessons from experience
  • Timing is important to obtain best results from sharing
  • Lessons from existing sharing arrangements
  • Conclusions & recommendations
  • Recommendations for telcos

Figures:

  • Figure 1: Types of network sharing
  • Figure 2: Typical network cost splits of no sharing versus sharing active RAN
  • Figure 3: Modelled effect of 3.5 GHz RAN sharing on 5G rollout speed in UK
  • Figure 4: Typical top-level split of network costs (opex)
  • Figure 5: Losses from building penetration as frequencies increase
  • Figure 6: MORAN sharing
  • Figure 7: MOCN Sharing
  • Figure 8: Shared spectrum efficiencies
  • Figure 9: Examples of spectrum sharing
  • Figure 10: Range of typical network costs as percentage of total
  • Figure 11: Typical breakdown of RAN opex costs
  • Figure 12: Network and IT costs
  • Figure 13: Effect of increased number of cell sites on proportion of network cost in RAN
  • Figure 14: Population and coverage data for the UK
  • Figure 15: Capex and opex infrastructure costs
  • Figure 16: Population coverage for different levels of gross annual capex
  • Figure 17: Base case coverage (£2 billion per annum)
  • Figure 18: The effect of sharing small cell layer on rollout
  • Figure 19: Effect on regional rollout of sharing small cells
  • Figure 20: Ericsson mobile data growth forecast
  • Figure 21: Ericsson forecasts data traffic growth 2018–2023 by region
  • Figure 22: Growth in traffic for different applications
  • Figure 23: Neutral host configuration for US 3.5GHz CBRS
  • Figure 24: Red Compartida coverage targets