Wireless Infrastructure Value Chain Consolidation?

Jun 4, 2014

Historically, the wireless infrastructure value chain consisting of tower operators, fiber backhaul providers and neutral colocation facility providers has existed as three distinct provider groups. With increased consolidation in each of the infrastructure sectors, and increased focus on turnkey wireless infrastructure deployment, the industry is increasingly filled with chatter about the viability and practicality of a play for consolidation between sectors to provide a fully integrated infrastructure play.

These three sectors represent the core building blocks for making networks work. Their pieces are intertwined, but deeper integration could be possible as key network trends drive increased opportunity for asset integration. (Hence, increased discussion about consolidation.) On the other side of the argument, consolidation of these sectors into single, integrated player models could be an uphill battle, as it would force measured changes in business models. Whether or not the infrastructure space converges on a fully integrated telecom infrastructure platform play will be a long-term question, with the answer driven by industry economics and corporate structure.

Trends favoring integrated models

Key industry trends are aligning in the wireless infrastructure sector that could produce the necessary circumstances for the emergence of integrated business models. At its core, end-user traffic growth and correlated network infrastructure investment is driving operators to evaluate how to deliver the best network experiences. As end-user traffic ramps up, carriers are investing in increased network capacity, coverage and interconnection in order to ensure a solid experience for end users.

On the capacity front, wireless operators are migrating macro-cell site backhaul from a purchased, lit capacity model to a dark fiber-based wireless operator managed backhaul model. On the coverage front, wireless operators are investing in more macro cells to drive LTE density while adding small-cell networks to boost coverage in dense central business districts.

From an interconnection perspective, bringing content caching closer to the edge drives the last piece of the equation in end-user experience. In the future, look for wireless operators to seek hyper localized interconnection points in major metros to drive direct interconnection to major content sources (i.e. Google, Netflix, Apple, Amazon, Facebook and others).

Today, focused offerings rule the day

Today, solution-specific providers define each infrastructure ecosystem as players have emerged with focused offerings (i.e. pureplay tower operators, fiber players, etc.). However, the characteristics of the business models follow similar lines. These infrastructure players all focus on business driven by hard assets and long contract terms. Players require significant capital to enter and derive market power/value based on the geographic location of assets. Even though the basic business characteristics are relatively similar at first glance, the devil is in the details. Tower and neutral collocation operators have favored a real estate investment trust structure, while fiber operators do not organize under that structure. The majority of fiber and carrier-neutral collocation operators have focused on building services for broad customer bases (i.e. using fiber to serve business customers as well as wireless operators or providing carrier-neutral interconnection to a wide swath of network owners). Many other comparisons like this exist in and between the three converging ecosystems. In short, although the top-line business models hold several similar characteristics, the deeper details bring roadblocks that could prove difficult to circumvent. Although niche operators may present feasible opportunities for integration, their inherent lack of scale leaves potential consolidators without the large scale impact needed to justify an acquisition.

In the end, opportunity usually wins out

At the end of the day, the underlying business characteristics of each of the three core wireless network infrastructure support sectors do not lend themselves to easy integration and consolidation. However, as the wireless network infrastructure support models become more integrated, look for operators in each of the sectors to look for opportunities to leave their niches and take on greater portions of the value chain. If history is any guide, there’s a high probability of consolidation – or at least attempted consolidation – even if it means potentially painful integration challenges.

This analysis originally appeared at RCR Wireless.

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