Reliance Communications Tower Network Sale Raises Question: Where is Value?

Reliance Communications, the fourth-largest Indian mobile services provider, plans to sell its tower network, a move that sheds light on the relative value of mobile access assets. For mobile operators, the scarce asset is the ownership of spectrum rights, not the towers and radios.

That is different from the way fixed network access assets are viewed. There, it is the scarcity of the physical connections that tend to confer value.

It might be subtle, but the difference is that the physical access assets are key to fixed network value. For mobile operators, it is the control of spectrum.

The implications are that an owner of fixed network access facilities might well consider outsourcing many other parts of its operation, but should not generally consider giving up control of its physical access network. In effect, that is why network owner tend to be unhappy with mandatory wholesale agreements, especially those that mandate low wholesale prices.

Mandatory wholesale access reduces scarcity value.

For mobile operators, what is scarce is the right to use spectrum, not the physical means use to commercialize the asset.

To be sure, ownership of tower networks might well have some positive value. But many managers would conclude that the value is less than the value of freeing up capital to acquire more spectrum, for example, or expand scale by buying other mobile service provider firms.

Reliance is not alone in its thinking. Bharti Airtel, India's largest telecom company by market capitalization and revenues, earlier had entered into an infrastructure sharing deal with the telecom arm of Reliance Industries.

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The deal gave Reliance Jio pan-India access to Bharti's nationwide tower and radio infrastructure while giving Bharti access to the optical fiber backhaul capacity created by Jio in the future.

In April of 2013, the two fierce competitors had signed an agreement under which Bharti provided capacity on its i2i submarine cable to Reliance Jio.

The companies said the deal preserves capital and avoids duplication of investment. Bharti will gain lease revenue while Reliance Jio gets to market faster.

Also, Reliance is building a fiber backhaul network at a time when Bharti has only about 10 percent of its tower locations connected by optical fiber.

It has been clear for some time that ownership of mobile cell sites is not necessarily “strategic” for a mobile service provider. Carriers often lease space on towers owned by third parties, sharing those sites with rivals.

In India and some markets in Africa, mobile service providers have agreed to share the cost of tower facilities. Some service providers outsource actual operations of their radio networks as well.

For a very long time, one vital "core competence " for a fixed network telco might have been said to be its right to operate a monopoly access network. By definition, a legal barrier of entry to all other competitors is a rather notable advantage.

But the value of that advantage is challenged under competitive conditions. When there are at least two ubiquitous fixed networks, or two or more broadband networks, plus mobile, fixed wireless and satellite access providers, one might argue the uniqueness of any access network is lessened, and presumably therefore the value of owning any single set of network facilities.

Few competitors would argue that network ownership is an insignificant source of advantage. But contestants might disagree about the extent of value, in a competitive market. And that also speaks to new questions about "core competence," which also relates to strategic business value.

What is a telco's core competence? It is a tougher question that sometimes seems to be the case. A core competence is not just "something we are good at," but a unique attribute that provides significant business advantage.

Some would say the three key attributes include:

1. It is not easy for competitors to imitate.
2. It can be reused widely for many products and markets.
3. It must contribute to the end consumer's experienced benefits and the value of the product/service to its customers.

Spectrum fits the definition. Towers and radios arguably do not.