Research Notes

5G Telecom Infrastructure Investment Challenge: LATAM can learn from the building and running of networks in EU

Building telecom networks is a complex undertaking with many considerations, including the need to manage cash flow in the short and long term, the impact of competition, and regulatory requirements for coverage and so on. Selecting and managing equipment vendors is just one of many critical issues. Given the global nature of data flows and supply chains, infrastructure has geopolitical implications.

Policymakers seek a balance of market and geopolitical power to produce telecom equipment – companies such as Ericsson, Nokia, Samsung, Mavenir, NEC, Fujitsu, Huawei, ZTE, and others compete vigorously emerging countries. Further, there is a public relations contest between these vendors. They all market their elements of technology, strategy, and sustainability. Moreover, Huawei and ZTE assert that they deliver better and cheaper equipment and can offer better financing through Chinese state-subsidies (though this violates rules in many countries). The implication is that their competitors are more expensive. However, a review of the facts shows that all vendors are price competitive ceteris paribus.

Strand Consult has examined these issues for years in a series of reports including  The real cost to rip and replace Chinese equipment from telecom networks.  We debunked the myths surrounding the costs associated with switching suppliers in connection with a technology shift from e.g. 4G to 5G.

A mobile operator’s radio access network (RAN) comprises just 3-4 percent of an operators’ average revenue per user (ARPU). If one RAN supplier is 10 percent cheaper than another, then pass-through savings would only decrease a subscriber’s bill by 0.1 – 0.3 percent. That amounts to 8 cents per month per subscriber. In any event, no operator or vendor has documented such a cost differential or consumer savings from network vendor selection.

Network equipment price itself does not necessarily make or break the choice of vendor. Generally, mobile operators look holistically at the total cost of management of a network, with vendor selection being just one of many factors.

Notably, cellular site rental and energy costs are significant costs for a mobile operator, higher than capital expenditure (CAPEX) on RAN. For example, energy consumption accounts for about 5 percent of a developed country mobile operator’s operating expenditure (OPEX). In emerging markets the corresponding figure is about 7%. Rental cost to European tower companies alone amounts to over €6 billion per year. This can be compared with the €3 billion per year operators spend on capital expenditure (CAPEX) for RAN.

Strand Consult’s forthcoming report presents the results of the evaluation of data sourced from both regulators and industry in emerging markets on the choices made by telecom infrastructure providers and their criteria for selecting equipment vendors. To put this evaluation in context, Strand Consult examines network infrastructure policy at the technical, regulatory, and industrial levels, considering both quantitative and qualitative factors, and compares the state of the art in countries across Latin America and the European Economic Area. The analysis has used primary source documents in English, Spanish, Portuguese, and other languages to provide relevant, valuable on ground insight.  Here are some of the preliminary findings.  

Economic Considerations

For starters, there is a need for more careful and correct observations about the economic and financial elements of infrastructure. For example, some vendors attempt to market their equipment mainly via price, claiming that low-priced equipment in itself improves mobile coverage in rural areas. This is misleading.  There is no single determinate of coverage; price is one of many factors in total cost of a radio access site or an end-to-end network.  A better approach incorporates key factors like coverage requirements, energy efficiency, service quality. and so on.  

Financial Considerations

A second question investigated is whether and to what degree cost savings from network purchases are passed on to shareholders, reinvested to increase coverage, or directed to other objectives. This involved gathering data on operators’ free cash flow. Understanding this question requires careful evaluation of CAPEX, revenue, and price.

Strand Consult’s approach takes these and related factors into account for the evaluation of budget for infrastructure, including RAN equipment, spectrum, towers, energy, labor, and other costs which are independent of vendor selection.  These line items are important to consider when evaluating whether one vendor offers and advantage over another.

One marketing claim emerged that because an operator did not select a Chinese vendor, it offered poor quality and coverage and that the operator which did had the opposite outcome. This is not an evidenced-based claim.

Strand Consult continually tests the premise of whether vendor equipment selection alone determines network quality and coverage with its annual report on market share of equipment vendors in Europe. There are a multiplicity of equipment vendors in the EU and divergent results for network quality and coverage. There is no correlation between vendor selection and superior network quality or coverage.

Security Considerations

Given increasing reliance on information networks and the primacy of mobile technologies in emerging markets, security is an increasingly important consideration. Nations have adopted a variety of policies and practices to mitigate risk and to protect consumers and data. The European Union has been at the forefront with a comprehensive set of policies for the products and services related to telecom and information networks.  In certain cases, country specific restrictions have been adopted to reduce risks which otherwise can’t be mitigated from nations like Russia, North Korea, Iran, China and so on.

The European Union and Latin American countries, notably Costa Rica, have promulgated policies to ensure privacy and to guard against data breaches. They also restrict certain telecom equipment and/or vendors associated with the Chinese state and have successfully enforced these policies.

Policymakers and operators want to know whether and to what degree there may be hidden costs with a vendor, network strategy, or other course of action. The distribution of such costs between society and telecom operators informs the calculation of risk. Strand Consult’s forthcoming report explores how nations and operators have managed these important questions and how it informs a rational, transparent process of vendor selection.  

Trust is important when choosing network partners, and it matters more than “savings” in network equipment purchases. Once a network is deployed, it is not quick, easy, or cheap to change a vendor if there is a systematic problem, deficiency, or risk. Hence various countries or regions – including the European Economic Area – conceptualize trust as a parameter for vendor selection. This is expressed in a continuum of trusted and non-trusted vendors. 

Policy objectives include building, running, and upgrading networks which are high-quality, secure, and cost-effective, and which fulfill the regulatory requirements for coverage, safety, privacy, and so on.  Strand Consult’s new report helps elucidate the framework in which these many important factors can be considered.  

Telecom infrastructure policy encompasses far more than mere vendor selection. There are larger issues to consider when the digital economy and society is at stake.  

Governments can help operators.

Operators are building the next generation of mobile networks. 5G is an evolution, and commercial products are combinations of 4G, 5G, NB-LTE, FWA and other technologies. While 5G promises a new technological revolution, there are major regulatory challenges to deploy the networks.

Strand Consult’s survey of the past 25 years of building and operating mobile networks shows that conditions for mobile operators have worsened, not improved, for operators. The process to erect a single mobile mast/antenna can take between 12-36 months and cost €100,000 – €350,000. In some countries policymakers and local government want to copy-paste the tower paradigm to small cell networks, a development which would kill 5G in the cradle.

While operators are stepping up their investments in spectrum, infrastructure, and technology, consumers increasingly complain about mobile coverage. Demand for data has exploded but subscriber revenues have not kept pace. As such, operators need to take concerted steps to optimize the expected benefits and costs when they deploy 5G. Governments can help operators to improve rollout infrastructure, and to address the regulatory challenges that impede its business. Key goals should include:

  • Reduce the regulatory burden in time and cost to establishing new infrastructure.
  • Improve policy (nationally and locally) to roll out network infrastructure
  • Improve cooperation between telecom authorities and operators
  • Reduce mobile site rental cost.
  • Improve economic frameworks for networks so that operators can improve financial performance and increase resources for network investment.

The analysis How mobile operators can reduce cost for mobile masts and improve mast regulation has changed the market conditions for the Danish mobile operators. It exposed  how both private and land owners took advantage of mobile operators. It became the driving force of change to modernize the framework for mobile network infrastructure in Denmark. In less than six months, Strand Consult changed the way that operators, the Danish press and Danish policymakers viewed this area of the mobile market.

The leaders of Latin America face a strategic choice for security.

The leaders of Latin America, a set of some two-dozen diverse, emerging countries with some 700 million people, face a strategic choice for security. This decision to secure trusted digital information networks will impact the region for the next century. It will determine whether the region develops in a prosperous, inclusive, sustainable, and democratic direction, or an authoritarian one.

Latin America faces some important choices in its digital development. It wants to ensure its citizens and enterprises enjoy world class technology; to protect and preserve human rights and sovereignty; and to innovate regionally with compelling digital solutions and services. Latin American leaders can learn and adapt from EU models for digital governance. That’s what we described in the research note:  Latin America’s Digital Development – This century’s strategic choice for security

To safeguard security and resilience, the EU developed a foundational and globally unique approach to security of 5G networks with the EU 5G Toolbox. The EU deems 5G networks critical for their horizontal role underpinning the delivery of health, energy, manufacturing, media, and mobility. Hence the EU Member States, the European Commission, European Union Agency for Cybersecurity (ENISA), and the Body of European Regulators for Electronic Communication (BEREC) developed an EU-wide coordinated risk assessment.

Based upon a set of identified risks, the EU 5G Toolbox was developed and agreed to include strategic (non-technical) and technical mitigating measures. In sum, the European Commission and the EU member states implement key measures in two areas; strategic (non-technical) and technical security measures, both of these assessments and mitigation measures must be satisfied to deem 5G equipment suppliers as secure and trusted.

Romania has already implemented the EU’s 5G toolbox, while at the same time acknowledging that the China you have today is not the same China as you knew 10 years ago.. This was underlined recently when authorities across a number of countries were able to document that Chinese state hackers from APT 31 had spied on policymakers around the world.

Strand Consult’s objective is to create transparency so that policymakers can improve decision-making. For more information about vendor trust, see Strand Consult’s library of research notes

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