Conflict looms in mobile telephone site leasing market

Scott Munro (AAPI) says mobile telephone base stations have sometimes been mismanaged by property owners

As an asset class, mobile telephone base stations have sometimes been misunderstood and mismanaged by property owners.

As a result, there are some robust and confused rental negotiations with the respective parties lining up for the “guns at 10 paces” shoot-out over rent reviews. There is also an array of third parties seeking to profit from the various rental negotiations and create a wedge between the site owner and the tenant.

In Australia, the first mobile telephone call was made in September 1987 and there are now in excess of 20 million subscribers, either utilising voice or data applications on mobile base station networks. Telstra was the first mobile service provider or “carrier” followed by Optus and Vodafone. Hutchison and Orange followed, as did One Tel and AAPT, along with a wireless trunk radio operator called Oze-Tel that came and went.

Australia currently has approximately 18,000 mobile telephone base station sites, with an estimated annual rental of $270 million. The facilities comprise an array of antennae, as well as a small room housing the electronics that convert radio signal into telephone calls and data transmission. These sites are often located on the tops of buildings and in spare allotments of land and are the infrastructure that enables mobile telephone calls and data transmission to function.

The base stations are built by the carriers on land or buildings that are leased from suitable site owners. Telstra is currently said to operate in excess of 7000 of such sites, while Optus operates around 6000, and Vodafone at approximately 5000 respectively.

Many of these sites were established 15 to 20 years ago when the industry was booming. At that time, carriers sought to compete on the basis of network coverage – the prevailing wisdom was that wider coverage would attract more customers. Carriers are now more inclined to compete on product bundling and device applications rather than network coverage alone.

The Average Revenue Per User (ARPU) was much higher then than it is today, meaning the business case for acquiring the sites was more robust then than it is now. The lease rates and terms were driven by speed to market advantage rather than operational cost considerations, which is now the main driver.

Networks have sometimes been likened to utility enterprises. In that scenario, once the establishment cost is recovered, operations become very profitable, but those economics do not apply to mobile telephone base station networks. The ongoing costs and need to upgrade equipment, as well as the cost of government license fees and radio spectrum, often run into hundreds of millions of ongoing cost – hardly the “build and collect” scenario of a utility company.

There is a direct correlation between the number of people using mobile telephone and data networks and the number of base stations needed. Base stations carry a limited amount of traffic, meaning growth in the number of subscribers and traffic carried requires ongoing capital expenditure to ensure networks operate effectively.

In days gone by, the average spends for a mobile telephone service with a basic handset may have been around $150 per month. That can be contrasted today where a business can readily procure a combined mobile package for 20 users that includes a substantial credit to purchase Smartphones and calls and data for around $900.

While it could be deemed poor logic to equate call costs with rent paid by telephone carriers at sites, the concept of rent being linked to revenue is not entirely foreign in the property sector, and perhaps vaguely useful here. The correlation, however, is a little more difficult as size and complexity of the cost structures for mobile telephone service providers mean that there are a myriad of cost items that affect the overall profitability of carriers.

As subscriber call costs and revenues dropped, the business models of some of these service providers has failed. At present, only Telstra, Optus and Vodafone (in conjunction with Hutchison) operate mobile networks. The stand-alone networks of One Tel, Hutchison, AAPT and Oze-Tel are no longer, and in some of those cases, the whole business failed. These are often the companies that sent the high over-market rentals sometimes paid early in the industry’s establishment.

On balance – and countering the downward profitability and downward ARPU numbers – is the spectacular customer growth that carriers are attracting. The popularity of Smartphones and tablet computers has driven data use across these networks. Some have even required extensive upgrades to carry such data, but the cost is huge and dent carrier opportunities for any additional profits on the existing infrastructure.

Somewhat in the background to all of this are the site providers. Site providers have enjoyed some attractive and escalating rental streams from these facilities that have generally been unchallenged. That scenario may have run its course as carriers seek to contain costs.

To add a little more confusion to this market segment, there are several foreign companies operating to purchase site leases from site providers. Generally a lump sum is offered that is calculated as the sum of rent for the full term, with discounts for the current value and profit. Those companies then seek additional rental from the carriers to improve their business model.

The lure of receiving rent in advance may be compelling to some site providers, however should be considered with caution. To own a parcel of land or building that has a portion controlled by a third party may well fetter opportunities to develop, sell or otherwise deal with the affected land or building.

The sector has also seen a number of tenant representatives trying to carve out a niche. At best, these parties can assist site providers resolving any issues they may have. At worst, the above parties will create conflict and mixed messages in the sector, can cost site providers revenue, as well as forcing carriers away from some sites.

Carriers are now becoming much more strategic with all property holdings and sites that are expensive, or above market, are being vacated or managed out. With some carriers failing, whole networks have been made redundant and sites vacated.

There are some serious legal actions underway between carriers and government land managers regarding rental amounts.

The market for this asset class has been mostly benign up until now. Amid all these market forces, site providers have options. They may have opportunities to either lock in long-term income streams, or at the other extreme, have their sites deemed unattractive to the industry.

To reconcile these competing market forces, perhaps the way forward can be found from the application of a little old-fashioned bush logic: “You are better to milk the cow than pull its udders off” and seek a fair rental. Alternatively, continuing to seek post boom conditions may risk losing the income stream altogether.

Scott Munro (AAPI) is the managing director of CPS Global which has provided property services to the telecommunications sector for the last 22 years.