Japanese and other global mobile network operators are increasingly facing the need to expand and upgrade their existing networks, despite the often high costs in doing so. Network sharing is one method that operators can use to improve their network offering at a significantly lower cost than more traditional unilateral methods. In addition, network sharing presents an opportunity to increase capacity, enter new markets and share the logistical costs of rolling-out new technologies.
Operators in developing markets and rural areas can take advantage of network sharing to expand networks efficiently, avoiding the previous (and costly) practice of setting up individual unshared infrastructure (often covering geographically identical areas). This makes Africa, the Middle East, Asia and the Americas ripe targets for network sharing where local operators are focused on increasing market share and improving service quality.
In addition, operators in established markets are facing the need to implement cost-cutting initiatives in response to the recent harsh economic climate at the same time as they face increased demands to upgrade their networks with more modern technology. Again, network sharing can play an important role for operators in implementing such goals.
It is particularly important for Japanese companies seeking to invest in overseas network operators to consider including network sharing arrangements as part of the investment structures, as such operators will often already be working with several domestic and international partners.
What is network sharing?
Network sharing is the pooling of resources by several mobile operators operating the same services in the same region. "Passive" sharing usually involves the collective use of physical infrastructure, such as towers, whereas "active" sharing of companies' radio access network can result in the mutual enjoyment of connectivity and transmission links. Network sharing has been commonly implemented where there are established networks which can be used more efficiently (as illustrated by Vodafone's recent mobile network sharing deals with O2 in the UK).
Why might Japanese companies enter into network sharing agreements?
There are numerous potential benefits to network sharing, including:
In challenging economic conditions, perhaps the main driver behind network sharing for Japanese companies would be to lower costs and become more cost-efficient, thereby increasing profit margins. In addition, consumers' increasing demand for mobile data also presents challenges to mobile operators' traditional business models.
- Benefits for the consumer
Lower operating costs may allow operators to retail their services more aggressively, which ultimately benefits consumers by reducing user costs. Further, the consumer can benefit from enhanced coverage and better service.
- Roll-out of new technologies
Network sharing allows the procurement and logistical costs of new technology roll-out to be shared and can allow the new technology to be rolled out in a shorter time frame.
- Increase resources available for R&D
Lower daily operating costs facilitates re-investment into the expansion, coverage, capacity and technology of the network, as well as freeing up increased resources for new products, services and innovation. Shared infrastructure has historically allowed operators to broaden coverage for consumers, jointly buy equipment to reduce costs and increase the number of sites connected to a high-speed fibre network.
- Access to previously unreachable markets
Owing to aesthetic and environmental policy issues, some countries have strict construction permit requirements for physical infrastructure (such as masts, ducts and buildings). This can make it difficult for operators to obtain necessary consents to operate a full service in particular markets. For this reason, network sharing makes previously impenetrable markets a cost-effective reality for established operators who struggled in the past to obtain the necessary consents. Also, for smaller operators, network sharing under such circumstances allows expansion into areas where they would otherwise lack the resources to compete.
- Satisfy licence obligations
Network sharing can increase the footprint of operators enabling them to quickly and easily satisfy coverage obligations in their licences. Also, given the cost and other benefits some jurisdictions mandate or encourage network sharing through legislation.
What are the legal and commercial considerations associated with network sharing?
There are two main legal structures for implementing network sharing arrangements: co-operation agreements and joint venture (JV) structures.
Under co-operation agreements, two or more companies enter in a partnership arrangement, invoicing each other for the costs related to the shared network. Particularly important issues related to a partnership arrangement include the allocation of costs and liabilities, issues related to exclusivity and determining which existing sites each company seeks to redevelop or decommission. Co-operation agreements do afford operators some flexibility in that they can "test run" sharing on a small number of sites before possibly moving to full integration. Similarly, operators may agree to share in respect of future site acquisitions rather than attempt to rationalise their existing infrastructure. In relationships where less integration is envisaged, it is important for companies to clearly define the scope of each party's role in the partnership in order to reduce disputes in the future.
JVs or "lite" JVs may also be used, under which a new company is typically set up for the purposes of creating, developing and sharing the network resources. A JV is an arrangement (which can take a number of legal forms) between independent operators that allows them to share risks and expertise in order to achieve a common goal. However, as with other JV structures, it is important to remember that around half of all JVs fail and the majority end with one party buying out the other. It is therefore crucial that each company's motivation fuelling the network share is clearly known, communicated to the other party and forward planning is employed to ensure that the risk of major deadlock is minimised. It is equally crucial that the documentation governing the JV contains the right provisions in case of deadlock between the operators and provide for an orderly exit from the JV.
The market into which entry is sought may not be governed by network sharing-friendly laws. Alongside foreign investment controls (which may necessitate the creation of a local subsidiary or the use of a local partner), national laws may discourage network sharing by imposing strict competition clearances or may otherwise expressly prohibit network sharing, particularly "active" sharing. Furthermore, restrictions on information sharing (from both antitrust and data protection perspectives) are likely to develop further as the regulatory approach to network sharing evolves. Any such competition/antitrust and data protection issues may differ significantly from the equivalent Japanese law regimes (including potentially more severe penalties) and as such Japanese companies will want to be particularly alive to such issues.
As with any new project or investment, tax considerations are vital. Upon entry into a network sharing arrangement, Japanese companies employing a JV structure should think about the tax effects of the shared entity, and the structure needed to protect losses and minimise VAT, transfer tax and direct tax exposure. For example, taxes associated with contributing assets (e.g. sites and towers) to a JV could undermine potential costs savings. Once set up, considerations turn towards extracting value from the arrangement, and issues of withholding tax, transfer pricing and thin capitalisation. If and when an exit is finalised, tax issues do not stop. Withdrawal from the joint venture is often simplified using a sale or transfer of shares although jurisdictional differences mean specific tax advice should be sought. The tax treatment of co-operation agreements will normally be similar to that of any other commercial transaction but again specific advice should always be sought.
Like tax considerations, finance issues are present in any corporate transaction. For network sharing projects, sponsor support is key and Japanese companies should also consider the security package proffered, the sensitivity of default triggers and the acceptability of the network sharing plan for institutional lenders.
Real estate issues
Real estate is a key component of any network sharing arrangement. When creating a "TowerCo", the parties will need to structure the transfer of their sites to the new company in a way which preserves the accounting treatment of the sites as passive assets (mitigating tax liability) whilst permitting roll-out and service continuity in a manner which complies with the terms of any lease or licence.
Network sharing provides exciting opportunities for Japanese companies big and small to reduce costs and improve profitability in relation to their telecoms activities as well as expand into new markets. The benefits passed on to consumers as a result of network sharing can also help boost the telecoms market generally and allow greater investment in innovation. As outlined above, there are a number of legal and other challenges to take into consideration when considering network sharing but such challenges are not insurmountable if the network sharing model is carefully structured by the operators and their advisors.