Falling site rents are critical to a 5G mobile revolution

Falling site rents are critical to a 5G mobile revolution

Everyone involved (mobile operators, government, local authorities) have to view the rolling out of dense small cell 5G networks as an operation to be organised on an industrial scale, with all the component costs scaled to a mass production of broadband data capacity across cities and towns. The new small cell network economics should only have one thing in common with today’s mobile networks – ”affordable access fees”.  This drives an imperative to hold down running costs as the number of cells multiply.

Over the next 20 years the number of UK mobile base station sites needs to grow from 50,000 to 5 million. This next generation of mobile base stations site will no longer comprise large metal towers with an adjacent equipment room the size of a family caravan. Instead the electronics will be housed in a small box not much larger than a home WiFi and fixed to anything handy with a 200-300m view from an altitude of a few 10’s of metres. The national benefits will be a wireless infrastructure over urban areas providing a massive wireless data transport capacity and data speeds of up to 1 Gb/s. There will not only be a lot more capacity but that capacity will be more intelligently mapped onto user demand to give users (and applications) “always sufficient” network resources. In this way users will perceive they are connected to a network with infinite capacity. The capital cost of such a leap in wireless infrastructure performance is affordable…but the whole concept could be sunk by high running costs if the government and local authorities fail to do their maths on the financial and other conditions needed to create this revolution.

Let’s start with the capital cost of 5m small cells. With such huge volumes the cost of an installed small cell unit, excluding power supply connection, can easily be brought to under £500. This leads to a total capital investment of £2.5 billion for 5 million small cells…roughly what Ofcom raised at the last spectrum auction. This supports the proposition that the capital cost is affordable.

The power supply connection could be a problem. An electricity company can charge several thousand pounds to run a new electricity cable if it involves digging up the road. A £10 billion price tag for running 5 million electricity cables starts to look like a serious road block. This places locations that already have an electrical power connection at a premium – which drives lamp posts and illuminated traffic signs high up the list of desirable structures.

The next thing to check is the cost of back-haul.  BT and Virgin have cable ducts running down every street in all our cities and large towns and they are filled with fibre optic cables. A combination of micro-wave link daisy chains and fibre pick-up points might add another £2.5 billion or so to the national capital bill, which is not out of court. There may be a regulatory head ache or two to ensure fair competition between BT/Virgin’s own small cell wireless networks and those of the four mobile network operators…but the fundamental economics of back haul for dense small cell networks over urban areas looks sound.

The next issue to examine is the running cost. This looks likely to be dominated by site rents.  A Strutt & Parker reports says there were 52,500 sites in 2010. Average rentals ranges from £5k/year for structures under 15m to  £12k/year for London roof tops. This puts the mobile industry annual site rental cost into the £1 billion a year ballpark. What the report also notes is that, in spite of efforts by the mobile operators to try to pass on the cost pressures they are under onto landlords, they have largely failed to talk-down site rents. The reason is simple. In most cases there is little or no competition for a site location to fill a gap in mobile coverage or capacity. No monopolist is likely to walk away from what has been a very lucrative cut of mobile service revenues. Why this issue is critical is that if the number of sites increases by a factor of 100 (50,000 sites to 5 million sites) and the average site rent stays constant – the mobile industry would face a £100 billion per year bill for site rents. Such a preposterous figure shows clearly that there can be no small-cell mobile revolution without a revolution in site rents. We know that if access to the mobile broadband infrastructure is to remain affordable the access fees have to remain broadly flat in real terms. This lead inexorably to the conclusion that the overall site rent bill has to remain largely flat ie the average site rent has to fall by at least a factor of 100.

From a Google search there appear to be roughly 6 million Lamp Posts in the UK and the number is sufficiently broad brush to throw in all the other structures owned by the 400 – 500 local authorities and other public bodies. A significant number of these structures may be subject to contracting out arrangements. They all sit within a culture of case by case negotiations.   How can a 10,000% reduction in average site rents over the next 20 years be accomplished by this fragmented localised piece-meal mêlée of case by case negotiations?  The short answer is that it can’t. A bold new approach is needed.

This bold new initiative needs to come from government and local authorities in offering mobile operators “access rights” to fit this new generation of small cell packages onto publicly owned structures at a pepper corn rent per structure. In fact the ideal is a single payments giving access to all 6 million structures across the UK with local business rates thrown into this single payment. In this way adding new base stations does not build up running costs.  The right conditions would then have been created for this mass production of mobile broadband data capacity across our cities and towns. This would complement the improvements we are also likely to see with the next generation of WiFi providing huge wireless capacity in all our buildings. The result will be a wireless infrastructure that will allow every urban based industrial and commercial sector in the UK economy to modernize themselves. That is a huge prize that cannot be allowed to be choked-off by a failure to modernize the site rental business model to suit a new age of the mass production of digital data wireless capacity over urban areas.

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