Telefonica Rumored to be Selling Fixed Line Assets in Spain

Posted on Friday, July 06, 2018

The various global telecom newsletters this morning reported a story that Telefonica was mulling an at least partial sale of its Spanish fixed line assets. What struck me is how much these assets were at the center of its recent Industry Analyst & Customer Day.

At Telefonica’s recent Industry Analyst & Customer Day (see my blog here), the company’s fiber network underlay much of what was presented.

  • As always, there was a half-day devoted to its Enterprise Portfolio – it was “& Customer” day after all – and while this portfolio does not ignore mobile, it is largely about cloud for SME’s and connectivity for Large Enterprises.
  • The company highlighted the importance Pay TV services for top-line growth at several points in the proceedings.
  • The showcase piece in the Consumer portfolio was a new SmartWiFi portfolio, TEF having designed its own CPE to improve customers experience in fixed broadband.
  • Although 5G was not as important in these sessions as I would expect it to be in, say, an equivalent AT&T or Verizon event, higher speed mobile broadband and the promise of 5G for other verticals was ever present in executive presentation.

All of these opportunities presuppose a base of fixed, presumably fiber-based, broadband.

The news item was based on a ‘rumor’ and the company did not respond so maybe this is just bored journalists needing something for a deadline.

But I think I can construct an argument that makes this rational: innovative, definitely ‘out there’ but rational.

Firstly, the obvious purely financial explanation. The news articles referenced paying down Telefonica’s significant debt and there is no doubt that the company has always stated this was a priority. Maybe, this was some bright idea in Finance that leaked out prematurely – or was floated in the press a trial balloon – but I doubt it would be implemented unless the executive team had got its head around how it was going to make money in the future without owning the ‘circulatory system’ of its ‘body’.

So that is the challenge: how do you do that?

Telefonica has adopted a ‘platform framework’ where the ‘pipes’ are the first platform and increasing levels of intelligence are built on top of each successive layer. The fourth platform, the highest level in the hierarchy, is Intelligence and this is where the company sees growth and profits in the future.

There would be a logic saying, “No one considers towers to be strategic assets today. Why would we consider the glass fibers strategic? All they do is connect those towers and other intelligent network assets (second platform) together.”

Towers are a real-estate business: long-lived assets that have to be maintained (but fairly simply) with the associated land, electricity etc. They can be multi-tenant or single-tenant depending on the renter’s desire with more significant benefits for the customer if they are prepared to accept participation in a multi-tenant location.

Adapting idea for the fiber network is conceivable at least from the financial side. The fibers themselves are long-lived, as are the ducts. Pension funds – who are always looking for stable cash flow, long-lived investments – could be interested in participating.

The key point would be multi-tenancy. The buyer or spun-out entity would be in the dark fiber business and Telefonica would have to accept the possibility of Vodafone (for example) riding in the next strand. I can conceive issues with maintenance (access to the fiber is often where there are also single-tenant electronics) and ownership of rights-of-way (where an operator inherited rights from former monopoly carriers).

Multi-tenancy is not just the way that the company would save money with this deal but the way it would avoid being just a ‘sale-and-leaseback’. If the contract looked too much like the latter, it might be hard to convince investors that the company had not just swapped one kind of debt for another (a long-term lease contract).

Which brings up an issue with making this work, at least in Latin America if TEF actually does it and then decided to apply it beyond Spain. “Plays well with others” has never been a hallmark of Latin American operators. Telefonica may be committed to the strategy and accept the consequences, but would there be buyers/renters? Dark fiber and facility sharing works in low client density areas where the economics are just too compelling – like long-haul to secondary and tertiary cities. But sharing metro fiber, sharing last kilometer fiber? That takes a considerable amount of trust.

This may be a complete fantasy. I may get an email from friends in Telefonica telling me that not only is the rumor false but my justification is crazy.

But it might be an innovative ‘next step’ in the virtualization of networks.

Twenty years ago, many thought tower outsourcing was ‘crazy’ and ‘impossible’.


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