The power logic behind the sky-high rents of tower companies

Recently, an inconspicuous piece of information shocked the communications industry: Yang Jie, president and chief operating officer of China Telecom, said that the disposal of tower assets had been completed last year, but the rental fees paid by China Telecom to the tower company were 20% higher than the cost of operating and maintaining the towers itself .

Why is it so shocking? It’s because industry insiders really don’t understand one thing: originally the three operators wanted to hand over the construction of base stations to the tower company for joint leasing to reduce costs, but the financial result is indeed bloody that it is more expensive than building them by themselves!

The cold and dull iron tower brings in sexy and plump rental income!

This is true for China Telecom, and even more so for China Unicom and China Mobile. According to people close to China Mobile's financial situation, the rental fees charged by the tower company to the three operators are more than 30% higher than the financial expenses of the three operators' own construction and sharing. Shang Bing, chairman of China Mobile, said that from November to December last year, the company paid 5.6 billion yuan (the same below) in rental fees to the tower company, and it is preliminarily estimated that the relevant fees this year will be about 35 billion yuan.

It can be said that the tower companies have trapped themselves in a trap and killed the chicken to get blood, which has made the operators overwhelmed. At the beginning of this year, telecom operators found that their costs did not decrease but increased after handing over the towers they built to the tower companies. The sky-high rents they paid to the tower companies were 20%-30% higher than the cost of operating and maintaining the towers themselves. It is not as cost-effective as building them themselves. What kind of demands are being sought behind the sky-high rents?

You should know that Liu Aili, chairman of the China Tower Corporation, recently stated publicly that he would strive to get the China Tower Corporation listed in 2017.

If you want to understand this truth, you might as well listen to a fable I tell you:

One day, the rogue rabbit was tired from writing a paper and went out for a walk. He accidentally met a fox. The fox caught it and wanted to eat it. It said, "Wait until I finish writing the paper before eating me?" The fox laughed and said, "Are you kidding? A rabbit can also write a paper?" The rogue rabbit said, "Of course, I wrote "How Rabbits Defeat Foxes and Wolves". If you don't believe me, come with me to see it." The fox went with the rogue rabbit, and never came back...

A few days later, the rabbit was accidentally caught by a wolf again. The wolf said, "Wait until I finish writing my paper before eating me." The wolf laughed like the fox: "Are you kidding? Rabbits can write papers too?" The rogue rabbit said, "Of course. What I wrote is "How Rabbits Defeat Foxes and Wolves". If you don't believe me, come with me and take a look." The fox left with the rogue rabbit, and they never came back...

Finally finished writing, the rogue rabbit went out for a walk and met his girlfriend. She asked: "Why haven't I seen you these days? What have you been doing?" The rogue rabbit said: "I wrote a paper, and my supervisor just defended it today. The title is "How Rabbits Defeat Foxes and Wolves"." His girlfriend didn't believe it, so he said, "If you don't believe me, come with me and see it"...

Arriving at the door of the rogue rabbit's house, there was a pile of fox bones on the left side of the door, and a pile of wolf bones on the right side of the door. Sitting at the door was a lion, licking the blood from the corner of its mouth with its bloody mouth wide open.

Now she understood: no matter who you are or what you write, the key is who your mentor is...

On October 14, 2015, the three major operators, China Reform Holdings Co., Ltd. (hereinafter referred to as China Reform) and Tower Corporation signed an agreement. China Telecom sold a number of communication towers and related assets to Tower Corporation and paid cash to Tower Corporation in exchange for the latter's new shares. China Mobile and China Unicom sold a number of communication towers and related assets to Tower Corporation in exchange for the latter's new shares and cash. At the same time, China Reform subscribed for Tower Corporation's new shares in cash.

According to information on China Guoxing’s official website, the company was established on December 22, 2010. It is positioned as an enterprise operating platform that cooperates with the State-owned Assets Supervision and Administration Commission to optimize the layout structure of central enterprises and mainly engages in the operation and management of state-owned assets.

After the Tower Corporation completed the above-mentioned new share issuance, China Telecom, China Unicom, China Mobile and China Reform Holdings held 27.9%, 28.1%, 38.0% and 6.0% of the shares of the Tower Corporation respectively.

Originally, the three operators each operated their own base stations and built their own towers, which was equivalent to three tower companies, cooperating with the three operators respectively. The establishment of the tower company was actually a form of forced outsourcing and forced divestiture. The tower company ended the three-way division and unified the world, which would form a new monopoly. In this situation, the tower company took over all the tower resources, but did not directly face consumers, did not directly make profits, and had no competitors. Relying on this monopoly position, the tower company was bound to become an important gaming force in the Chinese communications market. Moreover, through the tower company, the relevant government management departments also had additional power to manipulate the market.

However, the leasing pricing of the unified tower companies is somewhat abnormal:

If only one operator uses a tower, the rental fee is 100% of the list price; if two operators use the tower, each operator pays 80% of the list price; if three operators use the tower, each operator pays 70% of the list price. Standard pricing itself is highly profitable.

So, let's think back to the original intention of establishing the tower company. To a certain extent, market competition erodes power. When the three operators compete fiercely in the market, what is eroded in turn is the power of the competent authorities. In a sense, the previous WeChat charges are the best example.

When there is only one company with no branches, the status of the enterprise is actually the power of the government management department. This is the power logic behind the tower company - any department has the motivation to expand its own power.

Look back at the fable above, imagine the rogue rabbit that you thought was the protagonist as the tower company, and the lion that you thought was not the protagonist as the power logic behind it, and you may be able to figure it out.

The last sentence is very classic. No matter what it is, it only matters who makes the final decision. It is a bit like the state of "If they say you can succeed, you succeed; if they say you can't succeed, you can't succeed; if they say you can't succeed, you can't succeed. If you don't accept it, you can't succeed." The exercise of market power is a science, a very interesting science. You may not be able to peek into its door mirror in your lifetime.

So, is the Tower Company a rogue rabbit?

【About the author】 @中国好4G, a communications analyst and iResearch core expert, focuses on communications business research and writes original articles with attitude. If you are interested, please visit his WeChat official account: "中国3G" (china_3g).