Article published in Telecom Review on December 16th, by Reef Read, Partner, TMT, and Ming Chan, Associate Partner, TMT, PMP Strategy.
In the rapidly evolving telecom landscape, managed connectivity has emerged as a critical enabler for businesses and commercial property owners seeking to enhance their operational efficiency and customer experience. Managed connectivity encompasses a range of technologies, including WiFi, Distributed Antenna Systems (DAS), small cells, and Private Mobile Networks (PMN), all designed to provide seamless, reliable connectivity. This article delves into the significance of managed connectivity from a potential investor’s perspective, exploring its main types, demand drivers, key investment themes, and future outlook.
Types of Managed Connectivity Technologies
Managed connectivity providers typically design and install network infrastructure, as well as operate and manage the connectivity service. These technologies come in various forms, each with unique advantages and applications.
WiFi is a wireless networking technology that allows devices to connect to the internet and communicate wirelessly within a local area. It is widely used in homes, offices, and public spaces to provide internet access. In the UK and Europe, notable players in the managed WiFi market include ASK4, Glide, Wifinity, Wifirst, and Passman.
Distributed Antenna Systems (DAS) and small cells are other important technologies within managed connectivity. DAS is a network of spatially separated antenna nodes connected to a common source, enhancing wireless coverage within buildings and other structures. Small cells, on the other hand, are low-powered cellular radio access nodes that improve coverage and capacity in specific areas. Key players in this segment include Freshwave, WIG, Boldyn and Shared Access, with TowerCos such as Cellnex, TDF and Vantage Towers also developing offerings.
Private Mobile Networks (PMN) are dedicated mobile networks designed for specific organizations or industries, providing secure and reliable connectivity tailored to their needs. These networks are particularly beneficial for industries with stringent security and reliability requirements, such as healthcare, manufacturing, and logistics.
Range of Asset Ownership and Customer Segments
Managed connectivity solutions involve various levels of asset ownership and serve diverse customer segments. Asset ownership could include data centres, upstream connectivity, local access (passive and active), and the software layer. Different ownership models can impact the flexibility and control over the connectivity solutions, influencing the overall service quality as well as revenue models. For instance, an ISP service offered by a managed connectivity provider could involve it owning both the passive and active equipment, whereas if offered as a managed service, the provider would typically just own the software layer.
Managed connectivity serves a broad range of industries, each with unique connectivity requirements and challenges. For instance, commercial real estate developers invest in advanced connectivity solutions to enhance the value of their properties and attract high-quality tenants. In the hospitality industry, reliable high-speed internet access is a critical amenity that can significantly impact guest satisfaction. Similarly, healthcare providers rely on powerful connectivity solutions to support telemedicine, electronic health records, and other digital health initiatives.
Demand Drivers
Several factors are driving the demand for managed connectivity solutions. One of the primary drivers is growing data demand. For instance, mobile traffic growth has exceeded 25% per annum globally, driven by smartphone proliferation, increased usage of streaming services and social media, and the introduction of unlimited data plans by major carriers. To keep up with the pace in data consumption, significant infrastructure investment is needed to ensure adequate network capacity.
Another key driver is the decline in Capex spending by Mobile Network Operators (MNOs). Mobile ARPUs have declined in many markets, leading MNOs to reduce their cost base to maintain margins through restructuring and carving out infrastructure assets. Moreover, operators invested heavily in 5G from 2017-2022 but faced high competition and flat revenue growth, leading to expected decreases in network Capex in 2023 and beyond. This has led to a shift from MNO-funded to venue-funded models.
The post-pandemic shift towards hybrid working patterns has also boosted demand for high-quality connectivity solutions. Enterprises are taking up less space, with a clear flight to quality as they choose Grade A spaces to attract employees back to offices. Commercial building developers are investing in technology to improve the quality of space, with in-building connectivity seen as a vital amenity.
Building materials also play a significant role in driving demand for managed connectivity solutions. As 5G technology promotes the use of higher frequency bands, it is more susceptible to interference from metal, insulation, and tinted glass used in buildings. With 5G subscriptions accelerating, indoor cellular coverage issues are expected to increase, creating strong demand for in-building capacity solutions such as DAS and WiFi.
Investment Rationale for Infrastructure Funds, Private Equity Funds and Strategics
Infrastructure funds are increasingly interested in managed connectivity for several reasons. One of the primary reasons is asset ownership. Owning active and/or passive infrastructure provides long-term value and control over critical assets, ensuring stable and predictable cash flows. High capex requirements and the need to build strong relationships create barriers to entry, making it difficult for new players to compete.
Managed connectivity solutions also offer stability and predictability of cash flow through multi-year contracts (up to 5-10 years) and low churn rates. Additionally, managed connectivity providers are typically well-diversified in terms of sectors, serving a broad range of customer types, including B2C, government, hospitality, healthcare, enterprises and offices. This diversification provides insulation from economic cycles, with contracted revenue often protected against inflation. Recent deals, such as the acquisition of ASK4 by GI Partners, highlight the growing interest and investment in this sector by infrastructure funds.
Private equity funds are also increasingly drawn to managed connectivity investments. The managed services component of connectivity solutions offers recurring revenue as well as growth potential in adjacent segments and markets. For example, the acquisition of Wifirst by CAPZA demonstrates the attractiveness of managed connectivity solutions to private equity investors. These funds see opportunities for growth through strategic acquisitions and expansion into new markets, leveraging the recurring revenue streams and scalability of managed connectivity solutions.
Strategic investors are interested in managed connectivity assets for consolidation and synergy opportunities. The managed connectivity market could potentially be ripe for consolidation, with larger players acquiring smaller companies to expand their service offerings and market reach. For instance, opportunities exist for DAS providers to accelerate their positioning in the Managed WiFi segment (and vice versa) through acquisition, driven by synergies in account management, infrastructure, and technical capabilities. Bundling services as a unified communications offering can also reduce churn and enhance customer loyalty.
Potential Investment Risks
While managed connectivity offers numerous benefits, it also presents certain risks. Segment concentration can lead to seasonality and utilisation risks for some players. High competition in certain segments of the managed connectivity market can impact margins and growth potential. To mitigate these risks, conducting thorough commercial due diligence is essential to identify and address potential challenges.
As the demand for reliable and scalable connectivity solutions continues to grow, managed connectivity will play an increasingly vital role in driving digital transformation and unlocking new growth potential in the telecoms industry. By understanding the market drivers and strategic importance of managed connectivity, investors can effectively navigate the evolving landscape and capitalize on emerging opportunities.
