Funny things, wholesale divisions. Succeed under the ownership of a larger telecom business and they might indirectly hurt their retail brethren. Every time BT's Openreach arm signs a contract with a new reseller, it generates an additional competitor for BT's retail unit. That is a worry for owners and customers alike.

The obvious conflict of interest has not stopped a couple of Europe's telco incumbents from spinning off their towers, the coat racks for mobile equipment, and running them as towercos – firms that rent space on their towers to network operators. The one that has attracted the most attention is Vantage Towers, a Vodafone offshoot that counts Vodafone Germany as its majority owner. Currently worth about €15.8 billion (US$17.8 billion), it has just signed a deal with one of Vodafone Germany's most aggressive rivals.

Figure 1: A technician ascends a mobile tower.
(Source: European Wireless Infrastructure Association)

The network ambitions of 1&1, the company in question, first surfaced in mid-2019, when it splurged nearly €1.1 billion ($1.2 billion) on the spectrum licenses it needed to operate its own 5G network. Since then, it has hired Rakuten, a Japanese company with ambitions to challenge Ericsson and Nokia as a global mobile supplier, to take charge of its 5G network rollout. Rakuten sports all sorts of fashionable new technologies, including open RAN, a system that should (in theory) allow one supplier's products to harmonize with another's, like carol singers at Christmas. These days, products supplied to a given site come mainly from soloists.

What Rakuten lacks is passive site infrastructure in Germany. For that, 1&1 has turned to Vantage Towers. Under the deal announced today, it will gain access to at least 3,800 sites by the end of 2025, potentially rising to 5,000 in future. The contract between the two firms is for 20 years and gives 1&1 an extension option until 2060.

Mutually beneficial?

Operators throughout Europe already share site infrastructure and co-invest in networks. Without clear opportunities to boost sales, they have recognized that a costly rollout of 5G and fiber-based infrastructure will slowly erode margins, threaten dividends and make it harder to pay down debt – unless, that is, they pool resources.

In that regard, the deal between Vantage and 1&1 looks mutually beneficial. Vantage takes responsibility for site maintenance and buildout, catering to market demands. 1&1 gets somewhere to hang its basestations and would undoubtedly have to spend more in the short term to acquire its own site assets.

But the arrangement is unquestionably odd. If 1&1 eventually became the main retail threat to Vodafone Germany, the rationale for selling retail space to rivals would look far less clear – and not just in Germany. For the first six months of this fiscal year, Vantage made just shy of €500 million ($564 million) in revenues and €219 million ($247 million) in pre-tax profit. Vodafone's service revenues across the whole of Europe were nearly €15 billion ($16.9 billion). In other words, a very big service business could be endangered by a towerco sibling generating only one thirtieth as much in sales.

Vantage is growing fast and that will make it harder to dismiss, from a revenue perspective. Sales for the first six months were more than twice their level a year ago. Vantage says it added more than 670 non-Vodafone tenancies, giving it a closing tenancy ratio (which essentially means the number of tenants per tower) of 1.42. With the 1&1 contract, that rises to 1.5. Executives have probably rationalized that firms like 1&1 would simply rent from other towercos if Vantage did not exist, and that Vodafone would just miss out on additional business.

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Nevertheless, similar questions surround 1&1, which indirectly strengthens one of its chief rivals with every euro cent it pays to Vantage. Unfortunately, there seem to be few alternatives. Cellnex, Europe's largest independent towerco, has no presence in Germany. Deutsche Telekom, the incumbent telco, does not (yet) appear to be renting tower space to rivals.

"We are considering opportunities here," said Deutsche Telekom CEO Timotheus Höttges in November, when quizzed about tower plans during the company's latest earnings update with analysts. "We are working on this one, but we will inform you when we have something new to tell."

In the meantime, only a small percentage of German towers seem to be controlled by independent towercos. According to a year-old report by the European Wireless Infrastructure Association, just 3% of Germany's 71,000 towers were owned by independent firms last year, against a European average of about 20%. Of the main European markets, only Poland has fewer independent towers.

It is a head scratcher for Ralph Dommermuth, 1&1's boss, who cannot possibly hope to provide a competitive nationwide service with access to just 3,800 tower sites in such a vast country. A towerco with an extensive footprint, not affiliated to any of his big rivals, would be just the ticket he needs.

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— Iain Morris, International Editor, Light Reading