Are states going to opt-out of AT&T’s FirstNet?

Now that the Rivada court challenge appears to be resolved, many pundits and experts expect AT&T to be awarded the FirstNet contract.  Once the FirstNet contract is awarded to AT&T (only remaining qualified bidder), AT&T has 180 days to prepare state specific FirstNet plans.  States then have 90 days to decide to opt-in or out.   If they opt-out of FirstNet, states have the option of building their own public safety networks to FirstNet standards.  Some states have already issued RFPs and in one case, awarded the state public safety network to Rivada.  This does not mean that the states will opt-out- just that they are evaluating their options.  Should they choose to opt-out, they have 180 days to issue an RFP or provide FirstNet with a plan for review.  To the extent that a state opt-out, AT&T will not get spectrum or funds in that state.  

We prepared this map that represents the states that have issued, awarded, or announced that they plan to issue an RFP.

Map of states with RFPs for FirstNet state networks
states that may opt-out of the nationwide FirstNet

Verizon’s Unlimited Plan- Short Term Pain vs Long Term Gain

Don't misread Verizon's about-face on unlimited plans solely as a sign of network confidence.

Tickers: VZ, T, S, TMUS, AMT, CCI, SBAC, COMM, DY, ZAYO

 

Contrary to their previous explicit direction otherwise, Verizon announced on February 12th, 2017 that they would be offering an unlimited voice and data plan at rates slightly higher than comparable offerings from T-Mobile (TMUS) and Sprint (S). Not coincidentally, in its earnings call on Feb 14th, 2017, TMUS indicated that they were porting Verizon subscribers to TMUS at a 2.8:1 ratio to subscribers ported from TMUS to V. This plan is clearly slated to reduce the churn of postpaid customers from VZ to S and TMUS and we believe that it is a very compelling service offering.

 

Analysts were quick to choose sides: the first posited that this was a sign of VZ's confidence in their network upgrades and capacity, while the second group believes that the network will show signs of strain under the added capacity. We believe that both groups are partially correct and that infrastructure related entities are the ones that stand to gain the most.

 

Back in last January, we applauded VZ for their densification efforts in our note Verizon (VZ) positioning for a range of 5G futures. The premise was simple- Verizon's efforts to add fiber and small cells to their network give them a marked advantage over other wireless service providers in the race for 5G. That premise hasn't changed and further research since that note continues to suggest that VZ still has a 1-2-year first-mover advantage from a US wireless infrastructure perspective.

 

Street light small cell
Small Cell In Boston, MA
Nonetheless, it is our opinion that VZ's densification efforts, while industry setting, are not sufficiently complete to provide seamless and reliable service across all urban areas, especially in the near term. Verizon's densification is based on a three-prong approach: carrier aggregation, dark fiber, and rapid deployment of small cells. On the first prong, VZ has actively deployed 2 and 3 carrier aggregation across most of the nation. On the last two prongs, while they have been leading the market in both efforts, there still are areas where their efforts have been slowed due to factors outside their controls. Based on our on-the-ground level visibility, VZ has a hefty lead in dark fiber and small cells actively deployed or in development.

 

In our previous note, we suggested that the next 12 to 18 months will be tough for Verizon as the impact from their investments will take time to materialize. For urban markets where VZ has encountered delays due to local zoning or permitting for deployment of small cells, there will be a reduction in reliability and data speeds. These issues will be more pronounced in markets where Verizon is relying upon two carrier aggregation.

 

Fortunately for VZ, these issues are surmountable and addressable, but it will take some time to rectify them. Expect to see an acceleration of densification in specific troublesome markets. Verizon will need to rely more on outside fiber and small cell providers like CCI and ZAYO. TowerCos (AMT, CCI, SBAC) should also experience continued and possibly accelerated macrocell modification activity and possibly new macrocell deployment from VZ and TMUS in their efforts to meet the pending needs of video downloads (remember that video accounted for 60% of mobile data use in 2016 and VZ and TMUS now include zero-rated HD video in their unlimited plans). Lastly, we would not be surprised to see T extend their unlimited plans beyond DirecTV subscribers, thereby further increasing densification.  (Editor's note- subsuquent to this being written, T did extend its unlimited plans beyond DirecTV subscribers.)

 

Risks to this note: The perception of VZ network superiority declines at a faster rate than expected, causing subscribers to question whether they should spend the additional money on VZ's unlimited plans before VZ's network investments reverse those issues. VZ could reverse their strategy of using outside fiber and vendors in order to control their fate by increasing CapEx towards the development of owned dark fiber assets, thereby reducing ZAYO and CCI opportunities.

 

(Author's note: This research note was published first on 2/20/17. If you are interested in gaining access to our research on a timelier basis or have a discussion on this note or other wireless industry topics, please contact us.)

 

 

Small Cells Per State in United States

Map showing small cells per state across US
Map showing the distribution of small cells in US based upon 100,000 total

To show the impact of 100,000 small cells being deployed in the US over the next few years, we looked at total population per state and created this map which assumes that small cell deployment will follow population.   In other words, a state's relative population is used as a proxy for small cell need in this map.   In reality, there are many more factors which will influence the number of small cells in each state.

These include:  

  1. Population density
  2. Difficulty of procuring permits for macrocells
  3. Spectrum shortfalls in specific markets
  4. Competitive Pressure between Carriers
  5. Topography

Thus, this map is only intended as a rough estimate of small cells to be deployed by state.  Where it gets interesting is when you assume that the actual number of small cells could be 1,000,000.  Previous FCC Chair Tom Wheeler indicated in a 2016 speech that the number of small cells deployed "may reach into the millions".   Multiply the numbers in the map by 10 to see what we mean.  The state of California alone could see 120,000 small cells with most in urban and suburban areas.  That is a lot of small cells. 

 

Everest Infrastructure Partners: The Phoenix of Tristar Investors?

Illustration of Phoenix Rising from AshesHISTORY OF TRISTAR INVESTORS

Back in 2008-2013, a company called Tristar Investors was attempting to acquire ground leases under American Tower Corporation (AMT) and Crown Castle (CCI) cell towers. They had some success acquiring the leases using a unique acquisition model where they would "buy out" the tower ground lease by paying the landowner an additional annual or monthly payment above and beyond their current rent through the expiration of the cell tower lease. Tristar would then offer the landowner 50% of any revenue from the operation of the tower after the expiration of the lease. The marketing pitch? At expiration, Tristar assumes ownership of the tower and the landowner becomes a "partner" in the revenue generated on the tower. This was an effective pitch to landowners, and our best guess is that Tristar acquired 300-500 leases under valuable multi-carrier towers.   

In 2013, Tristar settled litigation with American Tower and after that, they shut down. We surmise that Tristar agreed to non-compete and non-solicitation language in their agreements that barred them from purchasing leases from under American Tower. We also believe that Tristar executives previously agreed to language with Crown Castle that provided for similar restrictions on acquiring Crown Castle leases.  

THE RISE OF EVEREST INFRASTRUCTURE PARTNERS

Flash forward to 2017 and it appears that these non-compete/non-solicitation agreements have expired, because a landlord of ours with a multi-carrier American Tower Corporation tower received a purchase offer from a company named Everest Infrastructure Partners that looks suspiciously like previous offers from Tristar Investors. Upon further review of the signatory and the agent who contacted our property owner, it appears that someone has gotten the old Tristar team together and is now attempting to acquire leases under the Everest Infrastructure Partners name. Both the agent and signatory list previous positions with Tristar in their LinkedIn profiles .  

Here is what the offer from Everest looks like: 

Everest Infrastructure Partners, Inc. (“Everest”) is pleased to present to you (“Owner”) this offer letter (“Offer”) for Everest to acquire an easement to the cell tower real estate you own at _____________________(“Property”).    

1. Current Lease.  The Offer is based on the following terms of the current lease for the cell tower operated on the Property:

Current Rent:   $xxx.00 /month    Final Lease Expiration: xx/xx/xx

2. Payment to Owner.  Everest will pay to Owner the sum of xxxxx Thousand and No/100 Dollars ($xx,000.00) per year until the expiration of the Current Lease.  Owner will keep all rents generated by the Current Lease until expiration. Additionally, commencing at the expiration of the Current Lease, Everest shall thereafter pay to Owner ongoing payments equal to Fifty Percent (50%) of the rental revenues received by Everest from any lessee(s) of the Property.

 3. Easement. In exchange for the consideration above, Everest will be granted an easement to the property. The easement area shall be the portion of the Property currently leased for wireless telecom use, and shall include access and utility easements thereto. 

RECOMMENDATIONS FOR CELL TOWER LEASEHOLDERS

There are a few concerns that landowners should have about this offer. First, a landowner who receives this offer should clarify with Everest whether they intend to take over the ownership of the tower at expiration, whether they plan to sell the lease back to the tower company, or whether they expect to renegotiate the lease with the tower company and take 50% of the rent for doing so.   

In the first scenario, these types of offers can be attractive to landowners. Our clients who previously sold to Tristar were generally better off for doing so.  

In the second scenario, we believe the landowner is better off just selling or renegotiating the lease with the tower company. Otherwise, at expiration, if Everest sells the lease to the tower company, the tower company could just decide to offer below market lease terms and the landowner would get the very short end of the deal.   

In the third scenario, we also believe that the landowner is better served by selling to the tower company or renegotiating the lease with the tower company. Unless the "buyout" amount exceeds the present value of 50% of future rent from the extended tower lease, the landowner would be better off just keeping the lease and negotiating its own extension or sale with the tower company.   

Accordingly, if you receive an offer from Everest, we recommend confirming with them whether they intend to take over the tower at expiration. If not, we suggest asking Everest about their explicit intentions with the lease. In either of the latter two scenarios, we recommend contacting us so that we can help you determine the value of the lease and explain fully all of your options – not just those presented by Everest.   

Please note that we are not affiliated with Everest. Everest Infrastructure Partners may be a registered trademark. If you found this post while searching for Everest Infrastructure Partners, please direct your browser to www.everestinfrastructure.com.   

AT&T Shifting Capex into Small Cells

Implications: T, S, ZAYO, CCI, AIRO, COMM, DY, ERIC, NOK  (Disclosure- author holds position in ZAYO)

Looks like T's finally cutting over to small-cell investment as S continues to under invest.

Carrier capex budgets for 2017 and forecasts for 2018 aren't out yet, but our checks indicate that AT&T, which has to-date been a relative holdout on small cells, is finally shifting investment share in this direction.

Back in June, T highlighted that 90% of its next-5-year macrocell infrastructure was already in place, but only 5-10% of the small cell infrastructure for this same period had been built.

Checks now show that T is beginning to reassign real estate department personnel to work on small cells. Furthermore, some subcontractors are reporting increased requests from AT&T to do site walks for small cells.

Notably, we are not yet seeing increased municipal permitting / leasing. Given 9-12 month lead times, this suggests that small cell ramps will occur toward the middle of 2017 with a likely acceleration into 2018.

We anticipate that T will focus its small cell efforts in Wireline markets where the company already owns existing fiber and has access to Right of Ways and Franchise Agreements. T will best be able to control costs in these areas where it is already considered a wireline utility and has existing infrastructure in place. These markets include most of the Southeast and Midwest as well as a few markets in California.

Map showing the states in which AT&T has wireline service
AT&T -Landline Markets before CT was sold (Image from AT&T)

Implications

 We see this shift as an incremental positive for fiber providers and small cell operators like ZAYO, CCI and CSAL; although the effect is likely to be muted to the extent that their metro fiber overlaps with AT&T's. It's a likely positive for OEMs like AIRO and COMM that provide small cell equipment and antennas but don't have exposure to the decline in macro cell equipment.  Implications will likely be mixed for DY, NOK and ERIC. They should benefit from increased small cell work but are already seeing reduced capex allocated to macro cells.

Sprint Follow-up

Related to our past comments on Sprint, (see 10/26 – Sprint (S) still behind small cell 8-ball), we continue to see additional data points supporting our thesis.

Sprint confirmed during their last earnings call that last year’s Capex was lower than their previous guidance to the market by $2B ($2.3B actual vs $5B guidance).  Sprint has been talking up its plans for years with relatively little to show for it, and recognition seems to be building throughout the marketplace, and the investor community, that the Mobilitie relationship has yielded far fewer small cells than were anticipated.  Sprint is giving lip service to 2017 being a better year for permits and capex, but its hopes seem to be predicated on FCC leadership changes and possible rulemaking to remove impediments to small-cell deployment in right of ways.  In fact, Mobilitie seems to have pinned a significant amount of hope on a Petition to the FCC for Relief.

We think Sprint's capex will increase in 2017 off of an ultra-low 2016 number, but the service provider continues to struggle to deploy capex dollars.  We wouldn't be surprised to see major revisions to the strategy as well as Street expectations.

 

SITA Research Reveals the Real Big Game in Houston was in Small Cells

Small cell scoreboard.

A new competitive dynamic emerges in the fight for densification dominance

Tickers: ZAYO, CCI

(Disclosure- author holds positions in ZAYO)

The deployment of small cells started in earnest in 2015. Two years later, all of the Big 4 wireless carriers have adopted a small cell strategy to handle the 50+% YOY growth in mobile data usage. Along with acquiring or deploying fiber, the deployment of small cells sits at the heart of a hyperconnected 5G future.

As small cells have grown in prominence, analysts have argued about their impact on traditional tower company business models. Recently, Crown Castle (CCI) indicated small cells account for over 12% of total revenue and small cell deployment will only climb in the future—a trend we highlighted in our note Ten Predictions for 2017. Understanding how companies like CCI and Zayo deploy small cells, at what economics, and how the economics compare to historical returns on capital in the tower business is increasingly important.

Last week, we put out an article on how wireless service providers connect with their subscribers at the Superbowl. In doing research for this article, we looked at towers and small cell infrastructure using our proprietary tower and small cell database to examine deployments in and around NRG Stadium in Houston, TX. The wireless carriers have been actively densifying their networks in Houston to prepare for the onslaught of increased wireless data usage, and our data shows ZAYO and CCI competing for the city’s small cell future. While this note focuses on ZAYO and CCI in Houston, there are other players with a presence in this bellwether market. For the sake of simplicity, we’ve chosen to focus on what we see as the top two competitors going forward.

There are three key takeaways that emerged from our research:

1. At the end of the first quarter of small cell deployment, ZAYO is ahead of CCI in Houston.

Zayo is significantly ahead of Crown Castle in the deployment of small cells in Houston, where CCI’s headquarters is located and where CCI just closed on the acquisition of Fibernet earlier this month). CCI stated on their earnings call on 1/26/2017 that “FiberNet substantially strengthens our footprint in Miami and Houston, both markets where we are seeing significant small cell demand.” But despite CCI’s claims about their efforts in Houston, our checks indicate that Zayo small cell nodes (both proposed and completed) exceed CCI nodes by a factor of approximately 10x, giving ZAYO a significant advantage in the market. We have plotted these deployments in the map below, with ZAYO in green and CCI in yellow, and ZAYO’s advantage is clear. Map showing the proposed and deployed small cells for Crown Castle and Zayo in Houston

Our research is specific to Houston and is not a commentary on the ZAYO vs. CCI competitive dynamic across the entire US. We see accelerated development of small cells in Houston because it is a top three city in terms of population and because of the publicity surrounding the Big Game.  However, from a zoning and permitting perspective, Houston is “infrastructure friendly” relative to other cities.  In other words, Houston is an ideal location for robust small cell deployment, so we will continue to watch developments in the marketplace as a bellwether for other major cities. 

2. The Small Cell Game is fundamentally more competitive than the Macrocell game, and First-Mover-Advantage is critical.

Small cells are more competitive than traditional towerco business models, and so the first-mover advantage is more important. Because small cells are deployed primarily in the right of way, and with fewer zoning restrictions and limited NIMBYism to constrain competitive deployments, the first company to win the land grab has an advantage attracting carriers as customers. In some areas, we are hearing that there are six to seven applicants applying for right of way access rights simultaneously in the same locations.

Already having fiber in the ground is beneficial because it enables the lead infrastructure company to solicit potential wireless service providers first. If a second infrastructure company enters the market and builds out the same right-of-way, then a duopoly is created wherein neither gets all four customers onto nodes along the same fiber routes. The best case duopoly IRR scenario is three carriers on the lead and just one on the follower; however, our research suggests that so far Sprint is focused on deploying its own nodes; so markets tend toward two customers on the lead and one on the follower. In their 4th Q earnings call, CCI indicated that “we are building small cell systems with initial yields of 6% to 7% that increased to low-double digits with the second tenant and higher yields with the third and fourth tenants.” This statement presupposes a local monopoly for the leader, not a lower-yielding duopoly. And let's not talk about what happens when there are more than two fiber providers in the same Right of Way.

Our proprietary data allows us to quantify the monopoly vs duopoly state of Houston and therefore to narrow in on CCI’s return on investment as small cells are added to FPL Fibernet’s assets.  If rumored carrier consolidation between Sprint and T-Mobile occurs, the first-mover advantage grows as fewer carriers mean that the second infrastructure deployed in any given city has a fundamentally lower potential return profile. Though the reverse is also true; entry by a cable company into the wireless space could expand the number of potential customers, enabling higher second-mover returns. Net net, with no guarantee of a local monopoly, the second infrastructure deployed is simply compressing the wireless value chain in the favor of carriers. 

3. Even though CCI is down in the first quarter, they can still turn it around.

We are not suggesting that Fibernet was a bad acquisition, nor that ZAYO has the Houston market in the bag. When Crown announced the Fibernet acquisition, the expectation was that CCI would be able to use the valuable metro-fiber plant to encourage small cell deployment on or near that fiber. CCI has indicated they are seeing strong interest for small cells in Houston but hasn’t yet provided any clarity on what constitutes “strong” and whether what they are seeing is in-line with their expectations.

We believe that both companies have valuable assets in Houston, especially to the extent that their infrastructure does not overlap—a factor which our proprietary datasets allow us to quantify. However, it is still too early to determine the degree to which CCI will succeed with Fibernet’s Houston assets. The small cell game is still too early to call. 

We will continue to closely monitor the situation in Houston and we will be expanding our research to additional top 25 markets in the coming months.

 

About Steel in the Air: We have long focused on a data-driven analysis of tower data and on lease rate data for wireless infrastructure. We were the first nationwide cell tower lease consultant and we are the largest, having assisted over 3,500 clients over the last 13 years. We count small to mid-size tower owners, public entities, not for profits, big box stores, shopping center REITs, federal entities, and individual landowners among our clients. We have unique visibility to what is happening on the ground as it pertains to wireless infrastructure deployment. We track everything- every lease, every tower, every cell site, every cell tower lease buyout offer, and every sale of a tower portfolio that comes across our virtual desk. We provide custom research for investment banks on the public tower companies and the small cell providers and developers. If you are interested in discussing this or any article or topic, we can be retained for in-depth discussion and analysis. Contact us for more details.

Rooftop Small Cell in Syracuse, NY (Ken’s Hometown)

Despite living here for over a year now, I just came across my first small cell in the City of Syracuse.   The site and equipment are located on and adjacent to the rooftop of Rosie’s Bar & Grill just west of Syracuse.

Small Cell Location

Below is a photo showing the rooftop small cell- which includes a small antenna mount along with an omni type antenna.  Based on what we have seen in proposed Verizon rooftop small cell plans for other clients- this appears to be a Verizon installation.

Small Cell Photo
Rooftop Verizon Small Cell

The Verizon small cell connects to an approximately 4′ tall equipment cabinet mounted on a steel platform on the side of the building.    Verizon has likely entered into a small cell lease agreement with Rosie’s for the placement of the equipment.  They typically offer $250/month to $300/mo. for this type of lease although like anything that is negotiable.   If Verizon or another small cell provider contacts you for a similar proposal- give us a call at (877) 428-6937 or contact us.

Small Cell EquipmentSmall Cell Equipment

 

 

A Tale of Two Small Cell Providers – Part Two

Last year in April, we wrote about how Crown Castle and Mobilitie respectively approached the City of Orlando regarding small cells.    In that post, we described how each company approached the application process and why the City approved the Crown Castle small cells while it determined that the Mobilitie applications were incomplete.

We recently came across some data from Montgomery County, MD.   If you have followed wireless siting news, there have been a number of stories about Montgomery County and the opposition for small cells from NIMFYs.

Interestingly, the data shows a similar story happening in Montgomery County as that which happened in the City of Orlando.  Of the 171 small cell or DAS installations submitted by Crown Castle, 81 have been approved or recommended for approval.   90 are under review currently.   Of these 171 poles proposed by Crown, only 20 are new poles as opposed to installations on existing utility structures.   The average height of all Crown poles/antennas is 28 feet.   Another interesting statistic regarding the Crown DAS poles is that 26 of them have two carriers coming out of the ground.   Almost all include Verizon- but some include T-Mobile.

Mobilitie has taken a different tact and not surprisingly, NONE of the 141 small cells that Mobilitie has applied for have been recommended for approval as of the date of the file we reviewed which appears to be October of last year.   The average height of the Mobilitie poles- 66 feet.   The number of new poles vs attachments to existing poles is 117 to 24 respectively.

Lastly, Verizon has submitted 15 small cell applications of their own.

Below is a map we created in Google Maps showing the various DAS and small cell providers and the submitted infrastructure.   You can click on the individual points for further details on who is where and whether the sites have been approved.  (here is a link to the map itself in Google Maps)

 

Verizon Backup Fiber Requests: How Landowners Should Respond.

Verizon's proposed fiber route on client's property.
Verizon’s proposed fiber route on client’s property.

We have been starting to see requests being made to our landowner clients where Verizon is seeking to get consent to add utilities.  Initially, the pitch is that Verizon needs additional fiber for advanced technologies.   When asked why they need a new utility easement across the property and why they can’t use the existing utility easement, Verizon indicates that they need backup fiber.  In short, they don’t want the backup fiber routed along the existing utility easement because it could be cut at the same time as the primary fiber.

The issue this creates for a landowner is that there are now additional easements run across the property that could inhibit future development of the property.   If every wireless carrier at a site does this- it would be easy to see where there would be a patchwork of fiber easements across the entire property.

Our guidance to landowners facing these type of requests is as follows.

  1. Don’t ever just sign the simple consent letter.
  2. Ask for full construction drawings showing the route of the fiber and any handholds or fiber boxes being added to the property.
  3. If you don’t mind the location, great.  If you do, ask Verizon to route it along a more favorable location on the property.
  4. Check your lease agreement to confirm whether you have any obligation to grant them another fiber/utility easement.
  5. If not, ask for compensation for the easement.  If you need help figuring out the appropriate amount, contact us.
  6. Ask whether you will be required to sign an easement with another utility company and if so, ask to see the actual document.
  7. Have that easement document reviewed by your attorney.
  8. Ask your attorney to add language that requires Verizon to relocate the fiber at their expense if you need to use that portion of the property in the future.