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.

Wave of NIMFY (Not In My Front Yard) Small Cell Ordinances and Litigation Coming

Small Cell Drawing
Construction drawing page showing a small cell submitted to a municipality for approval

Over the last year, we have seen a significant jump in the number of municipalities revising their land use ordinances in response to the increasing tide of proposals for new small cells to be installed within the right of way. Residents and communities typically dislike having wireless equipment located close to their homes, and many view the possibility of new poles with small cells being erected in their front yards to be even more objectionable. Public opposition is significant, and municipalities are lawyering up to determine what rights they have to oppose these new small cell poles. The industry has historically referred to this faction of tower opponents as “NIMBY”s – an acronym for Not In My Back Yard. Because these proposed small cells are to be installed in the right of way – in front yards – we will refer to this subgroup as “NIMFY”s – Not In My Front Yard. [Read more…]

Crown Castle Small Cell and Tower Update- 2ndQ 2016

New replacement pole small cell
New replacement pole small cell

While the call itself was pretty understated as compared to even other CCI calls, it was in the Q&A where the call got interesting.  Here is what we took from the call.

TOWERS:  ($115M organic revenue growth in 2nd Quarter)

New Builds:  In regards to new builds, CCI is not building many new towers- only 50 of them in the last quarter.  They don’t say it, but we believe that the majority of those towers are replacements of their existing towers where the underlying landowner wasn’t willing to extend the underlying tower ground lease at a fair market value rent.   Crown doesn’t expect this slow pace to change, noting specifically that there are a number of new tower company entrants or established mid-tier tower companies that will do non-sensible build-to-suit deals in order to establish market share. [Read more…]

AT&T Forecasts 6,700 New Macrocells from 2017-2022

In a presentation at the Cohen and Company’s 44th Annual Technology, Media, and Telecom conference, AT&T’s CTO and President of AT&T Labs Krish Prabhu indicated that AT&T believes that small cells will make up the substantial majority of their future cell tower and cell site development over the next 5 years.   In response to a question on how small cells will fit into their future 5G, fixed wireless, and IOT networks, Prabhu indicates that AT&T has approximately 90% of their macrocell network that they expect to be in place in the next five years already standing.   However, they have only deployed 5-10% of the total count of small cells that they expect to have at 2022. [Read more…]

Verizon Small Cell for Comparison

As an addendum to our earlier article about Crown Castle and Mobilitie small cell proposed installations in Orlando, we thought it would be helpful to include a drawing of a Verizon proposed small cell from Massachusetts.   In this case, Verizon is installing a Cloud Radio Access Network (C-RAN) with two small cells to augment their coverage and capacity in the vicinity of an existing Verizon macrocell which is collocated on an existing SBA Communications tower. [Read more…]

Crown Castle (CCI) Small Cell Initiatives and Reporting

Crown Castle DAS Node
Picture of Crown Castle DAS Node from FCC Presentation by Crown

So as a clear indication that Wall Street is very focused on small cell initiatives by the public tower companies, Crown Castle
started reporting their small cell financials separately from their tower financials in the Q1 2016 quarterly earnings and call.   They must have been receiving a significant number of questions from the analysts because the earnings call presentation is carefully crafted to show a rosy picture even though Crown hasn’t been completely transparent on their small cell financials.

SOME VISIBILITY- BUT QUESTIONS STILL REMAIN

In general, we are excited to see them Crown add this reporting, as we have been suggesting to the various analysts that retain us that it is difficult to measure how successful their small cell efforts are without this breakdown. Unfortunately, Crown still isn’t distinguishing between small cells and DAS in the breakdown preferring to treat all DAS nodes and small cells as if they are the same and have similar financial attributes.  Interestingly, an analyst from Bank of America specifically asked this same question in the Q&A without getting a substantive answer.

What we do know from the earnings call is that Crown’s small cell business still amounts to approximately 12% of their consolidated site rental revenue similar to what it was in late 2015.  Crown indicates that new small cell builds amount to 75% of their small cell systems’ incremental revenue – while 25% is additional collocation on existing fiber routes/DAS networks. They suggest that they have 16,500 miles of fiber, but don’t disclose how many miles are actually used for small cell nodes or DAS.   CCI says they are focused on the top 25 markets which isn’t surprising given the location of Sunesys fiber in these same cities. This suggests a few obvious questions for CCI that were partially addressed in this call and should be expanded upon in future calls:

1.  How do they expect to grow once those 25 markets are complete?

2.  Now that the world is fully aware of the value of dark fiber and surplus capacity, is it reasonable to expect another fiber company acquisition?

3.  How many nodes are in top 25 markets or Central Business Districts (CBD) as opposed to non urban core areas? [Read more…]

Tale of Two Small Cell Proposals – Crown Castle vs. Mobilitie

The City of Orlando, Florida recently received two separate applications for two separate sets of DAS nodes and/or small cells. The applications were submitted by Crown Castle and Telemobilitie, both of whom purport to request planning approval for new poles and/or the replacement of existing poles. We believe that Telemobilitie is a “Doing Business As” name for Mobilitie – the applicant who submitted the plans to the City on behalf of Telemobilitie has a LinkedIn page indicating she works for Mobilitie, a company which is purported to be assisting Sprint with the development of 70,000 “mini-macro” small cell sites. [Read more…]