First 6-sector cell site we have seen from T-Mobile. Most cell sites have 3-sectors. The additional sectors are added for capacity- note the LTE and AWS/PCS designations.
FirstNet Award to AT&T Confirmed: Checks Confirm Amendment Activity before Official Announcement
Tickers: T, AMT, CCI, SBAC
Tags: Ken Schmidt, Wireless Infrastructure
In Examining FirstNet Assumptions 12/9/2016, we reviewed the likelihood that AT&T would win the FirstNet RFP and the impact on TowerCos, Equipment OEMs, and FiberCos. As the time, the FirstNet award was stalled pending litigation over Rivada's claim that it was improperly excluded as a bidder. No timeline for resolution was available even as 2017 models were being fine-tuned across the Street. In our AT&T FirstNet Revisited note from 3/21/2017- we correctly suggested that the award would happen this week- which it did today.
In our previous notes, we pulled forward our expectations for AT&T's deployments of FirstNet-capable equipment by 1-2 quarters. In general, FirstNet site modification work is a positive for the TowerCos, and their 2017 guidance (given on Q4 calls) does not include FirstNet.
FirstNet Contract Review:
In review, AT&T gains a long-term contract to utilize 20MHz of 700 MHz spectrum to accompany the up to 5-10MHz of the 700MHz spectrum they already have across approximately two-thirds of the US. Carriers prefer low band spectrum for its ability to penetrate buildings and because it propagates further than the higher bands.
AT&T also gets $6.5B in cash from the Federal government to facilitate the development of the first responder and public safety network. This amount could be less if not all states opt into AT&T's plan, which they are entitled to do, provided they build their own statewide Radio Access Network subject to the provisions of the Act.
Lastly, AT&T also gets a "sticky" market of 3 to 5 million public safety users, which is a market that AT&T has historically underserved.
AT&T has indicated they expect to spend over $40 billion over the next 5 years to build out FirstNet. (We believe that this number includes other non-FirstNet related modifications).
Under the RFP, AT&T is required to develop a public safety network on a certain schedule. Assuming an April 2017 award date, here is how the network will be deployed:
- October 2017: States Opt-In or Opt-Out
- April 2018: 20% of coverage to be built out
- April 2019: 60% of coverage to be built out
2020: 80% of coverage to be built out
- April 2021: 95% of coverage to be built out
- April 2022: 100% of coverage to be built out
AT&T will be required to develop and obtain approval for suitable devices, applications, and back-end operations and infrastructure to enable FirstNet capabilities. Initially, AT&T can use its network and devices but will eventually need to develop FirstNet-specific devices and infrastructure per the requirements of the RFP. Furthermore, AT&T will need to pay FirstNet at least $5.6B over the 25-year term of the contract with annual fees starting at $80M and escalating from there.
Implications for TowerCos
As far back as December, we indicated that TowerCos would benefit from the award, though we cautioned that there are three buckets of sites: some AT&T sites which already have antennas capable of transmitting/receiving in the 700MHz band, where there would modifications that do not justify a rent increase or amendment; some that require antenna change outs and additional remote radio units, and some that require additional antennas and remote radio units. In the second and third bucket, the TowerCos come out ahead. In total, we estimate the number of AT&T macrocells that will be touched over 5 years will likely exceed 75% or more of AT&T's total site count.
Regarding the timing of the amendment activity, our checks show that AT&T was submitting applications for modifications at the end of 2016 that include equipment suitable for FirstNet—months before today's FirstNet announcement.
Implications for Landowners and Rooftop Owners
Landowners with AT&T towers on their property, for the most part, won't receive any additional rent due to FirstNet activity. If AT&T ends up hardening sites by adding generators or backup power, there may be some lease area expansions which could yield additional rent. Building owners with AT&T rooftop leases may see additional revenue as AT&T needs to modify or expand existing equipment and antennas on the roof. For those building owners who previously agreed to AT&T's E911 language that they were inserting into their leases that states that AT&T is allowed to make changes to sites if needed for E911 purposes, there may not be the opportunity to charge additional rent for changes even if they exceed the current footprint of the equipment area.
Minor Boost for Rip-n-Replace Towers
Ironically, a subset of activities related to FirstNet deployment could cannibalize existing TowerCo revenue. As discussed in our Rip-n-Replace note of 3/22/17 where we discuss the increasing willingness of wireless carriers to relocate equipment from existing towers, the more that AT&T modifies or adds equipment, and particularly in cases where there are changes to the structural loading on an existing tower, the more an adjacent alternative site may make sense.
The more equipment that AT&T needs to add, the greater the structural loading on the tower. The greater the structural loading, the more likely that structural modifications to the tower will be required. The more that structural modifications are needed, the higher the pass-through to AT&T. The higher pass-through, the greater the incentive for AT&T to relocate to a newly built adjacent tower with surplus structural capacity.
Want to Know More?
We have strong opinions on who stands to gain from the FirstNet award to AT&T. Give us a call– we can break down which equipment manufacturers, which construction and engineering companies, and which tower companies are best positioned for upside from FirstNet.
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.
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.)
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.
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.
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.
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…]
In an effort to establish a wider flight safety path for airplanes that might “lose power during takeoff,” the Federal Aviation Administration (FAA) has recently proposed that the maximum height of buildings near all U.S. airports should be reduced. Some industries have balked at this proposal, including real estate developers and cell tower companies. Wireless telecom players are concerned that the proposed rules would limit the ability to successfully deploy antennas on rooftops, in addition to hampering the construction of cell towers in general. Current legislation allows buildings to be as high as 250 feet and towers to be as high as 200 feet at a boundary that begins 10K feet from an airport. If the new rules go into effect, the maximum height of towers could be reduced to l60 feet, which is liable to cause a lot of spending due to equipment modifications, and might even cause some carriers to relocate. Many chambers of commerce across the nation are also concerned that the change would slow growth in local economies, especially those with dense urban centers located within ten miles of the airport, such as Tempe, Arizona.
In 2012, wireless subscriber use surpassed 100% – meaning that the average person in the US had more than one wireless device – and this upside is not going to end any time soon! In fact, wireless data use is expected to quadruple in the next five years, so it’s best to prepare in advance. Wireless carriers network infrastructure plans were originally intended to optimize and enable voice traffic, as opposed to data; however this strategy has changed dramatically in the past year or two. [Read more…]
Building owners and tower ground leaseholders nationwide are being contacted on a regular basis by the wireless carriers and tower companies who occupy their property to grant access rights for fiber optic cable. As data demands increase dramatically, there is a need to improve the data throughput from the individual cell sites. The solution is to lay fiber optic cable, which is faster than traditional copper wire, less expensive, and more efficient than T-1 or DS3 lines. [Read more…]
A follow up story by the Wall Street Journal mentioned reports from American Tower and SBA who confirmed the number of leases impacted:
- American Tower has 3,100 towers where AT&T and T-Mobile are both on the tower out of 36,000 sites or 8.6% overlap. American Tower’s lease agreements with T-Mobile have between 5 and 6 years remaining on them.
- SBA has 1,533 of the company’s 9,260 towers with duplication between T-Mobile and AT&T or 16.5% overlap. The average lease has 3 years remaining on it.
- Crown has 4,000 of the company’s 22,000 towers with duplication. The average AT&T lease has 12 years remaining while T-Mobile has 7 years remaining.
A client we represent had a Sprint construction crew show up at their doorstep to perform what they called “standard maintenance”. It was a sizeable construction crew and they never notified the landowner prior to showing up. Our client wisely prevented the crew from entering the site at that time- stating that they had the right to do regular maintenance but not modifcation of the existing cell site. The Sprint agent tried to tell the client that they were legally entitled to the modifications. [Read more…]