Our Predictions for the Wireless (and Wired) Industries in 2018

Every year, we put together our prognostications for the coming year. This year, we are obviously a little late – primarily because the beginning of the year has been very active for SITA. In the final days of 2017, I drafted a “State of SITA” email to our staff, predicting that 2018 would be the Year of More. And that’s just what we are seeing – more of everything. More proposed new leases – both from carriers and tower companies looking to build new towers. More amendment activity on existing sites as all four carriers are actively pursuing applications for site mods. More lease extension offers and more lease buyout offers with more rent or more money, respectively. More of our clients are seeing substantial offers to acquire their leasehold interests at a premium. So, what does that mean for 2018?


1. 5G Becomes Closer to Reality and Farther from Carrier Fiction.












Anybody else annoyed with 5G hype? Seems like you can’t look at the trade magazines or TV ads or newspapers without seeing an article or ads with one carrier proclaiming why their 5G vision is better than the others. Hint: 5G has the same potential for each carrier. Their visions are different because the carriers don’t have the same spectrum or fiber. With 5G being so encompassing in terms of wired and wireless technologies, it necessarily will be deployed differently for each carrier.

Guess what, each cable company, fiber provider, and wireless internet service provider will have their own distinctive brand of 5G. But the good news is that instead of the vague marketing hype, we are already starting to get more specific but still preliminary information about the 2018 and 2019 strategies early in 2018.

This trend will continue when we start to see actual deployments. As previously stated, we are seeing more applications for site modifications on behalf of our clients. Some of these actually have pre-5G equipment specified, and, as the year goes on, we will see actual 5G equipment being deployed. While it may be pre-standard, it is critical to remember that 5G is an evolution, not a revolution. (Bring on the comments.)


2. Whatever the G, It Still Means More Macrocell Activity.












Every year around this time, we are asked how this year stacks up against the previous year in terms of carrier activity, especially as it pertains to tower companies. Most years, we tend to be optimistic, but this is probably the year we are most optimistic about.For the first time in years, we are seeing actual, repeated, and specific activity by Sprint. Vendors are actually hiring to staff Sprint projects, applications are coming in, and projects that were on hold for years are coming back up.

Landowners are being contacted by Lendlease on behalf of Sprint and by Sprint directly. Mobilitie is actively pursuing small cell applications (the normal way this time). This is on top of AT&T FirstNet activity (2H 2018), T-Mobile rural expansion, and Verizon’s continued steady-eddy development. It’s a good year to be a tower company other than projections #3 and #7 below.


3. And Carriers Are More Willing Than Ever to Consider Alternatives to Existing Towers.













Unfortunately, we will start to an increase in cell tower lease terminations (i.e. churn) in the not so distant future, just as much of the Clearwire, Cricket, MetroPCS, Nextel, US Cellular lease terminations is coming to a close.

Why? Because carriers are less willing to accept high-dollar sites, especially when they have build-to-suit tower companies that are willing to make questionable investment decisions to build new towers next to existing towers. Furthermore, structural capacity issues of existing towers will strain the ability of wireless carriers to make site modifications without substantive structural modifications required to the tower. Rather than put more money into OPT (other people’s towers), the carriers will see the opportunity to build another tower adjacent to the existing tower, thereby limiting their future Opex and pushing Capex to an asset they own.

Still thinking that this won’t happen in scale? What we are seeing day to day suggests otherwise. Fortunately, the terminations may not immediately impact TowerCo revenue, but they will in the future as the underlying leases expire or to the earliest date that they can be terminated. Already, some tower companies like American Tower are starting to tell landowners that they can’t offer terms as good as previously on lease extensions because they have received non-renewal notices from AT&T. (As an aside, we also expect to see more announcements similar to that of Crown Castle’s, where they extended some of their underlying Master Lease Agreements in order to prevent further lease terminations.)


4. Fiber, Fiber, Fiber.

More fiber deployed. More glass ordered. More puffery by some carriers of how they can handle backhaul through agreements with cable companies. More dark fiber than previous years. More fiber redundancy.

The carriers who don’t have fiber will find themselves rushing to deploy it as 5G becomes closer to reality and customer expectations are measured against wireless carriers that have dense fiber. Having 5G-capable wireless transmission equipment won’t mean much if the end user can’t use 5G because of too many users and too little fronthaul/backhaul. Already, Verizon has hinted that 2018 Capex will be skewed more toward fiber than 2017. AT&T announced in March that they anticipate that fiber deployment will accelerate, which was partially due to the 2019 deadline for deployment to 12.5 million homes as a result of an agreement with the FCC during the DirecTV acquisition.Expect the same from other carriers. We had this same projection in our 2017 projections, and we expect this year to be even better.


5. Edge Computing Relies on Fiber – and Small Cells.












Not familiar with edge computing? To quote Wikipedia, edge computing “is a method of optimizing cloud computing systems by performing data processing at the edge of the network, near the source of the data. This reduces the communications bandwidth needed between sensors and the central datacenter by performing analytics and knowledge generation at or near the source of the data.This approach requires leveraging resources that may not be continuously connected to a network such as laptops, smartphones, tablets, and sensors.” In other words, it puts computing resources closer to the end user.

What is required for edge computing? The oversimplified answer is that three things are needed: fiber, power, and a secure location for equipment. Guess who has all three of these in spades: wireless providers, cable companies, fiber entities, and tower companies. Expect to see a flurry of announcements about edge computing in 2018, with intensity ultimately rivaling that of 5G announcements. But, like 5G, these will still be more hype than reality, at least for another year or two.


6. But the Road to Deploying Small Cells Isn’t Settled Yet!












After a series of victories last year in statewide legislation, the carriers and tower companies suffered a setback in the vetoing of similar legislation in California. Industry favorable legislation will be introduced again in CA and perhaps passed if the wireless industry is willing to back down the totality of their demands. However, cities are starting to see what good small cell deployment looks like and what bad small cells deployment looks like.

More information is available about small cells that are more positively received or just not noticed, and those installations that, on their face, are objectionable. Some short-sighted companies (not just one that starts with “M”) have deployed some really bad small cells/macros/mini-macros on utility poles and on new poles in the Right of Way (ROW). (See the City of Santa Rosa vs Verizon – which suggests that just because you have the right to install something ridiculous doesn’t mean that you should.)

Cities are becoming more intelligent and will start to demand attractive small cells. I suspect that we will see more intelligent and organized opposition to statewide legislation while simultaneously seeing the wireless industry increase the pressure through lobbying and contributions to state legislators. We will also see some state legislators cave to pressure from their constituents when the above-mentioned short-sighted companies install ugly small cells in front of people’s homes and businesses. We are already seeing municipalities draft contracts that protect their interests better, even in states with small cell legislation. Don’t get me wrong, I suspect that the industry still comes out ahead at the state and federal level overall, but we will see municipalities be innovative as well in how they maintain their ROWs.


7. All of This Activity Requires More Capable Workers, Which the Industry Simply Doesn’t Have.

The only thing that will hinder the Year of More is not enough qualified tower crews. In our regular discussions with industry vets, the same topic comes up: where can we find tower crews to do the work?

With AT&T’s FirstNet commencing in earnest, T-Mobile’s continued 600MHz build, Sprint’s tri-band overlays and new macros/small cells, and Verizon’s steady macro and small cell deployment, there simply aren’t enough tower crews to go around. Expect to see announcements in earnings calls about why rollouts aren’t happening as planned due to labor shortages.

The irony is that the wireless carriers helped cause this labor shortage by driving the price down so effectively that many tower construction companies found other non-wireless work rather than accept sub-standard terms.


8. 2018 Will be the Year for Landowners to Secure Their Cell Tower Lease Revenue.

2017 was the first year where we started advising our clients that securing their cell tower lease revenue was more important than maximizing it. The wireless service provider toolbox has more tools in it than ever before to relocate/terminate high-dollar sites. That’s not to say that the carriers won’t continue to pay top dollar for unique locations, just that some locations that were previously unique are no longer unique.

That means that smart landowners/building owners will endeavor to understand the risks to their cell site/cell tower lease, especially if the lease rate being paid for the cell site is significantly higher than average. Depending on the location and the availability of other options (small cells, new build-to-suit towers, cell splitting), you may find that it is better to sell the lease or accept some small concessions in order to gain long-term security in your lease.


The year of 2018 offers a wide range of opportunities and uncertainties. Devil is in the details, and it's all about how you play your cards. If you're a wireless sector investor and want to talk through our projections and how they might impact the wireless stocks, we can be engaged for short discussions or more in-depth analysis of the sector.  If you are looking for real-time data about what is actually happening at the collocation lease level or with equipment modifications- we have it in spades.  
If you are a landowner or an existing client of Steel in the Air, please get in touch to schedule a free consultation to discuss your needs and if/how we can help. You can reach me on LinkedIn with a message or contact us here.


What’s Happened So Far in Wireless in 2017?

As we look back over the first half of 2017, there has been much non-activity on the merger front. Many people (myself included) expected greater merger and acquisition activity but other than a few fiber related transactions, nothing material has transpired. Sprint and T-Mobile are still separate companies, and DISH has not merged with or been acquired by anyone. So here are the most important stories or events of the year on a carrier by carrier and tower company by tower company basis so far.


1. AT&T is awarded FirstNet, but benefits still haven’t flowed down to tower companies, original equipment manufacturers, and landowners. There has been much discussion, but there haven’t been any substantive modification or new build activity as a result by AT&T. In short, we are all just waiting for the project to start in earnest. However, when it starts, it will start not with a whimper…


2. In the more of the same category, Verizon is refocusing its efforts on reducing leasing costs. So far, we have seen Verizon choosing not to join the very public and vocal opposition to traditional tower leasing models as AT&T, T-Mobile, and Sprint. However, they have hired Accenture to help them use standard renegotiation efforts like those from Md7 or Blackdot to try to renegotiate leases. What Verizon has done very effectively is push for 2% annual escalation or less in their new leases. The benefit of this change may be tempered though by their site acquisition agent’s willingness to increase the base lease rate to adjust for the reduction in escalation. We also see increased activity by Verizon to build their towers next to existing public tower company towers to avoid collocating on those towers.


3. While this is not that much of a surprise, T-Mobile has been killing it, and their network performance is increasing. Churn is historically low, cost of services is low, subscriber growth is high, and they have started building out 600MHz. Wouldn’t want to be one of the other wireless carriers trying to compete with the T-Mobile marketing juggernaut- T-Mobile gets away with snarky while when their competitors try it, it comes across as desperate (Sprint) or stodgy (AT&T and Verizon). We already see increased activity from T-Mobile modifications and new towers, and they are not even really started yet.


4. Sprint deserves kudos for their turnaround especially on their cost cutting having demonstrated profitability for the first quarter in the last 13 or so. Of course, they may have had more to cut than the other wireless carriers. Sprint also deserves accolades for their stream of quarterly earnings calls where they try to explain how they can continue to underspend their competitors quarter after quarter, year after year, with new technological innovations like HPUE, MagicBox, Spark, and Mini-macros. (Hint- they cannot as evidenced by Sprint’s Capex increase last quarter of over 100% from the previous quarter. Expect to see similar or higher Capex in this quarter from Sprint and perhaps even higher in the last quarter of the year). Equally enjoyable is the timing of all of the leaks related to potential mergers and acquisitions of Sprint that somehow happen to occur just before a bad earnings report or after a bad news story comes out. (Not saying that Sprint leaked the stories, just pointing out the odd but consistent timing). The good news with Sprint is that it is never boring. I do have to commend Sprint on their Double the Price pop-up stunt- snarky worked in this case.


5. All four carriers have gone Unlimited. Following T-Mobile’s lead, the other wireless carriers each have moved to unlimited plans. As a result, overall wireless service revenue has declined. This “race to the bottom” appears to have stabilized. Before you feel too bad for the wireless carriers, remember that each of them generated over 25% EBITDA (profit) margins this past quarter from wireless and Verizon has one of its best quarters ever regarding profit margin. If revenue is declining, how can profit margin be increasing, you might ask? The wireless carriers have been squeezing contractors and vendors to reduce their operating expenditures all while increasing the efficiency of their wireless networks. Despite attractive profit margins, expect further cost cutting and a renewed emphasis on negotiating better leases with landowners and tower companies as shown in the articles on our blog below.


6. Crown Castle has had an active year purchasing fiber, announcing the acquisition of both Wilcon and Lightower Fiber Networks and completing the acquisition of FPL Fibernet. Crown sees a vision of a small cell world where fiber is critical to being able to persuade wireless carriers to place their small cell infrastructure on Crown fiber and poles. We would agree with them but would temper expectations slightly due to the next point below and due to efforts by wireless carriers to deploy their own fiber networks.


7. The wireless carriers collectively have been successful at convincing eleven states to pass bills that limit local review of proposed small cells, prohibit the forced collocation on existing poles, and reduce the lease rate that cities can charge for attachment rights to existing poles or to the public right of way. Some of the most populous states (Florida, Texas) have these bills in effect or about to go into effect. We hear of increased litigation already filed or planned to oppose these statutes, so expect more controversy on this legislation in coming months. Conceivably, these statutes will reduce the number of small cells leased on private property and could in isolated situations allow for termination of existing macrocells. In the eleven states that have passed such legislation, expect to see small cells and new poles popping up across urban areas in the very near future.


Our Takeaways from CommScope Second-Quarter 2017 Earnings Call

Man rolling spool of fiber down sidewalk

The CommScope Second-Quarter earnings call was interesting, more so due to what they couldn't report as opposed to what they did report. Here are our five takeaways from the call:

  • FTTX is being deployed – just not being connected. Fiber to the "X":  To their knowledge, fiber is being passed by residences but isn't being connected yet. We suspect that this is a reference to AT&T actively passing homes and residences to meet their FCC commitment of 12.5M residences passed.   
  • First Net is not here yet. No material orders yet for First Net equipment.   
  • MSOs and MNOs are being more cautious on spending. CommScope expects longer, steadier deployments of infrastructure, as MSOs (cable) and MNOs (wireless) seem to be more cost efficient in their spending.   
  • 2017 won't be Commscope's year. 2018 seems to be a better year.  
  • CommScope sees the addressable small cell market as indoors. With the Airvana acquisition and just the initial rollouts of OneCell, CommScope is focused on indoors.  

CommScope handled itself well during the call, answering questions fairly directly (for an earnings call). They addressed the elephant in the room – AT&T timing – repetitively during the call without actually referring to AT&T. Look for better guidance on a number of fronts this coming quarter.

AT&T Wins FirstNet but TowerCos are the Real Winners

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).


Buildout Timeline:

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
  • April
    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.

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.

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.


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…]

This is Why We Think Crown Castle’s Acquisition of Sunesys is a Smart Move

Crown Castle International (CCI) is currently the #1-ranked cell tower company in the nation, and owns approximately 40,000 cell towers.  CCI receives most of its revenue from subleasing space on Crown cell towers to wireless carriers.   On April 30, 2015, CCI announced that it would acquire Sunesys, a wholly-owned subsidiary of Quanta Services, for $1 billion.   Sunesys owns or has rights to 10,000 miles of fiber in major metropolitan markets, with ~60% located in the top BTAs. [Read more…]

Biggest Issues for Small Cells: Leases and Backhaul

Small Cell Installation on Rest Station
Small Cell Installation on Rest Station

Alcatel-Lucent has created a database of 600,000 potential small cell sites.  They have coordinated with building owners, tower companies, cable companies, outdoor advertising providers, systems integrators, and managed services providers to list locations where the landowner, building owner, or tower owner are interested in leasing space for small cells and where there is fiber optic service in place already.   These locations would include towers, billboards, DAS facilities, rooftops, and other properties or structures that would accommodate small cells.  [Read more…]

Consent Requests for Fiber Optic Cable

Cell tower fiber optic easement
Example of unacceptable repairs by the tower owner after installing fiber optic cable

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…]