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.

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…]

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…]

Zayo Group and Md7 Proposes Rent Reductions to $0/mo.

In a bold effort, MD7 on behalf of Zayo Group sent a letter to a client of ours asking the client to reduce the rent for the fiber access lease on their rooftop to $0/mo.   Their argument (a weak one) is that they are more akin to a utility and should be charged like one.   Since you don’t charge the power company to come on your property, why would you charge Zayo? [Read more…]

Cox Communications to Enter the Wireless Market

In one of the first signs of good news that I have seen recently surrounding our market (other than self serving statements from public tower company executives at the PCIA conference), Cox Communications recently announced that it will build its own Cox Communications cellular network. Cox Communications spent $550 million to purchase spectrum in Atlanta, New Orleans, San Diego, Omaha, and Las Vegas along with a good part of Kansas and southern New Mexico. [Read more…]

Sprint’s Sublease of Sites- Part 2- Lightower

Recently, a few of our clients have been contacted by agents of Lightower. Lightower was previously known as National Grid Wireless. These agents are requesting access to upgrade Sprint’s “telecommunications capabilities from traditional “copper” based services, to those of ‘fiber-optic’ service.”

[Read more…]