Not So Fast- California Governor Vetoes Small Cell Bill.

Small cell in San Francisco
Sunday night, California Governor Jerry Brown vetoed a contentious statewide small cell bill (SB649) which is one of many similar bills already passed in eleven other states. The bill would have removed local control over the placement of small cells and would have limited the fees that municipalities could charge for access to municipal pole infrastructure to $250/year.

This veto is fairly significant as the legislation has sailed through most other states without much influential opposition. The wireless industry has been targeting states for such relief from what they deem to be costly and time consuming small cell jurisdictional review and fees. In our opinion, the FCC seems to prefer that states regulate the fee structure but may choose to preempt local siting restrictions and approval process. AT&T has been the primary proponent of these statewide initiatives and has brought to bear a very well-financed and aggressive lobbying campaign at the state level to help push such legislation through.

The bill can still be pushed through with a 2/3rd majority in both assemblies. The bill passed the Senate by a 22 to 10 margin with 8 votes not recorded. The bill passed the Assembly with a 46 to 16 margin with 17 votes abstaining. If the vote occurred today with the same members voting as they did before, they would override the veto. Historically though, the California legislatures have been unwilling to override Governor Brown’s vetoes.

Why is this significant?

• California has more cities with difficult zoning that almost any other state in the US.

• California is near the top in terms of average small cell fee. This is not surprising given #1.

• California represents 12% of the US population. If one assumes a conservative total of 500,000 small cells to be deployed in the US and assumes that deployment will follow population, 60,000 of them will be deployed in California. Rates for small cell leases in California typically are 10 times higher or more than what the bill allowed at $250/year.

• Small cell deployment tends to follow areas of dense population. Of the densest urban areas of over 1,000,000 population, the top three are in California with five total in the top 10.

Before you assume though that this portends poorly for other statewide initiatives, we are cautious to point out that California cities tend to be more influential in statewide politics and that the opposition to the small cell legislation was by far the most organized and substantial as compared to that in other states.

Impact on Carriers (T, S, VZ, TMUS)

Despite industry rhetoric to the contrary, this won’t stop 5G nor will it prevent deployment of advanced technologies in California. None of the wireless carriers will allow California wireless throughput or quality of service to languish while customer’s churn to the best network in their area. However, this will delay deployment of small cells in California vis-à-vis other states that have passed small cell legislation although we don’t expect the delay to be material. There will be a negative impact on Opex for all carriers if the veto is not overridden and another bill is not passed in its place.

Impact on OEMs and E&C Companies (COMM, NOK, ERIC, MTZ, DY)

OEMs and E&C would have benefitted from the looser regulatory environment in CA both in terms of timing and amount of small cell and fiber investment. Ultimately, small cells will be deployed but perhaps in fewer numbers.

Impact on TowerCos (AMT, CCI, SBAC)

There will be a slight improvement on lease-up in California for the public tower companies as wireless carriers may choose to add short-term capacity via new macrocells on towers and existing structures as the Opex for a small cell stays higher relative to the Opex of a macrocell.

Sprint T-Mobile Merger? Who Wins and Who Loses


It looks like the Sprint/T-Mobile merger rumors may be serious this time. Reuters suggests that the parties are close to finalizing a merger. Obviously, we have been down this road before- Sprint and T-Mobile are the Sam and Diane of today’s wireless world. Everyone knows they will eventually try to get together, but their personalities are pretty diametrically opposed. This time though, reports seem to suggest that there is more to today’s round of talks than previous ones and that the parties are closer to a deal than ever before.

We can’t forget that any merger will need to be approved by the FCC and the DOJ. Personally, I suspect that the DOJ will be tougher to get approval as the FCC seems to be positioning itself to approve this type of merger already. For proof of this thesis, look at the 2016 Wireless Competition Report- the first one in a while that came to the conclusion that wireless is competitive in the US and one where the FCC selectively chose widely varying timeframes to prove the point they were trying to make in each section of the review. The DOJ though doesn’t have to agree though, and it is hard to suggest that consumers will remotely be better off by a combined Sprint and T-Mobile merger- especially after seeing how wildly successful T-Mobile has been as the Uncarrier in almost singlehandedly creating new competition in the wireless sector.

FORESEEN CONSEQUENCES

This has obvious negative consequences for OEMs, wireless engineering and construction companies, tower cos, and landowners/site owners.  We know because we have the first-hand experience in dealing with previous mergers. Like AT&T/Cingular, Sprint/Nextel, Verizon/Alltel, Sprint/Clearwire, T-Mobile/MetroPCS, and AT&T/Cricket. All these mergers occurred after we started Steel in the Air.

We helped numerous landowner clients deal with the initial rounds of threats from the combined entity that they would terminate the ground lease if the client didn’t agree to revised terms. We advised private tower owners who were in the process of selling towers on newly revised (and lower) offers they received from prospective buyers after a merger was announced. We provided guidance to private equity on tower portfolio valuations both prior to and after failed and successful mergers. We tracked how many leases were terminated and how many sites were decommissioned. We observed how the wireless carriers reviewed their portfolios and which sites they ended up choosing to terminate. We watched new construction activity from the merged carriers abate for some time while they figured out what sites to keep or not and what additional sites they needed. And we observed what happened when they did start constructing again.

BUT…TODAY’S WIRELESS ENVIRONMENT IS DIFFERENT

All beneficiaries of new wireless construction (OEMs, Towercos, E&C companies) like to suggest that there is increased site development after the merger. They allude to the fact that they increased site counts after previous mergers. However, none of these companies directly address the loss of future business or growth that would have occurred if there had been no merger. Nor do they point out that today’s wireless environment is different and the merger of these two companies will be different if it occurs. How so, you ask?

1. Macrocells are no longer the only means of meeting capacity demands. Furthermore, in most of the previous mergers, there wasn’t the same amount of overlap in macro cells as there is today on Sprint and T-Mobile’s networks. We are currently working on an analysis of the exact amount of overlap between the two networks in areas of the country where we have data with all or most of the Sprint and T-Mobile sites in an area. We will examine same site overlap and adjacent site overlap in this study as we found in previous mergers that some sites as far apart as 1 mile were terminated.


2. Both networks already cover most urban and suburban areas– so macro sites won’t need to be kept for coverage reasons as they might have been in previous mergers.

3. Previous mergers were more difficult to complete than this merger due to different technologies used by each carrier in most of the mergers. Today’s environment is mostly LTE- with the focus of going all LTE. Sprint legacy CDMA subs and T-Mobile legacy GSM will need to be addressed- but much easier today than it was for Sprint CDMA and Nextel iDEN.

4. Sprint hasn’t been doing a lot in the last two years from a CapEx perspective- but T-Mobile has. We anticipated an increase in wireless CapEx in 2018 primarily driven by new Sprint work- but that won’t occur now. E&Cs and OEMs will lose this anticipated upside, making existing carrier contracts more valuable and new ones more competitive, ultimately driving down margin after an initial spike from decommissioning activity.

5. For Towerco’s, the loss of a fourth active NATIONAL carrier has a significantly greater impact overall as compared to the loss of a fifth or sixth active REGIONAL carrier. The margin in operating towers increases with each additional wireless carrier on the tower. Decrease the number of carriers and not only do you decrease the revenue but you decrease the margin.

SO, WHO BENEFITS?

Personally, I struggle to see how consumers benefit and the investment community must agree with me as AT&T and Verizon’s stocks both increased after the new rumors came out. Investors anticipate that both companies will be able to increase their pricing with lesser competition from two smaller competitors trying to grab market share.

Sprint benefits the most. With their primary focus over the last two years being cleaning up their P&L and balance sheet in anticipation of a merger, their network has suffered. As a result, they either had to start spending or merge. T-Mobile will gain subscribers and scale.

Free market proponents will benefit, especially those that think that the market should dictate competition, not regulatory entities.

Will Apple’s New iPhone X and iPhone 8 Work with all your Wireless Carrier’s Frequencies?

So, with great fanfare, the iPhone X and iPhone 8 were announced yesterday. The phone display looks amazing while it remains to be seen whether the new features on the phone are as game changing as Apple presents them to be.


As the features on each phone are widely covered already in virtually every newspaper and blog, we decided to focus in on the wireless tech inside the phone, namely the wireless frequency bands which Apple decided to support in the devices. The technical specifications list the following frequency bands as being supported.


Note the two models (A1865, and A1901)- one of which will accommodate CDMA and the other one which does not. As the note indicates, CDMA is used by Verizon and Sprint, although both companies are converting now or will convert from CDMA (2G/3G) to LTE (4G and soon to be part of 5G) entirely in the near future. Unfortunately, this list is difficult to decipher, so we put together this chart to help illustrate which bands are on the iPhone and notably, which ones are not for each of the Big 4 wireless carriers here in the US. This chart shows what LTE bands each wireless carrier uses in the last 4 columns and which LTE Bands are supported or not in the On New iPhones column. If you aren’t familiar with LTE, see this article that explains it further.


List of carrier bands in use are from this chart at Phone Arena.com– also, LTE Bands came from Wikipedia

So, what does this chart tell us? It tells that most LTE frequency bands used in the US are supported by the iPhone 8 and iPhone X. In other words, your new and shiny iPhone 8 or iPhone X will work on the majority of all LTE bands. The only two bands not supported are AT&T’s FirstNet 700MHz spectrum and T-Mobile’s (and other smaller carrier’s) 600MHz spectrum that they recently won in the Broadcast Incentive Auction. In other words, public safety users won’t be able to use the phone to connect to FirstNet. As it pertains to T-Mobile, while you will be able to connect to their 700MHz and PCS/AWS frequencies, you won’t be able to have as fast speeds in rural areas due to the lack of inclusion of 600MHz frequencies. Without making this article too technical, the more frequency bands available to your phone, the more simultaneous sets of data that can be sent back and forth. This is known as carrier aggregation, and it is what allows carriers to provide faster and faster throughput speeds to your device.

We suspect that Apple chose not to include these frequencies in the phones primarily because neither set of frequencies has been deployed on any scale, so users aren’t inclined to complain if they aren’t available. We anticipate that Apple will include Band 14 FirstNet frequencies in the next iteration of the phone, but the absence is notable especially given the number of public safety users that are potential subscribers on the AT&T/FirstNet network.

Top 10 Things the Wireless Industry Doesn’t Tell You about Small Cells

By Ken Schmidt, Omar Masry, and Rick Edwards

Are you a homeowner who's recently received a notice indicating that a new small cell antenna is going to be erected on or near your property? Or a lawmaker who has received one of the industry's new opinion papers about small cell antenna regulations? Or an FCC Commissioner who is considering small cell rule-making? Before you start citing from or buying into the pretty pictures and bright-eyed economic projections in the opinion papers below, you should know that these industry-commissioned studies do not tell the whole story:

    1. CTIA – Enabling the Wireless Networks of Tomorrow

    2. CTIA – How 5G Can Help Municipalities Become Vibrant Smart Cities

    2. WIA – Small Cells on Pole Facilities

What's wrong with them, you ask? Plenty. Here are the top 10 things the wireless industry doesn't tell you about small cell antennas:

#1: Despite the wireless industry's calls for collocation using shared infrastructure, in practice, carriers apply for individual small cells instead of shared infrastructure like DAS.

Small cells are standalone individual cells that can be installed separately. They're like miniature cell towers but without the tower. Like towers, a small cell requires both an antenna and equipment. Unlike towers though, the wireless industry likes to place the transmission equipment on the utility or other support structures. In effect, this means that the installation of small cells must either increase the visual blight of the pole or increase the diameter of the pole if the equipment is put inside.

Distributed Antenna Systems, in contrast, typically require less substantial infrastructure attached to each pole and can be more easily made to resemble street lights and signs (like the examples in #2). Common equipment can be placed within a centralized hub conveniently located underground or outside of view. Whereas small cells are single user installations, carriers can share DAS nodes. Multiple wireless service providers can share a DAS node, and multiple frequency bands (Carriers) can be facilitated on each node. This reduces the total number of sites needed and makes each site more attractive because most of the transmission equipment sits in a shared offsite DAS hub.

Given the benefits of DAS, you might wonder why the industry would prefer to build small cells instead of a constructing a DAS? There are 5 reasons – some of which are legitimately problematic for wireless carriers and some of which just require increased investment or time but aren't beneficial to the bottom line.

Reason 1: Each wireless provider has different objectives and may not need the same locations.

Reason 2: Each wireless provider has different deployment times and requiring DAS may force one carrier to wait if others are not ready.

Reason 3: DAS systems cost more because they're designed for the requirements of the most advanced user. So if carrier A needs feature X, even if carrier B doesn't, then the system will include feature X.

Reason 4: DAS systems require a concentrated, coordinated effort and someone to lead it.

Reason 5: Small cells are easier to deploy. DAS applications are reviewed in total – meaning that an objection to any part of the DAS application holds up the entire request.

The result: Providers submit applications for small cells even in downtown, urban core areas where DAS makes more sense. In some cases, providers apply for permits on adjacent poles where it's obvious that a DAS system would reduce visual clutter. Or even submit for new poles adjacent to other light/utility poles of similar height to avoid paying the rate schedules published by municipalities.

The map below shows the actual number of small cell application locations within the City of Houston by four different wireless entities. In a dense urban area like this – why not propose DAS nodes that all entities can share and decrease the number and impact of these facilities on the community?

The wireless industry needs to actually collocate rather than just talk about collocation. Furthermore, the FCC and cities themselves should mandate collocation when multi-carrier small cells are technologically feasible.

#2. The wireless industry associations want standardized federal, state, and local rules but don't even standardize themselves.

The wireless industry demands standardization of state and local government laws related to the erection of small cells. Their opinion papers suggest that without standardization, wireless applicants will be hit with a patchwork of wireless siting regulations. So they're putting forth a multi-pronged approach:

    1. Distributing Industry-Friendly Sample Ordinances

    2. Lobbying Heavily at State Level (see ALEC)

    3. Submitting a Petition for Relief to the FCC (see Mobilitie)

    4. Lobbying Heavily at the Federal Level

The wireless industry alleges — without providing any quantitative analysis — that most municipalities are applying costly, antiquated macrocell regulations to small cell applications. While many smaller municipalities do not have small cell policies in place at this time, that is because the wireless carriers aren't building many small cells in smaller towns and villages. But many larger municipalities (and those where 90% of small cell deployment are occurring) have begun to implement small cell regulations or will do shortly.

At the same time, the wireless industry's applicants can't even submit consistent small cell applications to their municipalities. It's blatantly hypocritical. For example, some cities report receiving location maps showing new small cells in the middle of ponds or on footbridges or in areas that are under another city or county's jurisdiction. Some applicants are not even submitting site-specific applications – instead submitting the same drawing over and over. If the wireless industry believes that standardizing the permitting process is necessary, they should be willing to standardize their own small cell antenna configurations and requests as well. All applications should provide for and include the same information so that the municipality does not have to ask multiple times for the applicant to complete the basic information. Every application should include a structural analysis wet-stamped by a state licensed engineer demonstrating that the new pole or existing pole is structurally sufficient for the current loading. Plans should include where power is coming from and how power will be metered, or better yet be subject to an unmetered wireless rate or utilize wireless smart metering

The WIA and CTIA should encourage standardized applications and requirements among their member constituents. But we believe their approach should not just consist of lobbying states, the FCC, and local governments. These organizations should work towards drafting common application requirements and best practices for their constituent members. They should then discipline or reprimand those members that do not follow such practices. Most importantly, wireless industry associations should focus on assisting member entities in developing and using shared infrastructure.

 

#3. What the industry installs looks vastly different than what they say is possible.

You may remember this article that went viral where Buzzfeed compared the fast food company photos of their food vs. what the consumer actually received.

Similarly, the wireless industry's glossy pictures show an idealized implementation that is far different from reality. Their reports showcase integrated poles with small cells contained within or Distributed Antenna Systems (DAS) nodes with an off-site equipment hub. These appear slim and attractive (relatively speaking). However, when these same wireless carriers or small cell companies submit the actual drawings and applications, the installations do not look anything like those pretty glossy pictures. Or, after they install the attractive poles, they bloat the view with additional equipment, creating a visual blight.

For example, below are photos promoted in the WIA Small Cell document. (Note these pictures are DAS nodes- not Small Cells – see #4 below)

Compare those to photos of actual small cell installations. They are nothing like the photos shown in wireless industry propaganda.

      

The reason for this is twofold: First, the industry likes to show pretty photos of DAS nodes because they are actual possibilities, even though the wireless carriers and tower companies are increasingly abandoning them. Wireless carriers are instead building small cells which usually have more equipment on the pole than DAS's central hub. Second, in many cases, the applicant omit to mention a part of the equipment that's to be mounted near or on the pole either because they're rushed or because they don't want to answer objections. The municipality is left holding the bag – inspecting each constructed small cell in order to confirm whether the applicant exceeded what they were authorized to install. Don't believe this actually happens? Look below to see what the industry submitted as a photo simulation versus what was eventually installed.

  

 

#4.  Once a site is erected, they can go back and increase its size ad nauseam provided that the changes do not exceed federal standards.

Once a small cell or DAS node is attached to a pole, the wireless carriers have the right under Section 6409(a) of the Middle-Class Tax Relief and Job Creation Act to expand their equipment. In other words, once a site is built, municipalities have little power to restrict further expansions of the pole's small cell antenna equipment if the applicants stay within the limits of 6409(a). Moreover, wireless companies can request to expand an unlimited number of times. So even if a small cell starts off looking small and svelte – it could be expanded in size immediately without the municipality being able to stop the expansion. And this can happen over and over again.

A GIF showing steps in a tower being expanded
How a small cell can be expanded into a mini cell tower.

Below is a photo showing what a small cell looks like after multiple expansions.

 

#5: The industry claims that wireless development will not occur without major policy changes. But in fact, wireless development has occurred and will continue to occur even without those changes.

Historically, the industry has made the same argument over and over again: that they will not be able to deploy infrastructure if wireless siting laws aren't loosened. They suggest that most any regulation that slows down wireless deployment limits technological advancement. The industry puts out derisive blacklists of cities and counties that one or more wireless company believes make it difficult or expensive to deploy wireless infrastructure. They label these cities as technologically backward and lobby decision makers to convince them that their city will not grow with such technological restrictions. For example, see this quote from Gary Jabara of Mobilitie about municipalities or counties who aren't receptive to Mobilitie's proposals to erect 120' mini-macro small cells in their city or county.

Nonetheless, even in expensive markets with incriminating reviews like the one above, small cell deployment still occurs. Wireless companies still build towers or even find private locations for rooftop cell sites. A quick examination of Verizon or AT&T's coverage map will show very few holes in urban or suburban areas.

Furthermore, in most states (35 or more) wireless companies have access to utility poles which are subject to pole attachment rates prescribed by the federal government. These pole access rates are fairly reasonable; they are typically less than $500/year per pole. However, working with the utilities can be time-consuming, which is why the wireless industry is pushing for easier access to municipal poles. Isn't it odd that wireless carriers claim to be utilities but aren't actually using utility poles?

Even in markets like Baltimore, MD where the small cell rates are somewhat high compared to other US cities, Baltimore is still receiving small cell applications at a pace comparable to communities with closer-to-average rental rates. In other words, while the industry claims that higher rates impede technological advancement for a city, the reality is that wireless carriers still build small cell sites and many of them. While small cell deployment would likely happen quicker with revisions to regulation and cheaper access to municipal structures, make no doubt about it, the development would occur either way.

 

#6: The industry labels any request for cost reimbursement or rents by a municipality as a "money grab" all while the industry itself is generating $60 billion in profit per quarter.

We participated in a meeting between one city and members of one of the national wireless trade groups. The trade group decried the city's rent requests for access to taxpayer-funded infrastructure as a "money grab." Meanwhile, each of the wireless carriers has generated 20% profit margins or better in recent years – with at least one generating margins over 40%. The Big 4 wireless carriers alone are generating nearly $60 billion a year or more in EBITDA margin while the wireless industry combined generated $85 billion.

To argue that municipalities are money grabbing by charging a reasonable price for access to publicly-funded infrastructure by for-profit entities is disingenuous at best.

If one assumes the industry is constructing 20,000 new small cell antennas a year, even if each pole fee was $3,000/year, the wireless industry AS A WHOLE would only lose out on $60 million or less than .1% of their annual profit. Yes, you read that right,- less than 1/10th of 1 percent of their annual profit.
To put in perspective, Verizon and AT&T alone spent half that amount on lobbying alone in 2016. (see Open Secrets for AT&T and for Verizon)

These arguments seem even more duplicitous when you see the headlines put out by the wireless industry that extol the tremendous revenue opportunities from 5G and other advancements. For example:

The Qualcomm "survey," says the 5G future will support up to 22 Million Jobs and $12 trillion dollars of goods and services.

Cisco says 50 billion things will connect to the internet. Read this article on why the hype on the number of connected devices is overblown.

CTIA citing an Accenture analysis suggests that 5G stands to create 3 million jobs in the US while yielding investment of $275 billion and encouraging GDP growth of $500 billion.

Simply put, the industry has every right to attempt to negotiate with municipalities for cheaper access to taxpayer funded and maintained municipal poles. But if they insist on making it about money, we believe those same taxpayers and municipalities should be prepared to point out the hypocrisy in their claims.

 

#7: The wireless industry wants to pay less for their small cell permit applications yet still receive faster review timelines from understaffed cities and counties.

Historically, we estimate that most cities rarely received more than 50 applications for new wireless sites per year from 2000-2015. Even in the boom years of 2008-2010, cities may have received just 150 applications for new wireless facilities. Contrast that to today: we have confirmed that the City of Houston received over 700 applications in 2016 alone for small cell infrastructure.

On the one hand, the wireless industry politely (or not so politely) asks for a quick turnaround on small cell antenna applications (complaining to the FCC and state representatives when they don't get it) but then on the other begrudges municipalities for charging fees to review the applications. For those of you not entrenched in the minutia of municipal red tape, these requests for the use of infrastructure or placement of equipment are rarely identical from one application to the next. Some companies are very good at drafting thorough and complete applications, but most are not. No matter what size the project is, the items to review in each application are the same. Each site still needs to be reviewed for structural, electrical, and physical safety.

Without standardization by the industry, these applications can't be reviewed easily. This, in turn, increases the cost to the municipality for reviewing such applications. The industry wants the best of all worlds – to submit hundreds of applications simultaneously, have those applications reviewed quickly regardless of their quality, and pay as little as possible for the city to review them.

Some members of the wireless industry have suggested that cities do not need to review the applications thoroughly as the wireless entities already do so internally. For proof of how ineffectively self-regulation works in the wireless industry, look no further than the 2007 Malibu Canyon fire which was caused by utility poles that were physically overloaded with telecommunication company antennas and equipment. Apart from safety concerns, the proliferation of poorly designed small cells can also degrade historic districts and draw noise complaints from neighbors when a carrier with loud cooling fans is mounted on a pole a few feet from a bedroom window.

 

#8: The wireless industry extols the wide-ranging benefits of the Internet of Things (IOT), smart cities, and self-driving cars, but fails to mention that many of these benefits can be obtained using current LTE-based technologies.

First, let's be clear that there are absolutely many wide-ranging benefits from 5G and small cell densification. Truly mobile IOT won't happen without wireless industry investment. No other private or public entity can or will develop sufficient wireless infrastructure in the US to enable pervasive low latency communications. Without wireless industry investment, remote control of sensitive machinery or vehicles simply won't occur. Self-driving autonomous cars will be possible but without the gains in safety and efficiency that would occur from a truly smart network of connected cars.

However, you can get the benefits of low bandwidth, non-essential IOT or smart city sensors and functions without small cells at all (or at least with fewer of them). The CTIA (Accenture) study above cites the benefits using smart meters and smart lighting. These include traffic management systems, public transportation location-based tracking, real-time public parking information, and gun-shot recognition. These are all benefits to be gained from IOT. However, neither Accenture nor the wireless industry makes any attempt to quantify or distinguish which smart city and IOT initiatives require wireless industry involvement and which don't.

Furthermore, these studies don't even remotely acknowledge which IOT benefits can happen on today's LTE networks versus those that need more robust densification of sites to occur. The wireless industry leads you to believe that you need the innovations they want to sell you to get any of these advances of the future. That is inaccurate.

 

#9: While the wireless industry claims densification of small cells is needed to enable smart city and IOT functions, they don't tell you that mobile video is the primary use of small cells both now and in the future.

Cisco, in its 2017 Global Mobile Data Traffic Forecast Update, indicated that video currently makes up 60% of mobile data traffic. Moreover, they forecast that three-quarters of the world's mobile data traffic will be video by 2021. Ericsson's own study states that mobile video traffic represents 55% of LTE/5G data traffic now, but is expected to grow to 95% (yes- 95%) of mobile data traffic by 2021.

Cisco states further that 50 billion IOT devices will be connected to the internet within 5 years. However, only 1.5 billion of these devices will have cellular connectivity. We have seen forecasts from other sources that IOT mobile data use will grow to 8% of total network mobile data use by 2021. In other words, IOT functionality only drives less than 10% of the bandwidth need for small cell densification.

This raises the question: how many small cells are necessary to enable Smart City and IOT initiatives versus how many are really needed to densify networks for the next generation of fixed wireless to home and mobile video?  For further information on why mobile and fixed wireless video is so important to AT&T and Verizon, see this article on the wireless industries efforts to compete with the cable companies.

To be clear, we aren't suggesting that mobile video or fixed wireless are inconsequential. Without the revenue generated from mobile and fixed wireless video, the wireless industry would not have the incentive to invest as much Capex in their wireless networks to enable some of the truly amazing IOT and smart city use cases – especially those that require low latency or secure and ultra-reliable communication.

We are, though, suggesting that any indication by the wireless industry that 5G and small cell densification is primarily about IOT and smart city functions is a half-truth at best. The reality is that small cells densification is more about paid consumer and commercial video than it is about IOT or smart cities.

 

#10.  The industry is willing to push select information about small cells but not willing to respond to substantive questions from municipalities.

Before a recent meeting began between one city and 20+ representatives of wireless and tower companies, each side exchanged questions. The wireless industry provided 30-40 questions to the city, and the city provided a list of 15-20 questions to the industry. The city's questions were fairly straightforward:

What do the wireless providers see in terms of other cities that require rental payments?

How many small cells does the industry contemplate installing in the city over the next 5 years?

What type of infrastructure/antennas does the wireless industry expect to need on the poles?

The city responded to all the industry's questions with substantive detail. In return, only ONE company responded to the city's questions. And most of those responses were cop-outs – claims that they couldn't answer due to competitive concerns. CTIA/WIA provided a glossy presentation that discussed all of the overarching benefits of IOT and 5G, but failed, for the most part, to provide any substantive and direct answers to the questions posed by the city itself.

At the end of the day, the wireless industry wanted to poke holes in the city's effort, but was unwilling to answer important questions that would have helped the city review and revise its own policy.

How can any city reasonably be expected to plan and prepare adequately for small cell infrastructure when the wireless industry continues to provide limited substantive information?

So Where Does this Leave Us?

Municipalities need to realize that wireless investment in small cells should be encouraged and reasonably managed and that doing so requires investment in staff and resources. They can no longer put their heads in the sand because it isn't a question of if, but of when and of how many small cells are coming. Reactionary policies and moratoriums almost always rushed and neither encourage thoughtful technological expansion nor protect the constituents.

Wireless carriers, tower companies, and industry associations need to provide better substantive guidance to their member constituents including model applications and construction/design criteria. They should truly encourage shared infrastructure use especially in dense areas where multiple providers want access to existing poles. These groups and companies should also be more forthright in their marketing materials and in answering legitimate questions and concerns by public entities.

We, as advisors to landowners and municipalities, will continue to help educate the public about the small cell leases and policies. Most landowners and municipalities are underrepresented and ill-informed when it comes to responding to the wireless industry's requests and/or demands. We hope that by highlighting the top 10 things the industry doesn't tell you about small cells, that you can better decide how to accomplish your goals. That small cell deployment will not be allowed to grow unchecked and unabated by an uninformed populace.

 

Comcast Wireless 2.0: This time it could actually work.

Image of cell phone with video playing
Mobile Video by Comcast
Implications for TowerCos and Construction Companies

Tickers: CMCSA, COMM, MTZ, DY, CCI, AMT, SBAC

Tags: Ken Schmidt, Wireless infrastructure

Background:

Analysts have been speculating about the winners of the FCC spectrum auction and the implications of those wins for the better part of a year. With the auction coming to a close and an announcement expected in the coming weeks, we took a look at the implications of Comcast’s (Nasdaq: CMCSA) expected entry into the wireless market.

On 4/6/2017, Comcast announced their Xfinity Wireless plans.  Much has been written on the details of those plans so we will not rehash them here other than to say that Comcast doesn't appear to be building its own network and that the plans are primarily intended to prevent Comcast customers from churning to AT&T or Verizon.   

Timing:

The FCC’s broadcast incentive auction was finalized on March 30, 2017. The FCC is expected to publicly announce the winning bidders sometime in the latter half of April. 

Expectations:

We expect that Comcast bid on and will win spectrum in the auction. CMCSA’s Q3 2016 cash flow statement, which was released publicly on Oct. 26, 2016, includes a $1.8B line item listed as a “deposit”; presumably an auction deposit by CMCSA to the FCC. Some analysts have suggested that CMCSA plans to acquire 30MHz of spectrum on a nationwide basis.  We believe that the more likely scenario is that CMCSA will win at least 10MHz of 600MHz spectrum in areas where CMCSA already has fiber/coax infrastructure, as shown on the map below.   Alternatively, if CMCSA does win nationwide licenses, we believe they will focus any buildout of equipment in just their current markets they serve now, at least until a compelling business case is developed otherwise.   

Map showing the areas of the US where Comcast provides Cable and Broadband Services
Comcast Availability Map
Source: www.cabletv.com/xfinity/availability-map

CMCSA’s Likely Strategy:

If we are correct and CMCSA wins spectrum in existing service areas, Comcast will use this spectrum to provide both mobile and fixed wireless services primarily to augment their cable services and reduce churn from wireless service providers’ forays into OTT video.  We see their plans as an extension of the recently announced Xfinity Wireless strategy.

Buildout Details

We anticipate that CMCSA will utilize a combination of WIFI and unlicensed spectrum to provide indoor and outdoor coverage and capacity, while using 600 MHz licensed spectrum for wide area coverage.   This will enable CMCSA to reduce payments to Verizon under their MVNO relationship and allow them to provide mobile video to customers without incurring per GB charges from Verizon which are reputed to be in the range of $7/GB. 

Competitive Dynamics

CMCSA’s product won’t attempt to compete with either Verizon or AT&T in terms of breadth of coverage. However, its product will be attractive to existing CMCSA cable subscribers who aren’t highly mobile and who don't require 20GB or more of data.  CMCSA's Xfinity Wireless is set at a competitive price point, particularly to existing customers via a “quad” package.

Marginal Positives for Infrastructure Players

Companies like COMM, MTZ, and DY should benefit marginally from increased need for CMCSA fiber and coax to the premise to accommodate additional bandwidth (inside and outside the premise). However, near-term expectations should be tempered as broadcasters have up to 39 months to relinquish the spectrum.

Implications for the TowerCos

The impact on TowerCos should be muted for two reasons.  First, broadcasters have up to 39 months to “repack” and return the spectrum to the winning bidders, so any tower lease revenue from CMCSA won’t materialize immediately. Secondly, we suspect CMCSA will attempt to control OPEX going forward by limiting the number of collocations on public tower company towers and by emphasizing small cells especially those that are attached on-strand to Comcast's existing fiber and coaxial cable runs in public right of ways.   Ironically, if the Wireless Industry Association is successful in pushing the FCC to override local zoning oversight and fee structures for small cells, they could be enabling competitors to their own constituent wireless carrier and TowerCo members. Nevertheless, there could be a small bump to TowerCos once the FCC announces the auction winners and the winners include entities that don’t currently lease tower space. The possibility of another potential customer could increase investor interest in TowerCos.

Risks and Unknowns:

The risks to this note include:

  1. CMCSA could be outbid / fail to acquire spectrum
  2. CMCSA could be acquired by or merge with an entity that owns spectrum already, and therefore would not need to acquire spectrum or build it out
  3. CMCSA’s near-term WiFi-First/MVNO-second wireless strategy could prove to be unsuccessful and/or discontinued, causing CMCSA to divest this spectrum prior to it being made available from the broadcasters.

Important Disclosures

This report is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, instrument or investment product. Our research for this report is based on current information obtained from public sources that we consider reliable, but we do not represent that the research or the report is accurate or complete, and it should not be relied on as such. Opinions and estimates expressed herein constitute judgments as of the date appearing on the report and are subject to change without notice.  Any reproduction or other distribution of this material in whole or in part without the prior written consent of Steel in the Air, Inc. is prohibited.  Any projections, forecasts, and estimates contained in this report are necessarily speculative in nature and are based upon certain assumptions. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results.  Steel in the Air, Inc. accepts no responsibility for any loss or damage suffered by any person or entity as a result of any such person or entity's reliance on the information presented. 

Verizon Appears to be Rivada Partner in FirstNet Bid

Capture

In examining the summary of the FirstNet/Rivada litigation as prepared by RCR Wireless, there may be confirmation that Verizon was the silent "carrier" partner of Rivada.  Specifically, in the recently made public documents, the court indicated "the first set of deficiencies related to ‘Rivada’s lack of financial stability, capacity, and required funding'” — including the riskiness of Rivada Mercury’s proposal to monetize the excess Band 14 spectrum through a wholesale marketplace, which required robust Band 4 device support in order to be adopted by non-FirstNet customers".   Band 4 consists of the AWS-1 frequencies acquired from SpectrumCo (cable company consortium) by Verizon in 2011.   In other words, Rivada intended to monetize the FirstNet spectrum by adding it to Band 4 (AWS-1) capable phones.   

While many people have suspected that Verizon was working with Rivada, we haven't seen any other evidence of it.  Of course, it is possible that another wireless carrier with AWS-1 (T-Mobile) could have been the partner, but we strongly doubt their participation given the substantial cost of building out a nationwide network to meet the coverage objectives of FirstNet.   Alternatively, perhaps Rivada was hoping for Verizon's participation- but based upon rumors we had heard previously, the discussions were farther along than that.  

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.

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

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. 

 

Steel in the Air – Wireless Predictions for 2017

2017 Start button

As we have done in years past, we look ahead to 2017 and share our forecasts for the coming year. All things considered, 2016 was a mediocre year for the industry. 2017 looks to be all about repositioning – meaning that while we don’t expect growth in CapEx, we do anticipate industry development in some areas and contraction in others. With that said, here goes:

1.  AT&T gets serious about small cells. Again.

For those of you who don’t recall, AT&T previously had an Antenna Solutions Group focused on both Distributed Antenna Systems (DAS) and small cell deployments. While most of the emphasis was on DAS, there were a decent number of small cell deployments, although nowhere near the 40,000 small cells AT&T led the industry to believe they were going to deploy. We believe that AT&T will end up increasing its capital expenditures on small cells this year at the expense of building new macrocells. However, that doesn’t mean that AT&T will stop investing in macrocells altogether – see the next point.

2.  AT&T wins the FirstNet RFP and starts to deploy both FirstNet and AWS-3 spectrum via site modifications to existing macrocells.

Per our previous notes, we (and others) anticipate that AT&T wins the FirstNet contract. As we have pointed out before, if AT&T has done 700MHz modifications at a site previously, the old antennas may be able to accommodate the additional FirstNet 700MHz spectrum, but that doesn’t mean they can accommodate AWS-3 frequencies. The AWS-3 spectrum is in the 1700MHz and 2100MHz ranges, and we are just starting to see modification requests from AT&T that cover the full range of the spectrum in both 700MHz and 1700-2100MHz bands. We anticipate that this continues. Note that this doesn’t mean that AT&T will pay more rent for all modifications.

3.  Verizon gets slightly more serious about small cells. Again.

In 2016, it seemed that Verizon had slowed down its deployment of small cells as compared to 2015. While we don’t have access to the number of small cells they deployed via Crown Castle, we do know that the municipalities that have retained us experienced a downtick in the number of new small cell applications. We suspect that Verizon has revised its strategy on small cells after discovering what does and didn’t work through trial and error in 2016. Previously extensive efforts by Verizon to enter master lease agreements with municipalities will pay dividends in 2017 as Verizon will experience quicker speed to market than other wireless carriers who haven’t negotiated such agreements in bulk.

4.  T-Mobile will focus on adding capacity to their network no matter how costly.

In 2016 T-Mobile negotiated and presumably signed a significantly increased number of leases to add equipment to existing DAS systems across the US. Furthermore, we have heard (but haven’t yet confirmed) that T-Mobile is entering collocation agreements on rural towers to avoid roaming agreements with rural carriers. Our experiences with rural tower-owning clients seem to confirm this – but we don’t know whether their leases are representative of what is happening with all tower companies. We surmise that T-Mobile doesn’t want to spend cash building its DAS networks or new towers, which is why they may be willing to agree to higher than average lease rates. We also assume that T-Mobile needs desperately to add capacity and to do it quickly – which supports why they would be willing to jump on current DAS systems and collocate on existing towers.

5. Sprint will continue to spend historically low levels of CapEx and somehow still convince market analysts that its spectrum holdings give it the flexibility to significantly limit spending on its network.

When Sprint announces its 3Q2016 fiscal year results in January, they will again surprise with lower than expected CapEx. Reduced lowered CapEx from Sprint could very well continue into the middle of 2017 based upon the limited activity we are seeing from Sprint now. Tower companies have already rightfully stopped projecting any income from Sprint in 2017 with the expectation that if it comes, we can all just be grateful. Despite these harbingers, market analysts will still continue to rate Sprint a Buy primarily due to the potential for a merger with T-Mobile which seems to be increasing slightly in probability every day. If Sprint seriously believes this merger will take place, they would be wise not to invest CapEx.

6. More fiber companies will be acquired and the values paid per route mile (especially metro fiber) will continue to increase.

We know that this isn’t that much of a reach regarding a prediction, but it is an important one nonetheless. 2016 saw several fiber acquisitions: Zayo/Electric Lightwave, Windstream/Earthlink, CenturyLink/Level3, and Crown Castle/Fibernet to name a few. Notably, both Zayo and Crown Castle are actively positioning themselves to be “the” small cell metro fiber providers. These companies know that fiber is the backbone of any 5G/small cell/fixed wireless network and that controlling costs of the fiber is paramount to the wireless carrier’s ability to keep pricing of wireless plans low.

7.   Speaking of fiber, landowners will receive more requests than ever before for new fiber routed across their property.

We are just starting to see requests from Verizon and other carriers to bring in “redundant” fiber from different cross-property routes from existing wireless lease utility easements. Our research shows that with the advent of small cells, and C-RAN particularly, companies like Verizon need redundancy and are willing to pay for a second utility easement across the property so that an aloof contractor cannot cut both fiber cables at a singular location. Unfortunately for large incumbent fiber providers, this fiber won’t be lit fiber.

8. 2017 will be the year of cell site hardening.

With FirstNet likely being awarded to AT&T, and the FCC’s recent order requiring wireless carriers to disclose the percentage of their sites that are out of commission during emergencies, we anticipate that carriers will begin improving power backup systems at individual sites. Cell site hardening will translate to more on-site generators, which means lease expansions and increased rent to landowners and tower companies. Sprint and T-Mobile will need to play catch up to AT&T and Verizon, both of whom have previously begun site hardening agendas.

9.  Wireless carriers are doing more than just talking about what they consider to be a lopsided relationship with the tower companies, and clear and demonstrable proof of this will emerge in 2017.

To date, tower companies have largely ignored inquiries and very public comments from the carriers about “expensive and unsustainable” collocation rents and modification requests. Despite some slight downward pressure on tower company stocks and analysts’ questions at industry events, the tower companies haven’t yet felt any real pressure from this carrier positioning. However, we believe strongly that the wireless carriers aren’t sitting idly by but are instead actively seeking to relocate some of their more expensive sites. Whether these efforts are selective and focused primarily on “scaring” the tower companies, or they represent actual and significant savings on operating expenditures going forward, we don’t know. Either way, we believe that there will be clear proof of the extent of these efforts in 2017 and that this will negatively impact the tower companies.

10. The carriers will not deploy any real 5G in 2017.

Despite claims to the contrary by Verizon and others about their 5G-like systems, they aren’t mobile, and they aren’t 5G. Mobile 5G specifications aren’t expected until 2020, and even pre-specification systems won’t meet the eventual 5G standards. 5G preparation will continue in earnest in 2017, to include robust fiber deployment and small cell site acquisition. None of this will prevent the carriers from saying they are deploying 5G. (Stay tuned on this topic- we anticipate doing a workshop for financial and tower company clients in NYC and Boston in February to address the common questions and concerns we have been hearing from analysts and reporters regarding 5G).

It is unlikely that these projections will be 100% correct – and if I had to pick one projection where we are more likely to be wrong (and where we hope we are wrong) – it #5, that Sprint won’t be deploying CapEx this year in any sizeable amount. The tower companies have fared well over the past year, considering the lack of any real, sizeable revenue growth from one of the “Big Four” wireless carriers.

If you disagree with any of our projections, we’d love to hear why. If you want further information about how we arrived at the predictions or wish to discuss the likely winners and losers, we welcome the opportunity to set up a private (paid) consultation to discuss our beliefs further. We have no confidentiality agreements in place with the companies listed above – and to the extent that we do have confidential information about them, we won’t disclose it.