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.

GCI is Building Out an Alaskan “Haul” Road with Cell Towers

Kind of fascinating – there are rural areas and then there are rural areas. If you work or live in those rural areas without any cell tower coverage, it can be annoying. But consider going hundreds of miles without any towers. Until recently, this is what truckers driving the Dalton Highway in Alaska have done for some time. However, GCI is building a cell tower in the middle of the route to help the 250 truckers per day that travel the route (and the random tourists). One long gravel road – no cell service – and lots of mountains. See some photos here of how long and repetitive this trip appears to be.   

Even more interesting is that GCI plans on building out more towers along this corridor. I assume they must believe that the roaming fees will be substantial for truckers using the corridor or that truckers who run the route will buy GCI service.  

Dalton Highway Map
A Google map showing the Dalton Highway – all 400 miles of it

Questions for SBAC Earnings Call This Afternoon

With SBAC poised to announce earnings this afternoon, and with AMT and CCI’s previous positive reporting for macrocell growth, we thought we would address the questions we have for SBAC, recognizing that some of these won’t be answered. 

  1. Have you received a substantive number of modification applications related to 600MHz from T-Mobile?
  2. What is the breakdown of new collocation applications – rural/suburban/urban?
  3. What impact are you seeing for new macrocell colocation applications in states that have approved statewide small cell legislation favorable to the wireless industry? 
  4. Is there any activity in the six FirstNet states that have opted in?  Will MLAs be amended before all states opt-in? 
  5. Is there churn on Big Four colocation leases older than five years?
  6. Are you seeing tower climbing crew shortages or backlog?
  7. Will FirstNet leases be negotiated proforma or individually? If individually, when will guidance relative to FirstNet be provided?
  8. Are you receiving increased pressure from the wireless service providers on escalators in lease amendment negotiations?
  9. With fewer tower assets being built and sold by smaller tower developers and large carrier portfolios already sold, how does SBA intend to increase or even maintain growth relative to its peers without a significant small cell or an international play?      

And just for fun:

  1. With AT&T and Verizon announcing very low churn and showing strong or record EBITDA margins this past quarter, is it hard not to laugh at them when they ask for rent concessions or escalator concessions for colocations?   

Et Tu, Brute? Verizon Appears to Have Hired Accenture to Renegotiate Cell Tower Leases Using Same Tired Threats of Relocation

Photo of Cell Tower
A cell tower with a substantial amount of equipment at the third RAD center
A municipal client, who has multiple public safety towers upon which Verizon is colocated, received a call and letter from a Verizon representative asking for reduced lease rate terms and escalation. The letter is on Verizon letterhead and does not make clear the relationship between Accenture and Verizon but refers to the Accenture employee or contractor as a "Verizon Representative." However, in the email from this representative, the signature block is for Accenture.  We surmise this means that Verizon is using Accenture instead of Black Dot or Md7 to renegotiate its leases. This is disappointing because Verizon has historically chosen not to stoop to these types of misleading negotiation tactics. And lest you think it is because of the ever more competitive wireless industry – Verizon still generates a very healthy 45.7% wireless profit margin.  

The letter states:  

As discussed during your recent call with ________, a Verizon representative, we are currently reviewing our real estate portfolio to assess market rates and trends. To remain competitive and provide the best value to our customers, we propose to modify our site lease terms, based on our knowledge of the market and our analysis of each site as follows:

 

 It further goes on to state (and this is the funny part):

Additionally, for all sites identified in this document, payment of rent shall include the following equipment rights:

  • 30,000 square inches wind load surface area at the RAD center (if available);
  • 10’ tip to tip RAD, if available. If not, space available up to 10’;
  • All you can build fixed fee amendments for the contract duration within the allotted tip to tip vertical and 30,000 square inches wind load surface area;
  • 16 cables;
  • No additional rent or fees for any additions or modifications to equipment throughout the contract term as long as the equipment rights identified above are not exceeded.

If we can't reach an agreement, we will remove you from our relocation list as we continue to evaluate our real estate portfolio.

As always, there is the implicit threat of termination – although carefully couched in language that doesn't constitute an anticipatory breach. So in essence, Verizon wants 30,000 square inches of equipment space in their 10' RAD center along with 16 cables. So no matter how much capacity this reduces on the tower or how much a tower owner would have to pay to structurally upgrade the tower to accommodate it, Verizon expects not to pay any additional fees. Generally, this is ludicrous and no tower owner should ever agree to this loading, regardless of whether they end up negotiating more favorable rent terms, in order to ensure the longevity of the lease. We aren't suggesting that Verizon may not eventually relocate some cell sites, just that it won't be that common and will be reserved for situations where they can save enough money by moving to justify the substantial expense of doing so.   

In this case, our municipal tower owner will be telling Verizon that they can keep their name on the relocation list. There is no chance on any of them that Verizon will end up moving. If you receive one of these Verizon/Accenture letters or calls threatening to renegotiate your lease or relocate the tower, please contact us.  

Want a Kinder Less Aggressive Tower Company Leasing Specialist? Just Fill Out a Survey!

Image of surveyOne of our client's called us yesterday to let us know that they had been beleaguered by a tower company rep who was perhaps too anxious and aggressive regarding a lease extension for a lease that wasn't set to expire for another 8 years.   This particular client has a Mona Lisa tower- a phrase American Tower used previously to refer to 4-6 carrier towers.   In other words, it wasn't going anywhere.   For some reason, the tower company rep felt that being aggressive and making all kinds of threats to move the tower and to cease discussions would make the landowner agree to the proposed terms.   

The landowner received a survey from the tower company- a generic one that asked about how the landowner felt about the tower company and whether lease payments were coming on time.   The landowner filled out the survey and added comments at the bottom that he didn't appreciate the rep's aggressive nature and angry demeanor.   Within a few days, the agent called him and apologized and the negotiations took a decidedly more friendly turn.    Perhaps that was because our client's tower is a very valuable tower.   Perhaps not.  Either way, if you are having a problem with your tower company rep and their negotiating tactics, fill out a survey or let the company know directly.   While the rep will and should continue to make threats about moving the tower, they should be able to do it in a less aggressive and cordial manner.  Both parties should remember that these negotiations are not personal, they are just business.  Treat the discussion as a business discussion, remove the personal aspect, and if you need help determining the business terms, consider contacting us.  

T-Mobile Sued for Alleged Unauthorized Attachment to High Tension Electric Tower

Utility pole cell tower

A few times a year, we are contacted by someone that believes that a wireless company attached equipment to an electric tower (not a small wood utility pole) on their property but that isn't getting compensation for it.  We just came across this news story where T-Mobile has a cell site attached to a utility pole and the landowners are not receiving any rent for the access to their property.  They are suing T-Mobile alleging that T-Mobile does not have the legal right to use the pole.  In the mid-2000's, there were a number of lawsuits, some class action, on this same issue.   In some, the landowners won and in others, the wireless carrier won.  

The key to whether a landowner should be compensated is based upon the language in the underlying utility easement for the electric towers.  The more specific the language is regarding what the easement is for, the better it is for the landowner.    If the easement language includes the right to provide telecommunication services or communication services, in many cases, that means that the utility company is within its rights to grant access to the wireless company without paying rent or getting landowner consent.   If the easement is specifically for the transmission of power, the wireless carrier may need your approval to be on the property which may mean additional rent.  

If you believe that the wireless carrier who has equipment on one of the electric towers on your property is improperly doing so, go to the clerk of court for your county or city and ask to see a copy of the utility easement across your property.   They are normally very helpful.   Get a copy and reach out to us.  While we cannot provide a legal interpretation of the easement language, we can advise whether you should spend the time and money to visit a local attorney.   If the attorney believes you should be compensated, we can help determine the appropriate amount for the lease or consent.   

Research In Progress- Sprint vs. T-Mobile Site Overlap

We are currently working on a bespoke research project for a client where we examine the overlap between Sprint and T-Mobile cell sites.  The merger talks seem to have stalled while Softbank talks to Comcast, Charter, Warren Buffett, and anyone who will listen about merging or investing.   Nonetheless, there is still investor interest in understanding the true overlap of Sprint and T-Mobile cell sites including those that are near each other but not on the same tower.   The public tower companies (AMT, CCI, SBAC) have incorrectly tried to portray their exposure to churn by providing the number of towers they have where there is direct same site overlap.  However, in previous mergers, we have seen very clearly that the merged carrier terminates cell sites that can be as much as 1 mile away from another cell site.    If you have any interest in this research, please contact us.

Map with T-Mobile and Sprint cell sites.
Overlap of Sprint and T-Mobile Cell Sites.

Scandinavian Vacation Slideshow (Of Cell Sites and Towers)

My wife and I visited Denmark, Sweden, and Norway while attending a friend's wedding in Denmark.   While there, I took a good amount of photos of cell sites in the three countries as we walked or biked in each of the countries.  While my wife is a professional photographer and carried her DSLR with her, I took all of these with an iPhone much to her dismay.  To her credit though, she pointed out rooftop sites and towers that I didn't see even though I know it bored her to death. If you watch to the end, I included some observations on wireless infrastructure in Scandinavia.   Wireless was cheap, plenty of MVNOs, and data speeds were generally above 25MB/s up and down.   

5 Themes from WIA Show 2017

Graphic of sign showing two directions for tower companies and wireless carriers
Tower companies this way- wireless carriers this way.
The Wireless Infrastructure Show is the pre-eminent tower show in the US. The WIA who puts on the show consists of both tower companies and wireless carriers although it has mostly been run by the tower companies. The Show is a great show to get a chance to talk to and hear from people in the field building and operating towers and small cells. Here are the themes that we found most intriguing at the show.

1. Wireless Carriers and Tower Companies Have Increasingly Different Objectives

The dichotomy between what we heard at the show public events and what we heard directly from tower companies during the meeting is greater than we can remember. Whether related to how small cells fit in, the focus of municipal legislation, or how small and mid-size tower companies are now fulfilling the role that public tower companies did previously for wireless carriers, there is a growing divide between what were previously cohesive goals.

2. Tower Companies and Wireless Carriers Don't See Eye to Eye on Small Cell Legislation

While the WIA is supposedly an organization that works for both carriers and tower companies, the dissention between the two is most apparent in the interest both groups have in small cell infrastructure. The tower companies are quick (too quick in my opinion) to proclaim that no macro tower has ever been replaced by small cells all while intentionally failing to acknowledge the displaced Capex budgets for small cells and the declining collocation lease-up for new macrocells. The carriers secretly (or not so secretly) are pushing for small cell legislation that doesn't afford the same protections to public tower companies (or DAS companies) as it does to wireless carriers. As a result, the tower companies now have lobbyists and possibly PACs of their own to push for their own objectives but nowhere near as many lobbyists as AT&T and Verizon have retained.

3. There Are Signs of Tower Crew Shortage Already.

We asked this question over and over and received mixed responses. Some smaller tower companies (presumably those with long term relationships with vendors) indicated that they weren't having any issues. However, we heard from more than one contact that there were notable shortages especially on larger jobs. Considering that nominal repacking from the broadcast incentive auction has commenced and that AT&T hasn't yet released the flood gates of FirstNet activity, we will be watching this trend closely to determine how it impacts revenue expectations by the public tower companies and deployment activity by the wireless carriers. After closely examining the location of tower company towers in each of the 10 phases of repacking for a hedge fund client which tend to be backloaded over the next 3-year period, we suspect that the crew shortage will get worse.

4. The Impact (if not the number of towers actually relocated) of "Rip-n-replace" is Greater Than Expected.

Unsurprisingly, this really wasn't discussed at the public level at all- but 8 out of 10 of our private conversations dealt with the possibility that private tower companies are building new towers near existing towers to accommodate one or more wireless carriers relocating from the existing tower to reduce their rent. While we aren't seeing evidence of a substantive number of actual relocations as of yet, we have received an increasing number of inquiries from landowners who have been approached by one of the eight or so private tower companies who are reputed to be actively engaged in relocation efforts.

More importantly, for the first time, we heard specific and actionable efforts by the public tower companies to counter the possible threat, which tends to suggest that they are more concerned about the threat than they publicly acknowledge.

5. The Tower Industry is Optimistic About Modification Activity, but Pessimistic Regarding New Lease-Up Activity.

At least as it pertains to our checks, the tower industry seems outright gleeful about the increase in modification activity expected in the coming years. Between FirstNet, the Incentive Auction, and TMUS activity, towers should see nice revenue growth from modification activity in the next 2-3 years.

Left unsaid (or in some cases directly said) was the low expectations of collocation lease-up activity in the coming future. While FirstNet may result in some limited number of new collocations, it won't be material. Some of our tower company clients indicated that they have been seeing low lease-up while others are seeing more positive lease-up. There does appear to be a correlation between higher lease-up and to the urban/suburban/rural location of the towers. If you are looking for details on which tower companies have the most urban/suburban/rural towers and which tower companies have the fewest competing structures per tower amongst the tower companies, we recently completed an in-depth statistical analysis on this for a hedge fund client. Contact us for more details.

 

 

 

 

Sprint’s not-so-mini Mini-Macro Problem

Photo of Mobilitie Pole
Sprint-Mobilitie Mini-Macro- This One Was Permitted
Sprint’s partner, Mobilitie, allegedly building mini-macros without adequate regulatory approvals

Tickers: S, AMT, CCI, SBAC

Tags: Ken Schmidt, Wireless infrastructure

Background:

Sprint has dramatically underspent competitors over the past few years, arguing that its superior spectrum position, coupled with its densification efforts, allowed it to serve wireless customers at a fifth of the cost of VZ, ATT, and TMUS.

In our previous note “Sprint Behind the Small Cell 8-Ball (10.26.16)”, we surveyed the top 25 cities and found that Sprint was talking a lot about, but not actually deploying, mini-macros at scale. Subsequently, in “Sprint Shows Signs of Life on Small Cells (04.10.17)”, we noted that increased hiring activity by Sprint’s small cells partner Mobilitie indicated near- to intermediate-term construction activity and that we would watch construction efforts to gauge follow-through.  

Recent Checks: Who Cares About Permits

On May 2, 2017, Event-Driven, a wireless industry news site, published a report claiming that Sprint approved the construction of non-permitted sites. The report includes what appears to be an internal memo from Sprint’s Vice President of Network Development to area development managers regarding a trial enabling Mobilitie to “commence construction on new wireless sites without full regulatory compliance…”  See the Memo here.  While the memo appears authentic, we have not received independent confirmation.

Assuming the memo and its content are real, this memo jeopardizes the timing of Sprint’s mini-macro build-out and densification efforts. If Mobilitie is not following zoning and permitting regulations or is not submitting to the FCC for NEPA, SHPO, and Tribal Consultation as may be required for some new structures, this could increase the timeline for construction of new mini-macros by six or more months.

In the memo, Sprint appears to recognize this. Sprint cites that it was building 33 new mini-macros per week, but that during the trial, new builds dropped to six per week. The memo clarifies that, in the future, Sprint will require that Mobilitie follows all regulatory requirements, and concludes that the “reputational risk” to Sprint outweighs the benefits of proceeding with the trial.

Implications:

We see an increased risk to Sprint’s ability to deploy critical wireless infrastructure, and we reiterate the historically low levels of Capex Sprint has spent over the past few years as a risk to its long-term competitive position. Municipalities in which non-permitted construction occurred will scrutinize Sprint’s (and maybe the industry’s) entire infrastructure portfolio, potentially resulting in take-down orders, fines, and possibly litigation. Sprint may find that the “site count” for this permit-less trial is neutral, or even negative after reviews are conducted by local, state, and federal authorities.

Failure by Sprint and/or Mobilitie to get enough sites “on-air” could cascade in unexpected ways. For instance, Sprint may be forced to revise its network densification strategy to a more tower-centric or traditional-small-cell-centric strategy, benefiting the public TowerCos. Sprint may also be forced to rely upon leased fiber or dark fiber, which could change Opex or Capex respectively.

There are M&A implications as well. Now that the FCC quiet period has come to a close, there is a slight increase in reputational risk that could potentially drive an acquirer, or a target, toward a rival.  However, Sprint’s underspend on the Capex side makes their cash flow look more inviting potentially encouraging suitors. 

Zooming out, this memo, authentic or not, could hamstring industrywide efforts to reduce regulations related to small cell siting.  Perceptions that Mobilitie and Sprint (allegedly) deliberately circumvented municipal regulations imperils petitions to the FCC for relief from such regulations, and the industry’s desired characterization as a “utility” could take longer to achieve, slowing broader CapEx deployments.  

This note was originally published on 5/2/17 to our research clients.  If you are interested in getting more timely access to our research or would like to have a discussion on this note, please contact us.