AT&T’s Brilliant Strategy to Double Dip from Public Funding to Build a Better Wireless Network (Investor Research Note from Steel in the Air)

 

We have been getting a lot of questions from investors related to FirstNet equipment and the potential impact on TowerCos, with most questions pertaining to the timing and revenue from amendment activity from FirstNet antenna modifications. You may recall that in AT&T FirstNet Revisited, we reviewed the impact of AT&T winning the FirstNet RFP and the impact on TowerCos, Equipment OEMs, and FiberCos.  We believe that investors may understand and appreciate AT&T’s one-truck roll concept for modifying existing cell sites, but we don’t believe that they understand how AT&T will “double dip” by using both FirstNet and CAF II funding to reduce Opex and Capex related to legacy wireline assets and to more effectively compete in rural areas with satellite broadband providers and even MSOs.  

FirstNet Update

As of 8/17/2017, 12 (editors note- it is now 15) states and the USVI have opted into FirstNet. Noticeably, many of the larger more populous states have not signed up yet, and AT&T needs additional State-level “wins” before declaring FirstNet a success. For a list of states, please see the chart at the end.  The deadline for Opt-in/Opt-Out decision by states is the middle of December, so we see a key indicator of FirstNet activity being large-State adoption in late Q3 and Q4.  

To date, our checks continue to indicate that there has not been any substantive activity on the deployment front. Our private tower company checks are indicating that they have not entered into lease amendments for equipment modifications, and none of the public tower companies or OEMs are reporting guidance related to FirstNet as of yet.  We did see our first AT&T modification request to a client for an existing macrocell which included FirstNet specific antennas and modifications.  If you would like to know more about the size and capabilities of these antennas and the probable impact on public TowerCo leasing revenue, please reach out to your Detwiler salesperson.  

Connect America Fund II and Fixed Wireless LTE

To encourage the build out of rural broadband, the FCC authorized grants to provide broadband services of at least 10 MB/s down and 1 MB/s up.  In 2015, AT&T accepted a grant of $427M per year over six years to build out broadband services to 1.1M rural subscribers, approximately 70,000 of which are connected currently. AT&T indicated that it expected to use WCS (2.3GHz) spectrum to meet these requirements and that buildout would occur between now and 2020 in 18 total states. To see which states are part of the CAF II funding, please see the chart at the end of this note.   

Fixed wireless broadband for AT&T works by connecting to standard AT&T LTE base stations and antennas. A fixed antenna is professionally installed on the roof or the side of the residence or business being served. AT&T commits to providing 10MB/s to the end user, the bare minimum to meet CAF II funding requirements, although we anticipate that AT&T will adjust the throughput dynamically upwards if there is excess capacity at the subject cell site.  

Service runs $60/month and includes 160GB data bucket with additional 50GB blocks available for $10/month. We anticipate that AT&T carefully chose this amount of data in order to encourage purchase of DirecTV bundles. Fixed wireless plans are separate from mobile wireless plans.   

Implications for AT&T

AT&T has consistently discussed the value of deploying FirstNet along with fallow AWS and WCS spectrum. They refer to this as a “one-truck roll”, meaning that they only have to visit each cell site to be modified once. This reduces amendment costs and time delays.  Given the reliance on WCS spectrum for CAF II rural fixed wireless broadband, it makes a lot of sense for AT&T to focus on those areas where it expects to have to meet both CAF II requirements and FirstNet coverage requirements. Furthermore, to the extent that AT&T continues to effectively lobby state utility commissions to allow it to abandon landline service as fixed wireless takes over, AT&T benefits from reduced operating expenses from costly to maintain copper landlines.   

Implications for TowerCos 

Previously, we indicated that TowerCos would benefit from the award and nothing has changed in that regards other than the delayed timing of guidance from the TowerCos related to FirstNet. As we start to see our first modifications, we see slightly larger antennas than we described in previous notes, which could support the higher end of the range on modification revenue. We anticipate that AT&T will focus on modifying existing sites as opposed to new collocations on public tower company towers so most of the opportunity for the public TowerCos will come from modification amendments. As we addressed in Rip-n-Replace- When Moving Off One Tower to Another Makes Sense (private note, if interested, please contact us), we expect that AT&T will utilize private build-to-suit companies for new site locations instead of collocating on existing public tower company towers, even if it means building a new tower next to an existing tower.   

Implications for Satellite 

One of the more regular questions we receive from clients focused on VSAT and SATS is regarding the impact of rural fixed wireless broadband and the scope of expansion by MNOs and other entities into those areas predominantly served by satellite broadband. Specifically, whether the economics are justified for MNOs to expand into rural areas. While the economics may not be sufficient based solely on providing broadband services, the calculation changes when the FCC or FirstNet starts to fund part of that buildout. At this point, we don’t know the total addressable market of current satellite only subscribers that would potentially churn to AT&T service. Stay tuned though as we are working on a bespoke research project looking specifically at the extent to which fixed terrestrial wireless could supplant the need for satellite broadband services.  

 

STATE BY STATE LIST OF LAND LINE, CAF II, and FIRSTNET ADOPTION AS OF 8/17/2017

 

 

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’s Tricky-Tricky Cell Site Lease Assignment Language

Verizon sign/logo on building

We applaud Verizon for their interest in preventing their leases from being sold to third parties like lease buyout companies.  It is understandable that Verizon (along with other wireless carriers) would prefer not to have an informed third party purchase the rights to a Verizon ground or rooftop lease.   Having to work through a lease aggregator or whomever that lease aggregator sold their tranches of leases is difficult and time-consuming and likely exposes Verizon to increased cost because the aggregator is incentivized to maximize the rent.   To that end, we have heard of litigation between wireless carriers or tower companies and third party buyout companies who unreasonably withhold consent for modifications.  

However, in Verizon's newest template lease, they have gone too far.   For some time, Verizon has had a Right of First Refusal (ROFR) clause in their lease which prevents a landowner from selling the lease without giving Verizon the right to match the offer.  While we don't like the Right of First Refusal clause, we can accept it with some changes that limit the scope of the ROFR.   In their most recent lease template though, Verizon has added language that would make it difficult if not impossible for a landowner to assign the lease or sell the lease to a third party EVEN IF Verizon chooses not to match someone else's offer.  

Without any approval or consent of the other Party, this Agreement may be sold, assigned or transferred by either Party to (i) any entity in which the Party directly or indirectly holds an equity or similar interest; (ii) any entity which directly or indirectly holds an equity or similar interest in the Party; or (iii) any entity directly or indirectly under common control with the Party.  LESSEE may assign this Agreement to any entity which acquires all or substantially all of LESSEE's assets in the market defined by the FCC in which the Property is located by reason of a merger, acquisition or other business reorganization without approval or consent of LESSOR.  As to other parties, this Agreement may not be sold, assigned or transferred without the written consent of the other Party, which such consent will not be unreasonably withheld, delayed or conditioned.  No change of stock ownership, partnership interest or control of LESSEE or transfer upon partnership or corporate dissolution of either Party shall constitute an assignment hereunder.  LESSEE may sublet the Premises in LESSEE’s sole discretion.

In other words, Verizon is saying:  "If you get a poor offer to buy the lease that we want to match, we will. Conversely, if we don't want to match, we will not match and then we will decline to consent to your sale of the lease so you can't sell it anyway."   This is a crappy deal and we advise all landowners to remove the anti-assignment language from the lease.  If Verizon doesn't want you to sell to a third party, great.  They can opt to buy the lease directly; if not, they shouldn't be able to prevent you from selling to someone else.   Landowners who agree to this language will end up devaluing their leases as buyout companies won't make offers on leases that aren't assignable.  

Md7 Sending AT&T Renegotiation Letters- without Disclosing Letter is from Md7

We had heard previously that AT&T wasn't willing to allow lease optimization firms to send out letters on its letterhead without disclosing that the letter did not include actually come from the AT&T.   A client just received a letter though that clearly does not include anything identifying that Md7 (a lease optimization company) is involved.   We assume that Md7 is involved because the address on the letter as shown in the letterhead below

just happens to match that of Md7's offices.

The letter is the same as many other letters that are going out predominantly to private tower owners and municipal tower owners indicating that AT&T may extend or terminate the lease at the end of the current term and that AT&T is implementing a new program to "evaluate terms and conditions of all leases coming up for renewal, explore advance renegotiation options and consider alternative site locations." (emphasis added)   AT&T further requests that the tower owner: 

It appears that Md7 and AT&T have decided to remove any indication that Md7 is involved here altogether (except for the address).  Is that because the renegotiation efforts have been unsuccessful otherwise or is AT&T just looking to ratchet up the heat on tower owners to remove the opportunity for rent increases due to possible FirstNet modifications?  How many times can a company threaten to terminate a lease but not actually terminate it before owners just completely ignore the requests?   AT&T knows and based upon the fact that they keep sending the letters, there must be some tower owners that accept the revised terms with each round of letters.  

Another option for small cell poles- not that pretty- but quick and cheap to deploy.

With small cells, there is an ongoing controversy about the cost of the small cell infrastructure vs. the aesthetic impact of the pole.   There tends to be an inverse relationship between the aesthetic appearance of the pole and the cost- meaning better-looking poles cost more and vice versa.   The issue is that not all small cell installations require a highly aesthetic pole especially those that aren’t in the public view or are in areas where there is no permitting.   In these areas, wireless providers are seeking to build as cheap a small cell pole as possible without consideration of the aesthetics.   

To address those needs, Hemphill (a manufacturer of all types of towers and whom we have to disclose is a long term client of ours on the tower brokerage side) has designed this specific small cell pole they call a “Micro-Site” with this market in mind. Here is how they describe it:  "Micro-Sites are 20', 4" steel tube hinged towers on no dig pre-cast ballast foundations.  Foundations can be placed on a level surface with a skid steer tractor.  Installation is a very quick process.  The tower's hinged base makes antenna maintenance easy and safe." 

Small cell pole
A small cell pole concept from Hemphill

We could see this being used in rural areas, on private property, or in areas where there is no permitting.   We could also envision fleets of these being deployed like COLTs or COWs.  Hemphill will need to come up with a fancy acronym for this.    Here is a photo showing the pole bending over for maintenance purposes.

Photo of small cell with pole and solar
Hemphill's quick deployment small cells with solar panel for power

Here is another photo showing a carrier's test equipment adjacent to the pole.

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.