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.

What’s Happened So Far in Wireless in 2017?

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

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.  

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

AT&T Shifting Capex into Small Cells

Implications: T, S, ZAYO, CCI, AIRO, COMM, DY, ERIC, NOK  (Disclosure- author holds position in ZAYO)

Looks like T's finally cutting over to small-cell investment as S continues to under invest.

Carrier capex budgets for 2017 and forecasts for 2018 aren't out yet, but our checks indicate that AT&T, which has to-date been a relative holdout on small cells, is finally shifting investment share in this direction.

Back in June, T highlighted that 90% of its next-5-year macrocell infrastructure was already in place, but only 5-10% of the small cell infrastructure for this same period had been built.

Checks now show that T is beginning to reassign real estate department personnel to work on small cells. Furthermore, some subcontractors are reporting increased requests from AT&T to do site walks for small cells.

Notably, we are not yet seeing increased municipal permitting / leasing. Given 9-12 month lead times, this suggests that small cell ramps will occur toward the middle of 2017 with a likely acceleration into 2018.

We anticipate that T will focus its small cell efforts in Wireline markets where the company already owns existing fiber and has access to Right of Ways and Franchise Agreements. T will best be able to control costs in these areas where it is already considered a wireline utility and has existing infrastructure in place. These markets include most of the Southeast and Midwest as well as a few markets in California.

Map showing the states in which AT&T has wireline service
AT&T -Landline Markets before CT was sold (Image from AT&T)

Implications

 We see this shift as an incremental positive for fiber providers and small cell operators like ZAYO, CCI and CSAL; although the effect is likely to be muted to the extent that their metro fiber overlaps with AT&T's. It's a likely positive for OEMs like AIRO and COMM that provide small cell equipment and antennas but don't have exposure to the decline in macro cell equipment.  Implications will likely be mixed for DY, NOK and ERIC. They should benefit from increased small cell work but are already seeing reduced capex allocated to macro cells.

Sprint Follow-up

Related to our past comments on Sprint, (see 10/26 – Sprint (S) still behind small cell 8-ball), we continue to see additional data points supporting our thesis.

Sprint confirmed during their last earnings call that last year’s Capex was lower than their previous guidance to the market by $2B ($2.3B actual vs $5B guidance).  Sprint has been talking up its plans for years with relatively little to show for it, and recognition seems to be building throughout the marketplace, and the investor community, that the Mobilitie relationship has yielded far fewer small cells than were anticipated.  Sprint is giving lip service to 2017 being a better year for permits and capex, but its hopes seem to be predicated on FCC leadership changes and possible rulemaking to remove impediments to small-cell deployment in right of ways.  In fact, Mobilitie seems to have pinned a significant amount of hope on a Petition to the FCC for Relief.

We think Sprint's capex will increase in 2017 off of an ultra-low 2016 number, but the service provider continues to struggle to deploy capex dollars.  We wouldn't be surprised to see major revisions to the strategy as well as Street expectations.

 

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.

AT&T Forecasts 6,700 New Macrocells from 2017-2022

In a presentation at the Cohen and Company’s 44th Annual Technology, Media, and Telecom conference, AT&T’s CTO and President of AT&T Labs Krish Prabhu indicated that AT&T believes that small cells will make up the substantial majority of their future cell tower and cell site development over the next 5 years.   In response to a question on how small cells will fit into their future 5G, fixed wireless, and IOT networks, Prabhu indicates that AT&T has approximately 90% of their macrocell network that they expect to be in place in the next five years already standing.   However, they have only deployed 5-10% of the total count of small cells that they expect to have at 2022. [Read more…]

5G and LTE-U Test Markets for Each Wireless Carrier

We were curious what markets we would start seeing modifications requests come in for new antennas on existing cell towers for 5G and LTE-U installations.   These trials in most cases will require new antennas with new frequency bands.   So we created the map that you can see below- or see the online version of the 5G and LTE-U Test Market map. [Read more…]