Desperate to Get Back at the Tower Companies: The Verizon, AT&T, and Tillman Infrastructure JV

Aerial photo showing tower locations
Tillman Infrastructure Builds Next to American Tower
Yesterday, in a surprise press release by Verizon, Verizon indicated that it had formed a joint venture with AT&T and Tillman Infrastructure to develop "hundreds" of communication towers with "the potential for significantly more new site locations in the future".  Tillman Infrastructure is relatively new to the US- but owns a few thousand towers in Asia.  The press release further states that "These new structures will add to the overall communications infrastructure in the US, and will fulfill the need for new locations where towers do not exist today. They also will serve as opportunities for the carriers to relocate equipment from current towers."  

"WHERE TOWERS DO NOT EXIST TODAY" – REALLY?

Our landowner clients have been contacted by Tillman Infrastructure for placement of new towers on their property. However, despite Tillman's claim to the contrary that the towers will be built where towers do not exist today, virtually all of the proposed Tillman towers we are seeing or hearing of appear to be near existing cell towers.  In other words, Tillman is building new towers right near existing public towerco towers because AT&T appears to be unwilling to continue paying the higher rent that they are paying on an existing tower. The requests that we have seen are primarily in rural areas, presumably where ground rent will be cheaper and where there is no zoning to prevent the proliferation of towers as being proposed by Tillman. (How do we know?  Because we maintain a comprehensive tower location and lease rate database and can easily look up the location of other nearby towers and in many cases identify specific tenants on those towers.) 

VERIZON ENTERS THE FRAY

The first interesting aspect of the press release is not that Tillman is out building collocation replacement towers for AT&T on a build-to-suit basis, but that Verizon issued the press release.  This strikes us as a clear attempt by Verizon to enter a fray between the tower companies and the carriers where historically their public opposition has been muted.  We have already noted Verizon's reluctance to collocate on public tower company towers in the past- this is another option. However, we suspect that there isn't much of a commitment on Verizon's behalf other than that they will consider relocating to new towers from existing towers where Tillman can make them a much better offer than what they are paying already on the existing tower. To us, this press release suggests that neither Verizon nor AT&T has been successful at convincing the public tower companies to adjust their Master Lease Agreements (MLAs) significantly and that both companies are now trying publicly (desperately?) to damage the public tower companies by trying to impact their market valuation.  (SBAC dropped slightly yesterday while AMT and CCI were both relatively unimpacted.)   We suspect that previous negative comments by all the carriers during previous industry conferences and during earnings calls have been ineffective at changing deal terms in the MLAs and investors were not treating the threats seriously because the economics of building a single tenant tower on inferior build-to-suit terms are poor.   However, if both Verizon and AT&T are willing to move from an exisitng tower, suddenly the economics for the proposed tower become more attractive to the build-to-suit partner.  

ONLY A FEW HUNDREDS TOWERS?

The second interesting impact of this note is that it specifically calls out that the agreement is for a few hundred towers.  We struggle to understand why any of the three companies (except Tillman) would want the investment community to know that it is only a few hundred towers that are being considered currently.  While there is a veiled suggestion that it could be more, this press release would have potentially had more impact on investors had it been silent on the number of towers being considered.  A few hundred towers is a drop in the bucket for any of the public tower companies.  

Clearly there are benefits to AT&T and Verizon of relocating. Not only do they save rent, but they also avoid costly modification upgrade fees and possible structural modification Capex on the existing tower to accomodate additional equipment.   With FirstNet on its way, AT&T likely sees this as an alternative to dealing with the tower companies.

If you are a landowner who has been contacted by Tillman for a tower on your property, please contact us and we can help you evaluate their offer and whether you have room to negotiate and if so, by how much.   We will review whether there is an existing tower in the area and if so, whether there are other properties besides your that Tillman can select.  Please note that Tillman has advised our clients that if they get a consultant involved with negotiating the lease, that Tillman will take their tower elsewhere- so don't tell them we are involved.  There may be a time where it makes sense to do so though, at which point, we will advise you to tell them.

If you are an investor who wants to know more about specific areas of focus for Tillman, estimates of how many sites Tillman is pursuing, and which tower companies seem to be targeted more than others, please reach out to set up a paid research call.   We can also intelligently discuss the financial justification for moving and what amount of rent savings justifies relocation.  We can also discuss how the public tower companies will combat these efforts and when they will be effective and when they won't.  Lastly, Tillman isn't the only company focused on collocation relocation build to suit efforts – its just the first one that has gone public with its endeavor.  

 

SITA Research Reveals the Real Big Game in Houston was in Small Cells

Small cell scoreboard.

A new competitive dynamic emerges in the fight for densification dominance

Tickers: ZAYO, CCI

(Disclosure- author holds positions in ZAYO)

The deployment of small cells started in earnest in 2015. Two years later, all of the Big 4 wireless carriers have adopted a small cell strategy to handle the 50+% YOY growth in mobile data usage. Along with acquiring or deploying fiber, the deployment of small cells sits at the heart of a hyperconnected 5G future.

As small cells have grown in prominence, analysts have argued about their impact on traditional tower company business models. Recently, Crown Castle (CCI) indicated small cells account for over 12% of total revenue and small cell deployment will only climb in the future—a trend we highlighted in our note Ten Predictions for 2017. Understanding how companies like CCI and Zayo deploy small cells, at what economics, and how the economics compare to historical returns on capital in the tower business is increasingly important.

Last week, we put out an article on how wireless service providers connect with their subscribers at the Superbowl. In doing research for this article, we looked at towers and small cell infrastructure using our proprietary tower and small cell database to examine deployments in and around NRG Stadium in Houston, TX. The wireless carriers have been actively densifying their networks in Houston to prepare for the onslaught of increased wireless data usage, and our data shows ZAYO and CCI competing for the city’s small cell future. While this note focuses on ZAYO and CCI in Houston, there are other players with a presence in this bellwether market. For the sake of simplicity, we’ve chosen to focus on what we see as the top two competitors going forward.

There are three key takeaways that emerged from our research:

1. At the end of the first quarter of small cell deployment, ZAYO is ahead of CCI in Houston.

Zayo is significantly ahead of Crown Castle in the deployment of small cells in Houston, where CCI’s headquarters is located and where CCI just closed on the acquisition of Fibernet earlier this month). CCI stated on their earnings call on 1/26/2017 that “FiberNet substantially strengthens our footprint in Miami and Houston, both markets where we are seeing significant small cell demand.” But despite CCI’s claims about their efforts in Houston, our checks indicate that Zayo small cell nodes (both proposed and completed) exceed CCI nodes by a factor of approximately 10x, giving ZAYO a significant advantage in the market. We have plotted these deployments in the map below, with ZAYO in green and CCI in yellow, and ZAYO’s advantage is clear. Map showing the proposed and deployed small cells for Crown Castle and Zayo in Houston

Our research is specific to Houston and is not a commentary on the ZAYO vs. CCI competitive dynamic across the entire US. We see accelerated development of small cells in Houston because it is a top three city in terms of population and because of the publicity surrounding the Big Game.  However, from a zoning and permitting perspective, Houston is “infrastructure friendly” relative to other cities.  In other words, Houston is an ideal location for robust small cell deployment, so we will continue to watch developments in the marketplace as a bellwether for other major cities. 

2. The Small Cell Game is fundamentally more competitive than the Macrocell game, and First-Mover-Advantage is critical.

Small cells are more competitive than traditional towerco business models, and so the first-mover advantage is more important. Because small cells are deployed primarily in the right of way, and with fewer zoning restrictions and limited NIMBYism to constrain competitive deployments, the first company to win the land grab has an advantage attracting carriers as customers. In some areas, we are hearing that there are six to seven applicants applying for right of way access rights simultaneously in the same locations.

Already having fiber in the ground is beneficial because it enables the lead infrastructure company to solicit potential wireless service providers first. If a second infrastructure company enters the market and builds out the same right-of-way, then a duopoly is created wherein neither gets all four customers onto nodes along the same fiber routes. The best case duopoly IRR scenario is three carriers on the lead and just one on the follower; however, our research suggests that so far Sprint is focused on deploying its own nodes; so markets tend toward two customers on the lead and one on the follower. In their 4th Q earnings call, CCI indicated that “we are building small cell systems with initial yields of 6% to 7% that increased to low-double digits with the second tenant and higher yields with the third and fourth tenants.” This statement presupposes a local monopoly for the leader, not a lower-yielding duopoly. And let's not talk about what happens when there are more than two fiber providers in the same Right of Way.

Our proprietary data allows us to quantify the monopoly vs duopoly state of Houston and therefore to narrow in on CCI’s return on investment as small cells are added to FPL Fibernet’s assets.  If rumored carrier consolidation between Sprint and T-Mobile occurs, the first-mover advantage grows as fewer carriers mean that the second infrastructure deployed in any given city has a fundamentally lower potential return profile. Though the reverse is also true; entry by a cable company into the wireless space could expand the number of potential customers, enabling higher second-mover returns. Net net, with no guarantee of a local monopoly, the second infrastructure deployed is simply compressing the wireless value chain in the favor of carriers. 

3. Even though CCI is down in the first quarter, they can still turn it around.

We are not suggesting that Fibernet was a bad acquisition, nor that ZAYO has the Houston market in the bag. When Crown announced the Fibernet acquisition, the expectation was that CCI would be able to use the valuable metro-fiber plant to encourage small cell deployment on or near that fiber. CCI has indicated they are seeing strong interest for small cells in Houston but hasn’t yet provided any clarity on what constitutes “strong” and whether what they are seeing is in-line with their expectations.

We believe that both companies have valuable assets in Houston, especially to the extent that their infrastructure does not overlap—a factor which our proprietary datasets allow us to quantify. However, it is still too early to determine the degree to which CCI will succeed with Fibernet’s Houston assets. The small cell game is still too early to call. 

We will continue to closely monitor the situation in Houston and we will be expanding our research to additional top 25 markets in the coming months.

 

About Steel in the Air: We have long focused on a data-driven analysis of tower data and on lease rate data for wireless infrastructure. We were the first nationwide cell tower lease consultant and we are the largest, having assisted over 3,500 clients over the last 13 years. We count small to mid-size tower owners, public entities, not for profits, big box stores, shopping center REITs, federal entities, and individual landowners among our clients. We have unique visibility to what is happening on the ground as it pertains to wireless infrastructure deployment. We track everything- every lease, every tower, every cell site, every cell tower lease buyout offer, and every sale of a tower portfolio that comes across our virtual desk. We provide custom research for investment banks on the public tower companies and the small cell providers and developers. If you are interested in discussing this or any article or topic, we can be retained for in-depth discussion and analysis. Contact us for more details.

Non-Cellular Companies That Lease Cell Towers

Cell Tower Leasing Companies
A tower a client of ours sold for over $2,000,000.

Or How to Sell a Cell Tower for $2,000,000

A tower owner client of ours asked us for help in documenting for their lender that cell towers are used by many companies, not just cellular companies.  To assist, we established the list of non-cellular cell tower leasing companies.  Most people understand that the typical cell tower is constructed and operated with a focus on leasing space on the tower to cellular providers.   However, there are a number of other companies that provide telecommunication services to other companies or direct to consumers that actively lease space on towers. [Read more…]