Our Predictions for the Wireless (and Wired) Industries in 2018

Every year, we put together our prognostications for the coming year. This year, we are obviously a little late – primarily because the beginning of the year has been very active for SITA. In the final days of 2017, I drafted a “State of SITA” email to our staff, predicting that 2018 would be the Year of More. And that’s just what we are seeing – more of everything. More proposed new leases – both from carriers and tower companies looking to build new towers. More amendment activity on existing sites as all four carriers are actively pursuing applications for site mods. More lease extension offers and more lease buyout offers with more rent or more money, respectively. More of our clients are seeing substantial offers to acquire their leasehold interests at a premium. So, what does that mean for 2018?

 


1. 5G Becomes Closer to Reality and Farther from Carrier Fiction.

 

 

 

 

 

 

 

 

 

 

 


Anybody else annoyed with 5G hype? Seems like you can’t look at the trade magazines or TV ads or newspapers without seeing an article or ads with one carrier proclaiming why their 5G vision is better than the others. Hint: 5G has the same potential for each carrier. Their visions are different because the carriers don’t have the same spectrum or fiber. With 5G being so encompassing in terms of wired and wireless technologies, it necessarily will be deployed differently for each carrier.

Guess what, each cable company, fiber provider, and wireless internet service provider will have their own distinctive brand of 5G. But the good news is that instead of the vague marketing hype, we are already starting to get more specific but still preliminary information about the 2018 and 2019 strategies early in 2018.

This trend will continue when we start to see actual deployments. As previously stated, we are seeing more applications for site modifications on behalf of our clients. Some of these actually have pre-5G equipment specified, and, as the year goes on, we will see actual 5G equipment being deployed. While it may be pre-standard, it is critical to remember that 5G is an evolution, not a revolution. (Bring on the comments.)

 

2. Whatever the G, It Still Means More Macrocell Activity.

 

 

 

 

 

 

 

 

 

 

 


Every year around this time, we are asked how this year stacks up against the previous year in terms of carrier activity, especially as it pertains to tower companies. Most years, we tend to be optimistic, but this is probably the year we are most optimistic about.For the first time in years, we are seeing actual, repeated, and specific activity by Sprint. Vendors are actually hiring to staff Sprint projects, applications are coming in, and projects that were on hold for years are coming back up.

Landowners are being contacted by Lendlease on behalf of Sprint and by Sprint directly. Mobilitie is actively pursuing small cell applications (the normal way this time). This is on top of AT&T FirstNet activity (2H 2018), T-Mobile rural expansion, and Verizon’s continued steady-eddy development. It’s a good year to be a tower company other than projections #3 and #7 below.

 

3. And Carriers Are More Willing Than Ever to Consider Alternatives to Existing Towers.

 

 

 

 

 

 

 

 

 

 

 

 

Unfortunately, we will start to an increase in cell tower lease terminations (i.e. churn) in the not so distant future, just as much of the Clearwire, Cricket, MetroPCS, Nextel, US Cellular lease terminations is coming to a close.

Why? Because carriers are less willing to accept high-dollar sites, especially when they have build-to-suit tower companies that are willing to make questionable investment decisions to build new towers next to existing towers. Furthermore, structural capacity issues of existing towers will strain the ability of wireless carriers to make site modifications without substantive structural modifications required to the tower. Rather than put more money into OPT (other people’s towers), the carriers will see the opportunity to build another tower adjacent to the existing tower, thereby limiting their future Opex and pushing Capex to an asset they own.

Still thinking that this won’t happen in scale? What we are seeing day to day suggests otherwise. Fortunately, the terminations may not immediately impact TowerCo revenue, but they will in the future as the underlying leases expire or to the earliest date that they can be terminated. Already, some tower companies like American Tower are starting to tell landowners that they can’t offer terms as good as previously on lease extensions because they have received non-renewal notices from AT&T. (As an aside, we also expect to see more announcements similar to that of Crown Castle’s, where they extended some of their underlying Master Lease Agreements in order to prevent further lease terminations.)

 

4. Fiber, Fiber, Fiber.

More fiber deployed. More glass ordered. More puffery by some carriers of how they can handle backhaul through agreements with cable companies. More dark fiber than previous years. More fiber redundancy.

The carriers who don’t have fiber will find themselves rushing to deploy it as 5G becomes closer to reality and customer expectations are measured against wireless carriers that have dense fiber. Having 5G-capable wireless transmission equipment won’t mean much if the end user can’t use 5G because of too many users and too little fronthaul/backhaul. Already, Verizon has hinted that 2018 Capex will be skewed more toward fiber than 2017. AT&T announced in March that they anticipate that fiber deployment will accelerate, which was partially due to the 2019 deadline for deployment to 12.5 million homes as a result of an agreement with the FCC during the DirecTV acquisition.Expect the same from other carriers. We had this same projection in our 2017 projections, and we expect this year to be even better.

 

5. Edge Computing Relies on Fiber – and Small Cells.

 

 

 

 

 

 

 

 

 

 

 


Not familiar with edge computing? To quote Wikipedia, edge computing “is a method of optimizing cloud computing systems by performing data processing at the edge of the network, near the source of the data. This reduces the communications bandwidth needed between sensors and the central datacenter by performing analytics and knowledge generation at or near the source of the data.This approach requires leveraging resources that may not be continuously connected to a network such as laptops, smartphones, tablets, and sensors.” In other words, it puts computing resources closer to the end user.

What is required for edge computing? The oversimplified answer is that three things are needed: fiber, power, and a secure location for equipment. Guess who has all three of these in spades: wireless providers, cable companies, fiber entities, and tower companies. Expect to see a flurry of announcements about edge computing in 2018, with intensity ultimately rivaling that of 5G announcements. But, like 5G, these will still be more hype than reality, at least for another year or two.

 

6. But the Road to Deploying Small Cells Isn’t Settled Yet!

 

 

 

 

 

 

 

 

 

 

 


After a series of victories last year in statewide legislation, the carriers and tower companies suffered a setback in the vetoing of similar legislation in California. Industry favorable legislation will be introduced again in CA and perhaps passed if the wireless industry is willing to back down the totality of their demands. However, cities are starting to see what good small cell deployment looks like and what bad small cells deployment looks like.

More information is available about small cells that are more positively received or just not noticed, and those installations that, on their face, are objectionable. Some short-sighted companies (not just one that starts with “M”) have deployed some really bad small cells/macros/mini-macros on utility poles and on new poles in the Right of Way (ROW). (See the City of Santa Rosa vs Verizon – which suggests that just because you have the right to install something ridiculous doesn’t mean that you should.)

Cities are becoming more intelligent and will start to demand attractive small cells. I suspect that we will see more intelligent and organized opposition to statewide legislation while simultaneously seeing the wireless industry increase the pressure through lobbying and contributions to state legislators. We will also see some state legislators cave to pressure from their constituents when the above-mentioned short-sighted companies install ugly small cells in front of people’s homes and businesses. We are already seeing municipalities draft contracts that protect their interests better, even in states with small cell legislation. Don’t get me wrong, I suspect that the industry still comes out ahead at the state and federal level overall, but we will see municipalities be innovative as well in how they maintain their ROWs.

 

7. All of This Activity Requires More Capable Workers, Which the Industry Simply Doesn’t Have.

The only thing that will hinder the Year of More is not enough qualified tower crews. In our regular discussions with industry vets, the same topic comes up: where can we find tower crews to do the work?

With AT&T’s FirstNet commencing in earnest, T-Mobile’s continued 600MHz build, Sprint’s tri-band overlays and new macros/small cells, and Verizon’s steady macro and small cell deployment, there simply aren’t enough tower crews to go around. Expect to see announcements in earnings calls about why rollouts aren’t happening as planned due to labor shortages.

The irony is that the wireless carriers helped cause this labor shortage by driving the price down so effectively that many tower construction companies found other non-wireless work rather than accept sub-standard terms.

 

8. 2018 Will be the Year for Landowners to Secure Their Cell Tower Lease Revenue.

2017 was the first year where we started advising our clients that securing their cell tower lease revenue was more important than maximizing it. The wireless service provider toolbox has more tools in it than ever before to relocate/terminate high-dollar sites. That’s not to say that the carriers won’t continue to pay top dollar for unique locations, just that some locations that were previously unique are no longer unique.

That means that smart landowners/building owners will endeavor to understand the risks to their cell site/cell tower lease, especially if the lease rate being paid for the cell site is significantly higher than average. Depending on the location and the availability of other options (small cells, new build-to-suit towers, cell splitting), you may find that it is better to sell the lease or accept some small concessions in order to gain long-term security in your lease.

 

The year of 2018 offers a wide range of opportunities and uncertainties. Devil is in the details, and it's all about how you play your cards. If you're a wireless sector investor and want to talk through our projections and how they might impact the wireless stocks, we can be engaged for short discussions or more in-depth analysis of the sector.  If you are looking for real-time data about what is actually happening at the collocation lease level or with equipment modifications- we have it in spades.  
If you are a landowner or an existing client of Steel in the Air, please get in touch to schedule a free consultation to discuss your needs and if/how we can help. You can reach me on LinkedIn with a message or contact us here.

 

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.

 

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.

Verizon’s Unlimited Plan- Short Term Pain vs Long Term Gain

Don't misread Verizon's about-face on unlimited plans solely as a sign of network confidence.

Tickers: VZ, T, S, TMUS, AMT, CCI, SBAC, COMM, DY, ZAYO

 

Contrary to their previous explicit direction otherwise, Verizon announced on February 12th, 2017 that they would be offering an unlimited voice and data plan at rates slightly higher than comparable offerings from T-Mobile (TMUS) and Sprint (S). Not coincidentally, in its earnings call on Feb 14th, 2017, TMUS indicated that they were porting Verizon subscribers to TMUS at a 2.8:1 ratio to subscribers ported from TMUS to V. This plan is clearly slated to reduce the churn of postpaid customers from VZ to S and TMUS and we believe that it is a very compelling service offering.

 

Analysts were quick to choose sides: the first posited that this was a sign of VZ's confidence in their network upgrades and capacity, while the second group believes that the network will show signs of strain under the added capacity. We believe that both groups are partially correct and that infrastructure related entities are the ones that stand to gain the most.

 

Back in last January, we applauded VZ for their densification efforts in our note Verizon (VZ) positioning for a range of 5G futures. The premise was simple- Verizon's efforts to add fiber and small cells to their network give them a marked advantage over other wireless service providers in the race for 5G. That premise hasn't changed and further research since that note continues to suggest that VZ still has a 1-2-year first-mover advantage from a US wireless infrastructure perspective.

 

Street light small cell
Small Cell In Boston, MA
Nonetheless, it is our opinion that VZ's densification efforts, while industry setting, are not sufficiently complete to provide seamless and reliable service across all urban areas, especially in the near term. Verizon's densification is based on a three-prong approach: carrier aggregation, dark fiber, and rapid deployment of small cells. On the first prong, VZ has actively deployed 2 and 3 carrier aggregation across most of the nation. On the last two prongs, while they have been leading the market in both efforts, there still are areas where their efforts have been slowed due to factors outside their controls. Based on our on-the-ground level visibility, VZ has a hefty lead in dark fiber and small cells actively deployed or in development.

 

In our previous note, we suggested that the next 12 to 18 months will be tough for Verizon as the impact from their investments will take time to materialize. For urban markets where VZ has encountered delays due to local zoning or permitting for deployment of small cells, there will be a reduction in reliability and data speeds. These issues will be more pronounced in markets where Verizon is relying upon two carrier aggregation.

 

Fortunately for VZ, these issues are surmountable and addressable, but it will take some time to rectify them. Expect to see an acceleration of densification in specific troublesome markets. Verizon will need to rely more on outside fiber and small cell providers like CCI and ZAYO. TowerCos (AMT, CCI, SBAC) should also experience continued and possibly accelerated macrocell modification activity and possibly new macrocell deployment from VZ and TMUS in their efforts to meet the pending needs of video downloads (remember that video accounted for 60% of mobile data use in 2016 and VZ and TMUS now include zero-rated HD video in their unlimited plans). Lastly, we would not be surprised to see T extend their unlimited plans beyond DirecTV subscribers, thereby further increasing densification.  (Editor's note- subsuquent to this being written, T did extend its unlimited plans beyond DirecTV subscribers.)

 

Risks to this note: The perception of VZ network superiority declines at a faster rate than expected, causing subscribers to question whether they should spend the additional money on VZ's unlimited plans before VZ's network investments reverse those issues. VZ could reverse their strategy of using outside fiber and vendors in order to control their fate by increasing CapEx towards the development of owned dark fiber assets, thereby reducing ZAYO and CCI opportunities.

 

(Author's note: This research note was published first on 2/20/17. If you are interested in gaining access to our research on a timelier basis or have a discussion on this note or other wireless industry topics, please contact us.)

 

 

Verizon Backup Fiber Requests: How Landowners Should Respond.

Verizon's proposed fiber route on client's property.
Verizon’s proposed fiber route on client’s property.

We have been starting to see requests being made to our landowner clients where Verizon is seeking to get consent to add utilities.  Initially, the pitch is that Verizon needs additional fiber for advanced technologies.   When asked why they need a new utility easement across the property and why they can’t use the existing utility easement, Verizon indicates that they need backup fiber.  In short, they don’t want the backup fiber routed along the existing utility easement because it could be cut at the same time as the primary fiber.

The issue this creates for a landowner is that there are now additional easements run across the property that could inhibit future development of the property.   If every wireless carrier at a site does this- it would be easy to see where there would be a patchwork of fiber easements across the entire property.

Our guidance to landowners facing these type of requests is as follows.

  1. Don’t ever just sign the simple consent letter.
  2. Ask for full construction drawings showing the route of the fiber and any handholds or fiber boxes being added to the property.
  3. If you don’t mind the location, great.  If you do, ask Verizon to route it along a more favorable location on the property.
  4. Check your lease agreement to confirm whether you have any obligation to grant them another fiber/utility easement.
  5. If not, ask for compensation for the easement.  If you need help figuring out the appropriate amount, contact us.
  6. Ask whether you will be required to sign an easement with another utility company and if so, ask to see the actual document.
  7. Have that easement document reviewed by your attorney.
  8. Ask your attorney to add language that requires Verizon to relocate the fiber at their expense if you need to use that portion of the property in the future.