So as a clear indication that Wall Street is very focused on small cell initiatives by the public tower companies, Crown Castle
started reporting their small cell financials separately from their tower financials in the Q1 2016 quarterly earnings and call. They must have been receiving a significant number of questions from the analysts because the earnings call presentation is carefully crafted to show a rosy picture even though Crown hasn’t been completely transparent on their small cell financials.
SOME VISIBILITY- BUT QUESTIONS STILL REMAIN
In general, we are excited to see them Crown add this reporting, as we have been suggesting to the various analysts that retain us that it is difficult to measure how successful their small cell efforts are without this breakdown. Unfortunately, Crown still isn’t distinguishing between small cells and DAS in the breakdown preferring to treat all DAS nodes and small cells as if they are the same and have similar financial attributes. Interestingly, an analyst from Bank of America specifically asked this same question in the Q&A without getting a substantive answer.
What we do know from the earnings call is that Crown’s small cell business still amounts to approximately 12% of their consolidated site rental revenue similar to what it was in late 2015. Crown indicates that new small cell builds amount to 75% of their small cell systems’ incremental revenue – while 25% is additional collocation on existing fiber routes/DAS networks. They suggest that they have 16,500 miles of fiber, but don’t disclose how many miles are actually used for small cell nodes or DAS. CCI says they are focused on the top 25 markets which isn’t surprising given the location of Sunesys fiber in these same cities. This suggests a few obvious questions for CCI that were partially addressed in this call and should be expanded upon in future calls:
1. How do they expect to grow once those 25 markets are complete?
2. Now that the world is fully aware of the value of dark fiber and surplus capacity, is it reasonable to expect another fiber company acquisition?
3. How many nodes are in top 25 markets or Central Business Districts (CBD) as opposed to non urban core areas?
CROWN’S SAMPLE MARKETS – LAS VEGAS AND DENVER
In the earnings call and presentation, they point to two “small cell” networks that they suggest demonstrate the viability/profitability of their efforts.
The first is a Denver project where they suggest they are seeing a 20% yield. It is important to note that this is an Outdoor DAS, not small cells, and shouldn’t be held up as representative of the returns CCI will see for all small cell installations. For more information, see this description of Greenwood Village Crown Castle DAS.
The second example is in Las Vegas. Crown points to a 13% yield on this project, and notes that they are seeing the second tenant on this network. We assume the first is Verizon, but we cannot conclusively identify the second tenant. Either way, this is a positive indication of future collocation on fiber based small cell initiatives albeit with limitations.
Both of these systems are what Crown refers to as “vintage systems” – i.e., older more mature systems. Both are in primarily residential areas where the DAS or small cell installation is needed for coverage, not capacity. In its Q&A, CCI references the probability that these systems will become 3 tenant systems. We suspect that this is likely for the Denver DAS, as adding to an existing DAS provides true value to the wireless service provider. The incremental cost of connecting to additional nodes isn’t significant, and providing coverage in those areas is much more problematic, thereby increasing the probability that 3 tenants will use the system. For Las Vegas, the 3rd tenant is also likely given that it would be difficult for a wireless service provider to build a tower in this residential area especially since the small cells/fiber has already been deployed and approved by the city.
But to hold out the two examples that Crown did as indicative of the future performance of their small cell networks is at best creative marketing. Here is Crown CFO Jay Brown’s quote: “We tried not to pick actually the best systems that we had, but we tried to pick some that we thought were somewhat representative as the markets develop.” The problem is that these small cell networks aren’t representative of what Crown is currently building. Most of the activity we see from Crown these days (and we readily accept that we aren’t seeing everything Crown does) is in large metropolitan areas. Large metropolitan areas are not like residential areas where there is no deployed fiber nor are there conduits already in the ground that can be easily expanded. The cost to deploy fiber is more expensive in urban areas. However, the probability of greater density or “collocation” on existing networks is greater as well.
In other words, we question whether these two networks are “representative” of what Crown is actively deploying. If these aren’t their best systems- we would like to see more information about those systems especially if they are more urban small cell deployments as opposed to DAS or small cells greenfield builds in residential areas.
CROWN’S OPPORTUNITIES AND HURDLES IN SMALL CELLS
For small cells, there are fewer barriers to entry for subsequent wireless service providers in an urban area. While the ease of access may be attractive, the combination of upfront capex and long term continuing opex isn’t as desirable. Crown suggests that small cells are susceptible to a “land grab,” just as towers were. While true to an extent, in most cases, Crown’s acquisition of small cell rights is not a significant barrier to entry to other small cell providers or the wireless service providers who wish to establish similar and (mostly) equal rights. As opposed to a “land grab,” we characterize it as more of a “first choice” type opportunity where CCI may procure some select locations, there are in most cases many other locations that will work just as good. Unlike towers where there is often monopoly type restrictions placed on the building of new towers, small cell agreements with municipalities and utilities are very rarely exclusive such that they preclude another competitor from building a similar network.
Where we do agree with Crown is that they point out that competing established fiber companies don’t necessarily have an edge over Crown. The wireless service providers are currently looking at fiber holistically and are trying to avoid lit fiber to the extent possible preferring their own dark fiber. So to the extent that Crown can offer fiber and pole access concurrently, they are at an advantage to local or even national fiber companies. Furthermore, to the extent that their acquisition of Sunesys included space fiber capacity on the existing fiber routes, Crown has a further advantage.
We don’t wish to seem overly pessimistic about Crown’s efforts in small cells. To the extent that any company is doing it right, they are in our opinion. There is limited value add to the wireless service provider of having access to poles. However, fiber is and will continue to be a core requirement for future densification efforts. And once T-Mobile actively starts deploying small cells (which they will), they will seek existing networks that are ready to use like those that CCI has deployed or is deploying because adding capacity rapidly is more important to T-Mobile than controlling costs. Crown’s anchor tenant for most of their new small cell builds is Verizon and as such they are well insulated from future consolidation and well positioned for future densification modifications/expansion on existing small cells by Verizon who seems very focused on adding capacity to their networks with an emphasis on small cells.
As to competitors, Crown is well situated for now. American Tower (AMT) is looking at small cells in the US- our clients have reported inquiries from American Tower regarding small cell opportunities. SBA Communications (SBAC) seems content to sit it out for now. So for now, Crown has the market primarily to itself with some competition from Extenet and Mobilitie and minimal competition from local and national fiber companies.
IMPACT ON TOWERS
If you have read our previous posts, you know that we aren’t that bullish on future growth on existing towers. Small cells enable the wireless service providers to avoid costly and difficult densification using macro cells. This isn’t just our supposition: Crown suggests in the earnings call that they are expecting one new tenant every 10 years on the average tower that they acquired from AT&T and T-Mobile. Contrast this to the expectation in as late as 2006/2007 of one new tenant every four years on the average tower. While Crown doesn’t attribute the reduced “lease-up expectations” to small cells and efforts by the wireless service providers to avoid future collocation on public tower company towers, it seems pretty clear that they are forecasting lower lease-up as a result.
If you have been contacted by Crown Castle, Extenet, Mobilitie, or Verizon regarding a small cell master lease, please contact us. We have worked with airports, subway systems, amusement parks, major and secondary US cities, and private landowners in regards to similar proposals.