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).
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
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.