Cell Towers Blog

Insights on the US cell tower market

What is it about small cells…?

Small cell on a lamppost

Over the last few years we have got used to the many predictions according to which small cells, also known as heterogeneous networks, would take over the wireless telecommunications market away from macro-cells. Has it happened yet? No. Is it happening? Maybe…

Why small cells in the first place?
It is pretty clear that the current macro-cell set-up is going to creak in urban locations under the overwhelming growth of mobile data traffic. For a while MNOs have been keen to offload part of their traffic onto WiFi networks though this solution is not a smooth experience for users due to the need to switch network. Small cells offer the advantage to keep users on the same network  while providing them with the broadband capacity that they need through the local presence of multiple nodes all connected to Ethernet cabling. Only DAS systems can rival small cells in urban settings though the prevailing view in the market is that they are more expensive and difficult to install.

Increasingly relevant in the years to come
Small cells businesses have been growing fast and are expected to continue to do so. For example Sunesys expects to see its revenue grow at 15% per annum in the next 3 years. This growth is driven by a couple of factors: 1) urbanization trends and 2) network densification requirements. 81% of the US population live in cities today; this number is expected to rise to 87% by 2050 according to the United Nations. Given the challenges to obtain permissions to build new macro-cells in cities, small cells provide an obvious and more suitable alternative, especially given the large number of sites that would need to be added to meet the demand for bandwidth: small cells are discrete, whether positioned on lampposts or walls, and provide that extra capacity.

Is this a business opportunity for tower operators?
It is today: Crown Castle, following its acquisition of Sunesys, has 8% of its revenues already coming from small cells. Some investors don’t like it because they see tower operators as real estate investment conduits and because they think the small cell business is too capital intensive. It is also a fact that managing active telecom infrastructure requires new skills… but can tower operators really sit back and let the opportunity pass by? SBA Communications clearly decided that it was not core to their business when in July they sold their 20% stake in ExteNet, another small cell business, along with the other shareholders to Digital Bridge. Clearly Crown Castle took a different view and American Tower continues to invest in DAS systems.

Why small cells matter at the end of the day
As suggested above small cells are likely to be the preferred urban wireless infrastructure platform in 2 to 3 years: indeed roll-outs have been focused on the top 20 cities to date but they will spread to 2nd tier cities very soon. Small cells will become the natural network technology to host the forthcoming C-RAN, 3.5 GHz and 5GHz deployments given their dense coverage requirements. Given how important these initiatives will be in revenue terms to the likes of Verizon, it’s easy to understand that their infrastructure partners would want to offer the full suite of services in rural as well as urban areas. So what was SBA thinking…?

2016 prospects: some preliminary views

Crystal ball

The news from 2015

The carriers have invested a massive $33.1 bn in tower-related investments in 2015! I know that some might think that it is only a third of the $107 bn of profit that the the top 4 carriers are expected to make this year. Still… These investments have been significant and served to address both the coverage and the capacity requirements as part of their LTE network roll-out. As AT&T and Verizon appear to have achieved their coverage target, the question is: is 2016 going to see a potential drop in tower investments…?

Positive sentiment for 2016

The preliminary views of analysts covering tower stocks is that the carriers will actually marginally increase their investments in 2016 to $34.7 bn, that’s a more than  respectable increase of 4.8%. What’s a bit surprising is that AT&T will actually be a significant contributor to that growth: after a pause in tower-related investments in 2015, they intend to add c.3,000 macro sites in 2016, mostly with a view to increasing network capacity. The other contributor to growth is expected to be Sprint, who is expected to add between 3,000 to 5,000 macro sites to their network. Sprint’s network coverage is complete for 1.9 GHz but they need to build out the network for 800 MHz and 2.5 GHz as they seek to have each site effectively tri-banded.

What impact on Towercos?

This is all good news, taking also into account the revenues that are expected to come from public safety services as of 2018. Still towercos‘ revenue growth is quite differentiated: while American Tower is expected to grow by 8% in 2016, the comparable figure for Crown Castle is likely to be only +2%. Part of the difference comes from American Tower’s international exposure (30% of its revenues), mostly emerging markets. The issue is that emerging markets are not in the best shape at the moment, in particular Brazil to which both American Tower and SBA Communications are exposed to for around 10% of their revenues. There’s a clear foreign exchange risk that may weigh negatively on their growth prospects whereas Crown Castle, being 100% domestic-focused, does not have that issue.

 

Latest count of cell towers in the US

Towerlocation logo

That’s it, we’ve run a pretty comprehensive update of the towerlocation.com database of all towers and sites used for cellular and broadcasting purposes… and the results are that, in the last 8 months, 2,292 new towers were added (on a net basis) giving a new total of 272,282. On an annualized basis, that’s a growth rate of 1.3%. Not bad for a mature industry!

Where is the growth coming from?
It is difficult to draw too many hard conclusions from this update, the reason being that we don’t know for a fact whether these new towers were built or were only recently identified… Still it’s interesting to see that 1,800 of the net adds are lattices and masts as these two categories account for only 3% and 1% of the total number of towers in the country. Is there really a push at the moment to build such high structures? We’d love to hear your take on it. The other interesting result is that Verizon contributed to 23% of the total increase, which would confirm that at least one of the two largest carriers is still actively building out its infrastructure; on the other hand American Tower, Crown Castle and SBA Communications each contributed only 3% of the new sites, somewhat surprising given the emergence of independent tower operators to date. Lastly it is worth noting that about a quarter of these new towers were erected in just 3 states, namely Texas, California and Ohio: that kind of makes sense as these three states account for 24% of the US population…

What are the main growth drivers?
Adding towers is mostly about the carriers improving service coverage. Both Verizon and AT&T offer good coverage pretty much everywhere in the US but it’s not necessarily the case with Sprint PCS, T-Mobile, US Cellular, etc. These carriers have been under some pressure to improve their coverage though it doesn’t necessarily mean they need to add new towers. Indeed a lot of these carriers’ transmission equipment sits on towers owned and operated by independent tower operators e.g. Crown Castle and American Tower Corp. These operators make a business of co-locating the carriers’ equipment on their existing towers, which means there’s less of a need to build new towers…

How do these numbers compare with other countries?
If you look at the current number of sites in the US, it equates to a coverage per site of 1,132 people for an average area of 30 sq kms. Ideally we’d compare these stats with other countries to check how the US tower market fares; if only we had them…  Towerxchange.com assesses the number of towers (excluding rooftops and DAS) in Europe to be approximately 600,000: that implies a coverage per site of 1,238 people for an average area of 17 sq kms, which overall is fairly consistent with what we observe in the US market.

How many more sites should we expect in the next few years?
The question is whether we’re going to end up with 500,000 sites in 10 years. Ultimately you need to be a mix of a radio planning engineer and a technology wizard to address that question! In a world increasingly reliant on wireless communications, it’s easy to see more towers being added whether it’s because more antennae need to be installed or because the increasing use of high frequency radio signals will require a higher density of towers. It’s likely, however, that we’ll see existing towers being strengthened before operators decide to add new towers, for cost and planning permissions reasons. And let’s not forget that in urban settings micro-cells may end up substituting a few existing sites. On a net basis, however, continued and steady growth is the more likely scenario!

Clouds on the Horizon?

Storm on the horizon

Crown Castle’s 2015 outlook
The investment community had a bit of a shock on October 30 when Crown Castle revised its 2015 outlook for organic site rental revenue down, showing a 12% reduction vs 2014. Predictably the market didn’t like that and the stock plummeted by 6% within 24 hours. The question is whether there is a structural shift in the market resulting in lower growth prospects?

So what are the issues?
Crown Castle’s main issue had to do with non-renewals in 2015 which they expect to be almost twice what it was in 2014. The company expects to be negatively impacted by the decommissioning of Sprint’s iDEN technology and of the LEAP, MetroPCS and Clearwire networks. American Tower and SBA Communications are expecting to feel the pain too, albeit to a smaller extent as they have the benefit of a more internationally diversified portfolio. To be honest, all of that decommissioning business was kind of expected and makes a lot of sense: the mobile operators are cleaning up their portfolio of technologies and businesses to be fitter in a highly competitive marketplace.

What can expect in the next few years?
The US tower industry probably has to recognize that it can’t sustain an 8% growth rate as per 2014; the US wireless market is pretty mature and with 4G investments coming down, it is fair to assume growth prospects closer to 6% over the next few years according to research analysts. I grant you that it doesn’t put the industry on a par with the faster growing industries but combined with its awesome cash generating power it remains uniquely attractive to investors.

Consolidation vs. DAS
There is no doubt that the one big threat for the industry would be a consolidation of the wireless market from 4 down to 3 operators. Recent history suggests however that it may be a taller order than initially thought. I would predict that there is a better chance of a new entrant acquiring T-Mobile, which would obviously be a much better outcome for the tower industry. That is not likely to happen however if the current price war among mobile operators is sustained… The clearest source of upside for tower operators lies with the increasing adoption of DAS among mobile operators. According to towerlocation.com, there are only 7,500 towers / rooftops carrying DAS equipment deployed across the US, that is less than 3% of the total. That number is only going one way: up!

The Mysteries of the US Cell Tower Market

Towers in the fog photo

Isn’t it incredible that the US cell tower market, which represents a combined market capitalisation of more than $80bn, is so poorly documented in terms of basic facts such as the number of towers in the country? When asked the question by a client recently, we thought it would be a quick process to find the answer. How wrong were we! Some analysts believed it was c. 100,000 while one of so-called research website was putting forward the number of 500,000: it’s pretty incredible that estimates should be in a range of 1:5 in such a well-developed market as the US!

The challenges of market research
There are, to be fair, many good reasons as to why this figure is hard to get. If you wanted to find out more about cell towers in the country, you would probably consult the FCC’s or the FAA’s databases due to the fact that tower operators have to register their high towers with both regulators. The only problems are that the user interface of these databases is quite poor and doesn’t really provide a consolidated view of the US market. Individual operators’ databases provide information on their sites only – understandably. As to market research, we’ve been looking for reports on the sector: no disrespect but there aren’t any of any substance.

At last, some progress!
Faced with the issue, we thought we had to try to solve it by ourselves, so we spent a long time collecting data, checking it, correcting it and updating it, and ultimately we put together a pretty unique database that anyone with an interest in the cell tower market can access on www.towerlocation.com. Key information on all cell sites including their location, the type and height of the towers, the name of their operators and their active / non-active status is now available. The website gives users the ability to search towers by state, by city, by operator and even by height and visualize the information in tables, maps and graphs which they can print or save as needed.

So what do we know now?
At long last, we’re now able to confirm that there are approximately 268,000 cell phone sites (towers and roof-tops) in the US. 248,000 of these sites are actually active, a clear sign that the cell tower industry is thriving. The largest operators are Crown Castle, American Tower and SBA Communications with shares of the tower market of respectively 34%, 20% and 7% based on number of towers. Surprisingly the Big 4 cell phone operators, Verizon, AT&T, Sprint and T-Mobile, together operate only 11% of the sites. What’s interesting is that the remaining 28% of the market is still in the hands of businesses whose core business is not wireless telephony; they include radio / TV stations, cities, state or federal agencies and private individuals of course. In summary there’s still significant scope for market consolidation!

Tower specs
We now also know how the US tower portfolio breaks down by type of site. The most prevalent tower structure in the US market is the guyed: it accounts for 42% of the total. The 2nd most prevalent type of sites are rooftops with 24%, followed by monopole towers (13%) and self-supported towers (10%). DAS systems are still a long way behind at 3%. It’ll be interesting to see how these figures evolve, especially in the light of the development of the small cell market.

 

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