April 5, 2016 — Compounding towers’ current growth worries is the anger of the carriers concerning rising escalator costs, usually set at 3 percent annually, according to Jennifer Fritzsche, Wells Fargo senior analyst. AT&T has openly criticized the tower model, saying that if the carrier is growing at only 1 percent, it doesn’t want a vendor growing faster.
“In the case of AT&T and Sprint, there is almost a perfect storm surrounding the public tower companies. Although I have followed AT&T for 17 years, I have never seen them publicly comment on a vendor so angrily, as they have the tower companies,” Fritzsche said in an arm chair interview with AGL Magazine’s executive editor and associate publisher Don Bishop at IWCE’s Network Infrastructure Forum, held last month.
Fritzsche noted the speculation that AT&T may be attempting to bypass the major public tower companies with their requests for proposals.
“Some say that AT&T is trying to muscle some of the smaller tower companies into lower escalations,” Fritzsche said. “The tower companies clearly have leverage with existing macro sites, but new incremental sites that are coming, if there is a purposeful move around the public tower companies, that is somewhat alarming.
“Part of this is probably posturing, because they are currently negotiating master leasing agreements with the two largest tower companies, but you have woken up the sleeping bear,” she added.
Fritzsche, who is a sell-side analyst, spoke about her March 4th downgrade of the tower sector and how it was misconstrued by some as being a negative judgement of the tower industry. Her actions — she kept American Tower at a buy, moved SBA to a hold and kept Crown at a hold – were based on the short-term prospects for revenue growth, she said.
“Will these stocks move quickly? I didn’t think they would. I don’t see the catalysts for this group in the near term,” Fritzsche said. “I would characterize it as a holding pattern. The carriers, which I follow, have a lot to digest right now. They just spent $45 billion at the AWS-3 auction, and they have the broadcast incentive auction coming.”
The timing of AT&T’s return to capex growth in towers is the subject of much uncertainty, according Fritzsche. “With one of the major customers of the tower industry not moving quickly, I did not see the upside of the revenue estimates that I have in place for the tower sector,” she said.
Deploying fiber in the ground is currently dominating AT&T’s capex, and it follows an industry trend toward using fiber to support wireline over the top (OTT) services, small cell deployment and macro backhaul.
“I don’t see that changing right now. They view fiber as the critical element to support, not only the OTT broadband connection, but longer term as the plumbing that will undergird the strength of their wireless network,” Fritzsche said.
While some criticized the AT&T/DirecTV deal, Fritzsche said he she liked the media play quite a bit. “Although linear TV is experiencing downward pressure, more video is being watched than ever through over the top (OTT) services and on mobile devices. Now, AT&T has a hand in each honey pot,” she said. A healthy AT&T will be good for towers in the long run.