Wireless communications carriers have become much tougher on equipment space rental terms for tower sites, according to Bob Paige, senior vice president for mergers and acquisitions at Vertical Bridge, a private tower company based in Boca Raton, Florida.
“We focus on towers in our business, but also data centers and small cells,” he said. “We are, I think, the largest private tower company today.”
Paige spoke at a conference session about privately owned tower companies at the Connectivity Expo convention conducted by the Wireless Infrastructure Association in Charlotte, North Carolina. “Vertical Bridge is seeing increased rental activity from AT&T Mobility and, surprisingly, from Sprint,” he said. “I would tell you their terms have certainly gotten a lot tighter, whether it’s pricing, whether it’s reserve loading or whether it’s escalators. They’re certainly a lot tougher on terms than they were a few years ago when they were active last time.”
AT&T Mobility and Verizon Wireless not only have expressed dissatisfaction with rental rates. They took action last year to have alternative tower sites constructed on their behalf with the potential for moving equipment from towers they now lease to the new towers. Tower-owning companies such as Vertical Bridge may be responding by negotiating new rates.
“Once we set the new paradigm, we set the new pricing, we set the new loading, we set all the other terms and conditions, I think we’ll go back to business as usual,” Paige said. “Something to notice is that the wireless carriers are doing this at a time when they haven’t been very busy. They’re focused on it because they have resources. Once they get busy, this won’t be off the table because they’ve got to produce. With FirstNet and the AT&T build-out, they’re going to not focus on terms. They’re going to want speed-to-market real soon. When you start seeing 5G rollouts, the wireless carriers all will focus on that. In its build-out, T-Mobile certainly has started to focus on just getting things done. We’re at this paradigm shift in a time when we’re shifting terms. But once we set those, I think it’ll be a new business as usual.”
FirstNet is the First Responder Network Authority, a federal agency to which Congress gave the responsibility to construct, operate and maintain a nationwide public safety broadband wireless network. FirstNet contracted with AT&T to build the network, and AT&T has been using many of its existing facilities, including the towers it rents, to fulfill the contract.
Paige had praise for T-Mobile US, saying it had done an incredibly good job of moving TV broadcast stations from the 600-MHz spectrum the wireless carrier bought in FCC auctions. He said that three years ago, when it became obvious that the FCC would schedule the auctions, T-Mobile started talking with broadcasters to make sure they could exit the spectrum in a timely manner.
Announced about three weeks before the conference at which Paige spoke, the intended merger of T-Mobile and Sprint requires approval by the FCC and the U.S. Department of Justice (DoJ). Paige said that if the merger had been announced three or four weeks earlier, he would have given it no chance of obtaining approval.
Paige recalled when the DoJ turned down the AT&T and T-Mobile merger in August 2011 and issued a 16-page document explaining its position. He said when he plugged the metrics of the Sprint and T-Mobile merger into the document’s calculations, the merger looked even more anti-competitive by the Herfindahl-Hirschman index measure of market concentration. “That’s why I took a purely objective view, and I would have said there was no way the DoJ would approve the Sprint and T-Mobile merger,” Paige said.
But he said T-Mobile has done a masterful job of marketing the merger.
“They painted the future,” Paige said. “They said, ‘Don’t just look at today. Look at how this business will look three years, five years, 10 years down the road, and the amount of investment we have to make. It’s two separate companies.’ That’s resonating. We’re not seeing a public outcry against the merger. We’ve had a number of the FCC commissioners go on record as saying they are actually for it. The only uncontrollable force out there that may thwart this is the DoJ.”
Paige said the two companies might have to compromise with the DoJ to obtain approval, and such a compromise could involve spinning off Sprint’s Boost Mobile subsidiary, divesting some radio-frequency spectrum or possibly some anticompetitive markets.
Regarding the pending merger of T-Mobile and Sprint in which T-Mobile would control the resulting combination, Paige said he sees opportunity.
“Let’s assume that the merger goes through and T-Mobile decommissions all 35,000 sites,” Paige said.” We don’t have that many sites with Sprint today. And they’re going to put 10,000 new sites up and they’re going to favor private tower companies. We’re good. We would be net positive if they do that. Having a third healthy carrier that is growing is much better than having four, with two that do not have enough free cash flow to invest in 5G wireless communications. I won’t say T-Mobile and Sprint are not healthy, but they don’t really have the cash flow today to invest in 5G.”
Holding out the prospect that after the merger reduces the count of national carriers to three, a fourth network could start, Paige said: “At some point the FAANGs — Facebook, Amazon, Apple, Netflix and Google — have to do something.”
Paige referred to Dish Network, too, mentioning that its chairman, Charlie Ergen, spoke at the convention to say Dish would build a nationwide network for low-capacity internet-of-things service. He also mentioned cable TV companies as possible fourth network operators.
“Comcast is in the wireless business, whether they know it or not,” Paige said. A mobile virtual network operator doing business as Xfinity Mobile, Comcast uses the Verizon Wireless network to serve its 380,000 customers. Paige said if Xfinity signs up 2 million more subscribers next year as planned, Comcast will need the economic advantage of a network owner, sooner or later. He said Comcast could not keep using Verizon’s network and make a profit.
Whether or not a fourth network starts up after the T-Mobile merger with Sprint, Paige said he expects the near-term effect of the merger to be positive because the merged company’s growth will provide enough business to exceed what will be lost from decommissioned sites.
Vertical Bridge Buying Towers
Vertical Bridge has been a prolific buyer of towers during the past four years, Paige said. “As we are underwriting today, we are giving careful thought when Sprint is a tenant on a tower,” he said. “We have to perform a deeper-dive analysis to figure out whether Sprint is a long-term tenant. We would be acting irresponsibly, if we didn’t.”
On April 18, AT&T and Crown Castle signed an agreement simplifying and expanding their long-term leasing deal for wireless network infrastructure. “Everyone sort of skeptically looked at Crown’s strategy of moving into fiber, and this agreement is the perfect example of where it plays out really well for them,” Paige said. “They’ve extended the conversation with the customers that say, ‘I don’t just talk to you about macros anymore. I talk to you about your network.’ From a strategy perspective, Crown has done a great job of being able to expand the conversation with the customer.”
The Role of Small Cells
Paige said if state governments enact small cell legislation that adheres to the model the Wireless Infrastructure Association recommends, it will be good for the wireless industry. As long as the legislation does not choke the playing field to one technology — small cell versus macro — he said he is on board with it. Paige sees possible trouble with what he calls scope creep, in which legislation defines the size of the antenna structure large enough that small cells begin to approximate macro towers. He said small cell legislation will expedite the rollout of the greater coverage and lower latency that wireless communications users look forward to with 5G.
Small cell is a different business, Paige said, because the value-add is not the node, and it is not the small cell. He said the value-add in that equation is the fiber and managing a network, and a network requires more resources, more people, to manage it than macro sites do.
“We wrestle with small cell decisions as to whether we should stick our toe in some of the small cell things that come our way,” Paige said. “We always take a step back and say if it’s node only, where Verizon is going to build a fiber and we only have to put the pole up, that’s a great business for us. But if they really want a small cell solution, if Verizon or T-Mobile comes to us with a small cell solution, we should let our sister company do that because we don’t really have the technical expertise to handle it.” Digital Bridge owns Vertical Bridge, and it owns ExteNet Systems, a company that builds and owns distributed network systems, of which small cells can be a part.
Revenue from 5G?
Although some speak of the release of standards and the introduction of equipment as leading to 5G deployment, Paige said he believes it will depend more on market demand. He cited estimates of $175 billion to $275 billion to be spent deploying 5G network equipment, and it isn’t obvious to him how this investment will generate another dollar of revenue. “You have to figure how you’re going to generate the revenue to pay for that $200 billion-plus of investment before you actually deploy it,” he said.
“The equipment manufacturers would have you believe that you have to spend the money to drive the innovation,” Paige said. “But I don’t think you’ll go whole-hog on leading with a speculative build before you have some reason to believe it creates some revenue.”
With respect to Paige’s area of focus — mergers and acquisitions — he said acquiring more towers for Vertical Bridge is a matter of supply and demand.
“There’s just not a whole lot out there anymore, and so we’re sort of grabbing from the bottom of the barrel,” he said. He said when towers haven’t had previous ownership changes, there probably is a reason that could be related to problems with documentation, regulation or environmental considerations. “As we get into due diligence with these towers, we’re seeing things we didn’t see several years ago, and you’re seeing it more often. The increased level of due diligence is really a function of supply and demand. There are just not that many transactions these days. What you’re seeing are more challenged transactions.”
The next Connectivity Expo is set for May 20–23 in Orlando, Florida.
March 10, 2016 — The tower panel at the AGL Conference, held March 8 in Atlanta, agreed that the wireless industry in general, and towers in particular, has great potential for the future. But with leasing in the doldrums last year and so far this year, the conversation surrounded when that future will get here.
The industry trends that make wireless such a successful industry are still in place, according to Clayton Funk, managing director, MVP Capital.
“The tower industry has definitely cooled off, but longer term, trend-wise, it is very positive,” he said. “The macrocellular network is still the number one way for the carriers to provide the consumer with an excellent customer experience.”
That said, the tower industry is currently in “purgatory” with a number of factors possibly causing headwinds, according Funk. Questions surround how much capex is being spent on small cells and fiber deployment, as opposed to funding macrocellular network buildout.
“What will 5G look like and how much revenue will it push to the tower companies? Don’t underestimate how long it will take to find out,” Funk said. Other big picture items worth keeping an eye on include decreasing ARPUs and cost cutting at the carriers, he added.
Black & Veatch was not spared some of the pain in 2015, according to Marty Travers, president, telecommunications at B&V, who said he was happy when the year was over. However, he is optimistic about 2016 because the reduced capex of the carriers drove the company to diversify into alternative markets, such as Internet of Things/ Machine to Machine (IoT/M2M).
“[Carrier reduced capex] caused us to look at other markets where we could apply the skillsets that we have in infrastructure deployment,” Travers said. “We are looking at alternative markets, including working with Ingenu [on IoT/M2M], where there are small sites spread across large geography. That sits well with our skillsets.”
Surprisingly, work in the wireline sector has picked up some of the slack, as well. In 2014, 95 percent of Black & Veatch’s work was wireless versus 5 percent wireline. This year it is projected to be 65 percent wireless/35 percent wireline.
“Interestingly enough, everyone thought building out wireline capacity was over. That is not the case. It is seeing a significant resurgence. Wireless is still leading the way but we have shifted to an awful lot of fiber to the home projects,” Travers said. “This is the best way to keep our teams together and our expertise sharp.”
Travers is confident carriers will come back to investing in towers, but he urged the audience to take a broader view of the telecommunications landscape.
“Nobody wants less coverage, slower speeds or less capacity. Those will all eventually fuel our industry, but we have to be smart about where else we can apply our skillsets in an effective manner,” he said. “The skillsets that we have, and that this audience has, are applicable to other services.”
Bob Paige, SVP, mergers and acquisitions, predicted that AT&T will be up year over year, Verizon and T-Mobile will be steady, but “Sprint is the wild card.”
“[Sprint has] a lot of challenges with determining their network structure and how to finance the build out,” Paige said. “From our perspective, it really has been only one carrier spending for the last two years, so it is ironic that the tower companies’ stocks have been at historic levels.”
Funk noted that the billions of dollars will be spent on spectrum at the incentive auction this year and will be a drag on tower leasing.
“I think this year is going to be rather slow in terms of capex dollars and it will pick up in 2017/2018,” Funk said. Paige agreed with his assessment.