February 16, 2017 — Applauding Communications Sales & Leasing’s (CSAL) REIT structure, dividend yield and diversified growth strategy, Wells Fargo Securities announced today that it has commence coverage with an outperform rating.
“We expect CSAL to show nice organic growth in its fiber segment (Uniti Fiber),” wrote Jennifer Fritzsche, senior analyst. “By having many ‘tools’ in the tool box, the CSAL model should appeal as a new vendor of choice for wireless carriers as they move forward with their respective network densification initiatives.
Wells Fargo Securities believes CSAL will grow its tower portfolio network densification build-to-suit (BTS) contracts in concert with its fiber optic network buildout.
“Importantly, CSAL views towers as complementary to its fiber services and would expect any BTS opportunity to be linked to fiber contracts,” Fritzsche wrote. “We would expect CSAL will become more active in the tower sector throughout 2017 and beyond.”
CSAL acquires and constructs both wireless and wireline communications infrastructure. It currently owns 4.2 million fiber strand miles, 468 wireless towers and other communications real estate in the United States and Mexico.
“[CSAL’s] diversification is driven by opportunistic M&A,” Fritzsche wrote. “CSAL is focused on acquiring and constructing mission critical communications infrastructure, with priority being fiber (61 percent of pipeline), towers (22 percent), ground leases (13 percent), and consumer broadband (4 percent).
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.
Wells Fargo Securities Senior Analyst Jennifer Fritzsche published this Equity Research note recently on fronthaul and centralized radio access networks (C-RAN) and their impact on the wireless carriers, tower companies and fiber providers.
“Simply put – we see this trend as one in the VERY early innings. In terms of implications for specific sectors on our list: 1) Wireless Carriers – positive for network capacity and depth; but it will likely require capital to continue to be spend; 2) Towers – Neutral/Slightly Positive – Less space is required at base of tower, but more equipment and fiber would be placed on the tower. The shift in capital spend could be directed more to C-RAN and less to macros; 3) Fiber Companies – A significant positive, in our view. Fiber is the critical element in this initiative. Carriers need it to carry out C-RAN’s promises and capabilities.
“WHAT IS FRONTHAUL? Fronthaul plays a critical role in C-RAN, an architecture that places a baseband unit at a centralized location, with the ability to serve multiple remote radio units (RRUs) attached to wireless towers. The centralized baseband units and RRUs are typically connected by a fiber-optic line referred to as “fronthaul.”
“WHAT DOES THIS MEAN FOR WIRELESS CARRIERS? C-RAN architecture can provide a host of benefits to wireless carriers seeking to densify their networks, such as savings on capital and operating expenditures and lower power consumption needs. From a capex perspective, fewer baseband units are needed to service multiple remote radio heads. However, the fiber company must be paid. As a result, it is hard to assess the total capital outlay and how it may compare to “traditional” wireless capex spend.
“TOWERS – NEUTRAL EVENT FOR MOST/POSITIVE FOR Crown Castle International (CCI) – The impact to the tower companies from C-RAN deployments is less clear. On one hand, wireless operators will not need as much ground space at the cell site to house baseband units. On the other hand, the tower companies should see more leases for remote radio head attachment as these networks are built out. The best positioned tower company to capitalize on this trend is CCI given its Sunesys acquisition, in our view. This acquisition gave CCI ownership or rights to an additional 10,000 miles of dense metro fiber. This transaction not only allows CCI to control some of the connections to its 14,000 small cell nodes, it also enables CCI to provision dark fiber fronthaul as C-RAN topologies expand. Many believe CCI could be more active in the M&A space, with Sunesys as the first move for the company in the fiber space.
“FIBER COMPANIES MAY HOLD KEYS TO THE KINGDOM – Dense metro fiber networks for fronthaul are a critical component to make C-RAN deployments economical. The fronthaul can take many forms, such as carrier Ethernet, wavelengths or microwave, although dark fiber is the most efficient for large-scale deployments. ZAYO is best positioned to play here, in our opinion, given its large exposure to the wireless space already. Level Three Three (LVLT) – while it typically shied away from fiber-to-the-tower (FTT) builds – certainly has the size, scale and assets to be a serious player here if it wanted.”
— Jennifer Fritzsche
February 5, 2015 — Cisco has released its annual spotlight on the astounding growth of mobile data. Global mobile data traffic grew 69 percent in 2014, reaching 2.5 Exabytes per month at the end of 2014, up from 1.5 Exabytes per month at the end of 2013, according to the Cisco Visual Networking Index (VNI) Global Mobile Data Traffic Forecast Update, which presents some of Cisco’s major global mobile data traffic projections and growth trends.
Putting that number in perspective, last year’s mobile data traffic was nearly 30 times the size of the entire global Internet in 2000 when 1 Exabyte of data was transmitted.
Although the Cisco report is a global snapshot, Wells Fargo Senior Analyst Jennifer Fritzsche wrote that study provides positive long-term revenue visibility for the tower sector’s pipeline.
“We reiterate our OVERWEIGHT rating on the tower sector. In our view, [Cisco’s] findings offer tangible evidence about the continued strong demand for wireless data usage,” Fritzsche wrote. “We believe wireless carriers will need to continue to optimize their respective networks to handle the additional demands of mobile data usage.”
Specifically, mobile video traffic grew to 55 percent by the end of 2014. Also driving mobile data growth was the addition of 497 million mobile devices and connections during the year, up to 7.4 billion, with smartphones accounting for 88 percent of that growth. While only accounting for 26 percent of mobile devices, smart phones represent a majority (88 percent) of data traffic on a global basis.
Attempting to keep up with the mobile data growth, cellular connection speeds grew 20 percent in 2014, increasing average download speeds from 1,387 kilobits per second (kbps) in 2013 to 1,683 kbps in 2014.
Expect the good times to keep on rolling. Cisco projects that the mobile data growth will increase exponentially during the next five years, increasing tenfold to 24.3 Exabytes each month in 2019. That would be a CAGR of 57 percent from 2014 to 2019.
Jan. 8, 2015 — Network densification, which drove up new tower builds by 20 percent last year, will continue into the new year, but new tower builds may be less than in 2014, according to analysts at Wells Fargo Securities. Even so, wireless capex is not expected to slow down.
“We disagree with the thought there will be a meaningful slowdown in wireless carrier capex given the prices paid in AWS-3 auction,” wrote Jennifer Fritzsche, senior analyst. “Rather, we expect the capital to shift from densification activity back toward more amendment-related revenue for tower companies — especially in the densest U.S. cities with small cells playing a key role.”
Coverage vs. Capacity Spend
In 2014, densification activity was driven by AT&T and Verizon Wireless, which have more or less filled in their LTE networks. Sprint and T-Mobile are more focused on coverage than capacity today and shouldn’t be expected to begin densification of their networks until 2016.
In 2015, the winners of the AWS-3 auction will waste no time deploying their new spectrum in the urban areas with the most subscriber traffic.
“Rather, given that there likely will be more of a sense of urgency about fine-turning the capacity needs in the most dense U.S. cities where usage is the highest, we expect the capital to shift from densification activity back toward more amendment-related revenue for tower companies,” Fritzsche wrote.
Additionally, the industry will need time to absorb the influx of new towers that were built last year, which could put additional drag on new tower builds in the near future.
J. Sharpe Smith is the editor of AGL Link and Small Cell Link newsletters.