January 7, 2016 — Because of the new economics of providing wireless services, carriers no longer believe the current tower leasing model is sustainable, which may lead to a divergence from the traditional business model for renting space on towers, according to some in the industry.
“As the wireless industry continues to mature and carriers increasingly compete on price, revenue growth has slowed and profit margins have been squeezed. Carriers’ costs have increased due to the rapid growth in spectrum prices, tower rent escalators and tower rent increases related to the rollout of new technologies,” said Ronald Bizick II, CEO, Tarpon Towers.
As a result, carriers are looking to change the traditional tower leasing model in order to control their costs and align tower owners’ interests with their own.
“Carriers may be somewhat stuck with their current and legacy deals with both big and small tower companies, but I expect to see the carriers increasing downward pressure on rents and escalators on both new collocation and BTS leases,” Bizick said. “I think we are on the verge of the next great inflection point in the evolution of tower ownership and leasing.”
Wells Fargo Securities has done some research that has shown that AT&T is attempting to move some towers to secure lower rates.
“While we believe this is unlikely to happen, it seems to us that AT&T is showing a bit more ‘muscle’ with the tower companies these days,” Managing Director Jennifer Fritzsche wrote. “This begs the question: if AT&T begins to push back, will Verizon likely follow? A large portion of the tower companies’ recent growth has been driven by amendments. If the two largest wireless players begin to challenge these economics, it could impact the tower companies’ top-line growth rates.”
Alex Gellman, CEO, Vertical Bridge said the pressure on escalators from the carriers is only logical considering the economic environment. The tower industry needs to make adjustments accordingly.
“The more efficient the tower industry can be, lowering our costs, the better. That will allow us to help them address their costs,” he said. “Fundamentally, we are in the real estate business. If you have good locations, they will pay reasonable rent and stay a long time.”
The extent to whether the carriers can be successful in changing the tower leasing business model is not an issue in the short term. In the long run, however, the evolution of the tower leasing model could have a profound impact on tower companies, especially public companies.