‘Good Time’ Seen Now, Ahead for U.S. Wireless Tower Companies

The U.S. wireless tower sector is likely to do very well over the next 12 months amid a confluence of telecom industry trends like increasing network expansions and network quality improvements, industry participants and observers told us. Those trends taken together are making the tower sector “as robust as it’s ever been,” said Clayton Funk, a managing director at broker Media Venture Partners. Wireless carrier consolidations -- such as a possible merger between Sprint and T-Mobile US -- will continue to be a top factor in the industry’s outlook, but not as large as in the past, observers said.

"It’s a good time to be a tower operator,” said Evercore Partners analyst Jonathan Schildkraut. The top three tower companies -- American Tower, Crown Castle International and SBA Communications -- have all indicated they're experiencing “record” business activity, he said. American Tower earned almost a net $203 million during Q1 on $984 million in revenue, up more than 22 percent from revenue at the same time in 2013. Crown Castle had a net $91 million income during Q1 on $876 million in revenue, with revenue up 18 percent year-over-year. Crown Castle said its site rental revenue was up 21 percent year-over-year to $747 million. SBA had a net $1 million income on more than $345 million in revenue, with revenue up more than 10 percent year-over-year. SBA said its site rental revenue was up 13 percent year-over-year to more than $309 million.

There are “some very exciting things going on right now” for the tower sector, which had growth in 2013 in both carrier “amendment” upgrades to existing tower infrastructure and demand for new cell sites, Schildkraut said. Verizon added 2,600 tower sites during 2013, while AT&T added more than 1,900, he said. There’s likely to be an “acceleration” of new site activity over the next year because AT&T added more than 900 new sites during Q1 alone, Schildkraut said. Verizon’s Q1 pace for new site deployment was significantly slower than it was last year but it has indicated it will accelerate again in Q2, he said. Tower amendment activity has outpaced new site deployments in recent years, but demand for new sites is now increasing because of the migration to LTE, Funk said. “We've seen this with every migration,” he said. “Carriers spend the money on upgrading their existing sites and then they start doing infill to fill holes in their coverage."

Verizon’s rollout of its AWS spectrum for LTE use is ongoing, requiring amendment upgrades to tens of thousands of towers, along with its plans for new tower sites, Schildkraut said. AT&T was the “big spender” in Q1 on tower amendment activity, and still needs to add 7,200 tower sites over the next 21 months to meet its commitment to add 10,000 sites over a three-year period, he said. Sprint and T-Mobile are in far earlier phases of their upgrade cycle, but both are showing signs they are planning expanded tower activity, Schildkraut said. T-Mobile’s recent success with expanding its subscriber base has caused it to consider increasing its tower amendment activity from the 40 percent of sites it planned 18-21 months ago to up to 60 percent of sites, he said.

FCC Auctions

The FCC’s upcoming AWS-3 and broadcast spectrum auctions are likely to be “nothing but positive” for the tower companies, Funk said. Crown Castle’s analysis has been that introducing new spectrum into the market “has resulted in additional tower leasing,” he said. The tower companies won’t feel the effect of those auctions for a while, however, because it will be “another three years before that spectrum will be available” after the auctions conclude, Funk said.

Both Funk and Schildkraut said a potential Sprint/T-Mobile merger is a top risk the tower sector is watching. Funk said he believes it’s possible a Sprint/T-Mobile merger could arrest “any sort of momentum they may have been trying to get to improve their networks.” Schildkraut said he believes it’s possible a potential Sprint/T-Mobile merger could actually increase their infrastructure investment since both are still “massively under spending” relative to Verizon and AT&T.

Carrier consolidation “does hold some risk for tower companies because you sometimes end up with duplicative infrastructure,” but past consolidations like the failed AT&T/T-Mobile merger have taught the tower companies to be smarter about how they handle tower contracts, Schildkraut said. Tower contracts are now longer and specify the spectrum bands and technology the carrier will use on the tower, he said. “If you get carriers with different spectrum bands coming together, if they want to take advantage of each others’ infrastructure it’s going to be difficult,” Schildkraut said. Increasing subscriber demand on all carriers has made past mergers less onerous for tower companies than initially believed because the demand decreases the incentive for a carrier to decommission a tower if the carrier will end up needing to put a new one up again in the immediate future, Funk said.

Distributed antenna system (DAS) and small cell deployments have been less onerous for the tower companies than originally believed, Funk said. “There was a lot of speculation early on that DAS and small cells were going to potentially replace the need for macro sites, but what we're now hearing is that it’s incredibly complementary,” he said. “There is definitely a need for both macro sites and small cells.” DAS and small cells have been most effective for the carriers in urban areas where a higher concentration of full towers isn’t practical or allowed under zoning laws, Funk said. Both DAS and small cells “have a place in where we go over the next 5-10 years,” but their future role is still up for debate, Schildkraut said. Voice over LTE will also affect tower companies’ business because the technology will require denser tower deployments in the suburban and rural markets where it is likely to be most popular, he said.

The tower companies’ main regulatory focus right now has been the FCC’s tower siting rulemaking update, mandated under Section 6409(a) of the 2010 spectrum law, said PCIA Government Affairs Director Jonathan Campbell. “That’s going to be priority No. 1” it focuses both on collocations and modifications to existing towers along with DAS and small cell deployments, he said. Most commenters agree that the FCC should modify the tower siting rules to accommodate DAS and small cell deployments, PCIA told the commission earlier this year (CD March 7 p1). The sector also has a continued interest in modernizing the FCC’s aeronautical safety lighting and marking requirements and is continuing to examine the proposed Communications Act update, Campbell said.