Earlier this week AT&T raised eyebrows by saying they were not comfortable with the current tower business model. The long term viability of the current model was questioned, and they also announced that an internal task force had been formed to look at alternatives. T Mobile essentially followed suit, adding that the current model has become too complicated. And earlier this year, Sprint caused a stir in the industry by stating intentions to move wireless equipment off traditional tower facilities in a major cost cutting measure. While Sprint has since softened that message, the questions remain. Are these Carriers simply trying to negotiate better deals, or is something more systematic going on?
In a two part series I will be examining this topic. In this Part #1, I provide historical context on how the tower industry came to be, the underlying assumptions that existed when it was formed, and explain why we’re now at a point in time where that model is under question. In a future Part # 2, I’ll offer thoughts on potential impacts of these developments, how major players may be impacted, and on how the industry model could change over the next few years.
PART 1: HOW DID WE GET HERE?
I was there in the beginning. It was 1999 and I was involved in one of the first big tower deals. In what would later become the norm, a major US Carrier was selling its existing portfolio of towers to a tower company. In parallel, a Built to Suit (BTS) deal was negotiated whereby the tower company would build new towers for the carrier. According to the terms of the tower sale the carrier would retain the position of choice for its antennas on the tower (usually at the top), any additional antennas and cable which would add more weight and wind loading would trigger additional rent, and there was typically a 5 year rent escalator for the 20 year term. Similarly, in the BTS deal, the tower would be built to the Carrier’s specifications and Carrier would have dibs on mounting space. In return, the tower company owned the underlying tower asset and had the right to lease it up. I was on the Carrier side at the time, and we were very happy with ourselves for the money we had generated for our companies by selling the towers.
It’s important to note that the industry looked very different back then. Carriers had (at most) two frequency bands to deal with, spectrum caps were in place enforced by the FCC, and usually only one generation of technology was deployed. Also, most cellular traffic was still generated in cars and voice ruled the day. Most mobile plans still carried per minute charges and people managed their minutes carefully. As antiquated as those things sound today, that’s how the world looked when the framework of the industry tower business model was developed that is still largely in place today.
So now if you fast forward 17 years, you can start to see why you are hearing these comments by the Carriers. First, if the tower is of any age at all you are likely into the 1st, 2nd, or even 3rd rent escalation. Second, Carriers now use multiple frequency bands driving new and additional antennas and cables. Third, most major Carriers have at least three major technologies deployed (2G/3G/4G) and spend a lot of time balancing traffic between these technologies and bands. Lowering antenna levels and performing cell division are common place. And note that with 4G LTE, you have the requirement for Remote Radio Heads to be mounted at the top of the towers along with the antennas. All these things can considerable drive up lease costs in the current business model, and I believe that’s why you hear the Carriers reacting.
I want to emphasize that I am not being critical of tower companies. In fact, I feel quite the opposite. Through a combination of smart negotiating, taking the long view, and, yes, with some fortunate developments, they have become very large and successful companies. But as Carriers now look at yet another technology evolution on the way with 5G, the shape of which is still being determined, one can only assume that the Carriers’ internal cost projections are generating a lot of concern.
So, that’s how we got here. In the upcoming Part #2 I will examine what direction the tower industry model might take in the future based on the new technology, economic, and competitive factors. This part is much harder to speculate upon, as huge amounts of money (expense or revenue, depending on your point of view) is at stake. In the meantime, feel free to share your thoughts on how you see all this playing out. I’m always interested in hearing other people’s opinions.