A Towering Issue – Part 2: What Happens Now?
I want to begin by thanking everyone for the great response to Part #1 of my blog “A Towering Issue -How We Got Here”. Clearly a lot of people are interested this topic and are VERY interested how it might all play out. So with that as a preface, I will now take a shot at where I think all this is heading in this Part #2, titled “What Happens Now?”
I see two main factors influencing the shape of the tower industry in the future, namely new technology and competitive factors. So I’ve organized my thoughts into those 2 categories.
I’ll preface this by saying I’ve been hearing about the “death” of macro towers for a long time. I've heard many comments over the years suggesting “once we build all these towers this year we won’t need anymore”. The truth is it never really played out that way, as the need for new towers, driven by expanding coverage, lowering antenna levels, and cell division in established areas, have continued to force new towers to be built. And of course the explosive growth in mobile data has driven the need for new towers as well. But as you look ahead at the next few years, it is clear that trends are pointing more towards small cell densification and in-building solutions, and less towards new macro towers. Here are some of the reasons why:
The high frequency spectrum bands being discussed for 5G lend themselves better to shorter propagation distances in a small cell environment. I’m not saying that 5G spectrum bands won’t be deployed on macro cells, but small cells will definitely be the first using these new frequencies.
The new C-RAN architecture, with Remote Radio Heads on the poles and the Base Band Units in data centers, simplifies small cell implementation. This tends to encourage more small cell deployments vis a vis macro cell alternatives.
If the industry is successful in developing neutral host small cell solutions, such as has occurred with DAS, the per site cost of small cell solutions are greatly reduced.
In-building solutions such as Voice over WiFi will reduce the need for macro towers otherwise needed to penetrate buildings from the outside.
I don’t think this means the end of new macro site deployments, nor will it eliminate the need for modifications to existing towers. Reallocation of spectrum between older and new technologies alone will require that. But the trends are definitely moving in the small cell/ in-building direction for new applications. And given that small cell attachment agreements will be negotiated with different terms in mind, I believe this will change some of the underlying dynamics of the industry today as the percent of total sites that are macros decreases.
One of the first replies I received to my Part 1 blog was “with change comes opportunity”. And I believe there are a lot of companies out there who feel that way. These are credible industry players interested in expanding their businesses. As table stakes they would be willing to accept different financial terms including more Carrier-friendly Built to Suit (BTS) deals. In addition, we've already heard one major Carrier talk publicly about equipment relocations off existing towers. I do see this as an option, particularly in the cases of very high rent, to stimulate more competition and start adjusting the ownership mix of the installed base. But keep in mind that along with this strategy comes a potential new set of issues. From experience I can tell you that it’s hard to re-direct resources to relocation projects that don’t actually improve service to your customers when you're under the gun to complete projects that do. And, as operations people will attest to, any time you have more "hands in the network" you increase the risk of service interruptions. These are all factors the carriers will have to weigh carefully.
So, the bottom line is I do expect changes to the current industry model fueled by both technology and competitive factors. But, I also believe it will be more of an "evolution" than a "revolution". Major tower companies should still do well, even though I expect a number of other companies will grow their market share as Carriers negotiate more agreeable deals. Other reasons I say this will be an "evolution" is because:
These are not the type of changes that happen overnight. For example, the “Big Four” wireless Carriers have in the neighborhood of 40,000 – 60,000 cell sites each on the air today with constant competitive pressure to expand and improve coverage. That's a big battleship to try to turn quickly.
Rental agreements play out over a long period of time and can’t be arbitrarily broken without consequences. But, as these agreements expire or come up for renewal there is an opportunity for them to be re-negotiated on more agreeable terms.
Most major tower companies have diversified into providing what I heard described at last year’s CTIA as “complete telecom infrastructure.” These services are in demand and critical to the success of Carriers. Interestingly, we could see a scenario where increased revenue from these services would help offset rental revenue stream reductions associated with renegotiated tower deals. And maybe that becomes a new industry model.
Those are my thoughts. It is clear that changes to the U.S tower industry are coming although the exact shape and form are yet to be determined. As with Part #1, I encourage you to share YOUR thoughts on this very important industry topic.