The US mobile operators, especially AT&T, have been making concerted efforts to disrupt the traditional towercos, aiming to reduce their costs ahead of densification and 5G (Verizon has set a target of slashing operating costs by $10bn over four years, in which new approaches to sites is one tactic).
Last fall, Verizon and AT&T announced a highly unusual joint agreement with a company called Tillman Infrastructure, which introduced both a new cell site provider, and a new approach to traditional site leasing, to the industry. AT&T followed that with an amended relationship with one of the big three towercos, Crown Castle; and another new tower partner, Cityswitch.
Now, AT&T has come out with a bullish update on its side of the Tillman alliance, clearly sending a positive note to its shareholders, but also a warning signal to its traditional tower partners.
In its update, AT&T was explicit that its its three new deals were “designed to disrupt the traditional tower industry business model”. It said that, since signing with Tillman in November 2017, “hundreds of towers have been completed and hundreds of additional new sites are underway. Rather than to accept limited options with restrictive conditions from the nation’s largest cell tower companies, AT&T is focused on creating a diverse community of suppliers and tower companies that embrace a sustainable business model.”
The aim, as well as reducing AT&T’s costs, will be to accelerate the process of adding sites, in order fill gaps in current infrastructure coverage – especially as networks densify and new site types like lamp posts come into play.
But behind all the talk about speeding up 5G deployment and bringing high quality services to US citizens, the main message is clear – AT&T wants its towercos to reduce their prices and be more flexible, otherwise it will look elsewhere. This is not just about new sites – the Tillman towers are “an opportunity for AT&T to relocate equipment from current towers with other landlords as leases expire”, warned the telco.
“Our work with Tillman Infrastructure exemplifies our future model for the cell tower industry,” said Susan Johnson, AT&T’s EVP for global connections and supply chain, in a statement. “We’re committed to working with vendors who offer a sustainable cost model while also delivering best in class cycle times and tower construction.”
Bill Hague, CEO of Tillman, added: “We’re bringing a real alternative to the tower infrastructure space for all mobile operators, with competitive pricing and flexible lease terms that accommodate sustainable growth. We will continue to work aggressively to construct and operate thousands of additional sites.”
When the Tillman deal was first announced, Nicola Palmer, chief network officer of Verizon Wireless, commented: “It is imperative to reduce operating costs. We review all of our long term contracts as they come up for renewal and we are excited to develop new vendor partners to diversify our infrastructure providers.”
Tillman, which already owns and operates towers, small cell sites and city infrastructure, is an example of a company which is smaller than the US giants, but aims to use the new approach to network roll-out to ease its way into their core customers via their requirement for new sites such as lamp-posts or rural poles.
But while operators may favor a partner with a broad portfolio and added value services, the major cost element remains the traditional tower. Tillman will build these towers on a ‘to-suit’ basis geared to the needs of AT&T and Verizon, and in return they have committed to leasing and co-anchoring the co-located sites for a period of time (unspecified).
Meanwhile, AT&T’s deal with CitySwitch focuses on building new cell towers on a ‘to-suit’ basis, which is becoming a strong driver in many other parts of the world. The new partner has started building its towers in locations indicated by the telco, and will then lease them, when completed, to AT&T. By contrast with Tillman, there has not yet been an official progress update.
“Working with CitySwitch means more alternatives to the traditional tower leasing model still followed by many. The traditional model isn’t cost effective or sustainable,” Johnson said when the agreement was announced in April last year. “This deal is another step in continuing to diversify our suppliers based on site needs, increasing competition in the provision of tower space and exploring new avenues to cut costs.”
“With AT&T’s nationwide FirstNet build project underway and 5G on the horizon, it’s important AT&T addresses its network real estate needs in new and thoughtful ways. We are pleased to play an important role in this now and for many years to come,” said Rob Raville, CEO of CitySwitch.
Of course, as that indicates, the timing is good to put pressure on towercos since AT&T is embarking on its biggest roll-out for some time, combining the FirstNet deployment for public safety; LTE expansion in small cells and in supplementary bands such as WCS, 700 MHz and AWS-3; and 5G in millimeter wave, 600 MHz and sub-6 GHz bands.
That opportunity, and the urgent need to keep most of it for themselves, is sure to provoke a response from the major towercos – Crown Castle, American Tower and SBA, in particular. Some of that response has been ill-considered. American Tower briefly initiated a program to bar its contractors from building new towers within half a mile of an existing AT site – it quickly backed away from that approach.
But Crown Castle – which is the most advanced of the three in diversifying its model into small cells, edge compute, fiber and other neutral host activities – was also more flexible in its reaction to AT&T. In April 2018, it announced an expanded leasing agreement with AT&T that will include nearly all the carrier’s site requirements, not just macro towers – including sites for outdoor small cells and for the FirstNet public safety network build-out. The clear implication was that Crown had been brought close into the AT&T fold in return for being more flexible about its terms and conditions.
Announcing the agreement, Johns said: “This agreement marks a significant milestone in our relationship with Crown Castle. It establishes a market-based framework and simplifies the lease management and administration process. This will allow us to streamline network projects to better serve our customers.”
Currently, small cells are usually managed with completely separate site and operations processes to the main mobile network, and this has limited the ability to scale, especially if an MNO is having to deal with many small site owners rather than a single partner with a significant small site portfolio, as Crown Castle has been amassing, along with fiber assets for backhaul (which the towerco calls a ‘horizontal tower’ model).
Towerco analysts at Wells Fargo wrote in a client note in April: “We believe this announcement is a net positive for the towercos, particularly CCI. Recall, CCI bought AT&T’s ~9,700 towers portfolio back in October 2013. We have long thought CCI stands to uniquely benefit from providing a more holistic approach to carriers’ network builds by offering macro tower AND small cell solutions in the US.”
AT&T said the deal would streamline lease management and operations and give it improved flexibility to deploy whichever technologies were appropriate for particular locations and use cases. This will be vital to the economics of 5G, in which there will be far greater levels of density, and in which the lines between macro and small cells are already blurring.
For instance, many operators expect to deploy large numbers of ‘mini-macro’ base stations, which are larger than classic small cells but sit on roofs or street furniture. In addition, 5G and virtualized RANs will involve new types of equipment at the cell sites, with different site specifications, ranging from very stripped-down radio/antenna units to heavy Massive MIMO antenna arrays. And networks built for specific applications like public safety (as with FirstNet) or low power IoT will bring even more variations in terms of sites and equipment into play.
AT&T’s transformation of its tower relationships really started in 2016, when its former SVP of network architecture, Tom Keathley (now retired), said the operator was frustrated with the towerco model, adding: “There is a fair amount of frustration certainly with AT&T certainly with those business practices. I would even say it may not be sustainable going into the future. In fact, we’re looking at that pretty heavily.”
The carrier set up a taskforce to examine alternatives, followed by a new program “to evaluate terms and conditions of all leases coming up for renewal, explore advanced renegotiation options and consider possible alternative site locations. Our first choice is to create a new agreement that serves all parties well.” At the time, AT&T said it was particularly pushing for “fair” early termination rights, the ability to modify or upgrade tower equipment at no extra cost, reduced or eliminated price increases, and “rents reduced to competitive rates”, according to an internal letter. A ‘no’ or non-response would trigger AT&T’s review of alternate locations.
While Crown Castle, which gets more than 20% of its site revenues from AT&T, has taken a flexible approach, another option would be to brazen it out. Many Wall Street analysts are unconvinced AT&T, or even the carriers collectively, can pressurize the tower providers too much. Morgan Stanley researchers wrote in a client note: “We understand the carriers’ frustration with rising tower leasing costs, but we think their negotiating position is weak. Like premium content providers or other types of real estate, the tower companies should maintain pricing power.”
The analysts estimate that the towercos can cope with some new competition since they are not in a crowded market now. “On a national basis in a 0.5-mile radius, ~65% of towers have no competitor and just ~15% have more than one competitor,” the firm wrote. “Within a 1-mile radius, ~45% of sites nationally have no competitor and just ~35% have more than one competitor.”
Of course, that is why the telcos need to introduce new players into the mix, to boost price competition as well as support new site types. But the markets remain bullish about the US towercos, confident that there will be plenty of business to go around given densification and 5G.
Sprint rides on LendLease’s tower entry:
Sprint has been altering its cost structure through leaseback and other financing arrangements with its parent company Softbank, and just over a year ago, Softbank set up a towerco of its own in the US, in partnership with Australian property firm Lendlease Group.
The new venture, Lendlease Towers, sees each party committing an initial $200m to the initiative, to fund the acquisition of about 8,000 towers, including rooftops and poles, and the new firm is targeting $5bn of telecom infrastructure assets in the medium term. Sprint assets will be included in the portfolio.
Denis Hickey, CEO of Americas for Lendlease, said: “Consistent with our strategy of focusing on growing demand for infrastructure, we’ve identified the telco infrastructure sector as an opportunity to deploy our integrated business model.”
Part of Softbank’s agenda is likely to be to boost the effectiveness, and market value, of Sprint. Lendlease could provide a new, and more cost effective source of sites for the operator. Additionally, it could expand its business model as the idea of a utility operator emerges – one which differentiates itself with superior infrastructure which not only supports its own retail services, but a significant wholesale business.