When it discusses cost transformation, AT&T generally hits the headlines for radical new architectures, but there are far more pragmatic tactics which will also be important to keeping 5G total cost of ownership under control.
One is the relationship which the telco has with its tower operators. It has been trying to improve its balance of power with site providers over the past few years, aware that 5G will require far more locations – dense networks for high capacity urban applications and millimeter wave spectrum will both drive this. That means telcos must expand into new types of sites, such as lamp-posts, in numbers which will only be affordable if rental prices are negotiated on a very different basis to those of conventional towers and poles.
Following many reports of heavy-handed tactics to try to pressurize towercos to reduce their costs on established sites, while helping ease AT&T’s path to new locations, an agreement with American Tower signifies that the two giants may have reached a truce.
The pair announced a new, long term agreement and both claimed a victory in their multiyear rounds of negotiations, even though details of the terms, and the number of sites involved, were not revealed. American Tower is the biggest of the USA’s top three towercos – the others being Crown Castle and SBA – all of which have deals with AT&T. The latest announcement comes amid AT&T’s bid to sell 1,300 of the towers it still owns itself in the USA, a move to reduce its debt. That follows a similar announcement with Crown Castle.
American Tower said it expected to add $135m to its revenues this year as a result of the new agreement, and said this will raise its “property revenue” guidance for fiscal 2019 to between $7.34bn and $7.47bn.
AT&T has been adding to its site partnership roster to create more price competition with the big towercos, and to increase its ability to access non-conventional sites in a standardized way (rather than having to negotiate for each lamp post or rooftop individually). It has signed deals directly with some cities for use of their infrastructure, though some of these have come at a hefty cost (see inset). It has also been working with alternative site providers such as Tillman, CitySwitch and Uniti Towers to build new towers, carrying lower rental rates, close to existing sites where AT&T believed it was paying excessive fees.
It seems that, in return for additional business – presumably related to new sites, since we can assume per-site rentals have not risen in this deal – American Tower has agreed to streamline its processes and charging structures, to reduce operational cost and paperwork. JR Wilson, AT&T’s VP of tower strategy and roaming, said in a statement that the deal would “drive mutual value and growth through a simplified leasing process designed to drive efficiency and flexibility improvements directly benefiting our speed in deploying the latest technologies”.
There is speculation that American Tower has signed a more far-reaching or lucrative deal than its chief rival Crown Castle, which did not increase its revenue guidance when it announced its own AT&T arrangement. An important aspect will be support for AT&T’s build-out of the FirstNet public safety network, which will use 4G technology. The new agreement with American Tower is “essential for executing on both our 5G and FirstNet network builds”, said Wilson. “It ultimately helps us better serve our customers and first responders nationwide.”
However, Crown Castle has an advantage over its competitor when it comes to AT&T’s densification plans, since it has invested far more aggressively in small cell sites, including fiber and edge computing capabilities. This was a feature of the deal it announced with the telco in April 2018. This expanded leasing agreement covers sites for outdoor small cells and for FirstNet as well as macro sites.
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).
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, which has been putting heavy pressure on its towercos to reduce prices and increase flexibility, said at the time: “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.” Terms were not disclosed.
But the truce with Crown Castle did not stop AT&T expanding its newer partnerships., including one with Tillman Infrastructure. In autumn 2017, along with Verizon, it announced a highly unusual joint agreement with Tillman, which introduced both a new site provider, and a new approach to traditional site leasing, to the industry.
At the start of 2019, AT&T provided 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 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.”
“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.”
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. It is also building macro 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).
AT&T also has a deal with CitySwitch, which focuses on building new cell towers on a ‘to-suit’ basis. “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 2018. “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.”
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.
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.
At the time, 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.
The challenges of city cell sites:
As operators expand into city infrastructure to support dense urban networks of small cells, they have often had to delay deployment because of the cost and complexity of negotiating deals for these new sites. There are two main aspects to this challenge – agreeing on rental costs which make densification economically viable while providing cities with an incentive to support the new networks; and achieving a uniform, streamlined process for approving site access and equipment, in order to speed up time to market.
In May last year, AT&T scored a breakthrough on the latter point, with the influential City of San Jose (the ‘capital of Silicon Valley) – but this came at a high cost. The telco agreed to pay the city about $5m over a maximum 15-year period to access municipal site assets like light poles, throughout the metro area, in order to deploy about 170 small cells. AT&T will make additional payments to San Jose to hire or retrain staff, to speed up local permitting processes. The deal includes an upfront fee of $850,000 to fund new public works staff, and another $1m to help overhaul the city’s permitting processes as overall.
This was a major breakthrough, given the hostile disputes which have been going on between operators and cities in recent years over approvals processes and site access. The FCC has sought to impose more consistent processes for site and equipment approvals, to make it easier for MNOs to pursue their densification programs, but many municipalities have fought back, defending their right to make their own rules.
While most see the civic benefits of improved mobile broadband, they have pointed to the time and effort required to make and process approvals policies. And with each city having its own rules, there has been no opportunity for telcos to achieve a consistent process, which would reduce cost and time.
If other cities follow San Jose’s lead, MNOs could see their processes streamlined. Despite the cost of the deal, this is still likely to be cheaper, for a dense deployment in a major city, than negotiating and paying for each individual location to be approved. Of course, the business case is relatively easy to make in a city like this, which would be a key business target because of the wealth, heavy usage patterns and enterprise focus of its population. In less commercially attractive locations, the fees might be considerably less – and the tensions remain higher.
But AT&T has got what the MNOs most want – blanket approval for small cell deployments, provided the equipment stays within certain guidelines on size, power and so on. This will also be important for AT&T’s FirstNet and IoT deployments, which will require ubiquitous coverage.
AT&T surely made significant compromises. In the past, it has argued that fees imposed by cities should be capped at $50 a year for access to a section of the public rights-of-way, with an additional $50 a year for specific ROW infrastructure access. Some states have passed legislation that caps pole attachment fees.
San Jose’s city CIO, Shireen Santosham, was keen to present the AT&T deal in the context of digital access for everyone, noting that the city will dedicate fees from pole rentals to digital inclusion efforts. “This model is certainly a pioneering model. I don’t think any other city that I know of has really taken the revenues from these deals and earmarked them in this way specifically to bridge the digital divide,” he said.