The US’s Crown Castle has been a trailblazer for towercos looking to extend their business model into small cells. That has involved investing heavily in fiber to support backhaul for dense neutral host networks. The company has announced its fourth fiber-related acquisition in two years, paying $600m for privately held Wilcon.
The acquisition, from Pamlico Capital and other holders, will add 1,900 route miles of dark fiber to Crown Castle’s arsenal for small cell backhaul, mainly around the California cities of San Diego and Los Angeles. It will bring the towerco’s dark fiber total to 28,000 route miles, once the deal closes, probably in the third quarter.
During the first year after that close, Wilcon is expected to contribute about $40m to gross margin and about $10m of general and administrative expenses, said Crown Castle.
Its CEO, Jay Brown, said in a statement: “With its complementary footprint, we expect to benefit in the near term by leveraging Wilcon’s assets to execute on our substantial and growing pipeline of small cells,” Brown said. “Longer term, we believe Wilcon’s well located assets across the greater Los Angeles and San Diego metro areas, combined with its currently low utilization rate, provide us with a long runway of growth opportunities to pursue small cell deployments for our wireless customers as they seek to improve and enhance their networks to meet growing demand for high speed, high capacity wireless services.”
Analysts praised the deal for filling in gaps in Crown Castle’s existing dense fiber footprint. Jennifer Fritzsche of Wells Fargo pointed out in a client note that “the biggest cost element of the small cells model is fiber, and the more CCI owns of the underlying asset, the better the long term margin profile”.
The MNOs themselves are also investing heavily in fiber to support densification, high capacity backhaul and Cloud-RAN fronthaul. But in many cases, operators will find it more cost-effective and simpler to use a neutral host for their small cell infrastructure, rather than negotiating every site and fiber link themselves.
The most recent dark fiber deals struck by Crown Castle, before this one, were the acquisitions of FiberNet, Sunesys and 24/7 Mid-Atlantic. Last year, it paid $1.5bn in cash to buy FPL FiberNet from NextEra Energy, gaining 11,500 route miles of fiber. Before that, it acquired 24/7 Mid-Atlantic with 800 route miles of fiber, and Sunesys, which gave it a further 10,000 miles of fiber in major metro markets.
In November, Brown told an investor call that in 2013, his firm had counted 300 “tenant nodes on air” on approximately 100 miles of fiber in Chicago, or approximately three tenant nodes per mile of fiber. “Fast forward to today, we have approximately 1,100 nodes on air and under construction on 250 miles of fiber, with the tenant nodes density at approximately five tenant nodes per mile. This results in a yield on our investment in Chicago of about 10%,” he said.
At that time, Pacific Crest Securities analysts said they believed Crown Castle had deployed about 19,000 small cells.
Dark fiber is one of the growth areas in the wholesale ISP business. Sunit Patel, CFO of Level 3 – now part of CenturyLink – told a conference last fall: “We are in the dark fiber business, and it’s a growing business for us. Dark fiber is a solution that works for a certain narrow band of customers that have the scale and the resources to manage lighting it up and looking after that.”
Although AT&T and Verizon remain the biggest owners of fiber, even they need to fill in gaps in their coverage as they densify their networks and move towards 5G. Despite its purchase of XO, and its previous acquisition of MCI, Verizon has signed dark fiber deals with more than 10 providers in areas where it does not have its own footprint, as well as acquiring XO. Densification and small cells will only accelerate that trend.
As well as established ISPs, and regional telcos like Lumos, there are emerging US players focused mainly on dark fiber for telcos, including Cleareon, Cross River Fiber, Fatbeam, FiberLight, summitIG and Zayo.
Zayo’s CEO Dan Caruso has said that, while revenue growth has mainly come from fiber to macro towers, there has recently been a rising element from small cells. “I think small cells will become the larger opportunity relative to macro towers,” he said.