As LTE deployments in the United States accelerate this year, the nation's tower companies are ready for a fresh influx of revenue from both new site deployments and expansions of existing sites.
AT&T (NYSE:T) CEO Randall Stephenson said his company is building 2,000 new cell sites this year. According to estimates from RBC Capital Markets, AT&T also will have around 3,250 improvements to existing sites, with the majority of the work being done on LTE, as well as legacy HSPA work. Meantime, Verizon Wireless (NYSE:VZ) is expected to have between 1,000 and 1,300 new site deployments and 2,500 to 3,000 expansions to existing sites (known in the industry as site "amendments"), with the bulk of that for LTE. Due to their smaller scale, U.S. Cellular, MetroPCS (NASDAQ:PCS) and Leap Wireless (NASDAQ:LEAP) are all expected to have total deployment and expansion activity within the mid-hundreds range, according to RBC.
|RBC Capital Markets Wireless Cell Site Addition Estimates
estimates as of May 16, 2011
|AT&T new sites||930||1,454||1,889||1,822||2,500-3,100||AT&T appears to be the most active of all carriers. Its network build continues at a brisk pace with both new sites and 4G/LTE deployments. However, UMTS work appears to have slowed and possibly downscaled vs. prior targets.|
|AT&T lease equivalents added from overlays||1,875||2,500||1,400||2,200||3,250|
|T-Mobile new sites||2,500||3,359||3,062||2,236||1,100||Relatively slow start to 2011, expect a 2H weighted buildout. Company no longer appears to be targetting 900 rural sites in light of planned AT&T transaction.|
|T-Mobile lease equivalents added from overlays||2,000||2,000||2,792||1,381||675|
|Verizon Wireless new sites||2,418||2,426||1,600||327||1,000-1,300||Focus remains LTE, with phase 3 work commenced consisting primarily of overlays.|
|Verizon Wireless lease equiv. added from overlays||-||200||1,750||2,400||2,500-3,000|
|Sprint Nextel new sites||1,450||920||175||230||350-600||Earlier indications of robust CDMA site additions for 2011 (capacity and roaming-elimination) do not appear be be materializing. Preliminary network modernization work beginning in a few markets.|
|Sprint Nextel lease equivalents from overlays||1,338||420||-||125||500-1,000|
|Alltel||300||500||-||-||100||Early stages of an LTE network build at former Alltel properties acquired by Atlantic Tele-Network, but work not yet released.|
|US Cellular||420||400||402||366||500-600||Includes customary ~300 site additions plus LTE overlay impacts on leased towers|
|Clearwire new sites||1,045||1,000||4,175||9,500||500-1,500||Incremental population coverage is primarily in rural markets; we have noticed some overlay activity in existing markets as well.|
|Clearwire lease-equivalents from overlays||-||-||130||150||550|
|Leap Wireless||700||2,700||2,200||150||100||Expect primarily infill or expansion sites.|
|MetroPCS||1,100||1,850||1,100||150||300-550||Expect slightly greater fill-in and incremental expansion activities in 2011. Focus is on LTE overlay, with high overall volumes but minimal rent-amendment triggers.|
|MetroPCS lease equivalents from overlays||-||-||-||150||100-200|
|LightSquared||-||-||-||50||50-200||Inactive in all but 3 trial markets; with lengthy lease commencement dates. Sites leased likely to remain low pending additional investment or a meaningful carrier partnership.|
|TOTAL||16.1K||19.7K||20.9K||21.4K||14.1-17.8K||2011 tower demand drivers remain AT&T, Verizon, Sprint, T-Mobile and Clearwire. We believe LightSquared and several rural LTE builds are wildcards, but based on early indications could be additive to 2011 tower demand.|
|Note: Lease equivalents from overlays are based on assumptions that UMTS and LTE overlays trigger partial leases based on additional or replacement antennas and additional cabling.
(Data include site-equivalents from amendments/overlays).
Source: RBC Capital Markets estimates and company reports
Yet all is not entirely rosy for the nation's tower companies. The widespread deployment of 700 MHz spectrum could cut down on the number of LTE cell sites needed in rural parts of the country. Additionally, uncertainty about the AT&T/T-Mobile USA merger and the deployment plans of Clearwire (NASDAQ:CLWR) and LightSquared could put a crimp in the tower companies' bottom lines.
LTE deployments accelerating
Verizon is on track to increase the number of its LTE markets from around 55 today to more than 175 by year-end, covering 185 million POPs. AT&T named its first five LTE markets, set for a summer launch, and said up to 15 more would be coming by year-end, covering a total of 70 million POPs. Smaller carriers such as U.S. Cellular are also moving ahead with LTE deployments.
But what will those plans mean for tower companies? RBC analyst Jonathan Atkin said most of those LTE deployments will occur on existing sites, and that site expansions generate just one-third or one-fourth of the revenues that the rollout of a new site would.
But tower company executives are looking on the bright side. Crown Castle CEO Ben Moreland said the company, which is involved in deployments with Verizon, AT&T, Clearwire and others, believes its revenue from tenants "will materially increase over time through amendment [site expansion] activities, some of which will be 4G."
700 MHz - a boon or bane?
Verizon, AT&T, U.S. Cellular and others are using 700 MHz for LTE, and one of the chief benefits of the low-banded spectrum is its strong propagation characteristics. The result is that carriers may need fewer tower sites to cover the same area.
TowerCo CEO Richard Byrne acknowledged that there are some definite advantages to 700 MHz propagation, especially for inbuilding penetration, but said "at the end of the day, especially in densely populated areas, it comes down to volume of spectrum." He argued that, in cities, carriers will need to address capacity constraints with additional network equipment.
Atkin said the use of 700 MHz spectrum for LTE doesn't necessarily hurt tower companies, but it does dampen their advantages. "The only reason it would be a risk to towers is if all of the existing traffic would be migrated down that band," he said, but noted that 3G technologies likely will stick around for close to a decade. "It does take a while to replace the old with the new."
When AT&T announced its proposed $39 billion merger with T-Mobile, the company said the combination would increase its network density by approximately 30 percent in some of its most populated areas, while avoiding the need to construct additional cell towers.
John Stankey, the president of AT&T's business solutions unit, recently said that if the T-Mobile deal is approved AT&T will focus on consolidating the companies' 2G networks and aggressively migrating 2G customers to more advanced devices. As AT&T frees up T-Mobile's 1700 MHz AWS spectrum for LTE, T-Mobile customers will be migrated to AT&T's 1900 MHz spectrum, and in some markets where AT&T has a great deal of 1900 MHz spectrum, the transition could take around a year; in other markets it might take up to two years.
Analysts acknowledged that AT&T's purchase of T-Mobile, if approved, could eventually lead to the company shutting down some cell sites--but they said that wouldn't happen anytime soon. "In the near term, they're still going to leave to those towers up," Current Analysis analyst Peter Jarich said. Longer term, AT&T may choose to decommission cell sites as it consolidates, which could hurt tower companies and others leasing to T-Mobile. However, as AT&T adds more antennas and backhaul to existing sites, that will result in incremental revenue for tower companies.
Typically after a merger there is more network investment, Atkin said, and AT&T will have to pave the way for the migration. "It would have to be concurrently maintained," he said of the two networks. "You can't flip the switch overnight."
Clearwire, LightSquared and network sharing
Another question mark hanging over the tower industry is how the network rollouts of Clearwire and wholesale LTE provider LightSquared will play out.
There have been persistent rumors that LightSquared and Sprint Nextel (NYSE:S) will ink a network-sharing deal. Separately, Sprint CEO Dan Hesse said in May that Sprint and Clearwire have had talks about hosting Clearwire's traffic on Sprint's network. Looming in the background is Sprint's multi-year Network Vision project, which will see Sprint deploy new multi-mode base stations capable of transmitting LTE.
The prospect of Clearwire and LightSquared foregoing continued network deployments in favor of using Sprint's infrastructure could hurt the tower companies' bottom lines. "Would I rather have Clearwire and LightSquared build their own discreet networks? Absolutely," Crown Castle's Moreland said. "But I think that's practically not going to happen at this stage."
However, tower executives argued that any network-sharing deal could free up capital for longer-term deployments. Additionally, Sprint would have to negotiate new terms on its lease agreements to modify its towers and sites to accommodate the equipment to support Clearwire and LightSquared's networks.
"The rent I'm going to get is not going to be as high," TowerCo's Byrne said. "But I'm going get it faster, at a lot more sites and in a much more predictable fashion."
Byrne likened some of the uncertainty in the market over deployments to a game of musical chairs, but said he thought everything should be clearer in 12 months or so. "When you see a lot of change, like is going on now, we see a lot of the carriers trying to figure out how they are going to go about this," he said. "There is a lot of capital they have to spend. Things get a little choppy through this process. Eventually they are going to get some direction."