The 3 big topics affecting the U.S. tower industry today

macro cell wireless tower (Mike Dano / FierceWireless)
Crown Castle is expected to report earnings Wednesday. (Mike Dano/FierceWireless)

Crown Castle is scheduled to report its first-quarter earnings late on Wednesday. The company is one of the nation’s three largest cell tower operators—along with SBA Communications and American Tower—and it’s facing a handful of major issues as it heads into the earnings season.

Accordingly, here are the three main topics facing the nation’s top tower operators today:

1. Disruption

The nation’s wireless carriers are clearly working to gain leverage against the tower companies from which they lease antenna space. Carriers’ efforts in this regard were highlighted in 2016 when AT&T confirmed “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.”

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More recently, top operators have made clear their intention to take alternative routes to cell tower operation. For example, Sprint parent SoftBank and Lendlease Group last year announced a joint venture to buy or manage roughly 8,000 towers in the United States. And Verizon and AT&T announced a joint venture last year with Tillman Infrastructure to build and share hundreds of cell towers.

But Wall Street analysts at Morgan Stanley Research believe that tower companies “remain in the driver’s seat.”

“We understand the carriers' frustration with rising tower leasing costs, but we think their negotiating position is weak,” the analysts wrote in a report this week. “Like premium content providers or other types of real estate, the tower companies should maintain pricing power (though they may use it to achieve a different mix of results). Importantly, if the Tower companies don’t reach a deal, they continue to generate economic returns on their portfolios and they can reinvest in international acquisitions or small cell build-out. On the other hand, if carriers hold out for too many quarters, quality declines, churn rises, and pricing power diminishes. Even if carriers did negotiate better terms, tower spend is only about 4-5% of wireless service revenue. In the end, we expect the tower companies to achieve the better terms.”

Nonetheless, such issues may well be something that Crown Castle executives will address in their first quarter earnings report.

2. Mergers & Acquisitions

Reports that Sprint and T-Mobile have re-entered merger negotiations sparked a drop in tower company stocks on worries that the transaction would remove a major tower company customer from the market. A combined Sprint and T-Mobile presumably would need fewer towers than the two independent companies.

But at least one Wall Street research firm argued the situation wasn’t necessarily dire.

“While we caution that it remains unclear if a deal will ultimately be consummated, we believe the sheer threat will limit upside until clarity is provided considering the material impact such a deal would have,” the analysts at Cowen wrote in a recent report. “As a reminder, American has recently said Sprint and T-Mobile each contribute about 8% to consolidated property revenue and that overlap revenue is about 3-4% and they have an average remaining term of around 3-4 years; Crown has recently said Sprint and T-Mobile contribute about 15% and 20% respectively of rental revenue and that overlap revenue is about 5% and they have an average remaining term of around 5-7 years; while SBA said (back in 2016) that Sprint and T-Mobile each contribute about 16% to total site leasing revenue and that overlap revenue is <5% and they have an average remaining term of around 3-5 years.”

The analysts added that, if Sprint and T-Mobile do reach a merger agreement, the transaction still shouldn’t affect tower companies too much because, in part, “both T-Mobile and Sprint will continue to invest in their networks while they await potential approval.”

However, M&A activity will surely be a topic for tower company executives to address in the first quarter.

3. Network build-outs

Based on commentary by wireless carrier executives this year, it’s clear that mobile network operators are preparing to increase spending on their respective networks.

Specifically, AT&T is expected to start deploying equipment for its WCS and 700 MHz spectrum, while Sprint is expected to significantly increase spending in order to expand its 2.5 GHz operations while moving into 5G technology. And T-Mobile continues to deploy new 600 MHz and 700 MHz spectrum.

That work will likely translate into increased and expanded tower lease agreements. For example, the analysts at Wall Street research firm Barclays wrote that Crown Castle is expected to gain from “better-than-expected U.S. spending trends led by rising network investment at AT&T and Sprint, coupled with improving returns (thus increasing validation) of its small cell strategy.”

Indeed, Crown Castle and AT&T recently inked a new agreement that covers both towers and small cells.

Even so, tower company executives will likely continue to offer details on operators’ build-outs, particularly as the U.S. wireless industry works to launch 5G as early as this year.

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