Analysts: Sprint's reported network overhaul is high-risk, high-reward

Few details are known about Sprint's reported plans to save $1 billion by moving its towers from space leased by American Tower and Crown Castle to government land where rent is cheaper, as reported by Re/code last week. But analysts agree that it would be a high-risk, high-reward strategy.

And they also agree that Sprint's silence isn't helping the carrier's overall position.

In addition to moving toward smaller towers installed on government land, Sprint (NYSE:S) is looking to trim roughly $1 billion a year it pays to AT&T (NYSE: T) and Verizon (NYSE: VZ) for use of their fiber-optic cables for tower backhaul. Instead, the nation's fourth-largest carrier reportedly plans to use microwave technology to link its cell towers to telecom networks.

As Walter Piecyk of BTIG noted, neither of these developments is entirely new: Sprint has openly discussed moving to small cells using wireless backhaul to cut network costs, although its recently finalized plans appear to be more drastic than previously anticipated. And because the carrier is likely locked into contracts with traditional tower companies for the next several years, a major transition isn't likely to happen overnight.

"The tower companies we spoke with seemed unaware of Sprint's latest version of its network plan and noted that tower leases extend for 5+ years," Piecyk wrote. "Sprint's lack of information on the network has created confusion in the market which may be extending to potential customers. Press stories about cell site reductions is simply not the best way to convince consumers that Sprint's network performance is about to improve…. Even if Sprint is highly confident that it is on the cusp of delivering a superior network performance, why not start marketing that now?"

Executives at American Tower and Crown Castle didn't directly respond to FierceWireless' request for comment on the topic.

Evercore ISI also noted the long-term contracts used by tower companies, adding that each one it spoke to has an average remaining term with Sprint of five to six years, limiting the near-term risk for companies such as Crown Castle and American Tower. And those lingering contracts would complicate a major network transition as the deals expire one at a time.

"Our industry contacts pointed to two primary reasons why relocating equipment could be challenging: (1) substantial labor and other relocation costs, and (2) interim network management," Evercore ISI wrote. "As to this second point, because tower leases do not roll over on a city-by-city basis, S would only be able to relocate a handful of sites each year per market. Attempting to relocate just a few towers could create meaningful network topology challenges. Finally, we also believe a shift of this sort would create meaningful network service disruptions -- not dissimilar to those experienced by S customers during Network Vision."

According to Re/code, Mobilitie is one of the vendors Sprint is working with to locate its cell towers on government land. The privately held company has been linked to Sprint before; Wells Fargo analyst Jennifer Fritzsche last year said Sprint plans to deploy around 70,000 small cells and had struck an agreement with wireless infrastructure firm Mobilitie to deploy around 20,000 of the small cells. Representatives from Mobilitie did not respond to questions from FierceWireless on the topic.

Wells Fargo's Fritzsche cited Sprint's checkered past of network overhauls as well, observing that the carrier "needs to be solely focused on avoiding mistakes of the past, where network overhauls caused major disruptions in the network's performance."

Finally, analysts questioned just how effective a strategy employing small cells using wireless backhaul can be. Small cells can be more efficient and economical than traditional macro sties in many instances, but "we are highly skeptical of a strategy that cuts the coverage and broad capacity offered by the macro site layer," Piecyk wrote. "While it's hard to imagine that operators can deliver the ubiquitous performance and capacity with small cells, it is clearly an area of investment and could provide some longer term growth impact to tower companies. Ultimately, if small cells deployed every eighth of a mile, the bigger risk might be to the fixed broadband industry."

For more:
- see this BTIG post (reg. req.)
- see this Re/code report

Related articles:
Report: Sprint to cut $1B by moving towers to government-owned land, backhaul to microwave
Sprint CFO: Customers now on LTE 90% of the time
Sprint takes crown for lowest LTE wireless latency speeds in Q3 2015
Sprint's Robbiati vows to keep improving on the network and churn even amid cost cuts
Ericsson: E band spectrum key to boosting microwave capacity