AT&T’s Tom Keathley said the operator has formed an internal task force to develop alternatives to the traditional cell tower space-rental business model. Keathley said tower companies’ current business practices “may not be sustainable.”
Keathley, SVP of AT&T’s wireless network architecture and design, discussed the operator’s efforts during the Cowen Communications Infrastructure Summit. He said AT&T is “frustrated” with the real estate rental model that tower companies have developed over the years.
“There is a fair amount of frustration certainly with AT&T certainly with those business practices,” Keathley said. “I would even say it may not be sustainable going into the future. In fact, we’re looking at that pretty heavily. We have a task force already assigned with the task to look at that business model. I don’t have anything to report on that yet, but the frustration is very real.”
When questioned what exactly AT&T is concerned about – whether it’s escalating payments for tower space, extra charges for amendments to agreements, or something else – Keathley said those are the types of issues AT&T is working to address. “Those are certainly points of frustration. I don’t know what the solution steps will look like, that’s really what we’re looking at right now,” he said. “But the fundamentals are cost per megabyte, and we’ve got to get to a place where we can sustain cost per megabyte, moving into cost per gigabyte. So the current business models are likely not sustainable in that environment.”
And what might AT&T do? Keathley acknowledged the carrier could go so far as to locate alternative, nearby towers and move its equipment onto towers that offer better rental rates. “It’s really about looking at what options we have when the contracts are up, per site, and determining whether or not those options make sense,” he said.
Keathley isn’t the first executive from a major wireless carrier to voice concerns over the tower industry’s business model – AT&T, like most other major wireless carriers, essentially rents space for its antennas and network equipment on wireless towers owned by the likes of American Tower and Crown Castle.
For example, Dave Mayo, T-Mobile's SVP of technology, told attendees at the recent Wireless Infrastructure Association event that the infrastructure segment is ripe for disruption as the industry moves toward 5G. Mayo offered a litany of headaches network operators regularly deal with when maintaining and upgrading their towers: "It's too complicated, it's not sustainable," Mayo said, calling for "industrialization" of the infrastructure market. "The area seems rife with opportunity from my perspective," he said.
Indeed, complaints about tower rental fees and contracts have grown so much in recent months that tower company executives addressed investor questions about the issue during their recently quarterly conference calls.
“While this topic I think over the last six months to nine months has maybe gotten more conversation than what it has over the last couple of years, it's not really a new conversation and we've had this conversation all the way dating back to kind of the 1999 period and it comes up from time to time,” said Crown Castle CEO Jay Brown during the company’s recent second-quarter earnings conference call, according to a Seeking Alpha transcript of the event. “And the value equation and the provision of that value to the carriers today is about a 2.5% to 3% cost of lease against the overall cost of the asset and we believe that the very attractive cost provision, as we share the asset across multiple carriers, and in essence provides them with a really low cost alternative, and frankly, we don't see that the pricing dynamic in the business or the overall structure or arrangements that we have with the carriers, we just don't see that changing.”
Moreover, analysts who follow the space remain positive on the tower sector and tower companies in general, mainly due to carriers’ continued investments in equipment for new spectrum like AWS-3 and 600 MHz, and a pending move to 5G technology.
“We emerged encouraged by our constructive mid-term view on the tower sector following the reports of all three tower players along with the major U.S. wireless operators,” wrote the analysts at Barclays in a note to investors following the close of the second-quarter reporting season. “While visibility on the timing of an inflection point in macro site investment remains elusive, the return to a broadly beat and raise pattern across all three (albeit mixed to modest in some cases) gives us further comfort in our view that estimates have largely bottomed across the sector with a potential for upward bias.”
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