BTIG downgrades Crown Castle over small cell market concerns

Crown Castle's small cells business is threatened by both push-back from local municipalities and the lower rents the smaller antennas can command, according to BTIG Research.

While Sprint (NYSE: S) has been the most vocal proponent of small cells among U.S. carriers, all of the major operators are looking to the smaller transmitters to minimize costs as they densify their networks. But vendors such as Mobilitie – which is helping Sprint roll out as many as 70,000 small cells across the country – have been accused of deploying equipment on public rights of way haphazardly and sometimes without receiving the proper approvals.

So some local governing boards have taken stricter measures to better manage small cell deployments. That has caused something of a backlog for carriers hoping to build out their small cell footprints more rapidly.

That trend is likely to expand across the country. And it isn't all Mobilitie's fault, BTIG noted.

"Many markets face incremental challenges driven by the backlash from the aggressive tactics of Mobilitie," Walter Piecyk of BTIG wrote in a research note. "We previously noted how the planning commission in San Francisco voted in favor of a code amendment to deal with the proliferation of small cells better and insure their ability to force operators to clean-up shoddy work by requiring permit renewals after 10 years. We suspect that trend to continue in other towns and cities throughout America."

Carrier representatives have said it often takes two years to complete even a minor small cell, starting with the submission and approval process through actually completing an installation. While analysts say those processes will likely become streamlined over time, the bottlenecks may actually grow in the short term. 

"And to be clear, Mobilitie shouldn't shoulder all of the blame," Piecyk wrote. "As we continue to peel the onion, we are finding examples where Crown Castle's siting practices are aggravating local communities as well, as shown in the picture above which alleges the actual size of CommScope small cell equipment versus what was proposed by Crown."

Meanwhile, tower companies can't charge as much in rental fees for small cells because they simply don't require as much real estate. BTIG predicted Crown Castle will see a 23 percent jump in small cell revenue, but said the antennas will still represent only 15 percent of the company's overall rental revenue next year. So while small cells will only continue to gain favor among operators, they may not be a cash cow for vendors anytime soon.

"Despite these delays to the further densification of wireless networks, the proliferation of tens of thousands of small cells for each wireless operator is inevitable and will likely be a sustained investment program," Piecyk wrote, downgrading Crown Castle shares to neutral from buy but noting that the move isn't based on any expectation of material under-performance in the second quarter. "Dealing with local push-back is not a new issue for the industry, although investors should recognize that the scale of deployment and the tactics of using right of way will raise new community concerns."

For more:
- read this BTIG research note

Related articles:
Mobilitie downplays small cell concerns, says Sprint really is spending on network upgrades
Sprint faces questions on Mobilitie's small cell rollout efforts, handset write-off costs
Crown Castle sees strong potential in small cells -- American Tower and SBA, less so
Sprint's Saw: Our network densification won't be 'a traditional slow and expensive build'
Verizon, T-Mobile lead Q2 network spending, but AT&T and Sprint poised to boost investment
Verizon, Sprint, others turn to carrier aggregation, small cells for remainder of 2015 capex