Crown Castle's small-cell business is paying off, while American Tower remains focused on DAS

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Crown Castle believes its small-cell business could eventually rival macrocells.

Crown Castle’s small cells are beginning to pay off in a significant way, according to Wells Fargo Securities, and the company believes its small-cell business could eventually close the gap with its macrocell efforts.

Meanwhile, American Tower continues to avoid the little transmitters as it focuses on the indoor DAS (distributed antenna systems) segment.

Crown Castle has 25,000 small cells in its deployment pipeline, said Wells Fargo analysts after meeting with both companies at the National Association of Real Estate Investment Trusts conference in New York this week. The tower company estimates that it wins roughly half of the rollout contracts for which it competes in its current markets, although “it would require a lot of external labor” to reach its goals.

“In markets where Crown Castle owns the underlying fiber, the company is experiencing returns on small cells ahead of initial internal expectations,” Jennifer Fritzsche of Wells Fargo wrote in a note to investors Thursday. “Crown Castle noted its $6 billion investment in fiber assets is yielding 6% to 7%, which is ahead of early days of macro towers, which yielded 2.5% to 3%. Those macros are now yielding +10%.”

And while Crown Castle pegged the number of active small cells in the United States around 200,000, the company believes the market could eventually support 4 million to 5 million nodes.

“Crown Castle CEO Jay Brown expects the small cells total addressable market to be similar to that of macros over time,” Fritzsche wrote. “That is to say, he believes small cells could account for about $9 billion to $10 billion per year.”

U.S. carriers are increasingly looking to small cells as a way to densify their networks—particularly in urban areas—while minimizing costs as they increase capacity in advance of 5G deployments. The segment has been slowed, however, in part by a hodgepodge of zoning and permitting processes at the local level.

Analysts generally agree that the segment will continue to pick up steam as those headaches are addressed at the federal and state levels. But American Tower—which, along with Crown Castle, dominates the U.S. market—has yet to jump into the market, Fritzsche wrote, because it doesn’t want to compete with the fiber providers upon which its business depends.

“American Tower reiterated its preference for indoor DAS solutions, and noted it can achieve similar economics to the macro tower business,” the analyst wrote in a separate research note. “The same cannot be said for outdoor small cells, and American Tower has no plans to get into that segment. (Chief Financial Officer Tom) Bartlett believes that in order to make that model work, one must own the fiber, and compete in the enterprise space, which would be to compete with its customers.”