DAS and small cells 'more hype than substance' as tower market remains healthy, Pacific Crest says

U.S. mobile network operators may rein in their investments in traditional macro cells as they densify their networks with small cells and DAS deployments, according to analysts at Pacific Crest Securities. But they'll have to ramp up their spending on towers eventually to keep pace with demand for mobile data.

"We continue to believe small cells and DAS are more hype than substance at this juncture, and while revenue from these segments should grow, we believe it will be difficult to ever reach equivalent margins of the macro tower segment," Pacific Crest wrote in a research note summarizing last week's Wireless Infrastructure Association conference in Dallas. "It appears that the wireless carriers are, at least to a certain extent, using the carrot of macro amendments and new colocation agreements in hopes to drive better contractual pricing and revenue escalators. We do not believe the wireless towers will bite on this near term…. The wireless tower business model remains very solid long term."

And master lease agreements (MLAs) continue to be unpopular among tower companies, although carriers still push for them, Pacific Crest said. Neither SBA Communications nor American Tower are likely to sign an MLA in the near future, and Crown Castle is no longer looking to create any incremental MLAs after some of its past MLA deals were criticized.

"While each of the towers offer a slightly different perspective relative to the small cell opportunity and DAS deployments, they also provided a generally positive, but also realistic, view of the sector going forward," the analysts observed. "One of several points of contention among conference participants was when accelerated growth might return to the tower sector, with some stating 2017, while others pontificating that it may be 2018 before meaningful growth returns. We tend to lean toward at least mid-2017 before growth accelerates given that AT&T still appears very focused on its DirecTV integration, and Sprint will likely take at least until that time frame to meaningfully integrate its disparate spectrum within a cohesive plan."

Pacific Crest also said some carriers are hoping to pay higher upfront fees in exchange for lower revenue escalators, but tower companies are resisting out of fear of commoditizing their business models. Pacific Crest touted the tower industry in its entirety, and said American Tower is particularly attractive "due to its diverse set of domestic and international assets."

Pacific Crest's research note follows a report by Wells Fargo Securities claiming that tensions between operators and tower companies are "at an all time high" as carriers continue to try to drive down macrocell pricing.

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