Carriers may not love their tower partners right now, analysts at Evercore ISI say, but the romance is likely to pick up again next time they need to upgrade their networks.
Investors have been concerned about the tower market for months as operators increasingly look to small cells to densify their networks and as they prepare to spend billions for 600 MHz airwaves in the FCC's incentive auction. In a research note to investors in advance of the upcoming second-quarter earnings reports, Evercore said carrier spending on towers was stable, "albeit at muted levels." Verizon slowed its network investment slightly due to strike-related concerns, the analysts said; AT&T ramped up spending slightly; T-Mobile's investment was steady and Sprint's was "still a non-factor."
Unlike spending, though, bitter feelings toward tower companies were elevated during the quarter, Evercore said.
"Notably, carrier vitriol for towers appeared high – with checks highlighting an RFP for new builds from AT&T which would eliminate longer-term amendment fees," the analysts wrote. "In our view, it is easy for carriers to up the negative chatter in a down spending cycle, but when network investment re-accelerates all should be forgiven."
That re-acceleration may not occur anytime soon, however. Evercore predicted that spending will remain muted through the end of the incentive auction, and analysts generally agree that the recently announced $86 billion clearing cost will probably extend the event to late in 2016 or even into 2017. Evercore analysts said they expect at least one more reverse auction round, and that new carrier accounting methods meant to address the growth in equipment installment plans (EIPs) will have a negative impact on the free cash flow of Verizon and AT&T, which will limit their spending in the near term.
The Evercore note echoes a recent report from MoffettNathanson that indicated carriers are increasingly pressuring tower companies to lower their fees and make it easier for operators to maintain their antennas. AT&T, in fact, is rumored to have published a list of high-rent towers it specifically wants developers to target with promises of business in exchange for building new towers nearby.
But both analyst firms agree that carriers simply don't have many viable alternatives when it comes to operating their networks. So while spending may be relatively stagnant over the next several months, it will almost surely pick up again once the incentive auction is complete and carriers begin to aggressively pursue 5G.
"Tower companies are long-term infrastructure plays – and operators remained positive on key secular dynamics," Evercore reported. "Medium- and longer-term catalysts include the connected car, FirstNet, Dish's spectrum, AWS-3 spectrum, and 600 MHz spectrum. Additionally, 5G (as a list-mile wireline solution) will likely add to secular demand."
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