Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Small cells may be one of the hottest topics in the wireless infrastructure space today, but their impact has yet to show in the United States and many are beginning to question their relevancy: Do they really matter, and, will they really play a major role in U.S. wireless carrier networks and the marketplace? Or will they go the way of Ethernet exchanges, VoIP peering, microwave backhaul, 40 gigabit wavelengths, WiMAX, and … well, you get the idea.
With the initial LTE builds of Verizon Wireless and AT&T Mobility nearing completion, the next steps in network expansion will revolve around densification. These efforts, combined with continued capacity expansions, will drive new network requirements, which is where we find the strongest theoretical case for small-cell expansion. This expansion period can’t come soon enough for an entire ecosystem of equipment vendors, tower operators, site acquisition companies, fiber backhaul providers and others, which have little to show two years into what was billed by some as the era of the small cell. As with most new network technologies, adoption has been slower than analysts expect, but expansion needs remain. With business still in the early innings, questions about small cells should be rooted more in whether or not there are alternatives that are more economical or if key market impediments exist that need to be overcome in order for a carrier-deployed, small-cell boom to begin. Let’s dig in further to have a look.
Wireless expansion is a foregone conclusion
At this point, all carriers are talking traffic growth and the need for network expansion to support this growth. Ericsson recently released a report forecasting seven-fold growth in North American mobile data traffic between 2013 and 2019. Cisco estimates dovetail with this estimate, predicting five-fold growth from this year through 2017. Wireless carriers have established even more aggressive targets for traffic growth, expecting LTE expansion to drive adoption over the next five years in the same way smartphone adoption drove usage well past estimates over the previous five. These carriers are heavily focused on supporting this exploding end-user demand at a high quality of service, but face restraints on spectrum availability and, therefore, are focused on building network density. Since adding cell sites directly improves service and network capacity, small cells can play a role here, but the extent to which they impact the market depends on which flavors carrier network expansions come in.
Small cell alternatives
Carrier-deployed small cells (metrocells, microcells, picocells and the like, but not consumer-deployed femtocells) are not the only game in town when it comes to bolstering network density. Simply adding more macro cell sites and/or splitting existing cell cites provides a reliable alternative to small cell deployment, and on earnings calls, tower companies have been vocal about already immense but also rising opportunities surrounding these more traditional alternatives. American Tower, for example, recently indicated that 40% of current contract amendments for business from U.S. operators are coming from requests for additional co-locations at current sites compared to 30% in the year prior quarter (the remaining 60% of requests are centered on pricing changes).
Additionally, in specific areas, distributed antenna systems (networks of antennas connected to hubs) remain viable alternatives as well and have been effective in shopping malls, sports stadiums and other areas associated with amplified coverage requirements. Here again recent earnings calls highlight business development opportunities in these areas, with Crown Castle (which entered the business through its 2011 acquisition of NextG) and American Tower (which has taken an organic growth approach) reporting ongoing demand for DAS solutions. In other words, just like macro cells and cell splitting, DAS solutions offer market-tested alternatives to scaled deployments of small cell networks.
It’s the economics, stupid
When considering the options outlined above, we must consider the costs of small-cell deployments, each of which includes the upfront costs of site acquisition, permits and zoning, construction and network engineering. Recurring costs include all those associated with macro sites – network maintenance, backhaul, site leasing costs, utility costs, etc.
While each of the cost elements has its own issues, Atlantic-ACM’s interviews with ecosystem participants find that the key recurring cost item that remains a stumbling block in the economics of small cells is backhaul. Wireless operators expect macro site backhaul characteristics for each small cell but at significantly lower price points. In turn, in many cases wherein backhaul providers would need a new builds to anticipated small cell locations, challenges exist with respect to making return on investment targets fit within expected prices. Thus, without sacrifices on backhaul technology, operators may struggle with deployments outside fiber-rich, dense central business districts. In the end each of these cost components has the potential to jeopardize deployments and we can easily conjure up scenarios wherein the net costs of additional macro cell deployments are more favorable than small cell deployments. As a result of this reality, participants in the small-cell ecosystem are searching for ways to work with operators to generate cost effective solutions that make the economics work.
The bottom line
Small cells continue to present intriguing technologies with the potential to meet operator requirements for expanded density (and capacity) and maximize the use of existing spectrum assets. In the future as small-cell players innovate, driving stronger economic viability, look for outsourced models wherein ecosystem players provide more than single-element solutions, perhaps including outsourced servicing and maintenance that enable carrier to better justify small cell expenditures. For now since the economics of small cell deployments have yet to be fully defined and workable alternatives exist, the long-term outlook for small cells also remains not well understood, and whether or not they are relegated to niche applications or will generate the small-cell boom many analysts have predicted remains to be seen.
Aaron Blazar works as a VP for Atlantic-ACM on projects ranging from market sizing and forecasting to corporate strategy covering both the wireline and wireless telecom markets. Blazar has a broad perspective on the telecommunications industry and expertise in market segmentation, market analysis, market entry strategies and statistical analysis.
