NEW YORK-Excluding the third-generation wireless impact, the number of cell sites for mobile communications in the United States likely will reach 140,000 in the next two years, said Ric Prentiss, senior vice president of equity research for Raymond James & Associates.
Citing Cellular Telecommunications Industry Association figures, he said 16,000 new sites were installed last year, bringing the total to 82,000. Just two years earlier, the overall number was 21,000.
“Three-to-five years from now, towers will be so close together, you won’t need more towers,” said Steven E. Bernstein, chief executive officer and president of SBA Communications Corp.
“The huge upside, which all of us in this industry have underestimated in our models, is tenant lease-ups per towers. At SBA, we have built a lot of capacity into our towers, of which about two-thirds are newly built.”
Prentiss and Bernstein were among the speakers at last week’s “Tower Industry Investment and Capital Markets Symposium,” sponsored by Shorecliff Communications Inc.
“There are an awful lot of business claims out there, and if you add them all up, they are more than the Gross National Product. We need to make sure the technologies are viable. I am not suggesting a wholesale collapse, but there will be [carriers] that won’t survive,” said Steven B. Dodge, chairman and chief executive officer of American Tower Corp.
Acknowledging that caveat, Dodge noted that American Tower is getting rents from comparatively new players, including: Metricom, “which has heavy equipment and a high rent structure;” US Wireless, “which will have a $600-$700 piece of equipment at our sites;” fixed wireless, “which looks like $1,500-$2,000 a month with good escalators.”
Without divulging details, Dodge added, “Stay tuned. It’s not just the tower rental business. A lot more things can go on at these sites to increase revenues.”
His keynote address seemed to provide an answer to a question posed earlier by John M. Bensche, chief financial officer and senior vice president of Lehman Brothers Inc.
To pay 40 times earnings before interest, depreciation, taxes and amortization for tower companies’ stocks, “you need to have more than the assumption of 2-and-a-half tenants per tower,” Bensche said.
“Three-to-four tenants per tower. That’s how you get comfortable paying 30 to 40 times EBIDTA (cash flow) for these stocks.”
Today, 95 percent of wireless carriers’ capital expenditures on network infrastructure is devoted to voice communications.
“The voice business is very lucrative. It’s still got legs,” Bensche said.
In the near future, data communications and third-generation wireless should drive demand for more coverage.
“Carriers will push more data out to the edge of their networks, in other words, onto our sites, in order to move it faster,” said Dodge, American Tower’s CEO.
Whether demand will translate into justification of high multiples paid for tower company stocks depends as much on how the carrier playing field evolves as on the evolution of wireless technologies.
“The 1.9 (MHz) re-auction will create a lot of new builds. Who (among tower companies) wins if Sprint (PCS), a 1.9 carrier, gets the spectrum? But if it’s Verizon Wireless, an 800 MHz carrier, Verizon will need new towers,” Bensche said.
Verizon Wireless “will be out of (spectrum) capacity by 2003,” and therefore is likely to be an active bidder in the 700 MHz auction in September, Prentiss predicted.
Any carrier that builds out a third-generation wireless license will need twice to three times as many cell sites as required by second-generation mobile communications, he added.
The magnitude of the third-generation wireless undertaking means it is conceivable that new kinds of players will enter the arena to share the costs and the benefits.
“If the NextWave (Telecom Inc.) licenses come back into the market, [America Online Inc.] and Yahoo! are very interested in owning spectrum. Why did AOL just buy a company that makes it easy to do [Short Message Service]?” Prentiss said.
“They are looking at the auctions but are concerned about price, so they may try to buy into carriers.”
NextWave, the bankrupt C-block carrier fighting to retain its licenses, bases its business plan on a carrier’s carrier model. The United Kingdom, which just completed its auctions for third-generation wireless licenses, also is considering this approach.
“The U.K. is looking at open, wholesale networks for 3G, as opposed to closed networks, because if they build all the towers that will be needed for 3G, Britain will look like a pincushion,” Bensche said.
“However, the history of telco network sharing is not that great.”
Packet data will need about six times as much network capacity per minute as wireless voice, and streaming video will require 12-to-15 times as much, said Frank D. Canty, senior consultant for Mercator Partners, a telecommunications strategy advisory firm.
“There are only so many minutes in a day for someone to consume voice services, but there is no inherent limit on data communications,” he said.
“The innovative applications for 2.5 and 3G are only now emerging. They will be spawned out of two mature services, the Internet and mobile communications, so there will be a fast time to market. But I don’t believe in [Wireless Application Protocol]; it is not compelling at all.”
While acknowledging that costs for initial deployment of next-generation wireless communications likely will be much higher than for second-generation, “the unit cost of coverage will be much lower than for 2G,” Canty said.
These conditions bode well for the tower industry because they coalesce around its great strengths-the ability to supply dense networks quickly on an outsourced basis, he added.
“In the United States, [Global System for Mobile communications] carriers have a strong path to 3G because they are part of an immense, worldwide system with access to large-scale innovation. And they have a whole lot of spectrum because they don’t have a whole lot of customers,” Canty said.
“Sprint has a strong upgrade path, but because [Code Division Multiple Access] is less developed and widespread, it will remain a second-tier technology. AT&T (Wireless Services Inc.) and Nextel (Communications Inc.) are in a remarkably poor position to transition to 3G.”
Relative to other countries, the United States is handicapped for next-generation wireless because it already sold the spectrum other countries plan to use for third-generation services. Therefore, tower companies best positioned to capture these opportunities will have an active presence outside U.S. borders, Canty said.
