Tower companies tend to fall into a safe and cozy place in the hard driving, fast moving wireless machine, seemingly immune to the pitfalls that plague carriers and network equipment suppliers, pitfalls such as subscriber churn, microprocessor shortages and a crashing stock market that has stripped even the toughest companies to the bare bones.
That has been the case, or the assumption, until now. The truth, however, is elusive.
While no one disagrees that wireless subscribers are increasing throughout the world, carriers have been struggling to deploy the network equipment to support all these subscribers at the same intense pace. And although tower construction and buildout, both from the company and investment perspective, is a smart bet, tower companies and carriers today are taking more steps than ever to make better use of their current assets.
“Tower companies are only building new towers where they have to,” said Keith Radousky, executive director of engineering and advanced technology implementation for Cingular Wireless.
Everywhere else, colocation is rampant. So much so, that Radousky fears a day is coming when there will be a shortage of tower space because zoning laws and community opposition will keep new towers from being built in the places where they are needed the most.
“Where there is the highest demand for service is where it’s most difficult to get zoned. Industrial areas are not where most of the traffic is,” Radousky said.
Essentially, tower companies today are not so much building out as they are adding on. Revenues from leasing, as well as service revenues-which can include acquisition, zoning, engineering, network design and maintenance-are taking increasing precedence.
Tucker Anthony Sutro Capital Markets said American Tower Corp., Crown Castle International Inc. and SpectraSite Corp. generate significant line and installation revenue from new antennas placed on their towers. The firm said revenue from installing a broadband-equivalent antenna is between $35,000 and $40,000, roughly equal to the annual lease revenue of two broadband antennas. These peripheral sources of cash give tower companies something to tap into when carriers are putting the breaks on buildout.
But Radousky and Frank Del Col, chief operating officer of privately owned tower company TrinTel Communications Inc., said overall, their business is not slowing down. Del Col said demand for buildout is everywhere, especially in second-tier markets and among affiliates because carriers are still trying to get coverage.
“Getting things right the first time has been an advantage for us,” Del Col said.
Radousky said Cingular builds out its networks in direct relation to minutes of use, and since those numbers have not gone down, Cingular has not slowed down its network buildout. He said buildout has been particularly active in Cingular’s West Coast markets.
“Based on our usage demand from our customers, you would not have noticed the economy has taken a blip,” Radousky said.
But the term “buildout” is used loosely, and in many cases does not refer to new or acquired towers. Despite the good progress reports, analysts think a slight slump is about to occur.
“We hear again and again wireless operators have to spend. In the long term we agree. We do not agree for the short term,” said a report from Tucker Anthony Sutro analyst James McIlree on the first-quarter performance of the tower industry.
The firm noted as long as one carrier spends in order to grab customers, everyone else will as well. But if the market stalls, as it has in the past six to 12 months, and one carrier decides to hold back on spending, all will follow.
“In that environment, no one `has’ to keep spending,” said the report.
Tucker Anthony Sutro points out that Nextel Communications Inc. had a shortfall on its capital expenditures and is cautious in the near term. Sprint PCS is sticking to its capx but is looking to save money where it can, and the firm suspects Verizon and Cingular have counted on favorable capital markets to raise cash to fund spending.
The firm is bullish on the tower industry, yet lowered its estimates for American Tower, SBA Communications Inc., Crown Castle and SpectraSite because although lease rates may pick up as the year goes on, 2001 revenues will still reflect carrier spending cut backs from the last half of 2000.
The broadband wireless segment of the industry, which many anticipated would add significant revenue to tower companies through colocation, has left its ugly mark as well. Both Radousky and Del Col said broadband tenants have failed to live up to expectations.
“They (broadband wireless carriers) never really got going. We’re still continuously supporting the voice efforts in the industry. The broadband guys are still struggling,” said Del Col.
Indeed, despite broadband and third-generation service hype, “voice is king,” said Del Col, and will continue to provide a steady stream of income and more and better construction and colocation opportunities for tower companies going forward. For carriers, Radousky said the next frontier will be found in buildings.
Carriers are starting to beef up network capacity and coverage in high traffic areas by putting antennas in buildings where significant mobile-phone usage occurs, such as in airports, malls and hotels. The operator-agnostic indoor antennas free up space on outdoor towers for tenants, which eventually will include various broadband operators and carriers needing more capacity for 3G services.
“We are a firm believer in 3G and think it will impact tower companies within the next five years,” said Tucker Anthony Sutro.
