Small cells will benefit many companies, but some winners are easier to predict than others
Small cell deployments in dense urban environments have progressed more slowly than many carriers and vendors predicted, but these technologies remain the primary way for mobile network operators to meet near-term capacity demands, according to analysts.
“The proliferation of tens of thousands of small cells for each wireless operator is inevitable and will likely be a sustained investment program,” said BTIG analyst Walt Piecyk in a recent research note. Piecyk said he sees “pushback” from municipalities as a challenge that will slow progress in the near term, but will not prevent the eventual progression of small cell rollouts. “In population dense areas, small cells and in-building systems are the only viable solution, as available spectrum has become scarce,” he said.
AT&T was the first carrier to announce a small cell rollout plan, but the company had to back off its initial target of 40,000 small cells, as acquisitions required more of the company’s attention and capital. Sprint was the next to announce a goal of tens of thousands of small cells – a year later, the carrier has only deployed a fraction of that goal but appears to remain fully committed. Verizon Wireless has not committed to a specific number of small cells, but is viewed as the most active carrier so far in terms of actual deployments. Verizon Wireless has said that almost all of its 2016 network investment will focus on densification, and that all of its small cell deployments are supported by fiber backhaul.
Fiber will be key to outdoor small cell success, unless efforts to use microwave backhaul prove more successful than expected. That’s why analysts are looking at dark-fiber providers as clear winners in the small cell race. Fiber providers are positioned to benefit regardless of which carriers or infrastructure providers deliver the first or fastest network. Of course several of these companies have considerable fiber assets of their own, but nonetheless some analysts see pure-play fiber providers as the most obvious winners in the small cell race.
“We believe Zayo is the best way to play the densification of wireless networks given the breadth of its fiber assets and its ability to leverage new investments across a broadening target market, although to be clear this is still a small driver of revenue,” said Piecyk. “We also believe the desire for dark-fiber solutions continues to broaden beyond just the largest service providers and hyper-scale customers.”
Analyst Jennifer Fritzsche of Wells Fargo recently issued a very positive report on Zayo, arguing that investors are overly concerned about the company’s high capital outlays.
“Zayo’s returns on invested capital [are] in the high-teens – which compare favorably to other telecom infrastructure names,” wrote Fritzsche. “An increasing proportion of Zayo’s [capital expenditures] has been toward major network expansions that have long sales cycles and are very capital-intensive. However, these projects are all underpinned by an anchor tenant contract that pays for all of, or at least a significant portion of, the estimated capex. While Zayo has spent $175 million, or 21%, of the estimated $813 million in capex for these network expansions, it has only installed 7% of that spend. In other words, we estimate Zayo could generate over $40 million in additional annualized revenue by simply installing its existing backlog of these projects.”
Late last week, Zayo announced that a “major U.S. carrier” had selected the company to provide fiber services in eight states. Zayo said the carrier will use 3,200 route miles, including Zayo’s existing long-haul fiber network and previously announced routes that are under construction. At this time, Zayo’s North American long-haul dark-fiber network includes a total of 29,000 route miles.
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