Quote of the Month – Coverage vs Capacity – 4G Cell Sites

Quick shout-out to Phil Goldstein for his article posted here today on FierceWireless.  Here is an excellent quote from it. 

Coverage vs. capacity: Cisco’s Visual Networking Index predicted earlier this year that mobile data traffic will increase 39 times between 2009 and 2014. To meet that demand, Clearwire CTO John Saw said there needs to be an industry-wide paradigm shift away from coverage and toward capacity. “Our cell sites are not able to meet the needs when we become a capacity-driven business and not a coverage-driven business,” he said referring to the broader industry. “Is it time to move up.”

Tower companies, Saw said, need to think less about macro sites and more about micro sites, picocells, distributed antenna systems and rooftop deployments for urban areas.”

The Wireless Tipping Point

Why Wireless Operators are Shifting Focus from Capex to Opex

In the book, Tipping Point, author Malcolm Gladwell describes a tipping point as “the moment of critical mass, the threshold, the boiling point.” The point where the sociological scale tips and “ideas and products and messages and behaviors spread like viruses do.”  Gladwell gives interesting observations of how once unknown products and behaviors reach the “tipping point” and become wildly popular and eventually commonplace.  I argue that such a phenomenon will occur in the near future in the wireless industry.  No, I am not making some bold prediction but rather simply pointing out an obvious fact – with nearly everyone in possession of a cell phone, the cellular industry is nearing market saturation and is transitioning into the mature phase of the business life cycle. 

In the cellular industry, operators rapidly blew through the introduction phase and are deep into the growth phase where it has been for the last ten to fifteen years.  With the onset of the maturity phase, however, comes the cellular tipping point. 

Here’s Business 101. When companies reach the maturity phase of the business life cycle they attempt to prolong a product’s life span by stretching this phase for generations.  It is a business school fundamental that the best way to prolong this phase is to reinvent yourself as many times as possible and simultaneously optimize margins.  While struggling as of late, the auto industry is a classic example of success in this endeavor.  Each year they introduce new models of old cars aimed at getting consumers to trade-in for a new/improved version. But auto makers only paid attention to one side of the equation. It has been the mismanagement of opex over the last several decades that has caused American auto manufacturers to falter – they simply can’t compete with foreign manufactures that can produce an equal or better car with substantially lower labor costs per vehicle. 

Back to the cellular industry. Operators are making the same competitive adjustments to their products.  Each carrier is upgrading their networks to the next “G” in an effort to reinvent themselves faster than Madonna. They are introducing new über-cool handsets so quickly you’re in constant phone-envy and the end of your two-year contract comes slower than a child’s Christmas morning. 

But unlike the auto industry, don’t think operators are ignoring opex. FierceWireless recently published an article entitled, “Operators now playing the opex game”, which points out that mobile operators can no longer focus on subscriber acquisition to grow and that they are now focusing on opex in an attempt to manage margins. While I have been forecasting this phenomenon as “the perfect storm” ever since AGL published my first article, I want to declare again that the tipping point is very close.  Over the next twelve to twenty-four months I argue that key industry executives and Wall Street analysts will make the reduction of wireless opex such common speak that the masses will shift from focusing on capex and speed-to-market to scrutinizing operating margins.  Are you prepared for this tipping?

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Why Cellular Operators Are Building Smaller Cell Sites

Picocell in Beverly Hills

The most common thing I heard at the CTIA 2010 trade show this week at the Las Vegas Convention Center was that wireless operators will need more spectrum as they deploy WiMAX and LTE networks – generally marketed as 4G. This need was discussed twice within the opening hours of the show. First at the opening morning Raymond James Breakfast Roundtable which was part of the Tower Technology Summit co-located at CTIA and more notably in the opening key note address by Ralph de la Vega, President and CEO of AT&T Mobility and Consumer Markets. While earlier this month the FCC announced its plan to free up 500 MHz of spectrum in the next ten years, 300 MHz of which is expected within five years, the mobile operators can’t wait that long. New smartphones are fueling an insatiable consumer demand for applications that hog bandwidth, which in turn will require mobile operators to manage the spectrum they have more efficiently.

For me, this was the tone of this year’s trade show and thus raised the obvious question – what are carriers to do until they get the additional spectrum they need? Answer: Perform cell splits— decrease the cell radii and insert more cell sites to try to eek out more capacity with the limited spectrum they have. The simplified math works like this – you can have several users all downloading large amounts of data through one 4G cell site or you can break that site into multiple smaller cell sites to spread the consumer demand. By subdividing cell sites carriers can try to get more capacity out of their limited spectrum, at the risk of decreased efficiency and increased interference in the network.

These smaller cell sites are known as microcells, picocells and femtocells. Microcells usually have a cell radius of one mile or less. Picocells have a cell radius of a city block or less. The equipment for a picocell can be quite small, even deployed on light poles or street corners in dense, urban areas and are common in large public facilities like football stadiums, shopping centers, office buildings, airports, etc. And femtocells are typically private cell sites in a home or small office with four or less private users. Click here for a prior opinionpole.net blog on femtocells.

One thing is for sure, none of these three types of small cell sites are found on top of the typical cell tower. While there will always be a need for traditional cell towers, particularly for rural coverage, and high rooftop cell sites in urban areas, they are going to become less critical as network traffic begins to get off-loaded to these sites.

Ready, Set, Rent!

Coke Bottle AntennaSee Full Article in PDF
When the A/B Block PCS Auction ended in 1995 an unusual real estate phenomenon occurred. Cellular operators paid way too much to lease it. No, this wasn’t driven by low interest rates, the refi boom, Option ARMs or teaser rate mortgages. It was driven by a race for market share.

And, boy, was it a doozy. An analog-based industry had just gone digital. Wall Street was throwing money at this new enterprise as they were starting to inflate the dot-com bubble, and the FCC found a new revenue source for something they had previously given away for free. 

Before there was an auction for spectrum, the government had employed an inefficient lottery system to allocate spectrum. When the government realized that they could be the ones making money out of thin air (as economist Peter Cramton quipped after the first auction 15 years ago), the wheels were set in motion for a new industry dynamic that would profoundly affect future operating costs and the way carriers do business.

I know because I was there. I watched as players like WirelessCo, AT&T, PCS PrimeCo, Pacific Telesis, GTE, American Portable Telecommunications, Ameritech Wireless, Western PCS, Powertel PCS Partners and others together paid in excess of $7 billion for spectrum and then turned around and spent billions more to build their network — all before even selling their first PCS phone. They needed the frequency to build the network. They needed the network to sell the phones. They needed to sell the phones to appease the investors. The race was on.

Continue reading – full article in PDF

500 Percent Penetration

As published in AGL Magazine (December 2009)

In his address at the CTIA Wireless 2009 convention regarding the future of the wireless industry, Verizon CEO Ivan Seidenberg made a compelling case that “500 percent penetration is not only possible, it’s probable. Imagine a day when you not only own a smart phone, but also a wireless card in your laptop, a service such as On-Star for your car, an Amazon Kindle that downloads books on Sprint’s cellular network, and a wireless MP3 player on which you can download music. Oh, wait! That day is already here. We even already have lifesaving devices such as wireless heart monitors that transmit your vital signs to your doctor before a heart attack occurs.

Actually, the advancements we will see in wireless health care go far beyond the medical e-records that President Obama promised as part of his push for health care reform. Donald Jones, an executive at Qualcomm and the chief wireless officer for the West Wireless Health Institute, told attendees at a recent CommNexus meeting in San Diego that we can expect to see the “Kindleization of healthcare.” Essentially, that means that not only will we have remote monitoring of all our medical conditions, but also we will even have wireless bandages, we’ll just push a wireless strip on the box when we are down to one bandage and a replacement box will be shipped to us. In other words, 4G is going to take wireless to an entirely new level. As Seidenberg pointed out, the day when cellular networks will not only connect people to other people, but also connect people to machines and machines to machines is upon us. And in our lifetime, we will see a house managed by wireless devices embedded in the HVAC, the oven and maybe even the toaster. So, it is not hard to imagine a world where each person has at least five wireless devices of some sort — thus, 500 percent penetration.

500 percent for cell sites

Multiple devices per user means more cell sites — lots more. No wireless operator will want to be the company that lost a connection just as grandma’s vitals were being transmitted to the doctor’s office. But, these newer cell sites will be much different from the sites built for traditional voice service. Cell sites for 1G and 2G networks were typically built for coverage, thus the tallest site available covered the greatest area. There weren’t as many subscribers, so capacity was not an issue. As penetration grew, however, fill-in sites with lower rad centers were built to increase the capacity of the network. As user needs develop and networks mature, RF designs tend to shift from coverage to capacity. Sites will be more subscriber focused, offering greater bandwidth, greater capacity and more flexibility. Currently, 3G and 4G technologies use various techniques to provide a tradeoff between capacity and range, so there are still a variety of high, low and in between sites. Technology has enabled carriers to increase the range of their sites by reducing the throughput of the devices. Technology combined with subscriber demand for faster data rates is necessitating the continuous building of more sites.

In other words, with only voice technology, you either had connectivity or you didn’t, and everyone within range of the mountaintop site had coverage. Now, as handsets evolve and subscribers expect greater data rates, sites are developed to support subscribers and are more capacity oriented. So, no single site is as important as it used to be. Although RF engineers avoid holes in coverage, the use of many more lower sites means smaller holes; thus, on average, individual sites are less critical. An analogy: If you have one car, it’s pretty valuable. Without it, you can’t go anywhere. However, if you have a fleet of hundreds of cars, any particular car isn’t as valuable because you have others that can temporarily take up the slack if necessary.

500 percent for tenants

Watching penetration climb past 100 percent (as it already has in many European cities) does not necessarily translate into a corresponding increase in average revenue per user (ARPU) for network operators. The $100 per month we pay for unlimited plans for our smart phones does not include the card for your laptop, which is a separate $60. Sprint doesn’t charge for the Kindle access — it is included in the purchase price of the device when you buy it from Amazon. com. Medical devices will most likely work the same way. Consumers won’t be willing to pay extra for the ability to reorder supplies — that is a cost that will have to be covered by the seller. Wireless carriers still have to figure out pricing schemes for embedded wireless. And while we wait for those pricing models to take shape, we can be sure that 500 percent penetration does not mean a 500 percent increase in revenue for carriers — and it never will.

In fact, for a multiple-device world to exist, devices and airtime must be cheaper — much cheaper. No one will pay $99.99 per month for a wireless link between their car and their microwave oven just to make sure their day-old pizza is warm precisely as they pull into the garage. It must be cost-effective to be attractive, and that means cell site tenants will continue to drive down costs to support their overall goal to reduce operating expenses to keep up with the cost of subscriber demands. And over time, the reality is that rent is the biggest carrier expense for a cell site.

 

500 percent for landlords

No one would question that needing more cell sites increases the demand for antenna locations, and that is good for landlords. But as previously mentioned, the new sites are different and more flexible. So don’t expect to see as many tenants begging for the same location. Just as the handset has evolved, so has the cell site and, thus, the cell site lease. Generally speaking, multiple, tall, rooftop sites have replaced the mountaintop site, and lower rooftop sites are replacing tall rooftop sites, and lightpoles and femtocells are replacing lower rooftop sites. If every house gets a femtocell, the tall tower is much less vital to the tenant. For a carrier, the big benefit of femtocells is that they improve coverage and capacity while reducing capital and operating expenses.

If the cell site network comes down to the level of one site per house, carriers are not going to pay $1,800 per month for that site. As a matter of fact, carriers are not willing to pay anything for a femtocell in your house — they actually charge for that.

 

So what?

As wireless innovation and growth become more deeply embedded in every facet of our daily lives, what does this mean for cell sites? Doesn’t rapid technological evolution mean the need for more sites, and won’t cell site owners expect t0 see more demand for access to their sites, thus increasing rents? Well, if all the new technologies operate on the exact same sites as existing equipment, yes. But that is not necessarily the case. There will be more telecommunications sites, no doubt about it, but the increased demand won’t necessarily be for the same types of sites. New sites will be smaller, with a lower rad center, and will require less square footage. For example, the equipment for a WiMAX network is much smaller than traditional cellular equipment, and a 4G network operator has much more flexibility about where that equipment is located. Thus, it is not reasonable to expect them to pay the same amount as a traditional voice carrier would pay to have its antennas 150 to 200 feet in the air. A 4G network operator’s antenna array is smaller and lighter, and the 4G base station is not much different in size from one of my wife’s suitcases.

The dynamics between cell site landlords and tenants are changing. Cellular operators are looking for long-term partnerships with their thousands of landlords. Landlords would do well to treat their tenants like partners and customers with a long-term view in mind — which is simply prudent business.

Cell Phones Are Like Hamburgers

CellburgerAs published in AGL (Aug 2009) – PDF of Full Article

Whether or not you are a McDonald’s restaurant fan, there is no denying that the foodservice retailer has one of the most successful business models ever conceived — and not for the reasons you think. When McDonald’s Corporation founder Ray Kroc asked a group of business students what business he was in and they replied “fast food,” he quickly corrected them and said, “No, I am in the real estate business.” Although McDonald’s Big Mac hamburgers may have been a tasty fast food novelty, it was Kroc’s well-selected real estate that actually sold burgers. But there is much more to that story.

In a similar manner, you could say that the operators of cellular networks are not in the “phone business” but in the real estate business. Without well-located cell sites, they would not have adequate coverage and thus could not sell much airtime no matter how cool the latest handset. Although well-managed real estate has proven to be the key to a successful business model, wireless network operators haven’t exactly followed Kroc’s path. Let’s take a look at the lessons operators could learn from hamburgers.

Kroc struggled to make money in what most consider to be his primary business, selling the method originated by brothers Dick and Maurice “Mac” McDonald for mass-producing hamburgers in less than a minute. Kroc credited Harry Sonneborn, a former vice president of finance at Tastee Freeze who became McDonald’s chief financial officer and later its president and chief executive officer, for McDonald’s “real moneymaking engine . . . its little-known real estate business,” wrote John F. Love in McDonald’s: Behind the Arches.

In 1955, Sonneborn suggested that McDonald’s should control the real estate used by franchisees, as the idea was described in Forbes Greatest Business Stories of All Time by Daniel Gross and the Forbes magazine staff. In 1956, Sonneborn helped Kroc create Franchise Realty. Through Franchise Realty, McDonald’s made money by “leasing or buying potential store sites and then subleasing them to franchisees, initially at 20 percent markup and then 40 percent markup,” the book said. Eventually, franchisees would “then pay McDonald’s either a minimum rate or a percentage of sales …and … the company would collect more and more rent as its costs remained constant.”

In the early days of McDonald’s growth, Kroc would fly over the growing suburbs looking for open land near a church steeple because he wanted to be where the people were. In the cellular phone industry, I am sure a site acquisition agent or two also have driven around looking for church steeples.

Besides the fact that cell phones don’t taste good even with cheese, the difference between the two industries is in those early days of rapid growth. Unlike Kroc, who flew the countryside looking for the best locations to lease to franchisees, tower site acquisition agents drove every back road and alley looking for the best coverage, as fast as they could. They weren’t focused on making a profit for their clients on the real estate itself. Most weren’t even given incentives to find the best deal, because signed leases were pay points on their service contracts, regardless of rent amounts. In the end, they were more interested just getting a site leased so the operator could offer coverage more quickly. But as they say, location, location, location is the key to real estate, and if the cellular operators weren’t going to watch the long-term dollars spent on those sites, someone else was. The two primary beneficiaries were the tower companies that started popping up nationwide and the thousands of real estate owners who just happened to own the tallest site in an area or the one at a critical roadway intersection. Because cellular operators were more focused on speed to market and coverage than they were on the price of real estate, debt was bound to fund tower development and building owners got insane deals for rents on what is, for the most part, unusable space — rooftops.

The hamburgers and cell phones comparison diverges further. There are far more cell sites offering coverage than there are McDonald’s locations offering hamburgers, and the operators built their networks as tenants rather than landlords.

This is the defining difference between cell phones and hamburgers. Kroc made more and more money from his real estate holdings as their leases transpired, but the cellular operators are experiencing ever-escalating rents costs and tighter margins. Over the long term, rent is by far the largest expense in operating a cell site. This is an expense operators didn’t pay much attention to when they were rapidly expanding networks and adding subscribers. Now they have no choice but to focus on it.

Think like Ray Kroc

Kroc followed Americans to the suburbs, and cellular network operators are following the world everywhere. There are more than 30,000 McDonald’s restaurant locations worldwide. That does not even begin to compare to the more than 242,000 cells sites nationwide, a number that will continue to grow exponentially during the next five years. And we are far more addicted to our phones than we are to our burgers — well, most of us, anyway. All this is said to make the point that operators of cellular networks would do well to think like Ray Kroc and take command of their real estate before the networks collapse because of untenable operating costs.

Ultimate competitor

Biographers describe Kroc as the ultimate competitor who was so ruthless that after buying the naming rights from the McDonald brothers for the outrageous price of $2.7 million, he opened a location one block from their original store just to drive them out of business. He was also obsessed with standards, such as his insistence that all potatoes be cut to exactly 9/32 of an inch to become a McDonald’s fry. Cellular network operators are obsessed with standards, too. They are constantly trying to “raise the bar” so you can “hear me now” when we “stick together” on the “now” network. But historically, they have not been competitive in the management of their real estate portfolios.

Real estate is the core asset for thousands of companies, and they manage it as such. With the exception of oil and gas exploration companies and railroads, rarely has a company had as large a real estate portfolio as cellular operators. From the beginning, the cellular network operators have focused on their “hamburgers” — that is to say, their technology — and have done a great job of it. But now they need to focus on their real estate assets either internally or through outsourcing, or their “hamburgers” won’t be worth a dime.

This realization is dawning on operators around the globe. I argue that President Obama is not the only change we will see in the next few years.

PDF of Full Article

What is the Market Price for Cell Site Rent?

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As originally published in AGL (April 2009) – PDF of Full Article
 
WHAT IS IT WORTH?

 

Everyone wants to get paid what they’re worth.

Whether it’s based on principle or pride, it absolutely galls us when someone else gets a better deal, or we lose out to someone who undercuts our asking price. While we steadfastly hold something’s worth as an absolute, we have often come to this determination by a subjective, mind’s eye calculation of what is commonly referred to as “the going rate.”

For cell site landlords, the determination of worth goes something like this: “My buddy is making $1,650 a month on his cell site lease and my site is in a much better location than his so I should be getting $1,800.”

Landlords are often irked and even angered when they are told that’s not the rate that the tenant wants to pay. They think they’re getting gypped. They don’t understand why this tenant is not honoring the going rate. And therein lies the problem: never confuse the “going rate” with the “market rate.” The last house to sell on my street in San Diego almost a year ago has nothing to do with what a different buyer will pay for my house today.

The real market rate for cell site leases is not what another tenant paid down the street. In today’s business environment, it’s what the competing potential landlord across the street will accept. Thanks to carriers’ escalating operating costs, the public’s voracious appetite for new technology and the network’s evolving engineering requirements, cell site leasing has become a competitive marketplace. Let’s take a look at what landlords can do to protect their income. (Continue reading full article in PDF)

See full article in PDF

The Perfect Storm for Wireless Operators

Clooney

According to Wikipedia a “perfect storm” is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically.” The term gained popularity when George Clooney stared in a film called The Perfect Storm (based on the book by Sebastian Junger of the same name) about the 1991 Halloween Nor’easter in which three weather conditions combined to generate a perfectly fierce and deadly situation:

• warm air from a low-pressure system coming from one direction,
• a flow of cool and dry air generated by a high pressure from another direction, and
• tropical moisture provided by Hurricane Grace.

Today in both Europe and North America, the wireless industry shows its own combination of circumstances which could create a future perfect storm:

market saturation – it is estimated that 85-90% of Americans own a cell phone and the number in many European countries are estimated to be at or over 100%,
cheaper “all-you-can-eat” rate plans – in the USA, all of the four major carriers offer voice/data plans for $99/month and Metro PCS offers voice plans for as low as $50/month, and
increasing OPEX – the two largest expenses for wireless carriers are payroll and rent roll and both are inflating.

It doesn’t take a meteorologist to forecast enormous pressure on cellular operating margins. And it is safe to assume that cellular operators have and will continue to focus on this issue.

On the revenue side of the equation, operators will battle it out for the final 10-15% of market share, and operators will continue to search for more ways to increase ARPU by adding cool apps and services as well as introducing cooler handsets to encourage subscribers to remain loyal and/or switch to their service. The iPhone/Blackberry battle is the classic example of this.

On the expense side, these conditions place pressure on payroll and rent roll and operators are looking for ways to lower OPEX. Expect to see more outsourcing and tighter cost controls. Also expect to see more rigorous scrutiny applied to lease costs. With annual rent rolls in the billions, operators will be keeping a close eye on the rent expense.

Discussing Cellular Leases at PCIA 2009

In my first Opinion Pole blog I commented that PCIA 2008 in Hollywood, Florida was silent on cellular leases – not the site acquisition process itself, but on the actual leases documents and what can be done to improve them for the betterment of the entire industry.  Well I am happy to note herein that PICA 2009 in Nashville, Tennessee was better.  The company I work for (Md7, LLC) pushed the topic and began driving the conversations a bit more than usual this year.  While it is not my goal to turn this blog into a promotion for my company, it was through the presence of Md7 on two panels and hosting a hospitality suite that we were able to have several public and private conversations about leases and how to make them better.

My colleagues, Thomas Dolislager and Sudeep Gupta both participated on panels in which improved leases were at least part of the conversation.  Thomas’ panel was called “Outsourcing to Experts: How to Reap the Benefits” and was sponsored by Message Center Management.  The biggest take away from this discussion was to trust experts and select specialists who do one or two things really well.  Lease documentation is no exception.  While lease negotiations and preparations have long been entrusted to site acquisition companies and law firms, I do see a trend to concentrate in this area even further. 

Meanwhile, Sudeep participated on a panel called “Innovative Strategies for Reducing Network OpEx” where he raised the very valid point that over time the single biggest cost of operating a cell site is the rent expense.  Monthly rent that escalates each year will eventually outweigh the cost of base stations, zoning, maintenance and even construction.  So if rent is in fact the largest expense, then it makes sense to concentrate on managing it and making the documents themselves more efficient and standard.   
 
While not everyone agrees with me that there is a LOT of room for improvement in the hundreds-of-thousands of cellular lease documents currently in existence in the United States and abroad, most agree that rents are high and leases have to be negotiated and renegotiated multiple times – especially each time and upgrade is made to a cell site.  Let’s find ways to improve this process.

The Silence Is Broken

In the middle of the 2008 PCIA show in Hollywood, Florida I asked Dustin Cahill who works with me at Md7 if he heard anything and with a strange look on his face he shook his head and said “I don’t hear anything.”  To which I responded “Exactly!”  He thought I was crazy, but I was making a point – the wireless infrastructure show (and the wireless industry as a whole) was noticeably silent on my favorite professional topic – cellular leases and how to how to improve them.

Oh, there is always plenty of talk about site acquisition, zoning problems, and regulatory issues.  That is the same ole stuff.  In 2008 I also heard a lot of talk about DAS, “drop and swaps” and of course the “Titans of Tower” hour was very interesting.   But no one was talking about the leases themselves.  Things like: What are the key terms in a good lease? How can these key terms be improved?  Can we bag CPI escalators forever? And the all important one our industry seems to never openly discuss, why are rents so high and what can be done about it?

I have committed the last five years of my career to these very questions and had some very interesting conversations – some positive and some not.  Some people liked what I was saying and some told me I was crazy – some even hurled a few personal insults.  But seriously, we need to be talking about this topic and others.

It took me several months since that inspirational moment in South Florida last year to figure out Web 2.0, social networking, tweeting, connecting, making Facebook friends and the hardest of all – WordPress. But you are reading the result; my first blog!  This is the introduction of my contribution to sharing information among wireless industry players to encourage what I call “mutually beneficial outcomes.”

I’ll try not to be narcissistic in here.  I am not blogging to change the world, self-promote or generate business for myself.  I simply would like to engage in legitimate, interesting, respectful conversation and make acquaintances within the wireless industry – whether we agree or not.  Let’s call it stimulating professional conversation.

So, I hope you’ll enjoy the Opinion Pole and check back in regularly.  I look forward to chatting with you!