I remember the first time I saw a mobile phone. It was circa 1987 and it belonged to a sports agent that was visiting a couple of friends of mine who happened to be college athletes. I drove them to the airport in my Honda Prelude to pick him up for lunch. As he stepped off the private plane into my back seat I remember asking him “why he had two brief cases?” He replied “oh no, the second one is my phone.” At that moment I knew my buddies were going to sign with him – some guys just can’t resist a big battery.
The cellular industry has come a long way since then. The briefcase phone became the bag phone which evolved into the brick phone, then the flip-phone, the camera phone and now the smart-phone. Just as the handset has evolved so has the network – from analog to digital to 2.5G, to 3G… And cell sites have evolved too. From the first one at Soldier Field in Chicago and remote mountain top sites, to tall towers and the tallest building in town, to monopoles and lower roof-tops to light poles. Shelters at cell sites have become cabinets and even suit-cased sized boxes.
If we look forward we will see that the iPhone is just the beginning. The embedded wireless device is about to change it all again. We are rapidly approaching a world where we’ll have hidden wireless devices inside everyday items such as HVAC, appliances, medical devices, even our dogs. Farmers will remotely control their irrigation systems with apps on the smartphones, heart-monitors will notify you and your doctor before your heart fails. Disposable, one-use-only devices will automatically reorder household items when packages are empty. We are limited only by our own creativity.
But this post-modern technology won’t run on the current networks. 4G networks and beyond require more cell-splitting and lower rad centers. Cabinets and boxes are becoming remote radio heads. And, while we will still have a lot of towers in rural and sub-urban areas, DAS and picocells on the side of buildings and light poles will sustain capacity in urban and dense urban markets.
What about cell site leases?
You can’t have a technological explosion like this without updating the underlying cell site leases as well. We are already seeing a large jump in the number of modifications to existing sites – many of which require amendments to the underlying leases. These requests are coming at a more rapid pace than we have ever seen. And the number of cell sites – particularly in urban areas – is about to significantly increase.
Let’s be smart about how we negotiate new and amended lease documents! These deals need to be flexible and cost effective to sustain this rapid growth. Expansion and modification rights must be ongoing, rents must be manageable for the long haul. And cellular operators should rethink how they manage their massive real estate portfolios. As we enter into the age of outsourced network administration, lease administration is a non-core function that should optimized too.
In short, as we approach 2011, let’s keep up with the times and rethink how cell site leases are negotiated and managed.
From coast to coast, from Canada to Mexico and everywhere in between there is a real estate principle that always applies. You get a better deal if you have two or more properties to choose between. You always get a better deal if you play two owners against each other. This is obvious right?
There is no way I am going to out-negotiate a car salesman because I do not have subject matter expertise. So when I buy a new car, I go to two or three dealerships and play them against each other – in the end the best price wins. You have to create a competitive situation.
This principle holds true for wireless real estate as well. I have negotiated a lease for a cell site covering Wall Street, and a microwave tower in Screw Bean Draw, Texas (yes that is a real place – it is about six miles west of Orla). And I have negotiated for just about every type of property you can think of in between those two. I have been told so many times that if you want the best deal you have to be “a local” (from NYC or SBD) and that if you are not “a local” then you need to hire someone who is from there to negotiate for you. That simply isn’t true. If the landlord wants the monthly rental income, and you treat them with respect, then they’ll negotiate with you no matter how fast or slow you talk. And if you tell them you are choosing between two or more sites you have negotiating leverage.
I had to lower the rent on my rental properties in Florida because there was a glut of vacant condos on the beach four blocks away and my tenants had options – they didn’t want to move, but they certainly had an opportunity to do so and I had to lower my rent to keep them. I have been on both sides of a negotiation where a tenant had legitimate options and it always works to lower the rent.
When negotiating a lease for a new cell site anywhere in the USA, (despite the fact that RF engineers have the option to trump one candidate over another) you will do well to have more than one candidate. Finding alternatives changes the dynamics of a negotiation.
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 “dumb pipe” is inevitable. The iPhone is certainly accelerating its arrival and it is just a matter of time. The entire strategy of new wireless entrant LightSquared is to be a wholesale dumb pipe. While many believe that the Verizon network is a competitive differentiator, even it is evolving into a commodity. And in a commoditized market, the low cost provider wins.
It is simple business school math. If all wireless networks have relatively comparable coverage that simply transfer bytes back and forth between a handset and the internet then the only differentiators are the handsets themselves and the price for access to the system. While the buzz on the FCC investigation into handset exclusivity has cooled for the time being, price competition is hotter than ever. And price competition means each cellular operator must get more aggressive on cost cutting or their margins will suffer and they will get priced out of the game.
One of the largest items in a cellular operator’s OPEX is the rent roll for tens-of-thousands of cell sites around the country. The largest operators have an estimated seventy-thousand cell sites at an average of $1,700 per month. With built-in rent escalators averaging between three and four percent per year it won’t be long before nation-wide cellular rent rolls top $1.5 billion annually. But wait, it will grow beyond that! The high-tech wireless dumb pipes are actually 4G LTE and WiMAX networks built on top of already existing cellular networks. It is reasonable to expect the number of cell sites in the United States to double or even triple over the next five to ten years.
That’s good news if you own the only zoned and permitted cell tower in Middle America and the mayor is your brother-in-law. But what about more congested areas where traditional roof-top sites and micro/pico cells can be flexibly placed in more than one location? In that scenario cellular operators have options.
With OPEX pressure, any prudent wireless CFO will be looking to lower average rents on their rapidly expanding portfolio of cellular real estate and you can expect that pressure to trickle down to lease negotiators. And those lease negotiators will be more closely weighing their options when negotiating new cell site leases. Expect that trickle down pressure to impact the average rent on new leases.
The way cellular antenna leases are identified and negotiated is out-dated and has changed little since the cellular phone industry’s explosive growth began in 1995. Md7 Chairman and CEO, Michael Gianni, describes the traditional site acquisition process as agents “parachuting in, grabbing a rental car and driving all over town leaning over the steering wheel while they eat a burrito and look up in the air for potential cell sites.” Those traditional site acquisition agents had no incentive to negotiate a good lease with low rents and solid contract language that lasted the life of a traditional cell site. The traditional cellular antenna lease was just another “pay-point” on a fixed fee services agreement. Agents not only negotiated the lease but had to battle municipal administrators for permits and zoning approvals and many other pay-points before their work was done and a new site could be constructed. They were given as many search rings as they could handle and paid to get leases signed as fast as possible – there were few if any incentives to keep the rent down and negotiate solid lease terms.
While this strategy worked well in the short-term – it enabled cellular operators to build networks as fast possible, this was a classic case of “if you want it bad, you get it bad.” If you are in a hurry and don’t take the time to negotiate a lease properly you will pay for it in the long run. Cellular phone operators are now paying the long term price. The national average for cell site rent is estimated to be around $1,750 per month. If this is accurate, then for every 50,000 cell sites, a carrier has an annual rent roll of approximately $1 billion. The largest cellular operators in the United States have an estimated 65-70,000 cell sites. Thus they are pushing $1.5B and it increases by 3% every year before they even build one new site.
Carriers used competition to beat the site acquisition pay-point as low as it can go. Site acquisition agents are now commoditized and many of the good ones have moved on (or cashed out). But the leases are no better; the starting rents are still too high and language still has to be amended each time a site is modified. With the advent of 4G, our industry will double and maybe even triple the number of cell sites in the United States. Time to change the way cell sites leases are negotiated.
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.