Verizon iPhone has sparked the public race for “4G”

After all the speculation, all the anticipation, it is official – Verizon has begun selling the CDMA iPhone.  While I am a loyal Blackberry guy with no intention of switching, I must admit I am excited about the announcement.  You see, if you listened closely around the time of the announcement, you may have heard the shot fired from the starting gun for the race for the next generation of wireless coverage.  Actually it started long before that in the “war rooms” of each of the nationwide cellular operators but now the race is being run in public view – just watch one NFL football game for the ads they are running.

What is generally being marketed as “4G” will bring with it a massive expansion in the cellular networks – the largest infrastructure boom in the wireless industry since 1996 when the FCC auctioned off the PCS licenses releasing a lot of spectrum and networks began to upgrade from analogue to digital.  There is speculation that some iPhone users will jump from AT&T to Verizon because of the frustrations they experienced with AT&T coverage (actually it was a capacity problem, not a coverage problem). And some will wait to see if Verizon is prepared.  Regardless of your expectations or loyalties to one operator or another, one thing is sure – AT&T, Sprint, T-Mobile and Verizon all are in the process of upgrading their respective networks.  And, these upgrades will have two large impacts on their respective networks. 

First, each network will be substantially faster.  WiMAX, LTE, and HSPA+, will take each system to another level and that is great for consumers.  Whether you use the iPhone, Blackberry or Droid you are about to see an increase in speed which will in turn facilitate an explosion of even cooler apps and eventually machine-to-machine communication.

Second, the number of cell sites are about to significantly increase.  At first they will be overlaid on top of already existing sites and tower companies will see a big early bump in leasing revenue.  This initial overlay will establish 4G coverage nationwide.  But then the number of smartphones will quickly increase and so will consumers data usage and these initial sites will not offer adequate capacity because you can’t shove ten pounds of data through a five pound cell site.  While they can’t build ten pound cell sites, they can build two five pound sites.  Or go even further to manage capacity by building ten one-pound sites – one on every street corner and cul-de-sac.  All this because our appetite for data is about explode!!!

Cell Site Leases in the Future

Cellular history

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. 

Cellular Future

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.

The Impact of 4G (on Cell Sites)

This past week I attended the CommNexus presentation called The Road to Long Term Evolution (LTE): The Next Generation of Wireless Technology featuring Tami Erwin, President – West Area for Verizon Wireless. And this coming week I am attending the Wireless Infrastructure Show which was recently previewed by FierceWireless as “The opportunity and costs of 4G.” I put these two events on my calendar to broaden my perspective on the impact that 4G will have on cell sites. And while I have only attended the first of the two, I am already pretty excited about the future of wireless and more specifically – cell site leasing.

From the CommNexus event, I learned two things.

1. LTE will revolutionize the industry. Ms Erwin convinced me that LTE will be much more dynamic than anything we are currently experiencing. While she openly acknowledged that the iPhone was a “game changer,” she also pointed out that LTE will go further – much further. This was not a dis on the iPhone, but rather an attempt to show the limitless options before us in a 4G world. A world where machine-to-machine (M2M) wireless will connect everyone and everything. Check-out this video by Alcatel-Lucent that she shared with us.

2. The impact of 4G has not yet been clearly defined. Verizon plans to allow their subscribers to define how LTE evolves rather than attempt to define it themselves. They do not want to limit the impact of LTE by attempting to define it or set an expectation. They are merely building a network that will facilitate it. I’d give that a “thumbs-up” on Facebook!

I anticipate that 4G will change how we communicate much more than analog-to-digital conversions, 2.5G and 3G. But what about the Opinion Pole’s specific niche – what about 4G’s impact on cell sites and cellular antenna leases? As stated in prior blogs, we already know it will significantly increase the number of cell sites, it will lower the average rad center for cell sites, it will increase the number of micro/picocells, it will cause RF engineers to look for ways to off-load traffic to Wi-Fi as often as possible, and it will cause the cellular carriers to evolve into a “dumb pipe.” It will also drive C-Suite executives to focus on OPEX over CAPEX. And all of these things will impact cell site rents.

However, I am anticipating learning much more this week at the Wireless Infrastructure Show. Stay tuned!

Multiple Candidates = Better Cell Site Leases

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.

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 Best Cell Site in Town

The best location for a cellular antenna isn’t always where you think it will be – especially in a rapidly evolving wireless network.

A lot of cell site landlords claim they have “the best site in town” to locate a cellular antenna. Whether it is the lone tower in a small town, the tallest building off town square, the mountain top with the longest line-of-site, or the office building on the corner of Rodeo Drive in Beverly Hills – many claim their site is unique and best. However this is often not the case – especially as cellular networks become more sophisticated.

As wireless telecommunications technology evolves from 3G to 4G and beyond, so does the definition of “the best site in town.” As I mentioned in a prior article in AGL magazine, (What is the Market Price for Cell Site Rent?) contrary to popular belief, the Empire State Building does not offer the best coverage in Manhattan. One high site can’t handle the millions of calls made each day in New York, nor can it accommodate the bandwidth needed to run voice communication, video, email, music, photo transfers, download apps and more. In other words, taller is no longer better. Today’s network relies on a greater number of low elevation sites to accommodate the growing number of users and the bigger bandwidth requirements necessary to meet technology demands.

Landlords often think that their site is more valuable because it is in a high-traffic area, or it’s the tallest, or it’s centrally located. As noted above, advances in technology are redefining what makes a good cell site. But further, as cell sites come closer to the ground and closer to each other, carriers are less particular about their location. This flexibility, combined with an increasing ability to use non-typical cell sites (such as light poles), creates a competitive environment that drives cell site rents down. The landlord who once had “the best site in town” must now acknowledge that carriers have many viable options to choose from.

“Dumb Pipes” Lower Average Rent For Cell Sites

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.

Is That Salsa On Your Steering Wheel?

Time for the Way Cellular Antenna Leases Are Negotiated to Change.

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.

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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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.