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.
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.
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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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.