The major wireless carriers are vocalizing their frustration with the “Big Three” tower companies – American Tower, SBA, and Crown Castle – as tower rents continue to increase in an environment of ARPU pressure and it is becoming increasingly difficult for them to accept the status quo of increasing operating costs.

The unrest has resulted in considerable rhetoric, and some initial action. AT&T recently formed an internal task force to develop alternatives to the traditional cell tower model. Others have made explicit threats to migrate their cell sites off towers if the economics don’t improve. Dave Mayo, T-Mobile’s SVP of Technology, told attendees at a recent conference that the infrastructure segment is ripe for disruption as the industry moves toward 5G, and more specifically small cells, highlighting perhaps the strongest bargaining chip carriers could play. Also, over the past several months, Verizon’s CFO has brought attention to the favorable economics of small cells and their accessibility via connected fiber.

Interestingly, the Big Three have all responded to the carriers hyping potential wide-scale adoption of small cells in very different ways. American Tower, the largest player in the space, believes these new technologies are not an alternative to towers, but rather a complement to be used in special cases, especially densely populated areas with at least 10,000 people per square mile. Less than 1% of the company’s towers are found in these locations, so small cells would not be replacing the traditional model, but supplementing it. Additionally, the company is not bullish on outdoor small cells, seeing more opportunity surrounding indoor DAS. Rather than focusing its efforts on investing in small cell deployments or fiber to support them, American Tower has turned its sights to deploying macro sites overseas, taking advantage of favorable exchange rates.

Out of the triumvirate, Crown Castle shows the most interest in small cells. In April 2015, Crown Castle moved to purchase Sunesys for $1B. The acquisition provided the company with 16,000 miles of metro fiber and a DAS/small cell portfolio of 15,000 nodes. On the organic side, Crown Castle spent $60M on the construction of new infrastructure, with the majority devoted to small cells. Between 2014 and 2015, Crown Castle saw small sell site rental revenues go up 50% from 188.7M to 284.4M, while towers saw a 2.1% increase during the same period.

SBA was initially warm to small cells, but has since taken the opposite approach. The company recently agreed to sell its stake in ExteNet Systems, the second largest small cell and DAS operator with about 10,000 nodes deployed or under construction. This was a financially motivated move – SBA emphasized macro sites having much higher cash flow margins to validate its reduction in small cell investment. The company believes that towers are not only better for their income statement, but also better for carriers, given the spectrum they already own.

Are American Tower and SBA turning a blind eye as the technological foundation of their industry undergoes a cataclysmic shift? Or are they disciplined investors that are continuing to place bets on the assets that drive the most favorable returns for their shareholders? Analysts believe mobile network operators may rein in their investments in traditional macro cells as they densify their networks with small cells and DAS deployments, but they’ll have to ramp up their spending on towers eventually to keep pace with demand for mobile data. Even though macro sites may always be the foundational element of the mobile infrastructure landscape, the sudden pick up in small cell implementation after several years of underwhelming growth is difficult to ignore. IHS, a research firm, forecasts that the small cell market will hit 3.8 million units in 2019, up from only 901,000 in 2014.

Whether or not small cells will be the answer carriers are looking for, it’s clear they’re willing to start the conversation about the changes required to disrupt the steady increase of tower rents. Early this year, Sprint indicated that it plans to relocate some of its towers from space leased from Crown Castle and American Tower to government owned lands, hoping to save as much as $1B. It has since backed off of this claim as investors feared the impact to their network and questioned the allocation of capital, but the motivations haven’t gone away.

It’s too early to tell if the carriers will have any meaningful success in their efforts to drive down rent growth. In fact, the tower companies only exist because they were able to bring substantial amounts of investment to a capital-intensive industry. Has anything really changed? Won’t competing demands for carrier capital (e.g., network upgrades, spectrum) still cause them to rely on third parties to supplement the capital available to the industry? The chatter has certainly increased in recent years, and the Big Three would be well served to pay close attention to their customers’ actions, assuming it ever moves beyond talk.

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