AT&T has made no secret of its desire to reduce the rent it pays to tower companies -- as well as the hardball negotiating tactics it's willing to employ in the pursuit of its goal.
However, some new research into the tower sector indicates that AT&T's negotiating tactics -- which include the threat of building a new, cheaper tower next to an existing, expensive tower -- may be mostly hot air. At least so far.
Specifically, Ken Schmidt of cell tower consultation company Steel in the Air said that AT&T had relocated less than 1% of its roughly 65,000 cell tower locations during the past two and a half years. "That's nothing," he said.
Schmidt's findings also largely dovetail with a recent report from Morgan Stanley on the topic. The Wall Street research firm last year reported that around 65% of cell towers around the country don't face any competition whatsoever -- meaning, there are no alternative towers within a half-mile radius of each of those tower locations.
Perhaps not surprisingly, AT&T's J.R. Wilson disagrees. Wilson is the VP of the operator's cell tower strategy (that's his actual title). "It'll take time," he said of AT&T's efforts. "It's making a difference from a financial perspective," he said, adding ominously that there could be a "snowball effect" for the nation's big tower companies.
Why this matters
At issue here is the notion of "build to relocate." In the early days of the wireless industry, wireless network operators largely used whatever cell towers they could get their hands on to expand their network coverage area. Now, however, as the wireless industry matures, operators are looking to cut expenses in whatever ways they can, including by reducing the rental fees they pay to big tower companies like SBA Communications and American Tower for access to their so-called "vertical real estate."
But as any renter can attest, it's difficult to obtain leverage against a landlord. Thus, AT&T and Verizon roughly two years ago announced they would work with upstart tower companies like Tillman, CitySwitch and Uniti Towers to build new towers with much cheaper rental rates next to existing towers that were charging higher rental rates. A top AT&T executive said late last year that the carrier has been able to cut some of its rental rates in half by engaging in this "build to relocate" strategy.
Indeed, according to the Wall Street analysts at Wells Fargo, AT&T's Susan Johnson essentially reiterated the operator's threat during a recent appearance at the Connect (X) trade show, the tower industry's main annual conference. "AT&T has a list of high rent towers and terminating contracts when their lease terms come to an end, and relocating to a new set of tower providers with set terms (I.e.: Tillman, CitySwitch, Uniti Towers). Johnson noted AT&T is working with Verizon identifying where they both need a site then allowing Tillman (and others) to build," the Wells Fargo analysts wrote. "This is a top internal or priority, according to Johnson."
A bluff or a long game?
However, Schmidt of Steel in the Air said the data indicates there's very little actual "building to relocate" going on. He said that, from January 2017 through April 2019, the nation's tower companies collectively filed applications with the FCC to build a total of around 1,000 new cell towers, but constructed only around 500, or half, of those sites. He said there's a total of around 110,000 existing tower locations around the country, which means that less than 0.5% of existing tower sites could potentially see new competition from a cheaper, nearby tower.
Further, in Schmidt's Q1 2019 update, he found that around 40% of all FCC applications for new towers are next to existing towers, but less than a third of those applications appear to have actually been constructed so far.
Thus, Schmidt's findings indicate that there is a trend toward tower competition, in that tower companies are considering building new towers immediately next to existing towers. However, an application to build a tower doesn't necessarily mean that tower will be constructed (new macro cell towers can cost upwards of each $250,000 to build). Further, even if those new towers do get built, they might not stand as direct competition. For example, wireless network operators are adding a growing number of antenna elements to their towers, and older towers might not be able to handle all that additional weight -- meaning, new, adjacent towers might be necessary just to hold additional equipment rather than provide competitive alternatives.
But according to AT&T's Wilson, the company's tower strategy is just now starting to bear fruit -- and he said that it would begin to have a major impact on some of the nation's biggest tower companies in the years to come. He said AT&T is fed up with a "vicious model" wherein tower companies charge excessive rental fees and raise prices for any kind of change, even if that change ends up reducing the overall space and weight of the equipment on their towers. He said AT&T is working with a wide variety of tower companies to build towers that reduce rental rates by 50-60%. He said such sites are still profitable for the tower owner when equipment from additional operators like Sprint and Verizon are added to those sites.
Importantly, Wilson explained that some of AT&T's agreements with tower companies come up for renewal only once every ten years and that AT&T only really embarked on its "build to relocate" strategy at the beginning of last year. Further, he said the company is only targeting towers that it believes are charging excessive rates -- the ones that are the most profitable to tower owners -- so although the overall number of relocated towers might be relatively small, the effect on the tower industry could be outsized.
And Wilson said that if other operators join AT&T's efforts, tower companies eventually could have a real problem on their hands.
Indeed, some tower companies are concerned about competition from "build to relocate" towers. For example, American Tower last year discontinued a program that appeared designed to thwart nearby tower competition.
Vertical Bridge joins the fray
One final, important takeaway from Schmidt's findings is that Tillman, CitySwitch and Uniti Towers aren't the only companies that are participating with network operators in the "build to relocate" trend. Schmidt ran across another active player in the market called BRT Group -- according to FCC documents, that company is owned by Vertical Bridge, the nation's largest privately held tower company.
Officials from Vertical Bridge declined to discuss the topic.
AT&T's Wilson said his employer is working with virtually all of the nation's smaller and midsized tower companies on the program to put pressure on the nation's biggest tower companies, though he declined to name any of the tower companies AT&T is working with beyond Tillman, CitySwitch and Uniti. However, AT&T recently inked an agreement with Crown Castle, one of the nation's three major tower companies. The other two major tower companies in the US are SBA Communications and American Tower.