Taxes were not the only thing due April 15. The FCC’s Small Cell Streamlining Order, which ruled that overly stringent aesthetic requirements for small cells could be judged an unlawful prohibition of services, mandated compliant aesthetic ordinances be developed by local governments by mid-April.
Speakers and attendees at the Wireless West Conference last week in Phoenix said the aesthetic requirements produced by the cities have spanned the gamut from simple model ordinances to highly complex regulations meant to prohibit small cells.
Aesthetic codes have to reasonable, cannot be more burdensome than requirements of other infrastructure and have to be published in advance, according to the FCC. Aesthetics requirements must also be technically feasible and directed at mitigating public harm or deployments that are out-of-character with the cityscape.
The aesthetic code deadline came not long after the California State Supreme Court upheld an ordinance that established various standards of aesthetic compatibility for wireless equipment by the City and County of San Francisco in 2011.
“The California State Supreme Court ruling is not inconsistent with the FCC order,” said Bob Jystad, government relations manager, Crown Castle International, told eDigest before he moderated the panel, FCC & Me: Effects of the New FCC Order, on the second day of the show. “The FCC order goes into more detail, which is critical. What does it mean for the cities to act reasonably in terms of aesthetic review? The FCC order attempted to answer that.
Most of the jurisdictions have adopted reasonable design guidelines, working with the wireless industry, according to Jystad. “We have been pretty happy with what we have seen,” he said. “If you can identify a design that will go with our technology, we will go with it. We don’t want to be delayed or overcharged.”
Scott Longhurst, government relations manager, Crown Castle International, said the FCC order provides needed certainty for carriers and municipalities, creating a process for rapid small cell deployment. He is already seeing, at least for the short term, a thawing of the municipal/carrier relationship.
“If a carrier submits a design that meets those standards, they will get a permit. And, vice versa, for the jurisdictions. The carriers are going to build the types of facilities the cities want to see,” Longhurst said. “We see a lot of mutual agreements between the carriers and the municipalities. We are seeing the applicants be really flexible, extending time for the jurisdictions to figure out their processes.”
But, municipalities should not take advantage of that flexibility, according to Longhurst, or the wireless industry will come back enforce the FCC’s shot clock. “I am seeing a lot of patience, which preserves relationships. We are in a hand-holding stage, but if the order is upheld, we will need to see a more solid-fisted approach,” he said.
Jystad, on the other hand, said he likes how shot clocks can get a conversation started about what processes are really needed, such as whether a public hearing is needed for every single small cell using an approved design.
Mediator May Minimize Municipal/Carrier Conflict
In light of the conflict between municipalities and carriers, WSB engineering consultants saw a need in the marketplace to serve as a mediator between the parties.
Carly Kehoe, WSB senior planner, said a lot of cities merely want the carriers to provide model ordinances, while others are more contentious and write the most critical ordinance that they can. They try to get small cells denied through ordinances dense with details.
“There is disconnect. The cities are not listening,” Kehoe said. “It is a wide array that we are seeing in [aesthetic ordinances], Some of them are simple and some are complex and make compliance difficult. And a lot of cities don’t seem to care about meeting the aesthetic ordinance deadline.”
WSB uses its credibility gained from providing engineering services to jurisdictions and its contacts on the carrier side to act as a mediator.
“The industry is ready to deploy and it gets jammed. There is a clog in the pipeline at the local level,” Kehoe said. “We work with the local jurisdiction to determine the hold up and what the [September] FCC order means. Local jurisdictions don’t understand and they fear that the federal government is forcing them to do something with their land and they have lost their rights.”
One city that definitely is not in a listening mood is Austin, Texas, one of the cities that is suing the FCC over the Small Cell Streamlining order. Ironically, as the home of South By Southwest, the city brings in world-renown experts that speak on the latest and greatest technology annually, yet it does not want to work with any of the carriers to deploy small cells.
“They hate small cells, which is funny because this city wants to be on the cutting edge of technology,” Kehoe said.
Crown Castle International’s first quarter results were in line with its expectations for the year, with a 6 percent increase in site rental revenues, an 84 percent increase in net income, 8 percent increase in Adjusted EBITDA and 9 percent increase in AFFO.
“In the first quarter, we delivered solid results that were in line with our expectations, positioning us well to generate attractive growth in cash flows and dividends per share for the full year 2019,” stated Jay Brown, Crown Castle’s CEO. “This continued growth reflects the strong fundamentals we see across our business, including our major customers spending to improve their current networks while beginning to invest in 5G.”
Analysts, many of whom believe the tower stock prices will not go much higher, were not overly impressed.
Deutsche Bank Research
We continue to like Tower fundamentals and view CCI as our preferred idea (and top 5G beneficiary) among the group. However, our recent downgrade to Hold reflects lack of upside to our 2019YE price target ($121) and broader concerns around valuation. For context, CCI trades at 21x 2019E P/AFFO; this is at the high end of its historical range (17x-21x), despite a business mix incrementally skewing towards Fiber (relative to Towers) in recent years.
Nick Del Deo
Q1 2019 numbers were generally consistent with expectations, as is typically the case, though towers were a bit stronger than we expected and fiber / small cells softer, with network services contributing more than expected. Instead, we’d note that growth remains below that of its peers when considered on an apples-to-apples basis, the company has a meaningful contribution from non-tower assets, and its reported results require the greatest adjustments to derive its underlying economic results.
Wells Fargo Securities
CCI reported solid Q1 2019 results. Organic revenue growth was a tad light of our expectations, but considering the company reiterated its 2019 guide, we suspect activity was in-line with CCI’s expectations and look for an increased benefit in the balance of 2019. As presented in our 4/15 downgrade of the towers sector, we suspected the towers were pricing in a “beat and raise” story throughout 2019.
New Street Research
Site leasing revenue and EBITDA were in-line. AFFO beat on lower sustaining capex, but this will be offset by higher capex in subsequent quarters. Guidance was unchanged, which is modestly disappointing since CCI has tended to raise guidance at this point in the year. No material changes to estimates or thesis. We continue to see the greatest relative value in SBAC within the towers.
Site rental revenues grew $66 million, from first quarter 2018 to first quarter 2019, inclusive of approximately $65 million in Organic Contribution to Site Rental Revenues and a $1 million increase in straight-lined revenues. The $65 million in Organic Contribution to Site Rental Revenues represents approximately 5.7 percent growth, comprised of approximately 9.5 percent growth from new leasing activity and contracted tenant escalations, net of approximately 3.8 percent from tenant non-renewals.
Mosesso: What will the role of wireless be in the future?
Brown: The way we use our devices today, pulling down information either for work or entertainment, is going to change. With reductions in latency, what we will see over the next couple of decades is a meaningful amount of traffic moving to machine-to-machine communications in industrial settings in every vertical market. It will be used to reduce costs and increase savings. I am not aware of a single industry that is not working on wireless applications.
Mosesso: What are the opportunities for infrastructure providers like Crown Castle?
Brown: Towers are going to continue to play a role in the next generation of wireless deployments. They are the most cost-effective, efficient way for any company to deploy wireless spectrum. Even nontraditional owners of spectrum and deployers of wireless networks are likely to first use towers as the backbone of their network. Fiber-connected small cells will increasingly be used to improve coverage as well as the density of the network.
Mosesso: What are your thoughts on the effect of recent and upcoming auctions?
Brown: What is encouraging is that the cost of the spectrum bought at auction in the higher bands has come down dramatically, which means there will be more capital available to go toward the deployment of those technologies. The additional spectrum that is being provided by the FCC, both licensed and unlicensed, is really good for our industry and incredibly encouraging.
Mosesso: Most of the spectrum that is coming to market is in the higher frequency ranges. What does that mean for leasing across towers and small cells?
Brown: Even in the higher spectrum bands, towers are going to be used. Maybe less, however, than they were used, historically, nationwide. But in targeted areas, higher spectrum bands will be used on towers as a portion of the carrier’s network. It is more likely that those higher bands will be used on small cells in urban settings and dense suburban areas. Over time, small cells will have a greater diversity of spectrum bands than you see on macro sites, if you consider the whole portfolio of assets.
Mosesso: How do you respond when people outside of our industry will say that the coming of 5G will lead to a massive spike in capital spending?
Brown: I am quick to discourage people from thinking that way about our industry. In reality, the operators are likely to manage their cash flows and balance sheets appropriately and think about capital investment as a long runway of investment in their networks. They have done that for a number of years. A lot of the volatility of spending by wireless carriers has largely evaporated over the last five years. The level of spending has become relatively steady.
I believe over the next couple of decades we will see consistent investment in infrastructure as we deploy 5G.
Mosesso: You have said that Crown Castle will deploy 10,000 to 15,000 small cells in 2019. What is driving this significant acceleration?
Brown: Five years ago, we had almost no small cells — 1,000 to 2,000. Today, we have almost 30,000 of them that we have deployed in the top 30 U.S. markets. Another 35,000 small cells will be under construction in the next 18 to 24 months.
The deployment of small cells will require a massive increase in the amount of spending. That ramp is going to continue to accelerate. With the pipeline that carriers today say they are going to need in the coming years, that ramp is going to continue to accelerate. What is this going to look like in 20 years? Every industry estimate I have read says that each wireless carrier is going to have at least 1 million small cells.
Mosesso: What is one way in which the deployment of small cells differs from macrotowers?
Brown: While there are companies that are willing to build one to two to ten towers for a carrier, small cell deployments are a very different business. When we are building small cells in Southern California for example, we may get 4,000 to 6,000 small cells in one order, because they have to be deployed in scale using fiber-optic cable. There is less opportunity for smaller companies to come in and do a few small cells, because the carriers are looking to cover a much larger geography at one time.
The long awaited 5G deployments may disrupt other areas of the wireless infrastructure buildout, Earl Lum, president, EJL Research, told an audience at IWCE, this week in Las Vegas.
“Since we are at the cusp of rolling out 5G, small cells and anything on the periphery with get put on the back burner. Whenever a new network gets rolled out, you see priorities change,” Lum said. “You are going to see a big shift back to sub-6 Gig, particularly the CBRS band at 3.5 GHz.”
Indications from the carriers during the MWC19 in Barcelona last week are that purchases of small cell equipment and siting are beginning to slow down in the United States, which coincides with the increased concentration on a 5G macrocell deployment.
“I learned at the Mobile World Congress that all the countries that are planning to deploy 5G are deploying it on macrocells, collocating it with 4G and 3G equipment,” Lum said. “You are going to see the deployment of Massive MIMO antennas, which are not going to fit on a small cell.”
MIMO antennas operating in the 3.5 GHz band attached to macrocells can provide 5G coverage and put off the need for small cells.
“With Massive MIMO, you have multiple beams, each one is the equivalent of a small cell,” Lum said. “If you can put off building eight small cells, how much money do you save? At $100,000 per small cell, that’s $800,000 you have saved with a single MIMO that costs $35,000. That is a pretty good return on investment.”
Regulatory Uncertainty May be Affecting Small Cells
Their may be other factors affecting small cell rollout, such as regulatory uncertainty. The FCC’s small cell streamlining order is currently being scrutinized by the U.S. Court of Appeals Ninth Circuit. Congress is looking into whether the FCC colluded with the carriers, in an attempt to steer the judicial review of the FCC’s small cell order away from the Ninth Circuit, which is known for pro-municipal judgements. And 21 states have passed laws forcing localities to be in compliance rules streamlining small cell deployments.
“We are in a strange 90-day window,” Scott Longhurst, government relations manager, Crown Castle International. “Even though the small cell order was adopted Jan. 15, local jurisdictions have until April 15 to adopt their own aesthetics standards.”
Regulatory uncertainty is affecting carriers in mostly the secondary and tertiary markets, while major markets, such as New York, Los Angeles, Chicago, Boston, Miami – they are “building out pretty vigorously,” according to Longhurst. Crown Castle is currently building out 5,000 small cell nodes in Los Angeles, alone, for T-Mobile.
“In the largest markets, small cells are a coverage play, filling in around the macro antennas,” Longhurst said. “As chipsets are placed in the new handsets, the pressure will build for the carriers to deploy small cells.”
Even though the FCC adopted rules that limited fees, tower companies are still seeing municipal fees that are all over the map.
Questions about what fees are acceptable “might be a part of why you are seeing a bit of a slowdown right now is both sides, cities and carriers and tower companies are trying to figure this out,” Longhurst said.
Wireless has been the only use of the right of way that is regulated by planning departments of the local jurisdictions. Longhurst is confident that the courts will uphold the FCC’s effort to change that.
“The intent of the FCC in its small cell streamlining order was to force the local jurisdictions out of the discretionary permit process in the right of way. So wireless will be treated like any other utility in the right of way,” Longhurst said. “So, from that standpoint, the FCC order has a good chance of being upheld.”
Longhurst is beginning to see a change in heart at the associations representing the cities, because of the importance of 5G to the growth of cities in the future. “I think they are going to come around. They are not going to want their constituents coming back at them someday asking why their city got bypassed by the 5G revolution.”
The industry is still learning basic issues surrounding the physical deployment of small cells, according to Longhurst. For example, they have found that the integrated millimeter antennas cannot be placed behind a shroud. Because of the RF propagation characteristics of high-band, the waves reflect off of the shroud.
“We have been working with the cities for a year and a half on designs to conceal this equipment,” Longhurst said. Now we have to go back to them and tell them a square must be cut out of the shroud so the 5G radio and transmit and receive signals.”
Six weeks ago, few people knew there even was a Mobile Infrastructure Hall of Fame. But as WIA President and CEO Jonathan Adelstein took the stage for the first induction ceremony in a crowded room of 500 of the industry’s leaders, it felt like there has always been one. Or at least there was a pent-up demand for one.
“Today, these five honorees come from companies with a combined market cap of around $200 billion. They employ nearly 100,000 people and growing. And they’re driving the innovation economy with wireless broadband few dreamed possible in the flip phone era,” Adelstein said. “These five leaders are inducted tonight because of their foresight, their vision, and their tenacity. Each faced down challenges — and overcame them all.”
Gathering the top wireless CEOs and others at a ballroom in Washington D.C. on a Wednesday night in mid-November to honor its best had another altruistic goal. It raised $500 thousand for the WIA Foundation in support of training, education and apprenticeships.
“Tonight, the [inductees] lend us their presence because each believes — with us — that another challenge lies ahead for the wireless industry. To build world-class 5G networks — we need a world-class 5G workforce. Together, we’re taking steps to meet that challenge — building a workforce that’s worthy of this great industry,” Adelstein said.
The evening was attended by such notables as FCC Chairman Ajit Pai, Commissioners Michael O’Rielly and Brendan Carr, U.S. Sen. Steve Daines, and other guests from the FCC, Congress and the Administration.
The inaugural class of Hall of Fame inductees included: Neville Ray, CTO, T-Mobile; Steven Bernstein, founder, former CEO and current board member of SBA Communications; Steven Dodge, founder, former CEO, American Tower; John Kelly, former CEO, Crown Castle; and Jose Mas, CEO, MasTec Network Solutions.
John Legere, president and CEO of T-Mobile, lent his star power and sense of humor in a heartfelt tribute to Ray, who has 25 years of wireless experience and has led the carrier through the LTE roll out, from the zero POPs in 2012 to 324 million POPs today. The first 200 million POPs were built in six months. He also pushed new technology into the field, including Wi-Fi calling, VoLTE, License Assisted Access and 4X4 MIMO and 256 QAM.
“Neville Ray is truly a genius,” Legere said. “This is a guy that gets things done. You give him the goal and the resources, and you just know that it will be done. You get out of the way.” He joked that Ray’s budget of $50 billion also played a key role in the success. “Give the guy some cash and he makes it happen.” Ray later clarified that he only got $40 billion.
Jeffrey Stoops, president and CEO, SBA Communications, praised Bernstein’s decision-making ability and leadership qualities.
“He can quickly and incisively distill complex issues down to straightforward decisions has been a critical part of our success,” Stoops said. “More importantly, it’s his entrepreneurial spirit and his values, including honestly, integrity, fair play, quality, customer service and hard work, that Steve instilled in SBA that remains a driver of our continued growth and success.”
Jim Taiclet, chairman, president and CEO, American Tower, said Dodge has been a “true trailblazer” for the tower industry, and has served as innovator throughout his 40-year career, which included banking, media and telecom.
“He founded and took public three pioneering companies. The first was American Cable Systems, which he grew into an industry leading position and sold to Continental Cable. Then he went on to American Radio Systems, which was sold to CBS, and then American Tower Corporation. The only flaw in Steve’s plan was an apparent lack of creativity with company names.”
Ben Moreland, former CEO of Crown Castle, introduced Kelly as the “most wonderful person” he has ever known. Kelly served as a mentor to Moreland and “set a high bar as a humble leader and a really nice guy,” Moreland said. Kelly was CEO of Crown from 2001 to 2008 and remained on the board for a number of years afterward.
“He inspires people to be the best they can be,” Moreland said. “He instilled a very customer-centric focus that required us to always think about a win-win situation with the carriers.”
After Mas became CEO of MasTec, the company grew to 22,000 professionals nationwide, quadrupled its revenues, increased earnings six-fold, and reached a ranking of 428 in the Fortune 500, O’Rielly said in his introduction.
Additionally, Mas diversified MasTec beyond telecom construction into renewable energy, oil & gas and electric transmission, among others.
“Mr. Mas is not just as successful businessman. He is a long-time leader in the Miami-Dade United Way’s Toqueville Society, which donated $15 million to improve lives last year. Most recently Mas and his brother Jorge joined a consortium with David Beckham to raise $25 million to bring a new Major League Soccer team to Miami,” O’Reilly said.