American Tower and Others Operate in an Advantageous Business Environment

Implications: 1.      Tower companies are in a very similar business to real estate. 2.      Despite the leveling off of new wireless subscribers in the U.S., there continues to be substantial growth in the actual number of cell sites.   3.      Threats to the prosperity of tower operators appear to be minimal at this time.

Analysis:  GAAP accounting methods do not seem to accommodate the technology industry particularly well.  Because towers can be treated like buildings, the old school, traditional cash flow metrics work much better in that space.  When industry analysts veer away from treating tower companies like real estate businesses, their perceptions of the valuations of these companies can be misleading.  

The positions of communications tower site operators such as American Tower, Crown Castle, and SBA Communications tend to well protected.  There are not that many firms looking to directly compete with them.  It is simply much more cost-effective for the service providers to make lease payments to another company than to build their own towers across the country.   

There is a number of factors contributing to cell site growth in the U.S.  While it is starting to edge down a little bit, there is no indication that the continual growth in minutes of use that has been occurring for the about last 25 years is going to fall off too dramatically.  There also continues to be substantial build-outs where that has just been spotty coverage, especially in the Tier 2 and Tier 3 metros.  In addition, AWS construction is just starting to happen and construction resulting from the 700-MHz auction is expected mid to late next year.  

Moreover, there is a lot of locations in major metropolitan areas and high-density suburbs where the carriers are trying to shrink the physical size of cells.  However, the expected modest investments in 4G or other types of sophisticated technologies have a limited impact on the growth of sites.  

Given the scarcity of land available in large metros, rental prices are actually rising.  (Actually, even with the overall real estate market declining in some areas of the country, hard-to-find cell sites can still go at a premium.)   

Technological threats to the tower companies appear to be minimal at this time. The use of satellite for cell phones is almost non-existent.  It is so expensive that it tends to be used for this purpose only on private jets and other very specific business applications.  In fact, the satellite players like being a niche player in this space. 

The possibility of more open access in which any cell phone can connect to a network does not appear likely within the next few years.  Smart antennas are apparently going to be used more in private networks.   There is also the potential use of a WiFi connection at the home office to connect to the cell phone -- then utilizing the Internet to get to the cellular network – getting carriers away from the handset and the end user – yet, at this point, it is more of an isolated niche then a broad industry trend.   

Further consolidation of the wireless carriers can also have a negative impact on the number of towers needed.  But in general, the tower companies are in a really great business with strong fundamentals. The tower providers are really only constrained in terms of how many new sites they can put up every year by capital.   

The main issue for tower companies is simply a question of managing their debt loads.  It is a matter of avoiding the risk of overextension in order to construct a tower portfolio.  

These businesses run for the most part by themselves.  Only a minimal CAPEX for maintenance is needed.  Consolidation is not necessarily a high priority because there would only be a limited amount of OPEX savings.  

Industry observers just need to remember not to get caught up in the ups and downs of what is happening on the technology side of the wireless business.  They have to remember that there is a nice real estate business going on.