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Crown Castle: Cornering Synergy Combos

June, 2019

Although still considered a REIT play by the investment community, Crown Castle made a bold change in its corporate strategy to become a full-service provider, distinguishing itself from other tower companies, especially by the sheer breadth of its fiber acquisition and construction efforts. At REITweek 2019, it stated: “Over the course of the last seven or eight years, we have invested in the neighborhood of $15 billion in fiber and small cells [about 80 percent of that total on the former].” The idea is to provide a more complete package of offerings to wireless companies on one bill, while also generating higher margins for itself. Such a major shift is hardly without some real risk, including the challenge of getting into a totally new business of installing and selling dark fiber, where even Verizon itself, which has been deploying fiber since the 1980s, discovered it was way off on its Total Cost of Ownership (TCO) modeling this decade. However, at a time when there are threats to the overall cell tower business, as both Verizon and AT&T have been striving to reduce prices, and looking at alternatives, delivering a more complete program that includes becoming a fronthaul and backhaul vendor, particularly to AT&T and to the pending T-Mobile/Sprint merger, potentially strengthens Crown’s competitive position significantly.

When Crown deploys a new tower/small cell node, along with the necessary attachment, it will install a new conduit, taking it back to a common junction/aggregation point, which becomes easier when there is existing metro fiber in place. So, it explains why the company bought several fiber providers, which justified paying a premium in one or more cases – with the pairs traversing and going past its cell towers. This dark fiber is mostly in the dense, urban sector, in which there will naturally be a lot of small cell growth, and the goal is to leverage these existing high counts of fiber, which could result in sizable, internal cost declines for Crown. (Therefore, a “T-Mobile/Sprint” is able to outsource a big portion of its needs from Crown, up to the plug-ins for the radios).

Crown has recently been spending money on constructing big fiber networks in Texas, in Las Vegas, and in California (such as on extending its Wicon footprint there), as well as placing new fiber in Miami. Over the next several years, 100 percent of Crown’s rollout strategy will be putting in this physical groundwork, and it will be “investing a couple of billion dollars in the next 10 or 20 years of growth in the company through fiber and small cells.” Still, when it comes to fiber, the TCO can vary widely, as no two metropolitan areas are created equal in the US.

In fact, from a municipality planning standpoint, all of these tier 1 cities are fighting for the business community to stay, and given that the impact of 5G will be so encompassing in the very long-term, the extent to how many infrastructure resources are moved to a shared (fiber to street furniture, to bus stops, etc.) paradigm is up in the air at many of these localities. Myriad elements that can potentially affect the costs in the dark fiber business include the following five examples: 1) the variables in terrain; 2) the number of unknown obstacles to conducting even horizontal boring are much greater in an older city than in a more modern one because the latter is more likely to have some utility route planning; 3) certain states, such as California, have more regulatory barriers and higher labor costs than other parts of the country; 4) along with a city insisting on paving streets with digging, if it happens to cross a decorative sidewalk, replacement can be quite costly; and 5) given the nature of small cells, and that they will frequently be in locations in which there has not historically been telecom hardware, the actual digging will be more intense in that it is not the conventional pulling of fiber to a building with a handhole right out in front. In short, the support structure is the anchor of any dark fiber cost model, and that structure undeniably varies from market to market.

Despite these hurdles, that are four likely advantages for Crown: 1) given that wireless operators favor fixed-cost modeling, which always makes it easier to make projections, and so, the dark fiber supplier is putting its price at the limit of the service provider’s propensity to have a business case to build itself -- by throwing in the towers/small cells, there is more flexibility to negotiate on price (including dealing with any sharp pricing declines that may occur in the dark fiber space in general); 2) although there may be a good number of strand providers with lots of assets in a large metropolitan area, many of them will not necessarily have the proper makeup or product set to compete in the fronthaul; 3) the wireless providers are asking for fuller turnkey arrangements to mitigate the pain of all of the unknowns, and want to farm out the 5G capillaries -- again, providing the cell nodes gives Crown an edge; and 4) similar to Verizon as a 5G operator, Crown will increasingly have a first-mover advantage compared to other tower competitors in the space.

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As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

[written by Mark Lutkowitz]

 

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  • Mark Lutkowitz  
    August 11, 2019 at 12:03 PM Reply
    For additional commentary on this article, please see: https://www.linkedin.com/pulse/crown-castle-cornering-synergy-combos-mark-lutkowitz/