5G will create new opportunities for tower companies. But many of those opportunities will be outside our comfort zone of building, buying and leasing up macro towers. This article is preoccupied with two 5G opportunities: the opportunity to deploy fibre fed small cells, and the opportunity to co-locate micro data centres at selected cell sites. Both opportunities have been shrouded in hyperbole, so we seek to draw on the experiences of early adopters to understand how real, how valuable, and how imminent these opportunities are for towercos around the world.
Will fibre repeat the tower success story?
5G is going to necessitate fiberizing just about every urban and suburban cell site. If tower companies want to unlock new revenues from fibre, their ability to acquire or lay dark fibre will be key. And towercos stand to make as much revenue, if not more revenue, from deploying fibre-fed small cells as from the fibre itself.
Digital Bridge and Crown Castle stand apart as the early adopter pioneers in terms of tower companies committing to diversification into fibre and small cells. In his most recent analyst call, Crown Castle President and CEO Jay A. Brown described fibre as a movie that is “basically a sequel of what happened in towers. In the early days, you have a carrier who needs to cover a given geography, and over a relatively short period of time, other carriers need to cover that same geography. So we’re in the process of working with carriers and understanding their deployment plans and then assessing whether or not we believe the areas that they want to deploy small cells in have the opportunity for co-location… I think we’ve done a really good job of identifying locations to deploy small cells for an initial tenant, and then we’ve seen co-location that’s come after that, and that’s driven very attractive returns… with towers, we have historically added the equivalent of one additional tenant per tower across our portfolio over a ten year period of time. With fibre, we’re seeing small cell lease-up occur at nearly twice that pace, with the second tenant added on average within five years.”
Brown went on to compare the early days of towers, in which speculative investment in new towers without anchor tenants yielded ~3% initial yields on average, whereas early investments in small cells were more informed, less speculative, and generating 6-7% yields.
Fibre and small cells are two components of the same opportunity as far as most tower companies are concerned. Some would go so far as to contend that there is no opportunity for towercos to build a small cell business of scale unless they own the underlying fibre. Crown Castle have now acquired and deployed over 60,000 route miles of fibre and 30,000 small cells (with another 30,000 in the pipeline), and they report that about half their small cell nodes are being added to existing fibre, while the others require the deployment of new fibre. And a good proportion of small cells are co-locations at existing sites.
What does diversification look like in terms of cash flow growth?
Breakdown of Crown Castle new lease revenue
Permitting slows the pipeline
“We’ve seen so many opportunities to deploy small cells in dense urban areas, but if you cannot get the rights of way to trench – or hang – fibre, then we’re stuck with a permitting problem with the municipalities again,” one towerco told TowerXchange.
If there’s one bureaucratic process tower companies have proved themselves uniquely capable of navigating, its securing rights of way, permits and zoning for telecom infrastructure from municipal stakeholders. However, the most accomplished tower companies still struggles to accelerate timelines – Crown Castle report that it takes 18-24 months to deploy a small cell in the U.S., with permitting being the primary cause of delay. And even when rights of way are granted for fibre, there is increasing expectation to lay it underground rather than aerial fibre, which of course has significant cost implications.
Other early adopters beyond Crown Castle
President and CEO James Taiclet has given American Tower license to diversify beyond macro towers, providing they stick reasonably close to their core business of co-locatable wireless infrastructure. American Tower, particularly in the CALA region, is investing in innovation with a focus on opportunities that enhance the value of their towers. For example, American Tower entered Argentina through the acquisition of CyCSA and their portfolio of urban sites, fibre and rights of way – acquiring both assets and staff with technical and local knowledge. American Tower has made a similar acquisition in Mexico, spending half a billion dollars acquiring 2,100 route miles of fibre and 50,000 concrete poles from KIO Networks in Mexico. American Tower has also partnered with fibre player Frogfoot in South Africa.
While American Tower promotes small cells, both in-building and on outdoor smart poles, and has announced a partnership with Philips Lighting to leverage 800,000 prospective small cell locations, the current size of American Tower’s small cell business has not been disclosed. It is generally thought that American Tower prefers to focus on indoor DAS, where they are the market leader with a tenancy ratio of around 2.5.
Sticking with U.S. examples of early adopters, Digital Bridge has fibre investments across its footprint, and owns two data centre businesses, DataBank and Vantage. The company has also invested to acquire a majority stake in small cell thought leader ExteNet Systems.
“Small cells will take off when the cost falls below the cost of the macro network – the total cost of small cells need to be one sixth that of a macro cells if we’re going to replace a macro site with six small cells,” said Alex Gellman, CEO of Digital Bridge’s U.S. towerco Vertical Bridge.
“The low ground lease costs – sometimes free – makes six small cells more attractive than a macro site,” added Daniel Seiner, CEO of Digital Bridge’s Andean towerco ATP.
There are also early adopters of small cells among Europe’s tower companies. INWIT, the largest tower company in Italy, anticipates rolling out tens of thousands of small cells for 5G, and has signed an MOU with Huawei to promote the rollout of small cells.
Europe’s leading towerco Cellnex, which acquired small cell experts CommsCon in 2016, and has deployed over 1,500 DAS nodes, also has an appetite for diversification. In a recent interview Cellnex CEO Tobias Martinez told TowerXchange: “We have to expand from mainly passive infrastructure solutions to a more holistic approach. Multi-operator small cells, fibre to the tower, edge computing, maybe even big data analysis – why not? At the end of the day, we’re envisaging new business models which means more partnerships with other specialist companies.”
Indonesia is host to some of the world’s most mature tower companies outside North America. There, market leaders Protelindo followed a similar blueprint to Cellnex, acquiring small cell experts iForte. At the time of the acquisition of iForte in 2015, the company had 750km of fibre and a run-rate revenue of about IDR120bn. By the end of this year, iForte is expected to own nearly 8,000km of fibre with a run-rate revenue of nearly IDR600bn.
Even China Tower started a small cell business unit in 2017, albeit it only contributed less than 0.4% of operating revenue that year.
FTTT: a distinct but value-additive opportunity
Will offering fibre to the tower (FTTT) enhance the valuation of towercos’ core tower assets? Maintaining control of FTTT as the towerco’s exclusive asset affords increased control. But this highlights the political complexity of towercos getting into fibre: if an MNO client wants to run their own fibre to a tower, then the towerco loses that exclusivity and control. Some towercos report their MNO customers asking the towerco to provide last mile fibre, other MNOs are reluctant. Some towercos are happy to lay that last mile themselves, others want to partner with local fibrecos, often agreeing an up-front revenue share.
Whoever provides it, FTTT is a must-have for 5G – it’s almost a must-have for 4G if the experiences of Reliance Jio are anything to go by. When Reliance Jio blindsided a lot of industry stakeholders by leapfrogging to 4G in India, they were forced to self-deploy around half their cell sites because so many of India’s towerco sites were not fiberized.
What percentage of your towers are fiberized? What percentage of your towers need to be fiberized? Who is going to lay that fibre – do you want to control it and monetise it, or are you content for a third party to?
Other towercos still hung up on the question of multi-operator small cells
“Shareability and lease up remain our key indicators or profitability – single tenant small cells generate less returns if we’re deploying capex to satisfy the requirements of one customer,” said one towerco.
“While we don’t need a second tenant for the economics of a small cell to be attractive,” added another towerco, “when we want to add a second tenant we usually just add a second pole. Even when we build a 15-20m light pole on which we can mount the equipment of two operators, they often don’t want to share.”
Awareness remains low that there are multi-operator small cells on the market, designed to support neutral host business models. While there are often regulatory challenges to rolling out such systems, the technology exists (check out Huawei LampSite 3.0, Ericsson Dot and SpiderCloud E-RAN for example).
Edge computing and micro data centres at the tower: an opportunity for the 5G era
Edge computing, which through the lens of the towerco primarily manifests as the opportunity to locate micro data centres at selected cell sites, may not an opportunity until use cases demanding ultra-low latency are proven in the 5G era. Why?
Digital Colony tell us that the average latency you can expect in the U.S. in the 4G era today is 50-100 ms (milliseconds). Around 30-40 ms of the delay between instructing a device to retrieve some data and the data transfer beginning derives from the air interface. Transport accounts for around 5 ms per 1,000 km, with the average journey in the U.S. being 1,100km – so transport typically represents around 10% of the delay.
Data is already being brought ‘closer to the edge’ as the data centre industry pushes beyond the original nodes of the Internet (for example in the U.S. this was San Francisco, Dallas, Chicago, Ashburn and NY / NJ) into secondary markets (in the U.S. exemplified by Atlanta, Ohio, Minneapolis, Phoenix, Las Vegas and Salt Lake City). Bringing data even closer to the edge by using micro data centres at the tower might save 0.3-0.63 ms, but that’s not materially significant in the context of the 50-100 ms latency typically encountered in the 4G era.
But when 5G brings latency in the air interface down to 1-2 ms, suddenly the 0.3-0.63 ms that could be saved by serving content from a micro data centre at a local tower, rather than from their nearest tier one / tier two data centre, could be very significant. All we need is a compelling 5G use case that proves the need for ultra-low latency.
One such use case is provided by Huawei, who tell us that with the latency of a 4G network, a self-driving car travelling at 100 km/h will move 1.4m between the time it detects an obstacle ahead and the time when a braking command is executed. Under the same conditions, with the latency of a 5G network, the car will move just 2.8cm before braking – performance comparable with the standard of an anti-lock braking system.
There remains uncertainty about the applications that require low latency, so the 0.3-0.63 ms saved by co-locating micro data centres at a tower cannot yet be proved necessary. But if you believe in the promise of autonomous vehicles, remote medicine, or any number of other 5G / IoT-enabled ultra-low latency use cases, micro data centres will become a necessity.
“It feels to me like we’re a way from the edge being at a cell site,” said Vertical Bridge CEO Alex Gellman. “It will take time for demand to push to the edge.”
There is also uncertainty in the economics of edge computing compared to the existing data centre model. And it remains to be seen is whether the tower company is best placed to own and operate micro data centres, or whether towercos should just rent ground space to the thriving and well-funded data centre industry. “Why should edge computing go to a cell site versus a ‘data centre in a closet’ or an old MTSO or landline switching centre? Location, proximity to demand, connectivity and power are key,” said Gellman.
Developed market tower companies have generally shied away from engaging with power as a service and air conditioning – leaving such responsibilities to their tenants. In the data centre world, primary and backup power, air conditioning and security are vital; ultra-high reliability must be delivered but at an investible cost. Emerging market towercos often provide full power-as-a-service, on which basis they might be better equipped to diversify into edge computing, albeit it will take longer for 5G networks and 5G use cases to become prevalent in Africa and Asia.
The availability of modularised, containerised micro data centres means the technology exists and is available literally ‘out of the box’.
I’d bet on hybrid tower / digital infrastructure companies like Digital Colony claiming a significant piece of the action in edge computing. They are first movers, and they are investing in understanding the nuanced differences in business models. After all, tower and data centre business models are not so different either operationally or financially: both are predicated on leasing capacity in air conditioned rooms to wireless and internet companies, and both are capitally intensive and generate investible long term cash flows.
“Data Centers are spreading horizontally the way cell sites moved vertically – getting closer to the demand,” concluded Vertical Bridge CEO Alex Gellman. “Cell sites have moved from 40 story rooftops to 200 foot towers to 40 foot poles over 30 years. As demand density intensifies, compute, storage and cloud will continue to spread out to meet the demand.”
Conclusions
Tower companies have created a US$300bn asset class by focusing on vertical real estate. Towercos do towers really well, and some towercos will never and need never look beyond their current focus on macro telecom towers, rooftops, and maybe the odd DAS. Other towercos have appetite to diversify, and fibre and small cells are the most adjacent, most complementary, most near-term opportunities.
Edge computing and micro data centres show promise, but there are literally no real life examples to cite in this article – there are a lot more articles and conferences about micro data centres than there are micro data centres!
Some towercos see diversification into fibre, small cells and data centres not as a new endeavour, rather as a means of enhancing and supplementing the value of their core business. “The network infrastructure needed to support next-generation services, including those enabled by 5G, has the potential to dramatically increase the demand profile for our tower and fibre assets,” said Crown Castle’s Brown. “Industry estimates suggest that the current use cases associated with 5G networks will require a tenfold increase in network performance, as measured by latency, reliability and speed. This potential step function change will likely require a hyper-dense network of small cells and fibre and macro sites connected by high-capacity fibre.”
Tower industry purists would contend that the fibre and data centre businesses are disaggregated and trade at lower multiples than towercos, so why dilute the pureplay towerco business model? Such towercos and investors prefer to be selective about the layers of the digital infrastructure supply chain in which they want to invest, pointing out that a different skillset is needed to invest in and manage fibre and data centres.
If you’re waiting for TowerXchange to conclude which group we think is on the right path, towercos that diversify or towerco purists, you’re in for a disappointment. Because we think they are both right. Building, buying and leasing up towers is a great business, and there is plenty more growth to be found focusing on vertical real estate. But if towercos want to open up new revenue streams, revenue streams that are both comfortingly similar to their core business, and that augment the value of their core business, fibre and small cells are an opportunity for today, and micro data centres are an interesting opportunity for the future.
