The Impact of Cell Site Termination on Landlords

Presented by The Coalition for Cellular Industry Information A wave of consolidation and intense competition underway in the cellular telephone industry is bringing changes to cell site landlords that may not be widely understood. The merger be- tween Cingular Wireless and AT&T Wireless Services that cata- pulted Cingular to the position of the nation’s largest wireless carrier in 2004, was very short lived. When only a year later, SBC Communications acquired the entity, then merged with Bell South, and began operating under the global brand of AT&T in 2006. Those mergers alone created thousands of redundant cell sites on the combined network and gave landlords their first real glimpse of consolidation. Although massive in its scope, the AT&T consolidation of Cingu- lar, SBC, and Bell South, only comprises a portion of the large scale mergers that have taken place in the marketplace. Addi- tional consolidation continues to take place having even greater impacts on tower leases that landlords need to understand. For ment, landlords receive a monthly rent. instance, just within the last 10 years, in addition to the AT&T Each site has been selected by radio frequency (RF) engineers to mergers and acquisitions, Verizon acquired MCI, Bell Atlantic, achieve specific wireless network coverage objectives, and re- Vodafone, and Rural Cellular, and Sprint and T-Mobile were on quired an average of 18 months to bring on-line. Engineers the verge of merging just last year. This fierce competition has spend an average of one to six months to identify a site that is caused average revenue per user to plummet, forcing carriers to lease-able, zone-able, and build-able. The next step, obtaining a carefully manage and control costs. conditional use permit, often takes six to nine months. Finally, This document outlines the impact these changes may have on the equipment build-out can take one to three months, for a cell site landlords, including possible termination or rent reduc- total of up to a year and a half to bring a cellular access point tion, as well as opportunities for prudent cell site landlords to online. better position themselves to maintain long-term revenue Because of this lengthy and complex set-up process, a cell site streams and take advantage of new opportunities as the wire- has inherent value, even if it becomes redundant on a current less industry moves toward high-speed wireless Internet services wireless provider’s network, as there may be other opportuni- and other new technologies. ties available with regional carriers or with other carriers bring- Cell Site Overview ing on high-speed wireless Internet services. Changing Cellular Landscape There are two major types of cell sites: tower sites, which are Cingular’s purchase of AT&T Wireless Services for $47 billion stand-alone wireless access points that rent a portion of their (with debt), completed in October 2004, was the first of several capabilities to multiple wireless carriers, and non-tower sites, major mergers underway in the industry. In late 2006, BellSouth which lease a small amount of space on other business or gov- and AT&T closed a deal for $85.8 billion, consolidating owner- ernment property to support a wireless access point. ship of Cingular Wireless and began operating under one global Throughout the country, thousands of non-tower cell sites are brand as AT&T. The Wall Street Journal reported that third larg- now located in industrial buildings, as well as on church, public est carrier Sprint Corp. purchased fifth largest Nextel Communi- park, school and city properties, bringing a steady monthly in- cations for $36 billion. This deal, completed in 2005, created a come to the landlords with minimal effort or inconvenience. new Sprint/Nextel network with approximately 63 million sub- A typical cellular site consists of a mobile telecommunications scribers today, compared with AT&T’s 116.5 million and Verizon antenna and accompanying base station and access point equip- Wireless’ 123 million. But moreover it lead to massive duplica- ment and wiring. In return for providing the space for this equip- tion and overlap in network coverage which caused Sprint to ultimately disband the Nextel network in the summer of 2013. The consolidation has continued over the last few years with announcements in January 2005 that Alltel, the sixth largest mobile operator, has agreed to buy Western Wireless, a smaller regional carrier, in a deal valued at approximately $6 billion and T-Mobile just recently merged with Dish allowing for a broader spectrum of customers into Canada and Mexico . As a result, the once-fragmented U.S. wireless market is now dominated by a handful of carriers, and there is widespread speculation in the industry about even further consolidation .i.e., the T-Mobile Sprint merger that has been in the works for a few years may be next on the list.

Leased Cell Sites

What’s behind this wave of mergers and buyouts? Possibly the biggest factor driving consolidation is market maturation. Ac- cording to Cellular Telephone Industry Association Annual Sur- vey Report for 2014, there are approximately 355.4 million wire- less customers in the United States. This is approximately 110 percent of the U.S. population. As a result, industry growth has slowed and cellular service has become a commodity. To draw in new customers, carriers have been marketing new features and larger data plans, while cutting prices to draw in new customers and lure old ones away from competitors.

Another important factor is a change in Federal Communications Commission (FCC) regulations that became effective on Jan. 1, 2003. At that time, the FCC eliminated the Commercial Mobile Radio Services (CMRS) spectrum cap and cellular cross-interest rules that had previously been in effect. As a result, there are fewer restrictions on the amount of the CMRS spectrum that a single company can hold in a particular geographic area, which opened the market to the current mega-mergers.

While average revenue per user has been declining due to price cutting in the face of competition, costs for cell sites continue to rise. A few years ago, when expanding cellular networks as fast as possible was a priority, generous lease agreements were signed, often with automatic escalators, or built-in annual in- creases. Today, cellular providers must evaluate the cost/ benefits trade-offs of each available site, to optimize their over- all wireless network and balance the required wireless coverage while minimizing costs.

Redundant Sites Resulting from Mergers

Looking just at the Cingular/AT&T merger as an example, the combined Cingular network had a combined total of approxi- mately 52,000 sites, after the companies divested radio wave spectrum and network assets in 13 cities in 11 states, as re- quired by federal regulators as a condition of the sale. Of these 52,000 remaining sites, approximately 20,000 are tower sites, owned by a handful of tower companies, and 32,000 are non- tower sites. Of the non-tower sites, only about 17,000 are need- ed, leaving 15,000 redundant sites to be terminated.

RF engineers had to evaluate the networks to determine which sites to keep, based primarily on location, wireless coverage objectives and cost. In accordance with their agreements, land- lords were notified by the carrier when their site was scheduled to be terminated.

Today, approximately 70 percent of all cell sites either support multiple carriers, or are located very close to sites supporting other major wireless carriers. As industry consolidation contin- ues, a large percentage of operating sites today may be affected by changes ahead. Options Open to Redundant Site Landlords Existing cell sites offer a much more attractive alternative than 1. Negotiate new Agreement starting from scratch to For landlords of cell sites that are currently in a redundant mar- develop new sites. ket and possibly on a list to be terminated, there are options available to help position their sites to maintain long-term reve- References nue. Even if a site is on the termination list, it may be possible to CNET, “Sprint gets the Nextel monkey off its back,” Feb 8, 2012. renegotiate the lease agreement to make the redundant or un- necessary site more financially appealing than another site on CNN/Money, “Sprint’s Nextel network gets its death date: June the keep list that provides wireless coverage in the same area. 30, 2013,” May 29, 2013. By accepting a rent reduction, it may be possible to maintain an income stream, rather than having the cell site terminated. CNN/Money, “Cingular Nabs AT&T Wireless for $41B,” Feb. 17, 2004. 2. Repackage for Sale An alternative that may be attractive to landlords seeking op- CommsDesign, “Alltel, Western Wireless Confirm Merger,” Jan. tions to establish a new revenue stream is to work with the car- 10, 2005. rier that is trying to repackage groups of sites for sale to other carriers to support other wireless services, including next- CTIA Wireless Industry Indices, June 2014. generation high-speed wireless Internet service. Under this al- ternative, the landlord can opt to retain the equipment and site FCC Press release, “FCC Announces Wireless Spectrum Cap to as is through a lease amendment modifying the termination pro- Sunset Effective Jan. 1, 2003,” Nov. 8, 2001. visions. Typically, the landlord would agree to abate the rent for 24 months or other specified period, to allow time for the site to New York Times, “BellSouth and AT&T Close Deal,” Dec 30, be repackaged with others and resold. Rents would resume 2006. when the group of sites is resold. 3. Take Site Down Oligopoly Watch, “Industry Brief: US Phone Industry (Part 2, cell Landlords also have the option to stick to the terms of their orig- phones),” Jan. 22, 2004. inal lease, forgo their rental income, and simply have the equip- ment removed after receiving the termination notice. Pew Research Center, “Smartphone Ownership 2013,” June 5, 2013. What’s Ahead for Non-Redundant Site Landlords? Even if a specific site is not currently among the potentially re- RCR Wireless News, “Report: Sprint/Nextel Reach Tentative dundant sites resulting from past mergers and overlapping cov- $36B Deal,” Dec. 10, 2004. erage, it may be affected by the other upcoming mergers. For landlords of cell sites that are not currently on the list to be ter- RCR Wireless News, “From Six to Four: Sprint, Nextel Link Up,” minated, there are options available to help position their sites Dec. 20, 2004. to maintain long-term revenue. At the present time, an estimated 90 percent of cell sites are San Jose Mercury News, “Big Deals Looming in Wireless World,” under short term leases that can be terminated at any time, typ- Aug. 5, 2002. ically upon 30 days written notice. In exchange for reduction in rent and/or modification of automatic annual rent increases, Seattle Times, “Post-merger Work Force at Cingular to Shrink 10 carriers may be willing to negotiate longer term arrangements Percent,” Nov. 24, 2004. that have the potential to be mutually beneficial by reducing costs for the carrier while maintaining a smaller but longer term The Street.com, “Alltel Buys Old AT&T Wireless Spectrum,” income stream for the landlord. Nov. 26, 2004. Prudent landlords who act early to negotiate new agreements that better fit today’s cellular industry climate can minimize the Wall Street Journal, “Will Nextel and Sprint Connect?” Dec. 9, likelihood that their site will become redundant. 2004.

Opportunities Ahead Wall Street Journal, “Alltel: Expecting a Call?” Dec. 27, 2004. Given the current wave of consolidation, landlords may wonder how strong the opportunities are for finding new cellular carriers Wall Street Journal, “T-Mobile Stops Extra Charges for Calls, able to utilize their site. A new wave of wireless services is under Texts to Mexico and Canada,” July 9, 2015. development to provide an alternative to DSL and cable modem services for broadband services to the home. These services will Western Queens Gazette, “Cell Phone Antenna Fees Could Bring need widespread networks similar to today’s cellular networks. in $21.3M Annually,” July 14, 2004. In addition, the cellular industry will continue to evolve, and new networks will be required to support next-generation services.