Two weeks ago, we published an Insight Note to our clients on the neutral host business using Crown Castle (CCI) as an example to highlight the challenges of the small cell hosting model. In our Note, which you can download below, we detailed the most critical challenges associated with small cell deployments. We also answered the question of why market forecasts have been wrong about small cell deployments. The Note comes at a time when Verizon has reportedly reversed its stance on deploying more millimeter wave small cells. Verizon is the world’s largest operator of millimeter wave small cells with some 40,000 units in its network [1]. This sends a clear signal on the future of the small cell market.
Growing business with small cells
The challenges CCI has with the small cell neutral hosting is an interesting case study on expansion strategies for infrastructure service companies. CCI is unique among its competitors to base its strategy on fiber and small cell hosting, which it assembled through acquisitions. In comparison, its competitors chose to expand their tower business internationally.
Business structure compatibility
Unfortunately for CCI, the deployments of small cells was not as large as anticipated. The idea of sharing fiber and small cell sites did not align with the mindset and objective of US network operators, leading to low multi-tenancy rate. The business did not generate the anticipated cash flow and profit as revenue did not ramp up as forecasted. This dragged the financial performance of CCI which operates as a Real Estate Income Trust (REIT). CCI illustrates the incompatibility between an income trust business structure and a growth business (small cells) [another aspect is that of corporate governance, but that’s another issue!].
Elliott Management picked up on this point in 2020 when it highlighted the financial underperformance of CCI in comparison with American Tower and SBA Communications (see here). Elliott Management called on CCI to shed its fiber and small cell business. It renewed the call in November 2023 and pressed for changes in the Board of Directors and the removal of CCI’s CEO (see here). He stepped down about a week later (see here).
Do your due diligence
From my perspective, infrastructure service companies are under pressure to grow their revenues. The tower business has reached maturity in many markets. Several options are available to these companies, including for example, edge computing and private networks among other options. However, neutral hosts/infrastructure service companies need to carefully weigh these options away from market hype and rosy projections. They cannot rely on market forecasts that have little grounding in reality since these forecasts are made up for “justificationist” purposes.
For a concrete example, look at edge computing data centers. This option is being tested by American Tower and SBA. Interestingly, CCI did not pursue this expansion model under its corporate structure, opting to investing in a standalone entity (Vapor). Incoming CEO of American Tower recently indicated that edge computing “has slowed down a bit” (see here). American Tower and Verizon have pushed back their edge computing guidance among other players (SBA had stated they were building 40-50 tower-location edge computing data centers; no information where that plan stands now). So looking at edge computing from the prism of telcos one thinks it is slow going. This is not the case if one looks through the prism of cloud players of different types (public, private and players in different horizontal segments).
Final Thoughts
The current market and financial conditions have placed certain burdens and requirements on infrastructure service providers, neutral hosts and mobile network operators. The elevated debt on many network operators’ balance sheets could force a round of asset selloff which can benefit tower companies (as demonstrated by recent transactions). This equally applies to debt-laden infrastructure service providers (e.g. Cellnex has been selling off assets to reduce its debt). While this could be the first step in improving financial performance, neutral hosts need to look at boosting revenue. To plan an effective revenue growth strategy, infrastructure service providers need to:
- Do the proper due diligence which includes aligning with the local market context (i.e. what works in market X is not the same as in market Y).
- Align growth strategies with the business structure
- Consider the appropriate partnerships
[1] See our Insight Note on millimeter wave here.