The S&P and the Nasdaq are up approximately 20% year to date. Yet the three largest tower operators -- American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) -- have not participated in this rally (YTD returns between 1% and -11%) despite the rapid growth in wireless usages, their high leverage, and a strong bond market that has allowed them to refinance at attractive rates. I was at an industry dinner recently that included investors and tower industry experts where we discussed these issues. It was a wide-ranging discussion, but a few things stood out for me:
1) The major wireless carriers publicly indicated they are uninterested in unlicensed shared spectrum. But at the same time, they have rapidly moved to off-loading traffic in the most valuable urban areas to Wi-Fi. Depending on which estimates are considered, carriers currently offload approximately 50% of their traffic to Wi-Fi.
2) Wi-Fi siting is becoming easier in many areas due to some local zoning changes, including allowing for light pole mounting and similar improved siting policies that are becoming more common. This is likely to further expand Wi-Fi offloading.
3) The rapid move to Wi-Fi offloading is likely a significant part of the reason why prices for U.S. licensed spectrum have largely stopped increasing over the past few years. One prominent study concludes international spectrum prices have fallen rapidly. Tower operators generally do not host Wi-Fi sites. Thus, they now participated in only about half of the U.S. wireless traffic (and falling).
4) As spectrum prices have flattened, it is easier for wireless companies to increase capacity on their licensed spectrum (which carries their non-Wi-Fi traffic) by buying additional spectrum. Carriers are now somewhat less inclined to continually make capital expenditures to divide cell sites, compared to when spectrum prices seemed to be headed endlessly upward. This has allowed the wireless industry to expand capacity while adding fewer new antennas on towers.
5) Major carriers have obtained much of their additional spectrum from industry consolidation and then increasing utilization of the acquired carrier's spectrum (for example, T-Mobile (TMUS)/MetroPCS, Sprint (S)/Clearwire, AT&T (T)/Leap (LEAP), and many other smaller transactions). This has enabled them to take over antennas and existing leases on towers as opposed to building out the new spectrum from scratch.
6) The consolidation of the carriers has also likely begun to change the negotiating dynamics between the tower operators and the wireless carriers. There are now fewer wireless companies to compete for space on any given tower.
The tower industry is not without a bright side. Federal rules, including the "shock clock" that requires municipalities to quickly respond to tower siting applications, are likely to improve tower siting in suburban areas. Upcoming FCC spectrum allocations, including the incentive auction, are likely to increase demand for tower capacity as those frequencies are built out nationally as is FirstNet, the proposed federal safety communications network. However, more wireless capital expenditures are being made on spectrum and on Wi-Fi networks (often paid for by end customers) as opposed to cell splitting of licensed spectrum on towers. As a result, tower demand is poised to grow at a slower rate than overall wireless capital expenditures.