Shrinking Cellular Backhaul Revenues

There are a few carriers that rely on cellular backhaul as a major part of their revenue stream, but there are many more carriers that provide transport to a handful of cell sites. In all cases these are some of the highest-margin and lucrative products sold on the market today, and a business line that every carrier wants to keep. However, there are big changes coming in the cellular market and today I will look at the trends that are going to affect this market over the next decade.

Increasing Bandwidth Demand. The growth in bandwidth demand at many cell sites is explosive with the overall growth in cellular data doubling every 18 months. This growth is not the same everywhere with growth coming in cell sites serving residential customers and not in older cell sites built to satisfy highway phone coverage.

The demand growth is being driven by several factors. First, it’s becoming far more prevalent for customers to use cellphones to watch video. Part of that growth in demand comes directly from the big cellular companies which are bundling in access to content as part of the service. But a more important reason for the growth in demand is that the historic reluctance of customers to use cellular data is eroding as the cellular companies push ‘unlimited’ data plans.

Demands for Lower Transport Costs. Cellular service has become a commodity. The industry is no longer adding many new customers since almost everybody has a cellphone. This has led to price wars between cellular providers, and lower average customer prices are driving the cellular companies to look to cost reductions. At least in urban areas they are starting to also lose significant customers to Comcast, with Charter just entering the fray.

Recently I’ve seen cellular companies ask for lower prices as contracts get renewed or else demand greater bandwidth for the prices already in place. This means that fiber owners are not likely to see increases in revenues even as the bandwidth they are delivering grows.

Cellular Carriers Building Fiber. I’ve had several clients tell me recently that Verizon or AT&T is building fiber in their area. While this construction might be to reach a new large customer, the most likely reason these companies are building right now is to eliminate leased transport at cell sites. This is not just happening in urban areas and one of my clients who serves a market of 10,000 homes tells me that Verizon is building fiber to all of the cell sites in the area.

Verizon made headlines last year when they ordered $1 billion in fiber. AT&T is also building furiously. If you believe the claims made by T-Mobile and Sprint as part of the proposed merger – they also will be expanding their own fiber.

I also expect the cellular carriers to make reciprocal deals to swap fiber connections at cell sites where they now own fiber. If Verizon and AT&T each build to 2,000 cell sites they could easily swap transport and both gain access to 4,000 cell sites – that’s a huge nationwide decrease in transport revenues for others.

Growth of Small Cells. Layered on top of all of this is the predicted growth of small cell sites. I don’t think anybody knows how big this might market grow. I’ve seen optimistic predictions that small sell sites will be everywhere and other predictions that the business case for small cell sites might never materialize. Many of my clients are seeing the deployment of a few small cell sites to relive 4G congestion, but it’s hard to predict in smaller markets if this will ever expand past that.

One thing we can know for sure is that the cellular carriers will not be willing to pay the same prices for connection to small cell sites that they’ve been paying for the big cell tower sites. By definition, a smaller cell site is going to serve a smaller number of customers and the pricing must be reduced accordingly for it to make sense for the cellular providers.

Conclusion. My best guess is that cellular transport will be hit and miss depending up the specific local situation. There are many who will lose all cell site transport where the cellular carriers decide to build their own fiber. But even where they don’t build fiber I would expect the cellular carriers to bring the threat of physical bypass into price negotiations to drive transport prices far below where they are today.

This is a natural economic consequence of cellular becoming a commodity. As the cellular industry tightens its belt it’s going to demand lower costs from its supply chain. Transport costs are one of the major costs of the cellular industry and the most natural place for them to look to reduce costs. The big cell companies already understand this future which is one of the primary reasons they are furiously building fiber today while they have the cash to do so.

2 thoughts on “Shrinking Cellular Backhaul Revenues

  1. Very interesting post. How does this square with your April-2018 post on the looming backhaul crisis. Is the big change since then the behavior of the carriers and their willingness to spend capex on deploying fiber?
    Which companies will be most impacted? Zayo, Cogent, Level 3? Maybe Level 3 saw the writing on the wall, and that’s why they were willing to take equity from a challenged player in CenturyLink?

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    • Good question. The two most important drivers for the need for increased backhaul bandwidth is being driven by three different trends – the increasing use of video, the huge growth in machine-to-machine language and cellular backhaul, in that order.

      The backhaul ‘crisis’ is driven by several factors. First, there are parts of the country where the backhaul fiber routes built in the 90s are seeing physical failures for a number of reasons. Further, the vagaries of the way that carries lease fiber pairs has eaten into the capacity of a given cellular route – many leased pairs are used for private traffic and may not be full to capacity, and that capacity is not available to anybody else.

      The cellular backhaul issue is wrapped up a bit into the overall backhaul trends. But as I point out today, the cellular carriers are furiously building new fibers just to serve cellular towers and are in effect bypassing the existing fiber networks – these companies don’t want to pay anybody else for cellular transport or bandwidth.

      So while overall demand for fiber is growing at a rapid pace, we see cellular traffic being pulled off that network. But this is a very local situation and only the cellular carriers understand why they build fiber where they do. They might just be building to bypass the highest lease costs today or they might be looking at the long-haul and building to reach the most cell sites.

      No other carriers win when AT&T and Verizon build their own fiber – they bypass them all. That was the major point of today’s blog. The overall cellular bandwidth doubling every 18 months and there will be places where that’s a big opportunity for carriers. But at the same time the cellular carriers are pulling big numbers of cell sites off the market by building their own fiber. It must be really hard to be in the planning group at one of the big backhaul providers like those you’ve named.

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