Late last year AT&T announced that is had contracted for the construction of hundreds of new big cellular towers through Tillman Infrastructure. AT&T and Verizon jointly struck a deal to build with Tillman in 2017 and by late last year some of the new towers came online. This doesn’t sound like big news because towers are built every year – but these new towers were built to directly compete with and replace existing big towers. AT&T’s announcement was a warning to existing tower owners – lower your prices or we’ll bypass you.
You can’t blame AT&T and Verizon for this because they pay some of the highest prices for any telecom products to hang radios and to bring bandwidth to big towers. To a large degree, this is a problem of their own making, and the history of big towers is a great example of economics that has gone awry.
When the two companies first got into the cellular business they mostly built their own towers. There were some tall towers in existence – some to support public safety radio networks and many more that were part of the AT&T, MCI, and Verizon microwave backbone networks. You might remember the towers with the big horn antennas. When AT&T longlines started to replace microwave backhaul with fiber in the 1980s they sold the whole tower network to a newly formed company, American Tower. American Tower went on to remove the big horn antennas and leased space back on these towers to AT&T and Verizon for cellular use.
Within a few years, both big cellular carriers agreed to lease towers almost everywhere from American Tower and a few other big tower companies. At the time, both AT&T and Verizon were spinning off huge cash from the rapidly growing cellular business and they both decided to avoid the capital costs of building towers and allowed others to invest in the key infrastructure component of cellular networks. Both carriers also made similar choices about allowing others to construct the fiber needed to connect to their cell sites. Their decision to avoid capital costs turns out to have been a giant mistake in the long run.
Today, cellular companies are feeling huge pressure from competition as the prices of cellular plans have tumbled. Had the big carriers decided years ago to own their key infrastructure – towers and fiber – they would have minimal costs for operating these assets today. Instead, they are paying ever-escalating prices for tower space and fiber transport.
AT&T is now demanding big reductions in tower space rental prices. Building the new towers is an obvious threat that the company is willing to bypass anybody who won’t cut prices. A few hundred new towers is barely a blip in the tower market, but the AT&T message is clear. Last year Verizon used the same tactic to put pressure on fiber providers to lower transport costs – at the risk of Verizon building fiber to their towers and bypassing existing fiber.
All of this is happening at a time when we’re also seeing the proliferation of small cell sites. When I look at the architecture of cellular networks, a significant number of tall towers could be replaced with a network of small cell sites. The cellular network today is really two separate networks. There is the network built to provide cellular traffic along major highways – you see these towers at every few exits along every interstate highway. These towers are not likely to go away, and in fact, the tall towers are needed to provide coverage across large stretches of highway.
But there are a lot of cellular towers that have been built to serve where people live and work. There has been a long-standing unease in many communities about having the big towers in somebody’s back yard. Over time the cellular companies can make many of these towers obsolete as the smaller cell sites take over. (Of course, there is also now unease about having a lot of smaller towers in neighborhoods).
The big tower companies understand this transition. American Tower is leading the way in acquiring pole rights and is building electronics vaults along city streets for small cell sites to support 5G. Like other parts of the telecom market, the cell tower market segment is facing big changes. Just five years ago the big cellular carriers, the tower companies, and the fiber transport companies were all making big money from the cellular market. Today, all are feeling the pinch due to the advent of cellular price competition. It’s going to be interesting to see if AT&T and Verizon make the same choice all over again and lease small cell sites rather than building themselves.