Selling Transport to Small Cell Sites

A lot of my clients make money by selling transport to the big traditional cell sites. Except for a few of them that operate middle-mile networks, the extra money from cell site transport adds a relatively high-margin product into the last-mile network.

Companies are now wondering how hard they should pursue small cell sites. They keep reading about the real-estate grab in the major cities where a number of companies are competing to build small cell enclosures, hoping to attract multiple carriers. They want to understand the size of the potential market for small cells outside of the major metropolitan areas. It’s not an easy question to answer.

The cellular carriers are building small cell sites in larger markets because they have exhausted the capabilities of the traditional large cell sites. The cellular companies have pushed bigger data plans and convinced customers that it’s okay to watch video on cellphones, and now they find that they are running out of bandwidth capacity. The only two immediate fixes are to build additional cell sites (thus, the small cells) or else add more spectrum. They eventually will layer on full 5G capability that will stretch spectrum a lot farther.

There are varying estimates for the eventual market for small cell sites. For example, the CTIA, the lobbying group for the wireless industry, estimates that small cells will grow from 86,000 in 2018 to 800,000 by 2026. The Wall Street analyst firm Cowan estimates 275,000 small cells by the end of 2023.

The big companies that are in the cellular backhaul business are asking the same questions as my clients. Crown Castle is embracing the small cell opportunity and sees it as a big area of future growth. Its competitor American Tower is more cautious and only chases small cell opportunities that have high margins. They caution that the profit opportunity for small cells is a lot less than at big towers. Other companies like Zayo and CenturyLink are pursuing small cells where it makes sense, but neither has yet made this a major part of their growth strategy – they are instead hoping to monetize the opportunity by adding small cells where they already own fiber.

The question that most of my clients want to understand is if the small cell building craze that has hit major metropolitan areas will ever make it out to smaller cities. In general, the big cellular carriers report that the amount of data used on their cell sites is doubling every two years. That’s a huge growth rate that can’t be sustained for very long on any network. But it’s likely that this rate of growth is not the same everywhere, and there are likely many smaller markets where cell sites are still underutilized.

Metropolitan cell sites were already using a lot of broadband even before customers started using more data. We know this because the cellular carriers have been buying and using robust data backhaul to urban sites of a gigabit or more in capacity. One good way to judge the potential for small cell sites is to look at the broadband used on existing tall tower sites. If a big tower site is using only a few hundred Mbps of bandwidth, then the cell site is not overloaded and still has room to accommodate broadband growth.

Everybody also wants to understand the revenue potential. The analyst firm Cowan estimates that the revenue opportunity per small cell site will average between $500 and $1,000 per site per month. That seems like a high price outside of metropolitan areas, where fiber is really expensive. I’ve already been seeing the big cellular carriers pushing for much lower transport rates for the big cell sites and in smaller markets carriers want to pay less than $1,000 per big tower. It probably takes 5 – 7 small cells to fully replace a large tower and it’s hard to envision the cellular carriers greatly expanding their backhaul bill unless they have no option.

It’s also becoming clear that both Verizon and AT&T have a strategy of building their own fiber anyplace where the backhaul costs are too high. We’ve already seen each carrier build some fiber in smaller markets in the last few years to avoid high transport cost situations. If both companies continue to be willing to overbuild to avoid transport costs, they have great leverage for negotiating reasonable, and lower transport costs.

As usual, I always put pen to paper. If the CTIA is right and there will be 800,000 small cell sites within six years that would mean a new annual backhaul cost of almost $5 billion annually for the cellular companies at a cost of $500 per site. While this is a profitable industry, the carriers are not going to absorb that kind of cost increase unless they have no option. If the 800,000 figure is a good estimate, I predict that within that same 6-year period that the cellular carriers will build fiber to a significant percentage of the new sites.

Perhaps the most important factor about the small cell business is that it’s local. I have one client in a town of 7,000 that recently saw several small cell sites added. I have clients in much larger communities where the carriers are not currently looking at small cell sites.

The bottom line for me is that anybody that owns fiber ought to probably provide backhaul for small cells on existing fiber routes. I’d be a lot more cautious about building new fiber for small cell sites. If that new fiber doesn’t drive other good revenue opportunities then it’s probably a much riskier investment than building fiber for the big tower cell sites. It’s also worth understanding the kind of small cell site being constructed. Many small cells sites will continue to be strictly used for cellular service while others might also support 5G local loops. Every last mile fiber provider should be leery about providing access to a broadband competitor.