Wireless Infrastructure
Industry Review
Overview
Wireless infrastructure services are a critical part of the $44 billion U.S. wireless ser- vices industry. Wireless infrastructure is comprised of the towers, antennas, electron- ics and broadband and microwave backhaul equipment required for a wireless network to receive and transmit voice and data signals. Wireless infrastructure services include site selection and acquisition, construction, engineering and ongoing maintenance of wireless communication sites.
The demand for wireless infrastructure and the related services to create and maintain it is driven by the wireless carriers’ need for increased capacity, which is in turn driven by consumer usage. Consumer consumption of network bandwidth is driven by three factors: the number of wireless customers, the number of voice minutes per customer and the amount of data services per customer.
Despite wide penetration of wireless services in the United States, the number of customers, or wireless connections continues to increase. According to CTIA, the number of connections increased by 15 million in 2009 to reach 287 million total connections.
The following chart shows the increase in number of wireless connections over the past 20 years.
Estimated Connections
In conjunction with the continued increase in wireless subscribers and connections, carriers have seen a dramatic increase in demand for voice and data services from current customers. Wireless voice traffic increased to over 2.2 trillion minutes in 2009.
The chart below depicts the increase wireless usage on a per minute basis.
Wireless Minutes of Use
While the growth in voice minutes has begun to level off, the wireless industry continues to grow, primarily due to the increased demand for data services. According to CTIA, wireless data revenue accounted for 28% of all wireless services revenue in the second half of 2009, up two percentage points over the prior year.
The chart below shows total service revenues for the past 20 years.
Total Service Revenues
Wireless Carriers
After a long period of industry consolidation, AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile have become the four dominant wireless carriers in the United States, serving over 90% of subscribers nationwide. Nevertheless, these carriers face ongoing competition from each other and from newer entrants such as Clearwire and EchoStar.
The chart below shows the subscriber share as of year end 2009.
Subscriber Share
Competition among these carriers continues to intensify as a result of continuing increases in wireless market penetration levels, new technologies, new products and services, new market entrants, the availability of additional spectrum, and regulatory changes. At the end of 2009, U.S. market penetration reached approximately 92%.
In addition to direct competitors, wireless carriers are frequently competing with cable, satellite and internet companies offering untethered communication services. Additionally the market for value-added services is no longer the sole domain of the wire- less carriers as they now see competition from game developers, device manufacturers and application providers who sell directly to the consumer. Companies such as Google and Skype are beginning to sell products and services directly to consumers rather than going through wireless providers.
Wireless carriers compete most heavily on the capacity, reliability and coverage of their networks; pricing; product development; and customer service. Consumers identify competing carriers in the marketplace by the reputation each carrier has developed over time. Carriers use these reputations as advertisement platforms to demonstrate strengths and reveal the weaknesses of competitors. For example, Verizon Wireless promoted a wider 3G coverage area than AT&T with its “there’s a map for that” ad campaign.
The chart on the next is an example of a Verizon Wireless’ 3G coverage ad campaign.
Verizon & AT&T Coverage Maps
Verizon Wireless’ map shows its widespread 3G coverage of the U.S., while AT&T’s map is depicted as having minimal 3G coverage across the country. While AT&T does offer 2G coverage in a much wider portion of the country, this ad campaign, along with heavy data usage by iPhone customers, has forced AT&T to accelerate its 3G infrastructure build out. Meanwhile the other carriers are not standing still, as they continue to expand the capacity and geographic reach of their own 3G networks.
In the past, wireless carriers have been able to increase capacity ahead of expected demand. Now carriers struggle to keep up with the rising consumer demand. Upgrade cycles overlap as new generations of technology are introduced before the prior genera- tion has been fully deployed. Operators are now embarking on 4G upgrades well before completing their 3G build outs.
The chart below shows 3G coverage by carrier as of year end 2009.
Customers with 3G Coverage by Carrier
Technology Evolution
The chart below provides a summary of four generations of wireless technology.
1G – 4G Wireless Technologies
First generation or 1G represents the beginning of the cell phone era. This analog technology originated in the 1980s. In 1991, the 2G digital network commercially began on the Global System for Mobile Communications (GSM) standard and went on to utilize other digital protocols, including CDMA, TDMA, iDEN, and PDC. Using digitally encrypted technology, 2G allowed for greater spectrum efficiency and introduced data services such as SMS (text messaging) for mobile phones. As 2G gradually evolved into 3G, the unofficial 2.5G helped bridge the gap with technologies such as EDGE and CDMA 2000 1X. The shift from 2G to 3G has seen faster data transmission speeds, increased network capacity, and more advanced network services. On October 1, 2001, NTT DoCoMo launched the first commercial 3G network in Japan. As of December 2009, UMTS-HSPA, the world’s leading 3G technology accounted for 464 million sub- scriptions. 3.5G or “beyond 3G” which includes technologies such as HSPA+ and LTE, is the unofficial bridge to the 4G technology that will be known as “IMT-Advanced.”
The International Telecommunication Union (“ITU”) has officially defined 2G, 3G, and the technologies included within each generation as wireless standards. ITU is currently working to define the requirements for IMT-Advanced technology standards. The impending 4G promises even higher data rates in which real-time voice, data, and high-quality multimedia are available anytime and anywhere. With 4G technology, the speed differential between wireless and wire line is expected to be negligible. Existing protocol such as LTE and WiMAX are addressing the ITM-Advanced requirements in versions called LTE advanced and WiMAX 2.0. The widespread commercial launch of 4G networks is expected to occur between 2012 and 2015. By 2014, UMTS_HSPA and LTE 3G technologies are expected to account for 84% of global subscriptions or ap- proximately 2.8 billion subscribers, compared to a forecasted 528 million CDMA EV- DO and 89 million WiMAX subscriptions. Cisco forecast that mobile networks will have 5 billion personal devices linked by 2014.
The chart below shows a diagram of the move towards 4G over the past decade.
Evolution Towards 4G Technology
The newer network technologies require more backhaul than earlier generations. 2G needed backhaul with only 1.5Mbps of T1 copper, while 3G and 4G requires 10 – 20Mbps and 50 – 60Mbps respectively.
According to the National Broadband Plan, the FCC will release 300MHz of spectrum during the next five years and a total of 800 MHz over the next 10 years. In preparation for the deployment of the fourth generation of wireless technology, wireless carriers are allocating billions of dollars to network upgrades and new construction.
Infrastructure
In order for wireless carriers to unveil new technology and accommodate increased network usage, carriers must constantly upgrade, build out, and construct infrastructure to support their activities. Regardless of which generation of technology a wireless network utilizes, the frequency spectrum, backhaul, and backbone of the network have critical roles in the creation and maintenance of a reliable, high-quality wireless network. It costs approximately $100,000 - $200,000 to construct a new, fully functional tower from raw land. Antenna modifications and changes cost from $3,000 - $10,000. In addition to tower and antenna projects, backhaul work is becoming increasingly necessary to accommodate the new technologies.
There are three areas within infrastructure that, when put together, supply the necessary means to provide wireless carriers with the technology and services they promise to consumers. Professional services, construction services, and technical services combine to provide wireless carriers with the infrastructure necessary to run reliable networks with constantly changing technology.
Professional Services. Professional services refers to the work that must be completed prior to construction of a cell site. These services include a range of activities from acquiring the real estate for a site to performing the necessary due diligence to construct the tower. Due diligence for a cell tower is a complex process involving the design and layout of the tower, conformance to all FCC regulatory mandates, and obeying local compliance policies. While the profit margins are not as favorable in this area when compared to the construction or technical services, these pre-construction efforts initi- ate the development of a wireless site or tower.
Construction Services. Construction services can be a lengthy process that spans from the first movement of soil to placing antennas on the completed tower and everything in-between. Construction projects can be separated into two stages: civil construction and tower construction. The civil construction process begins as soon as the soil is moved and includes all ground and underground work that needs to be completed in order for tower construction to take place. Tasks include, but are not limited to, clearing the land, drilling, grading, and laying an access road. Tower construction includes tower construction, line-work, antenna placement, and testing.
Technical Services. Technical services encompasses the post-construction projects and other upgrades and maintenance services performed throughout the life of the tower. These services include integrating the base system, wiring the tower, and any improvements or repairs that the tower needs to function effectively.
As data and voice traffic continue to increase, the demand for new and upgraded cell tower sites increases. These activities however, are subject to many federal, state, and local regulations that must be taken into account for any project.
Regulatory Matters
Towers and Antenna. The location, construction, lighting, painting, and maintenance of towers are regulated not only by the Federal Communications Commission (“FCC”), but also by the Federal Aviation Administration (“FAA”). The FCC has rules and regulations for registering towers, reviewing the impact of a tower on the environment, and following maintenance procedures for making the tower visible. The construction of new towers or modifications to existing towers may require pre-approval by the FAA due to many factors that could affect air travel such as tower height and proximity to airports. Prior to construction, towers requiring FAA approval must first be registered with the FCC. Tower construction is also subject to local zoning restrictions and other covenants stipulated by local officials. Regulations generally require tower owners and licensees to obtain approval from local officials prior to the construction of a new tower or antenna additions to an existing tower. The Telecommunications Act of 1996 limits the jurisdiction of local zoning authorities by prohibiting any actions that discriminate between wireless providers or forbid tower construction altogether. The act also man- dates the federal government to help wireless communications licensees obtain access to preferable sites for their facilities in situations in which the local populations opposes construction activities.
Environmental Matters. Tower construction is subject to various environmental regulations, at all levels of government, including those relating to the management, use, storage, disposal, emission and remediation of, and exposure to, hazardous and non- hazardous substances, materials, and wastes, and the siting of towers. The FCC considers the construction of a new tower or the addition of a new antenna to an existing site to be a federal undertaking subject to prior environmental review and approval under the National Environmental Policy Act of 1969 (“NEPA”). Federal agencies must evaluate the environmental impacts of such projects to determine the environment effects. The FCC has imposed regulations implementing NEPA as well as the National Historic Preservation Act of 1966 and the Endangered Species Act of 1973. These acts compel licensees to investigate and disclose potential effects of operations in an environmental assessment prior to constructing a tower or adding a new antenna to a site.
Government Stimulus
Over the past decade, the exponential growth in the wireless industry stemmed from the location of the demand. Now however, broadband coverage in larger, faster paced cities dramatically trumps the coverage in rural areas. In the recently passed economic stimulus package, the Recovery Act directed $7.2 billion in funding to the Department of Agriculture's Rural Utilities Service (RUS) and the Department of Commerce's National Telecommunications Information Administration (NTIA). These funds are to be used for several broadband initiatives which include expanding broadband access to underserved communities across the U.S., providing job opportunities, and encouraging investments in technology and infrastructure. According to FCC Commissioner Michael Copps, widespread broadband coverage will help restore America’s economic well-being with the opportunities it presents to all Americans passing through or resid- ing in the rural areas. Over half of the funding amount has been delegated to the Broadband Technology Opportunities Program (BTOP) whose purpose is to provide access to broadband in underserved areas; improve broadband access for both under-served areas and public safety agencies; and provide broadband education, training, and support.
The Recovery Act provided an additional $2.5 billion in funding for the Broadband Initiatives Program that is designed to support the expansion of broadband service in rural areas through financing and grants to projects that provide access to high speed service and facilitate economic development in locations without sufficient access to such service.
The chart below shows access to greater than 4 Mbps broadband in the U.S.
Percentage Housing Units > 4Mbps Broadband Availability
Industry Participants
The wireless tower services industry is dominated by small, local companies with few firms having the ability to provide a full array of turnkey services. Industry participants in the wireless infrastructure industry compete on price, quality, reputation, and efficiency. Relying largely on repeat business, infrastructure firms strive to preserve the loyalty of their customers by proving their ability to provide reliable and timely services. The industry’s primary customers are wireless carriers, tower operators, telecom equipment companies, and project managers who are highly motivated to provide high service levels for their customers. The competitive landscape is highly fragmented and is comprised of tower operators, program managers, construction service firms, and technical service firms. There are few large players in the wireless tower industry that compete directly with smaller services providers and many of the larger players dedicate only a small portion of their efforts directly to wireless infrastructure.
M&A Market
Thus far, most acquisition activity in the wireless infrastructure services industry has been driven by companies moving in from adjacent sectors such as wire line construc- tion. Due to the attractive growth and margin opportunities in wireless, that trend will likely continue. Additionally, consolidation within the wireless infrastructure services sector is likely to accelerate as the market matures beyond its current highly fragmented state. While many infrastructure service providers currently advertise multi- state service areas, few have more than one or two office locations. Meanwhile, the customer base of wireless carriers and tower operators has become very consolidated. The large customers that remain have service needs that span across the country and beyond. As a result, leading infrastructure service providers can be expected to pursue acquisitions that give them a super-regional or national footprint.
With acquirers entering the market from adjacent sectors and increased combinations among current industry participants, merger and acquisition activity is likely to be strong for the next several years. Some examples of recent transactions are as follows:
Dycom Industries’ acquisition of NeoCom Solutions (December 2010)
Dycom is a leading provider of specialty contracting services to the telecommunications and infrastructure industries. NeoCom is a leading provider of services to construct, install, optimize and maintain wireless communication facilities in the south- eastern United States. Dycom’s telecom services have primarily been focused on wire line services, and the NeoCom acquisition will accelerate its efforts in the wireless sector.
Crown Castle International acquisition of NewPath Networks (September 2010)
Crown Castle International owns, operates and leases towers and other wireless infra- structure. NewPath Networks designs develops and operates distributed antenna systems for wireless communications in high density settings such as university campuses, sports arenas, large corporate campuses, communities and neighborhoods.
Unitek Global Services acquisition of Berliner Communications (January 2010)
Unitek Global Services provides engineering, construction management and installation services to the telecommunications, broadband cable and satellite industries. Berliner Communications provides site acquisition, construction and technical services primarily to the wireless carriers and tower operators. The acquisition will further Unitek’s penetration into wireless infrastructure services.
Conclusion
Consumer demand for data services will continue to put pressure on wireless carriers to expand and upgrade their facilities and equipment. As a result, infrastructure service providers are expected to experience rapid growth for the next several years. Strong growth and profitability, coupled with a rising need for nationwide service capabilities, will create a healthy environment for mergers and acquisitions within the industry.