Shifting Capital Risk

Cellular and PCS are starting to look like old technologies compared to what's currently on the drawing boards. Similarly, proprietary ownership of network infrastructure is starting to look like old-time thinking as well. Worse yet, it may be an imprudent business practice particularly in light of the permitting effort and capital requirements needed to deploy a new network or expand an existing one within micro compressed timelines.

Trends I predict that the trend in network infrastructure (i.e. towers and poles) is moving away from outright ownership and toward third-party ownership. Lest you be too quick to dismiss this idea, consider these industry events of the past 12 months:

* The number of companies claiming to offer build-to-suit programs exploded.

* Crown Castle International and Nextel Communications entered into a 250-site project whereby Crown delivers build-to-suit towers under a long-term lease arrangement.

* AT&T Wireless Services announced the franchising of several of its PCS markets in October 1997. The company brings the license and marketing expertise, and another entity will build, own and run the network.

* The BBC sold its entire transmission system, including +750 towers, to Castle Transmission International of Houston, TX, which now operates and maintains the network while the BBC remains a long-term tenant.

* PrimeCo Personal Communications announced the franchising of corridor portions of its network.

I also predict that by very early in the new millennium, carriers will avoid owning proprietary infrastructure because it will be a significant competitive disadvantage. As the cycle time shrinks between each new technology wave, time to market becomes an increasingly important part of being competitive. What better way to speed deployment of a new network than to use 100% existing infrastructure owned and managed by third parties or have new sites built by third parties in exchange for long-term leases. This also has the added benefit of outsourcing site maintenance.

Industry Shifts Four things will facilitate this industry shift:

(1) Consolidation in the site ownership/management industry over the last 18 months has created several companies with national site portfolios, and the trend on the carrier side is toward networks with national footprints.

(2) The sheer number of new siting opportunities available in the marketplace now compared to when PCS licenses were first auctioned in early 1995 will cause a shift.

(3) Most wireless incumbents do not want to build the network of their newest competitors, so they simply restrict co-location opportunities by requiring a 1-for-1 trade. When you're a new carrier entering the market, you have nothing to trade.

(4) The capital requirements for new networks are astronomical, and third-party ownership of the infrastructure shifts a portion of the capital risk to other parties.

Further, constructing towers, maintaining and repairing cell sites, and managing a portfolio of leases are not core competencies of a carrier. Keeping the network technically sound, delivering a quality product and attracting and keeping customers are the things a carrier does best. Does the vice president of engineering really want to deal with non-revenue-generating exercises such as changing out air conditioning units or repairing tower lighting systems?

Another advantage to non-proprietary ownership of network infrastructure is the increased speed that will be achieved in deploying new networks. This will have the effect of delivering new technologies to the consumer more quickly than new construction could, and it will be less costly due to lower capital costs. Then both the consumer and the network owner will benefit.

Those most likely to participate in this new trend are carriers with many new sites to build and for new networks not yet deployed. The incumbent cellular community is not likely to rush to build-to-suit programs based on its low need, readily available capital resources and entrenched thinking. The leaders will be PCS, E-SMR and the next generation of wireless service providers, all of which will have large geographic coverage requirements.