TOWERING TROUBLES

Most wireless carriers are planning to spend at least as much — if not more — expanding their networks in 2002 as they did in 2001. But tower providers are drastically cutting back their expansion plans for 2002, casting doubt on how the relationship between tower providers and their tenants might evolve in the coming months.

Tower companies across the board are suffering from an ugly accumulation of debt as an after-effect of rampant growth and acquisitions. American Tower, perhaps the least leveraged of the tower providers, reported a net loss of $1.44 per share for the first nine months of 2001. In its third quarter report, the company revealed it would erect 800 to 1,000 new towers in 2002, a step down from the 1,400 to 1,500 it put up in 2001. SpectraSite, another tower erector, originally planned 700 to 1,000 new towers for next year, said analysts; now it's talking more like 300 to 350.

If demand for wireless colocation space outstrips supply, Economics 101 suggests prices would rise proportionately as a result. Lease rates typically include a 3% to 4% annual “escalator,” but could tower providers, like OPEC, bring a greater return by slowing production?

“Let's face it — tower companies have to make more money or they're going to go out of business,” said Greg Gorbatenko, an analyst with Loop Capital. “How do they do it? Build more? Buy more?…There's a lot of price competition on these leases. I expect to see them a lot higher.”

Gorbatenko said upgrades to 3G networks will have a much greater impact on lease rates than the narrowing supply stream, but doesn't know how long tower providers will have to wait for the 3G injection.

Few analysts agree that tower owners will up the rent to pay down their own debt. In addition to the five publicly held tower providers, there is a cadre of eager up-and-comers, including Titan Towers, TrinTel Communications, Mesa Communications and Midwest Towers. If a tower owner raises its rates, carriers could take their business elsewhere.

“What we really need to see is some price leadership,” said Gorbatenko. “You're just not seeing it.”

Jim Eisenstein, chief development officer for American Tower, said new lease rates could go up or down next year, depending on the market and individual tower provider tactics. As tower providers try to restore their balance sheets, weaker players might in desperation use low prices to add customers. Gregor Dannacher, an analyst with CIBC World Markets, compares this move to taking a minimum-wage night job at McDonald's to pay down excess personal debt.

“That might be a great short-term solution, but your time may have been better spent doing research or something at night trying to find a more lucrative career.”

Tower providers are in a tenuous spot with investors, said Dannacher, and are ill-positioned to bully anyone around.

“I wouldn't expect a huge shift in the bargaining power [of tower owners] in 2002,” said Dannacher. “[Tower providers] need to continue to work in lock step with carriers and not upset the relationship by putting in onerous upfront fees that deter people. There are options out there.”

Among the other options open to expanding carriers: building towers themselves. AT&T Wireless and Sprint PCS each have more than 4,000 wireless towers. Eisenstein has his eyes on those numbers.

“Carriers will build a greater percentage of their own sites in 2002 than they did in 2001,” he said. “Carriers are recognizing that there are a bunch of greenfield sites that tower companies won't build for them.”

Estimated new tower additions (U.S.)

	2001	2002
American Tower	1400-1500	800-1000
Crown Castle	700	800-900
SpectraSite	900	300-350
SBA Communications	649	500

During the land grab of the last few years, said Eisenstein, tower companies would erect sites anywhere carriers expressed a vague assurance they'd want to be. These days, though, tower builders need far greater commitment before they agree to create a new site.

“A carrier's going to have to be on the tower the day we put it up, and we have to have good clear window on when the next carriers,” said Eisenstein, with special emphasis on the plural, “will come to the site. If carriers want to expand, some of that — in terms of capex per towers — is going to have to be on their own nickel. Tower companies aren't going to build every site for them anymore.”

Analysts don't think many carriers will opt to build their own towers. For one thing, tower sites are becoming increasingly tougher to zone, making it a laborious and time-consuming job for carriers. But mainly, it's just an inefficient use of capital. If a carrier has trouble renting space on its towers to competitors (which it may — they are, after all, competitors), it pays much more for the site than it would by paying a tower provider, who can spread the cost among a few carriers. In fact, that's why the outsourced tower-building industry developed in the first place.

“[Carriers] divested these tower portfolios for a reason,” said Seth Potter, equity analyst for Punk, Ziegel & Company.

Still, carriers have “mixed emotions” about not owning towers, according to Eisenstein. The finance folks at the carrier companies pushed for outsourcing towers, citing the greater capital efficiency. But as networks migrate to 3G, the people in charge of operations at the carriers — who never lobbied to outsource in the first place — are now having to explain to the finance folks why the price of outsourcing is going up.

“That's an ongoing brawl,” said Eisenstein.

Eisenstein expects tower providers to work off their debt simply by reducing their expansion, which shrinks spending and increases their revenue per tower. “Part of why our revenue per tower doesn't grow that fast is because we've continued to add new towers that are underdeveloped,” he said. Expanding carriers that are hesitant to build their own towers will increasingly fill up the vacancies on those existing underdeveloped towers.

In addition, experts say the relationship between carriers and tower providers should become more intimate and symbiotic as carriers become increasingly savvy about the mathematics of lease rates and tower providers cling more tightly to their customers' needs as a path to greater profits. This is why Eisenstein believes that lease rates, for example, will continue to be at a level that benefits both parties.

“Obviously, we're not a philanthropic organization. I'll tell you tongue-in-cheek: We always hope the rent goes up.”