The business of owning towers is great. Data usage keeps rising, and the customers of tower owners — telecommunications carriers — must continuously add tower capacity. There is little churn because users rarely leave, and there is little obsolescence risk; many tower structures built 70 or 80 years ago are still doing just fine.

But things change. Disruption is coming to the tower business, both positive and potentially negative. First, let’s look at where we are now.

The State of the Tower Business

Currently, as a result of the low-interest-rate environment of the past few years, many tower companies have a low-weighted average cost of capital. As a result, they can compete very effectively for desirable assets. While lower stock prices have a negative impact on using equity as currency, secured debt now has a very low interest cost, which benefits tower companies. Because of their low capital costs, they are looking for ways to invest money to keep their top-line revenue and cash flow growth intact.

Some companies are doing that by buying ground leases, rooftop leases, and more elements of the radio access network, as well as data centers. They are now looking at businesses adjacent to the tower business, such as wireless internet service providers (WISPs), that can benefit the tower business. All this is a significant departure from asset-only investing, which strongly indicates that the companies are running out of things to buy, at least in the U.S. market.

Disruptors to the Tower Business

What disruptors to the tower business lie ahead? One — which is no surprise to anyone — is the coming growth of 5G. The biggest driver of this growth will be autonomous vehicles, which will require a 5G network with 5G’s low-latency capabilities everywhere roads go. The growth of 5G will be a strong positive for the tower business.

A second disruptor is the WISPs, which are going after unserved areas as well as the money federal and state governments are providing to fund about half the equipment costs of deploying a network. That will create lots of demand for tower space in rural markets from WISPs and the carriers themselves with their at-home broadband offerings. Those use a carrier’s wireless network to connect an antenna at the customer’s premises. Since carriers have high-capacity wireless networks where not much capacity is being used, the plan is to carry customers’ internet traffic because it won’t be a big burden on the network but will require more antennas — which is good for tower companies.

Third is Dish Network. It is deploying a 5G network and has announced a billion-dollar deal for equipment, radios, and phones from Samsung. It’s launched a marketing effort in the Las Vegas market and is actively hiring across the country. I believe Dish will have a nationwide network operating in the next two years that reaches at least 70% of the U.S. population. Dish uses one antenna and two radios on a tower as its starting point, which means less rent for the tower companies but still additional business. Dish is also talking about providing private 5G networks, which will help accelerate network traffic and help the company develop a line of service for its retail revenues.

Fourth is fiber. The current fiber shortage reflects strong demand from a variety of services, including small cells and data centers. Fiber covers almost all wireless cell sites for backhaul and WISP backhaul and even last-mile connectivity. Fiber is at the center of all 5G deployments, and the fiber shortage is delaying them. Once more fiber connections are made, however, hundreds of customers can be served, unlike a tower where capacity limits usage to three or four tenants. So fiber could mean a declining need for macro towers and could be a long-term negative for the tower business.

Growth in the Tower Business

Looking at the tower business as a whole, I see the legacy business growing at about 4.5% per year this year and next, and then at a rate of 2.77% in the out years. A big reason for the slower growth will be equipment consolidations. Both 2G and 3G networks are being taken down aggressively, which means many carriers will relocate away from high-cost towers, resulting in many tower companies lowering their rents. Already, rent escalators have dropped from 2.5% to 2%. Also, new technology will increase the capacity of radio access networks (RANs), which permits sharing of facilities and slows the need for more antennas and new spectrum.

Despite these challenges, I still see healthy revenue growth ahead for tower companies as network usage continues to climb.

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About Thomas Dolislager

Thomas Dolislager is President and a Principal at SellTower Consulting, which serves the wireless industry. Previously, he served as Vice President of Wireless at Uniti Group Inc. and as a network deployment consultant for the Department of Homeland Security Office of Emergency Communications supporting FirstNet, where he had served as network procurement and deployment lead. Earlier in his career, Dolislager was network Chief Financial Officer at Alltel, which was acquired by Verizon.

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This telecommunications industry article was adapted from the GLG teleconference “U.S. Tower Industry: 2Q22 Earning Review and Industry Update.” If you would like access to events like this or would like to speak with telecommunications industry expert Thomas Dolislager or any of our approximately 1 million industry experts, please contact us.