A new niche segment of the wireless industry-build-to-suit-is attracting a lot of attention, both from carriers and Wall Street.
The idea behind the build-to-suit concept is to shift all aspects of tower siting-including zoning, construction and maintenance-to a third party. Carriers, increasingly burdened with competitive pressures, now can pass the time, capital and risk involved with tower siting to a vendor and focus their money on their core business, say build-to-suit companies.
One such build-to-suit company, SpectraSite Communications Inc., last week signed agreements in six markets with AT&T Wireless Services Inc., Nextel Communications Inc. and Sprint Spectrum L.P. SpectraSite said the combined contracts include several hundred build-to-suit tower sites in Charlotte and Raleigh, N.C., and Florida for AT&T Wireless; in the mid-South and Florida for Nextel and in Knoxville, Tenn., for Sprint.
“At a pretty high level, AT&T in the southeast region sees this as an opportunity to redirect capital away from site development and into marketing, customer care and other services that are related to service provision,” said Paul Pachutta, AT&T Wireless’ director of site development for the southeast region.
“There is a very large number of sites that remain to be built out, and carriers don’t think that’s where they want to put their capital,” said Stephen Clark, president of SpectraSite. “It has given birth to a new segment that didn’t exist a year ago.”
More than 350 people attended one of the industry’s first build-to-suit conferences in March, signalling a growing interest in a market segment that two years ago couldn’t seem to convince carriers to consider build-to-suit solutions.
Carriers “just weren’t ready to part with their towers,” said Mark Ein, a principal with the Carlyle Group, Washington D.C. “Now they realize that towers are less important strategically.”
“For many years, carriers wanted to build out and own their own sites, and they would only collocate if they were forced to,” said Steven Bernstein, president and chief executive officer of SBA Communications Inc., a build-to-suit company that is working with BellSouth DCS, PrimeCo Personal Communications L.P., Nextel, Sprint and AT&T. “They all said no to build-to-suit. Within the past three to six months though, carriers have been facing capital constraints and zoning is becoming more difficult.”
The financial community also has taken a keen interest in the emerging build-to-suit industry. SBA raised $30 million in private-equity financing and earlier this year received $150 million in high-yield financing, said Bernstein. Other build-to-suit companies have had equally successful financing.
“The capital markets have been very receptive to tower companies seeking to expand in the build-to-suit area,” said Bob Nabholz, associate director at Bear, Stearns & Co. “The bulk of the activity has been in the high-yield market, and they also have had a very warm reception in the equities market. I think there will be a number of companies tapping the public-equity markets in the coming months.”
Sheldon Moss of the Personal Communications Industry Association agreed.
“Three years ago, hardly anyone knew that this part of the industry existed,” he said. “There is a lot of interest on Wall Street and the financial community to invest in this unique facet of the wireless communications industry. It is viewed as a low-tech component in a high-tech industry.”
What is left to build?
Whether these companies will be successful depends largely on how much and what type of network buildout is left to do. Cellular carriers mainly are engaged in filling in their networks and converting them to digital-based service. A- and B-block PCS players have finished much of their initial buildout and are moving into second- and third-tier markets. Many C-, D-, E- and F-block carriers are just getting started or are in limbo where network buildout is concerned, say analysts.
PCIA estimates the industry will need about 135,000 total sites to support the cellular, personal communications services and enhanced specialized mobile radio networks. That number grows when taking other services into account such as paging, narrowband PCS, local multipoint distribution services and digital TV.
But growth of wireless communications industry spending on infrastructure decreased nearly 23 percent last year, according to the 1998 MultiMedia Telecommunications Market Review and Forecast, published by the MultiMedia Telecommunications Association. The study projects compound annual growth on spending for infrastructure to decrease 7.3 percent from 1997 to 2001.
“A jump in PCS infrastructure spending is anticipated in 1998 as the C-Block licensees begin launching services,” said the report. “Spending on PCS infrastructure is expected to increase to $2.1 billion in 1998 from $1.4 billion in 1997 and remain above the $2 billion level through 2001.
“Cellular infrastructure spending will be fueled by the conversion to digital, but aggregate spending will nevertheless decline since cellular infrastructure is largely in place,” continued the report. “Spending on cellular infrastructure will decrease from $3.4 billion in 1997 to $1.4 billion in 2001. Total infrastructure spending will drop from $4.8 billion to $3.6 billion.”
Brian Cotton, an analyst with Frost & Sullivan, said the network buildout cycle probably will peak this year or next year and decline after that in conjunction with capacity demands. Cotton said he expects an upswing in network buildout sometime around 2001 or 2002.
“At some point the buildout is going to end,” said SBA’s Bernstein. “We decided instead of just building for carriers, we would acquire and develop our own sites and rent space to the carriers. That way we still have a long-term business.”
Build-to-suit companies will be most successful in dealing with carriers building out third- and fourth-tier markets and along major highway corridors, said Greg Sweet, president and founder of Acquire Telecom. Sweet has 26 years experience in the telecommunications industry, primarily in real estate and siting functions.
Managing control
For carriers, one of the biggest issues in choosing a build-to-suit option is giving up control of the infrastructure, said AT&T’s Pachutta.
“Giving up control of the development process is disconcerting but manageable,” he said. AT&T endeavors to stay involved in the process rather than handing it over to a build-to-suit company and walking away.
Carriers have an incentive, if not an obligation, to ensure that companies building out their networks construct sites to their standards. If tower constructors, for example, are negligent in following Federal Aviation Administration tower lighting rules, the carriers could be held responsible, said Sweet.
Carriers also should be aware of who has been subcontracted by the build-to-suit companies to do the construction work. “These towers don’t just sprout out of the ground by themselves,” said Rich Berliner, president of Berliner Communications Inc., a company that provides much of the actual labor involved with site construction to build-to-suit companies. “Carriers need to be aware of who is physically out there, wearing a hard hat and actually building the tower.”
Another concern-which is more difficult to manage-is the carrier’s need to be able to move towers around to meet changing capacity demands. Increased capacity requirements might mean the company would replace one tall tower with two shorter towers located in different spots. The carrier could run into problems if those towers are collocated through build-to-suit contracts.
Existing somewhere between carrier-built networks and build-to-suit options are build-to-rent companies. Essentially, these companies assist c
arriers in renting out space on existing towers, a proposition that increases the value of the tower to the carrier while appeasing communities tr
oubled by the proliferation of towers.
In a build-to-rent scenario, carriers build the site how they normally would and then hire a company to market space on the tower to other carriers. The carrier retains control over construction and maintenance of the tower and is the recipient of a revenue stream, said Alex Gellman of Apex Site Management, a build-to-share company.
Collocation challenges
Collocation, the foundation of a build-to-suit company’s business plan, can be both a benefit and a burden.
“There is a greater and greater use of collocation,” said Moss of PCIA, which recently won approval to operate an antenna siting collocation clearinghouse. “The concept of site sharing is recognized as an expedient and cost-effective way of getting tower structures. Cellular carriers used to manage their own towers. Now local governments and communities are concerned about the proliferation of sites and it is harder to get zoning rights.”
Since companies like SpectraSite will own the tower, they represent themselves at zoning board meetings. Clark said local zoning boards are more receptive to them than carriers because they have more reason to believe they will put more than one carrier on a site.
But build-to-suit companies may have more problems than they expect with local zoning boards. Their argument, said Sweet, is that they will build one tower that holds three carriers instead of three separate towers.
“They don’t understand that the communities don’t want any towers at all,” he said. “They were going to force you to collocate anyway. What they will want is for you to conceal the sites.”
Some analysts say build-to-suit companies also will run into problems with local zoning boards because they have no incentive to locate carriers on existing towers or buildings. Their profit is made in constructing new sites.
There are other concerns about the build-to-suit industry, primarily that the increasing competitiveness among build-to-suit players will lead to price wars that will leave many of those companies bankrupt or out of business.
“The fear is that carriers will hire two or three different build-to-suit companies in a market, because they want to get the best deal possible,” said Sweet, who noted build-to-suit companies on average must locate two to four carriers per tower in order to make money. “The problem is, will other carriers cooperate? That’s the way it should work, but it’s a bit ideological.”
A source close to the issue said he questions how successful the build-to-suit industry will be considering disappointing earnings reported by companies that provide materials for tower siting. Those companies, he said, blame their results on slow buildout by carriers.
And carriers may have a difficult time transitioning the process to build-to-suit companies because of possible layoffs of employees formerly responsible for real estate and siting issues.
Still, build-to-suit companies appear to be picking up momentum and attracting the attention of carriers.
“Carriers are taking a hard look at the situation,” said John Tynan, president of TynanGroup Inc. “If they have a lot of raw land sites for new buildout, build-to-suit makes sense. In mature markets, it doesn’t make as much sense.
“The good news is if you have a new network in an area that is relatively new to PCS, build-to-suit encourages a lot of collocation,” continued Tynan. “It’s a great answer for tower proliferation, and it’s a great way to let carriers focus on their real product-airtime-and not real estate.”
