Reader Forum: Small cells and the challenge of remaining profitable

Spotlight on the network deployment services business

Adding a macro cell to cover a very low pop count area is not always economically viable, often forcing carriers to postpone a decision to cover certain rural or suburban areas. Until now, carriers have relied on highly customized solutions, like DAS or picocells, in order to address critical service requirements such as malls, stadiums or airports. These solutions, however, are expensive and not necessarily appropriate to address the majority of coverage and capacity challenges that networks face today.

While small cells appear to be the most attractive solution to enable network densification and fill coverage gaps while making more efficient use of resources (e.g., spectrum, power, space), the cost component continues to stall widespread deployment. For small cells to be deployed in large volumes (i.e., at least tens of thousands per year) and achieve an average TCO per pop that is similar to, or more attractive than, that of a traditional macro site, per site network deployment costs will have to be significantly smaller than their macro counterparts.

This by itself will require a simplification of the deployment model. Deployment services vendors will inevitably have to undergo a series of changes in order to profitably deliver site acquisition, construction, integration and optimization services for small cell deployments under such a low-cost model. In doing so, they will be facing a number of challenges:

Site acquisition services skill sets and processes will be very different:

• Zoning and permitting requirements will present different challenges, as such, an ability to navigate municipalities, pole authorities, etc. … will be a premium skill. Site acquisition services vendors need to understand small cell design and aesthetic requirements from different cities, counties and municipalities, and work with the carriers to ensure sites are designed to avoid public hearings and long delays. Having a detailed understanding of environmental and historic preservation regulations and developing specific strategies to minimize such reviews will be critical to shortening siting time frames and reducing costs.
• Substantial experience procuring attachment rights and securing power from municipalities, utilities and public entities also will be key. Finding a way to streamline this process while having to deal with requirements that change with every city, neighborhood, utility company, or even type of building, will be a significant endeavor. Preexisting relationships with such entities will be highly valuable.
• Broad knowledge of potential mounting locations (existing and future) and the availability and cost of power and backhaul at these locations will enable vendors to quickly adjust the design as site changes require. Small cell locations are much more sensitive to small changes than macro sites.
• Ultimately, zoning and leasing costs will likely have to drop to about 10% of what operators pay today for a typical macro site.

Current construction skills will become less valuable as traditional tower-top and ground work becomes less predominant, and the skills that small cell deployments demand may be available from other sources:

• As construction requirements change (e.g., RF cabling moves back toward the manufacturing stage) more emphasis will be placed on basic installation services and on running fiber or Cat 5 for backhaul access.
• Small cell deployment scenarios will be highly diverse, ranging from complex installs in indoor buildings to very simple (relative to traditional macrocells) pole/strand mounted small cells. While this certainly creates opportunity, it also opens the door for new entrants such as entrenched providers that do work in the ROW and on outside plant.
• Required installation and construction requirements will be very different to those currently provided by traditional construction crews. The expectation is that the bulk of small cells should be simple builds, and thus the construction costs should be significantly less expensive (e.g., no more $2,000 to $3,000 per day for an installation crew, and almost no civil work or heavy lifting).
• Any previous experience and relationships that can help expedite work in the ROW space will be a plus (e.g., traffic management, relationships with utility companies to expedite power delivery on poles).

Provisioning and integration work must be significantly simpler and faster than macro builds if the cost requirements are to be met:

• The work should require less field configuration in order to make the business model work, meaning fewer field techs and less time per-install, threatening one of the areas where deployment vendors can achieve attractive margins today.
• The configurations should also become simpler (e.g., some indoor small cell solutions can leverage existing Cat 5 cabling and self-optimize to a great extent). Carriers are looking for a simple and repeatable configuration and integration process in order to meet aggressive deployment timeline and cost requirements. Working with OEMs and third-party vendors, carriers are testing ways to implement a pre-configuration stage where equipment leaves their warehouse already configured for quick and easy integration. Consider how easy it has become for end customers to do a self-installation of their cable modems and Wi-Fi service with no tech on site.  This provides an idea of what operators are trying to accomplish with small cells, using a minimally trained technician. This may diminish large vendors’ ability to differentiate from small deployment service providers (since today it’s generally only these large incumbent vendors who know the equipment and its configuration complexities, creating barriers to entry for smaller providers).

The broader trend toward small cell deployments over the next several years presents a conundrum for deployment services vendors. Carriers are asking these vendors to innovate and identify ways to aggressively reduce costs, complexity and time to deploy. Making substantial progress toward these goals, however, may unravel the foundation of the deployment services model that has made these companies what they are today. As small cell siting and deployments become more commoditized, traditional deployment services vendors’ ability to differentiate from new entrants only gets eroded. Further, a corporate cost structure that relies on high-margin programs to bear a large fixed overhead will be severely threatened by leaner and more competitive small cell deployments.  This may prove challenging for many vendors, particularly the larger ones.  Suppliers will need to invest in tools and deployment strategies that can differentiate themselves from others in order to gain a larger market share and potentially command premium pricing.  

The rules of the game are changing and the need to move to a high-volume, low-margin model is urgent.  Without a major shift in the small cell cost structure, real volumes may never materialize.  If the shift does occur, those vendors that don’t adapt their expertise and cost structure will be left behind.

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