Is the Light at the End of the Tunnel Finally Being Seen for Small Cells?

July 7, 2022 | There has been much negativity directed toward small cells.  When Crown Castle adjusted their pipeline downward last year, this negativity seemed to feed on itself.  Many wrote this sector off completely.  

I never really understood this argument.  In 2010, I had the opportunity to hear the CTO of NTT DOCOMO present to a conference I was attending in Washington DC.  Most of the audience were more “inside the beltway” experts and I was one of the few ‘Wall Streeters’ there.  The presentation he made was so memorable for its simplicity.  The top of the slide said, “This is what a 5G Network Looks Like.”  And on the slide itself was what seemed like hundreds of concentric circles all overlapping one another.  And at the bottom it said DENSIFICATION (all in caps no less!). 

This presentation clearly left its mark on me because I was always bullish on the growth in small cells and those who enabled its trajectory. 

In my view, the small cell / fiber thesis was an easy one to defend for three reasons.  First, as carriers bring on a blended mix of spectrum, their wireless infrastructure needs will expand beyond towers.  More tools would be needed in the proverbial “toolkit”. This becomes especially true in the 5G ecosystem.  Second, the FCC has been awfully busy allocating more spectrum. Between the C-Band and 3.45GHz spectrum auctions, 380MHz of spectrum has entered carriers’ hands (and more is coming following next month’s Auction 108). While this spectrum is now called “mid-band”, a few years ago it was called “high-band.”   If physics still ‘works’, the propagation of this spectrum (which is now in the hands of the carriers) is best supported by small cells.  Third (and finally), to quote the great Ray LaChance…. “wireless needs wires” (aka fiber).  Having the “wires” attached to the small cells will become increasingly important as 5G networks continue to densify.

As an analyst, these were the three main pillars to my bullish thesis on small cell deployment (and those best leveraged to it).  However, in 2020 all of these thesis points had not yet proven true.

Fast forward two years since I sat in the analyst seat and things have changed.  The FCC has auctioned off these 380MHz of spectrum (which carriers paid over $102B+ in aggregate to get their hands on).  Fiber seems to be being viewed as ‘future proof’ technology. While most of this has been seen in fiber to the home (FTTH) multiples (which have experienced significant expansion), it is fair to say fiber is getting the respect we thought it deserved after some of the tower companies started placing their capital bets there.  And perhaps most importantly, the market for small cells seems to be (finally) coming to life!  In a June 22nd report by Dell’Oro Group, they noted that revenue for small cell RANs increased 15% yoy in Q1’22. There are not many double digit growth stories left in the telecom world these days.  The analysis noted that “Nearly all the small cell growth is driven by public 5G – small cell LTE revenues declined in the quarter and private 5G small cell investments are still negligible.”

While this is a positive, it still seems the carriers themselves need to get going.  

Enter Verizon.  At a recent Wells Fargo conference, Senior Analyst Eric Luebchow was interviewing Verizon CTO Ed Chan.  Chan noted that Verizon plans to ramp up in its small cell infrastructure spend later this year and early next year.  For Crown specifically, there was more good news.  According to Luebchow’s note, Verizon is moving to a more “balanced” outsourcing model in which they increasingly utilize third-party providers, like Crown Castle and ExteNet, as opposed to primarily self-building on its own fiber.

While history may not always repeat itself, it often is our guide.  And typically, Verizon has been the most front footed in its network approach (recall they were doing fiber to the home [aka FiOS] in 2007!).  Time will tell, but we do not see AT&T or T-Mobile sitting back when Verizon is leaning in and getting that spectrum it paid so much for “live.” Remember AT&T’s two main talking points: 5G and fiber.  Small cells touch both of these talking points in a big big way.  

And while we know T-Mobile is talking about decommissioning some small cells now, I would wait and see how Auction 108 (FCC auction for 2.5GHz spectrum) shapes up next month.  With T-Mobile expected to be the biggest winner (and perhaps only meaningful bidder of the Big 3), that strategy may change.

Watch this news flow in the coming months.  ‘Public 5G’ may be the canary in the coal mine of what is to come for this industry.  In my mind it continues to be a matter of “when” not “if” small cells grow and it feels like we are now (finally) a lot closer than we were when I was still banging quarterly earnings’ notes.

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