Editor’s Corner—What the small cell market looks like in 2018 (Hint: It looks good)

Mike Dano

Small cells have been a topic of discussion in the wireless industry for close to a decade. Indeed, in our own wrapup of the 2012 Mobile World Congress show, FierceWireless wrote that “nearly every vendor on the show floor at the Mobile World Congress was touting the benefits of small cell deployments.”

But in these intervening years the industry learned that small cells aren’t really that easy to deploy, mainly because carriers need extensive and sometimes costly local permits to install the mini base stations in locations like light poles and rooftops. Indeed, AT&T in 2015 said it had discontinued its plans to deploy 40,000 small cells on its network by the end of 2015, though it said part of the reason was because it has acquired Leap Wireless. More recently, Sprint executive Marcelo Claure complained that it takes a year to get approval to deploy a small cell and only one hour to install it.

Are things different today?

Based on a handful of data points, it would certainly appear that the small cell situation is improving:

  • “The number of small cells deployed is predicted to rapidly increase over the next few years from about 13,000 small cells in 2017 to 86,000 this year—a 550% increase—and over 800,000 by 2026,” wrote wireless industry trade association CTIA in its annual survey this month.
  • The analysts at Wall Street firm Macquarie Research predicted that fully 5-10% wireless operators’ operating expenses this year will go to small cells.
  • T-Mobile in February announced it would embark on a “significant” program to deploy 25,000 small cells in 2018 and early 2019. “This is on top of the approximately 18,000 small cells and DAS nodes already rolled out as of the end of 2017,” the company said.
  • And Verizon—a carrier that many regard as the nation’s early leader in small cell deployments—said that that fully 62% of its wireless deployments in 2017 were small cells, “a figure that will only grow larger as we deploy 5G in 2018 and beyond,” the carrier said. “Small cells are needed to meet exploding consumer demand for data, drive innovation, create new jobs, and fuel new services and capabilities such as smart communities, connected cars, smart farming, and the Internet of Things.”

But perhaps the best and clearest look at the growing small cell opportunity comes from tower company Crown Castle. Crown Castle is one of the nation’s three publicly traded tower operators, operating around 40,000 macro towers in the United States. It made a big, early bet on the small cell market, investing billions of dollars into deploying the devices and connecting them to fiber. Today, it counts 60,000 small cells on air or under contract.

And what does the company’s management have to say about Crown Castle’s early move into small cells?

“Since we made our initial investment in small cells, we have seen the market rapidly evolve from a small opportunity and only a few locations to where we are today with all four of the major wireless customers deploying small cells at scale across all of the top markets,” Crown Castle CEO Jay Brown said earlier this month during the company’s quarterly conference call with analysts, according to a Seeking Alpha transcript of the event. “And we believe we are at the very beginning of what will ultimately be in opportunities that rivals or exceeds what we have seen play out with towers over the last two decades where demand has far surpassed what even we could imagine at the time we made our initial investments.”

Crown Castle executives added that, a few years ago, they were installing between 5,000 and 7,000 small cells per year, and now the company is deploying between 10,000 and 15,000 small cells per year. And they said the pace continues to accelerate: Executives said that Crown Castle inked the same number of new small cell bookings in the first quarter of 2018 that the company did during all of 2016.

But it’s not all roses, Brown said. It still takes one or two years to receive local approvals to install small cells and get them switched on, he said. It’s also often necessary to connect the devices to fiber backhaul, which is sometimes difficult and expensive to route to locations like traffic lights. And most of Crown Castle’s small cell locations today support only one carrier—the company’s macro towers often hold equipment from some or all of the nation’s major carriers.

But some of those difficulties are easing, Brown said.

He explained that, even with one small cell tenant, Crown Castle is still recording yields of 6% to 7%. And he said the company is starting to add a second carrier to some small cell deployments, raising yields into the “mid to high teens,” Brown said.

“There's a real benefit to the customer of sharing that infrastructure,” he said. “And I don't see any scenario where the cost to construct comes down dramatically from where it is today such that the shared model is not the lowest cost alternative. So, our job day-in and day-out here at Crown Castle is to provide infrastructure at a much lower cost to our customers than what they could do on their own.”

And the FCC and some state legislatures have made moves to lower small cell deployment fees and speed up deployment timelines.

As a result, Brown said that Crown Castle’s small cell business is on pace to reach $55 million in revenues this year, up from around $40 million last year. That would make Crown Castle’s small cell business about half the size of its 20-year-old macro tower business.

That’s pretty significant growth—but trends later this year may prove to give small cells their inflection point.

Starting in November the FCC is scheduled to begin a series of millimeter wave spectrum auctions that will free up licenses ideal for small cell deployments. Although millimeter wave spectrum can transmit huge amounts of data, signal propagation is generally measured in meters rather than miles—meaning, small cells likely will be a big part of millimeter wave spectrum build-outs.

When asked about the millimeter-wave opportunity, Brown said that he expects carrier investment “probably goes a little bit more towards small cells than it would macro sites.”

In discussing Crown Castle’s view of the small cell market, CFO Dan Schlanger used a lighting analogy: “Macro sites become the overhead lights in the room and small cells become the lamps in the room, where they put a concentration of light in a specific area in order to solve a need,” he said. “And that's exactly how we're seeing the carriers to deploy these networks. The macro sites in essence become like hub sites upon which the small cells are designed in order to provision enough capacity to meet the demand.”

It's clear that, at least in the case of small cells, the light is definitely getting brighter. – Mike | @mikeddano

Editor's Corners are opinion columns written by a member of the Fierce editorial team. They are edited for balance and accuracy.