CNNO Playbook: Crown Castle

The big three U.S. telcos (AT&T, Verizon and T-Mobile) have historically owned and operated their own towers. However, with rising debt and heavy costs involved in deploying the networks, the big three telcos spun off their tower assets to independent tower companies. AT&T and T-Mobile sold their tower business to Crown Castle; and Verizon disposed of its tower assets to American Tower. It was a win-win situation for both the parties, as telcos could monetize their tower assets and pay off their debts. In exchange, tower companies could gain a long-term customer. The exit of the big three telcos from the tower space led to the market dominance of American Tower, Crown Castle and SBA in the U.S. tower market segment. 

Crown Castle’s tower business has been a stable source of revenue for the company for a long time. With long-term lease contracts, along with rent escalations, the heavy tower switching costs for telcos make the tower business attractive. With the U.S. tower market having reached its maturity, Crown Castle is now shifting its focus to fiber. This strategy is a sharp contrast to that of the other two tower companies, which went global with their tower business. Crown Castle’s focus on fiber makes sense, considering that 5G will require fiber optic cable lines for data transmission and connecting small-cell nodes for meeting wireless traffic demand in densely urban cities. However, small-cell networks require more capital expenditures (capex), and the returns will not come anytime soon. The reason for this is that AT&T, Verizon and cable companies (such as Charter and Comcast) have their own fiber networks and might not depend much on Crown Castle’s network. In addition, the long period that operators need to roll out and eventually scale up 5G networks means that Crown Castle will have to wait for a long time before it can start to reap the benefits of its fiber investment.

Below are a few highlights from the report:

• Crown Castle’s revenue growth in 2Q20 declined for the third straight quarter, down almost 3% YoY. Fiber revenue growth (up 7% YoY) could not offset the overall revenue slide caused by its struggling tower business.
• Crown Castle’s annualized capital intensity reached 34% in 2Q20. This is relatively higher than that of its peers, American Tower (12%) and SBA (7%). A reason for this is that small cell networks and fiber are more capital intensive than the tower business.
• Crown Castle needs to reduce its dependence on the big three telcos – which, combined, generates 75% of the company’s site rental revenues. Dish Network’s entrance into the wireless segment could bring some respite to this dependency.