Md7 Blog

How the Price of Bacon Affects Cell Site Rent

November 2nd, 2010

Cell site rent generally increases on a periodic basis (either at each renewal term or annually). Usually it’s a fixed percentage — between 1 and 3 percent per year, but sometimes it’s indexed off a national or local key economic indicator, with the most common index being the consumer price index (CPI).

I ran across a podcast on NPR’s Planet Money where they followed around one of the surveyors who gathers data to calculate CPI, and the podcast provides an interesting introduction of what goes into calculating it. The CPI is made up the price of thousands of items, and a federal agency has the task of visiting stores around the country, looking up the price of key items and determining if the prices described by the CPI are going up or going down. Is the price of a size 14 boy’s shirt the same as it was last month or has it increased? How about the price of bacon? All these items are considered. As you can see from this example table (out of a 100 page document), scores of factors are tracked and considered to calculate CPI.

This affects cell site rents because the CPI is impossible to predict. If a wireless operator has to predict their budget over the next three years and they have cell site rent escalators that are tied to CPI, they have no way of knowing exactly what they owe or what their rent expense will be. As a result, wireless operators have moved away from signing new leases that have variable escalation terms. Instead, whenever possible, they enter into long term leases with fixed escalation terms over the life of the lease. In addition, operators are pursuing initiatives to lower their lease expense through eliminating CPI escalation terms in existing cell site leases through negotiations with landlords.

CPI has averaged approximately 3% over the last ten years. This is a historically low value that has coincided with very low interest rates among other factors. The fact that CPI has remained a low value for a relatively long, ten year period, allows operators to substitute a fixed percent escalator at an attractive long term rate.

Lease Negotiation From Both Sides of the Fence

October 29th, 2010

By Tom Leddo

From coast to coast, from Canada to Mexico and everywhere in between there is a real estate principle that always applies: you get a better deal if you have two or more properties to choose between.

There is no way I am going to out-negotiate a car salesman because I do not have subject matter expertise. So when I buy a new car, I go to two or three dealerships and play them against each other – in the end the best price wins. You have to create a competitive situation.

This principle holds true for wireless real estate as well. I have negotiated a lease for a cell site covering Wall Street, and a microwave tower in Screw Bean Draw, Texas (yes that is a real place – it is about six miles west of Orla), and for just about every type of property in between. In my experience, no matter where they’re from if the landlord wants the monthly rental income, and you treat them with respect, then they’ll negotiate with you— no matter how fast or slow you talk. And if you let them know you are choosing between two or more sites you have negotiating leverage.

I’ve been on the other side, too. I had to lower the rent on my rental properties in Florida because there was a glut of vacant condos on the beach four blocks away and my tenants had options – they didn’t want to move, but they certainly had an opportunity to do so and I had to lower my rent to keep them. I have been on both sides of the fence of a negotiation where a tenant had legitimate options and it always works to lower the rent.

How a Single Wireless Standard Leads to Cost Reduction

October 26th, 2010

By Sudeep Gupta

I ran across some recent news from WirelessWeek about Alcatel-Lucent planning to deliver a TD-LTE standard for India. This drive for a single standard illustrates the need for operators to cut costs.

Cellular is more than 2 decades old, but only now we’re seeing a unique phenomenon — a single converged wireless protocol standard. And that’s good for consumers and the industry.

In the past, there have always been competing standards: GSM versus CDMA (more accurately called cdmaOne) versus D-AMPS (which some people called “TDMA”). For example, AT&T originally picked D-AMPS, Verizon went with cdmaOne, and T-Mobile had GSM. The result was consumers had islands of incompatible technologies.

Things have settled down quite a bit. Years ago, AT&T abandoned their D-AMPS and switched to GSM. Verizon more recently announced they are leaving the cdmaONE/cdma2000 standard and shifting over to the same LTE standard that AT&T is using and is popular in Europe. Why is this so important? Cost.

Wireless standards are made or broken by the price of the devices. The wider spread a wireless standard is, generally the cheaper the devices. That’s the crucial point — as wireless operators shift towards a single wireless protocol, consumers benefit because devices decrease in cost, operators don’t have to subsidize the devices as much, and consumers get more for their dollar/euro/etc. To a lesser extent, cell tower equipment prices get cheaper as well the more pervasive the standard is. Reducing the costs for equipment tends to drive down other costs as well, such as cell site rent costs and tower infrastructure costs, because operators tend to budget for those items as a fraction of what they spend on the equipment.

So the drive towards a single standard comes from the need for operators to reduce costs, which in a few years should benefit us all.

The Incredibly Shrinking Cell Tower

October 21st, 2010

By Sudeep Gupta

Back when cellular was first launched, it was designed only for voice communications. Today’s networks are different because they’re designed primarily for data. This change in subscriber patterns has changed the way cell sites are built and operated— specifically, everything about the site is shrinking.

The reason is that data today does not support the same margins as delivering voice. For example, at The Wireless Infrastructure Show a few weeks ago, a representative from Intel made an interesting remark: he said 10 years ago, 1 MB of data generated about $1000 in revenue. Today, 1000 MB of data generates $1 in revenue. That’s literally a change of a factor of a million! Operators realize they must drive down all their costs to match.

We see it with equipment today. Compare three generations of base station transceiver system (BTS)– the main equipment that sends and receives data between the cell tower and the subscribers’ devices. In 1990, a BTS in 1990 may have cost $450,000. Today it costs about $40,000. Reflecting the smaller price tag, the equipment is about 90% physically smaller as well.

Operators generally cue off of the price of a BTS when determine cell site costs. Back when the BTS cost a half million dollars, it was acceptable for cell site rent to be $20,000 per year. With rents escalating an average of 3% per year, that rent today would be abbot $34,000. But when the base station equipment prices have fallen to a tenth of that value, it’s hard for operators to justify rent costs that high. Not surprisingly, that change is reflected in rents today, where for new sites, rents are closer to $7,200/year.

View from CommNexus on 4G and Cell Sites

October 18th, 2010

by Tom Leddo

I attended the CommNexus presentation called The Road to Long Term Evolution (LTE): The Next Generation of Wireless Technology featuring Tami Erwin, President – West Area for Verizon Wireless. At the event, I learned a couple of things.

LTE will revolutionize the industry. Ms Erwin convinced me that LTE will be much more dynamic than anything we are currently experiencing. While she openly acknowledged that the iPhone was a “game changer,” she also pointed out that LTE will go further – much further. This was not a dis on the iPhone, but rather an attempt to show the limitless options before us in a 4G world. A world where machine-to-machine (M2M) wireless will connect everyone and everything. Check-out this video by Alcatel-Lucent that she shared with us.

The impact of 4G has not yet been clearly defined. Verizon plans to allow their subscribers to define how LTE evolves rather than attempt to define it themselves. They do not want to limit the impact of LTE by attempting to define it or set an expectation. They are merely building a network that will facilitate it. I’d give that a “thumbs-up” on Facebook!

I anticipate that 4G will change how we communicate much more than analog-to-digital conversions, 2.5G and 3G. But what about the niche of Md7 – what about 4G’s impact on cell sites and cellular antenna leases? The demand for capacity with 4G will require an increase the number of cell sites, include smaller cell sites, such as microcells, picocells, and femtocells, and cell sites will have shorter rad centers. Until more sites are built, RF engineers will have to look for ways to off-load traffic to Wi-Fi as often as possible. 4G may also force cellular operators to evolve into a “dumb pipe.” It will also drive C-level executives to focus on OPEX over CAPEX. And all of these things will impact cell site rents.

How an Operator Picks a Cell Tower Location

October 14th, 2010

by Sudeep Gupta

The most common question we’re asked is from landlords: “How can I get an operator (AT&T, T-Mobile, Sprint, Verizon, etc.) to put a cell tower on my property?” Where an operator decides to locate their cell site is more complex than having a willing landlord, so I thought I’d briefly explain how operators determine where they want to build a new site.

First, all wireless operators are continuously evaluating the quality of their networks, looking for areas where subscribers are seeing poor coverage (called coverage holes), or looking for areas where too many subscribers are trying to use the network at the same time (called congestion). They use a software application called a radio propagation prediction tool to estimate what would happen if they add a new cell site in a given area: does it “fill in” the coverage hole? Does it alleviate the traffic congestion? Does it cause an unexpected radio interference problem somewhere else in the network? After this analysis, the operator specifies a circle on a map (called a search ring) that represents usually a one kilometer area (depending on the type of area to be covered) indicating the optimal place to put a new site.

Next, they hand this search ring to a site acquisition company, whose job it is to find suitable candidates within this search ring. They look at many potential locations: existing towers, empty land where a tower could be erected, roof tops, or other structures. With each location, they determine its suitability. Can the existing tower handle the additional weight of the equipment? Is the building of the right height — is it tall enough to provide the proper coverage or is it too tall and would cause interference elsewhere in the network?

In recent years, the competitive nature of the wireless industry has forced operators to ask another question: is the cost of rent within their budget? Operators have only a finite budget to build new sites— and each year, their budgets get smaller and smaller— so they have to determine how to expand their networks while staying within a budget.

Finally, once all of these factors have been studied and weighed, the operator can make a selection on where to start the process to build a new site, which is a lengthy enough process that we should save discussion on that for another post.

Cell Site Leases as the Last Frontier

October 12th, 2010

By Michael Gianni

I returned last week from Europe after meeting with many of our customers, and something became apparent to me. Cell site real estate is the one asset that has been overlooked for the past 20+ years. It’s not as if operators have been ignoring it; I believe that they are becoming aware that they can actually affect it by addressing it, but they haven’t historically done so. In that sense, cell site leases are one of the last frontiers for operators to reduce operating expenses.

Operators have long since gotten their capital expenditures under control — they’ve consolidated suppliers, simplified their network infrastructure and engaged in network sharing to cut their costs. Operators have been getting some operating expense control, such as through outsourcing information systems (IS) and customer call centers. Recently, many operators have gone further: they are outsourcing their complete network operations, such as the high profile example of Sprint outsourcing to Ericsson. However, cell site real estate has historically been a trouble spot for operators because at the end of the day, it isn’t one of their core competencies.

These days things are starting to change. Cell site rent is one of operators’ most expensive network operating costs (up to 60% in some cases), and they can’t afford to ignore it much longer. Operators are challenging us to tame their network leases and help them chart a path to operational efficiency through OpEx reduction and harmonization of accounting/legal standards across networks and throughout operating groups.

Cellular Tower Leases: Time to Change

September 23rd, 2010

By Tom Leddo

The way the industry has identified and negotiated cellular antenna leases is out-dated and has changed little since the cellular phone industry’s explosive growth began in 1995. Md7 Chairman and CEO, Michael Gianni, describes the traditional site acquisition process as agents “parachuting in, grabbing a rental car and driving all over town leaning over the steering wheel while they eat a burrito and look up in the air for potential cell sites.” Back then, the site acquisition agents had no incentive to negotiate a good lease with low rents and solid contract language that lasted the life of a traditional cell site. The traditional cellular antenna lease was just another “pay-point” on a fixed fee services agreement. Agents not only negotiated the lease but had to battle municipal administrators for permits, zoning approvals and many other tasks for dozens of leases before their work was done. There were few if any incentives to keep the rent down and negotiate solid lease terms.

This strategy worked well in the short-term – it enabled cellular operators to build networks as fast possible– a classic case of “if you want it bad, you get it bad.” If you are in a hurry and don’t take the time to negotiate a lease properly, operators found they paid for it in the long run.

The national average for cell site rent is around $1,750 per month, and so for every 50,000 cell sites, a carrier has an annual rent roll of approximately $1 billion that increases by 3% every year, not not counting any new sites they must build. With the advent of 4G, our industry will double and maybe even triple the number of cell sites in the United States. The time is right to change the way cell sites leases are negotiated.

4 not 4G

July 1st, 2010

By Sudeep Gupta

It’s interesting that Apple has introduced their new iPhone 4 with a subtle change to its name. The previous versions Apple iPhone 3G and 3GS alluded to the generation of the wireless network that the phone supported, while with the fourth generation version does not. Is Apple trying to be sneaky? Trying to get people to think they have bought a “4G” phone, like the HTC Evo 4G? Not necessarily.

First, a little background.

EDGE, UMTS, HSDPA, HSUPA, OMG

The first generation iPhone supported the EDGE data protocol. EDGE stands for “Enhanced Data Rates for GSM Evolution” and is called a 2.5 generation wireless data protocol. It supports a pokey data rate of 236.8 kbps.

Apple followed up with the iPhone 3G, which supported the successor to EDGE called UMTS (“Universal Mobile Telecommunications System”) allowing for a greater data rate as UMTS slightly improved the data rate to 384 kbps. UMTS is considered to be a 3G wireless protocol, so the iPhone 3G name makes sense from that standpoint.

Next came the iPhone 3GS. Among other improvements, it supported High Speed Downlink Packet Access (HSDPA), an improvement to UMTS increasing the downlink (base station to handset) up to 15 Mbps. HSDPA is still considered to be a 3G protocol. In fact, some people call it a “3.5G” protocol.

Finally, we have the iPhone 4, which I’ve heard some people erroneously call the “iPhone 4G” (mostly because the previous generation models had “G” in the name). However this confusion about the name makes people think that this is a “4G” phone, but it’s not. The iPhone 4 supports an improved data link protocol: HSUPA, which provides for the same downlink data rate, but improves the uplink (handset to base station) data rate up to 5.76 Mbps. But HSUPA is still considered to be a “3.5G” technology.

Since Apple is not calling it an “iPhone 4G”, they’re not being dishonest, although the name may cause some people to erroneously append a G to the name. Then they will think it supports a true fourth generation wireless data protocol, like the HTC Evo 4G. It turns out the HTC Evo 4G isn’t “4G” either.

The HTC Evo 4G, which supports WiMAX IEEE 802.16e, is not technically a 4G phone either. The confusion comes from what the wireless industry considers to be “4G”. When the 16e standard was first being finalized in 2005, some people called it a “4G” protocol. However, later on the industry consensus is that WiMAX will not be a true “4G” protocol until the next 16m standard. Similarly, some people called the successor to HSUPA called “Long Term Evolution” or LTE 4G, but now the industry has agreed that a 4G version of that protocol won’t exist until its successor LTE Advanced it out, leaving LTE as a “3.9G,” for what that’s worth. The reason is today the industry consensus is that “4G” implies a protocol that can support a data rate of 100 Mbps.

Consumers v. Operators

In the end, this alphabet soup doesn’t really matter to consumers. The reason is because the rules for what the industry considers to be 3G and 4G aren’t really germane for what consumers are looking for. The protocols matter a lot to the wireless operators, who must make significant changes to their network infrastructure to support the evolving protocols. But the “generation” of the wireless data protocol supported by the devices isn’t as important to the consumer as what the device is capable of doing.

Data Moves the Cell Tower Inside

June 18th, 2010

By Sudeep Gupta

Starbucks announced yesterday that they will be providing free WiFi access to customers in all their US locations, with service provided by AT&T. Although WiFi never really succeeded as a replacement for cellular, operators are finding that it’s important to help offload the cellular network.

The reason is cellular networks were originally designed for delivering voice. They had large macrocells providing coverage across miles of area. The networks incorporated microcells and picocells in capacity-congested areas that would reduce the coverage area to a half-mile or even to a city block. However, the explosion of data means that operators have to rethink their networks again.

Data is generally an indoor technology. People play network games or surf the web on their Android phones when they’re waiting in line at the store. They’re watching videos or posting on FaceBook on their iPhones when they’re killing time in a waiting room. Trying to provide high data rates indoors with large macrocells is very expensive and difficult. Operators are turning to technologies such as femtocells installed in homes and distributed antenna systems (DAS) to support indoor data communications to support the growing data requirements.

The result is operators are looking towards alternatives to the large towers they traditionally built and towards techologies that allow for more concentrated coverage and capacity solutions.

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