Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com After a long wait through 2013, and with 2014 emerging as the year when small-cell deployment models are tested in the eld for proof-of-concept, players hungry for participation in the small-cell ecosystem are lining up with offerings narrow and broad. Several early development models are emerging as wireless operators and the myriad of players that can deliver the various components necessary for network expansion seek the best-possible models for fast, efcient and economical small-cell network development. White Paper: 2014 Small Cell Economics & Realities A New Round of Infrastructure Expansion .............................................. 2 Small Cell Requirements ....................... 3 Emerging Sourcing Models .................. 4 A La Carte ............................................. 6 Action Items .......................................... 8 About ATLANTIC-ACM .......................... 9 Contents Sponsored by ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com As 4G LTE Expansion Comes to a Close, a New Round of Infrastructure Expansion Begins The next round of mobile infrastructure expansion is upon us. AT&T and Verizon are nishing up their initial 4G LTE builds and T-Mobile and Sprint, which continue to build out, are proceeding at a rapid pace (see Figure 1). With initial LTE deployments beginning to move into the rearview mirror, the next round of infrastructure development is ramping up. The next round of development will be centered around macro- cell and small-cell deployments for network expansion and densication. AT&T and Verizon are deploying macro cells to expand coverage and ll holes in their LTE networks, which will require ongoing backhaul development and support. They also are pursuing small-cell solutions to add density in areas where macro-cell expansion is impractical due to spectrum or zoning restraints. Virtually all carriers have been vocal about the need for small-cell solutions. Infrastructure developers serving those carriers also report heavy interest in Figure 1: LTE Markets by Provider 2 #
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Verizon AT&T T-Mobile Sprint LTE Markets by Provider: 2011 to 2013* *Number of markets for 3Q, not end of year 195 476 500 26 103 435 46 254 49 230 0 100 200 300 400 500 600 2011 2012 2013 ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com their small-cell development services. (see Tables 1 & 2). Still, meaningful activity and scaled deployments remain scarce. Small Cell Requirements Small-cell deployments have the same requirements that exist in macro- cell deployments, but the scale of these deployments drives signicant complexity from an infrastructure perspective. For example, an area that is covered by a single macro cell may require 10 or more small-cells to boost coverage, and each small cell has the same requirements as a macro cell (see Figure 4). These include site acquisition, attachment rights, backhaul, power, Tables 1 & 2: Quotes on Macro Cells and Small Cells 3 Macro Cell Site Densication As noted on our last quarterly call, our 4G LTE coverage build is essentially completed so our capital spending going forward will be focused on adding capacity and density to our existing coverage. Verizon 3Q13 Earnings Call Increasing site densifcation leading to new leasing activity and shifting mix away from pre-sold and/ or amendment activity... It has started principally with Verizon and AT&T, so we would expect, over time, as the Sprint LTE and T-Mobile LTE builds go through the markets, that they will see a similar experience where theyll need to densify these networks and come back and cell split. Crown Castle International 3Q13 Earnings Call Presentation Consequently, the additional signal strength needed at the cell edge for many 4G applications will further encourage greater cell-site density and hence more tower leases over time... And therefore, they are increasing their demand, more tower spaces, as we go again, whether its on existing sites through amendments and more equipment or new sites to densify the network. So its a positive trend that continues along all of the fundamentals. American Tower Corporation 3Q13 Earnings Call Small Cell Networks Activity on small cell networks is also seeing strong activity as carriers continue to focus on improving their networks. Crown castle International 3Q13 Earnings Call Presentation AT&T plans to deploy 1,000+ distributed antennas and 40,000+ small cells through 2015 in order to increase network density (2012 AT&T Financial Analyst Day Network Strategy Presentation) Verizon plans to deploy 200 LTE small cells in 2013 (May 2013, Verizon CTO Nicola Palmer) Sprint plans to make aggressive use of small cells in its future LTE network, launching tens of thousands of tiny high-capacity base stations in high-trafc indoor and outdoor areas in 2013 and 2014. CTIA Wireless in New Orleans 2012, Sprint VP of Network Development and Engineering Iyad Tarazi Site acquisition and pole attachment rights provide small-cell radio Backhaul equipment located at base of or inside street furniture (depending on installation type) Fiber backhaul and power connection Small Cell Backhaul Equipment colocation and network management. All of these elements must be cost- effectively married and deployed.
Emerging Sourcing Models No clear, cost-effective business model has emerged for dealing with the scale-driven complexities of small-cell deployments. Accordingly, 2014 is shaping up as a proof-of-concept year for small-cell build-outs. Sourcing models are emerging in two forms turnkey and a la carte. Turnkey solutions, also known as small-cell-as-a-service, include all the components in Figure 4. Advantages to infrastructure suppliers pursing this model include the generation of scale across existing products and opportunities to become one-stop sourcing partners to wireless operators. For operators, advantages include ofoading small-cell development projects at a time when demand and 4G-related jockeying for competitive position is at its peak. Figure 4: Small Cell Requirements ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com 4 ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com Three key supplier groups encompass both models (turnkey and a la carte) tower/real estate providers, fber operators (ILECs, CLECs, cable MSOs, metro ber players, etc.) and integrators. Tower providers include the likes of American Tower, Crown Castle and SBA (among others). This groups core expertise in site selection and acquisition delivers value on its own, but some players are directly investing in small- cell expertise in order to meet carrier needs in the next wave of infrastructure expansion. For example, Crown Castle acquired NexG, which added a base of distributed antenna system (DAS) business to its portfolio as well as establishing a ber footprint in major metro areas (read: adding backhaul and ber services to deliver a complete, turnkey, small-cell enablement solution). Meanwhile, SBA has invested in turnkey small cell and DAS provider Extenet Systems and American Tower has pursued an organic strategy via an internal business unit. Figure 5: Small Cell as a Service Players / Timeline 5 Small Cell as a Service ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com Fiber players, including AT&T, CenturyLink, Verizon, Time Warner Cable, Charter, Cox, Comcast, Fiberlight, Fibertech, Tower Cloud, PEG Bandwidth, Zayo and many others, are primarily in the game for backhaul. However, they also hold the potential to provide services ranging from basic network management to their own full, turnkey solutions. Integrators such as EdgeConnex and ExteNet Systems can deliver small- cell services in pieces but are largely focused on turnkey solutions. In some quarters of the industry, integrators are viewed as potentially being at a competitive disadvantage on the pricing front because they lack infrastructure and/or direct assets to discount. However, the integrator models traditional value propositions of vendor neutrality and the ability to drive down prices through competitive bidding have traditionally served this model well especially in high-demand scenarios with plenty of business to go around. A La Carte The downside of the a la carte model is it saddles operators with onerous project management, including the sourcing of multiple vendors across an increasing number of network points, with each point having more than one infrastructure vendor. Since small-cell deployments are expected to occur at a signicantly higher order of magnitude than macro-cell deployments, the scope and scale of this management will be challenging. However, wireless operators, for their part, dont mind the complexity and like controlling services. Early discussions with market players, and data from ALANTIC-ACMs 2013 Metro Report Card Survey indicate that, at this point, a 6 { The next round of infrastructure development will be centered around macro- cell and small-cell deployments for network expansion and densication. ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com turnkey solution is not a requirement to win small-cell infrastructure business. When we asked about the services they expect to purchase along with small- cell backhaul, many (nearly 50%) wireless operators/buyers told us they see ongoing network management and utility contracting as complementary requirements. The remaining components in turnkey solutions were each cited by 29% or fewer wireless network buyers (Figure 6). Hence, while the scale and complexity of small-cell deployments favors single-vendor sourcing, desire for control of the build-out process exists with the majority of buyers, generating plenty of opportunity for a la carte players. Network Expectations Small-cell deployments come with expectations for certain types of backhaul services. With the macro-cell backhaul environment in the U.S. abuzz about Figure 6: Wireless Operator Interest in Small Cell Services 7 Wireless Operator Interest in Complementary Small Cell Services 53% 47% 53% 47% 71% 29% 76% 24% 76% 24% 76% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% On-Going Network Management Utility Contracting Site Selection and Acquisition RF Engineering Project Financing OEM Selection and Maintenance Q: Other than providing backhaul connectivity, do you expect the carrier/backhaul provider to provide any of the following services in conjunction with your small cell deployment? Source: 2013 ATLANTIC-ACM Metro Wholesale Service Provider Report Card Survey Yes No ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com dark ber replacement, operators will be interested in similar solutions where available for small-cell deployments. On the backhaul front, ATLANTIC-ACM surveys and discussions with wireless operators and ber players point to heavy demand for dark ber. This trend will hold true only if availability exists. (Small-deployments will not be able to work on the economics of new ber builds beyond short laterals.) However, with tight cost economics, ATLANTIC-ACM expects operators to look at new technologies as well as creative solutions for backhauling trafc. As operators test different deployment strategies and architecture, we expect them to develop best practices playbooks around backhaul, which will shape the large, scaled deployments of 2015 and beyond. Action Items for Infrastructure and Backhaul Players Dene the Value of Your Existing Assets. Dene a strategy that leverages the strengths of your existing asset base, as no single 8 Average Expected Portion of Small Cell Backhaul Spend By Technology 24% 22% 19% 13% 12% 10% 0% 5% 10% 15% 20% 25% 30% Dark Fiber Dedicated Ethernet Private Line Switched Ethernet Microwave Dediated Internet Access TDM/OCn Private Line (DS1/DS3) P o r t i o n
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Source: 2013 ATLANTIC-ACM Metro Wholesale Service Provider Report Card Survey Figure 7: Projected Small Cell Backhaul Spend by Technology ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com model will win it all. A preferred model may emerge in this years proof-of-concept trials, but plenty of opportunity exists for multiple models. Understanding your assets and how they t with mobile operator network needs will be key in winning business as current small-cell requirements do not create opportunities for capital intensive new builds or infrastructure development. Understand Customer Economics. Ultimately, deals will succeed when customer economics align with provider offers. Understanding evolving customer values and end user network pressure points, and creating solutions that meet those requirements, will be key to generating value and winning deals. Consider Strategic Acquisitions and Partnerships. Partnerships or acquisitions to expand skillsets or broaden asset bases should be on the table as economics will enable scaled players with density to drive wins. About ATLANTIC-ACM ATLANTIC-ACM is a leading provider of strategic research and consulting services to the communications and information industries. In addition to producing the industrys principal customer satisfaction, benchmarking, and market sizing and opportunity studies, ATLANTIC-ACM assists clients in evaluating business development opportunities for successful investment, 9 { On the backhaul front, ATLANTIC-ACM surveys and discussions with wireless operators and ber players point to heavy demand for dark ber. ATLANTIC-ACM One Beacon Street, 13th Floor Boston, MA 02108 Tel: 617-720-3700 www.atlantic-acm.com market entry and long-term planning. For more than two decades, ATLANTIC- ACM has helped leading companies identify opportunities, capture and retain market share, and navigate changing markets, economies and technologies. Contact For more information about the contents of this white paper, contact Aaron Blazar, ATLANTIC-ACM Vice President and principal author of this document, at (617) 720-3700, or by email at ablazar@atlantic-acm.com 10