Monday, June 11, 2007

The wireless market's new balancing act

Could the traditional seesaw totter between lessors and lessees of wireless sites be leveling itself out?

Balanced markets exist when buyers and sellers are on an equal footing, with neither party having a significant advantage over the other. With wireless, balanced market-conditions would exist when the lessor and lessee have an equal amount of influence.

Historically, wireless carriers have had more negotiating leverage compared with property owners or lessors. The carriers knew what it would cost them to construct a typical wireless site, the length of time to recover that investment, and what they are paying in rent for other sites in their network. Yet owners, by and large, did not have any of this information. Without a market vehicle to check rent offers (like classified ads, multiple-listing services, commercial brokers or appraisals), owners often accepted the first offer presented by the carriers—set at deliberately-low amounts that favored the lessee.

Although wireless leasing is still not as open and porous as the markets for others forms of real estate, the supply of new site leases is beginning to slow down in metropolitan areas with established wireless infrastructure. In San Diego, for example, the four major carriers (Verizon, Cingular/AT&T, Sprint-Nextel and T-Mobile) established their core wireless networks a number of years ago. For these companies, construction is mostly limited to site upgrades, or infilling with smaller sites to fill in coverage gaps. Only one carrier (Cricket Communications) is aggressively building out their core network at this time.

Recent numbers from the Cellular Telecommunications and Internet Association are indicating that the supply of cell sites may be leveling off, after more than a decade of exponential growth.

In fact, for the last three years, the annual rate of growth dropped below ten percent for the first time in several years, averaging 6.28%. In 2005, the number of sites nationwide increased by only 4.5% from the previous year, and 2006 reported a 6.5% increase from the 2005 total.

Since a key precursor to a balanced market is the equalization of supply and demand, these early cell-sites totals may indicate that supply and demand are trending closer together.

Another early indication that the wireless market may be balancing out is the emergence of tenant brokers (like Black Dot Wireless, MD7 and ITRA Realty Group) who only represent carriers and other lessees. These tenant reps have had some initial success at re-negotiate existing leases with high rents to lower amounts—a process these companies call “lease optimization.”

This is a marked shift from the early days of wireless site-leasing, when carriers could find plenty of opportunities to negotiate favorable lease terms—and could mean that balanced market conditions are not far off.

Saturday, June 9, 2007

Growing like the cells of your skin

Telecom cells and the cells of your skin are not as different as you might think.

In both contexts, cells serve as basic building blocks, from which larger organisms can be created. Within a wireless context, cells are both a basic building block for a larger organism (the cellular network), and an agent for social interaction.

According to Dr. Charles W. Emarine, a radiologist with Kaiser Permanente in San Diego, skin cells grow in a process called epithelization. When we receive a cut or wound, new epithelial cells (skin cells) begin to grow from the edges of the wound towards the center. The better the blood supply to the underlying dermis, the faster the epithelial growth. Eventually, these new skin cells will form fibers (or “corridors”) across the healing wound, as the clusters of new skin cells start to link together. Eventually, these various fibrous corridors will merge resulting in a fully-covered wound,

Telecom-cell growth has, and continues to, spread across this country in irregular ripples, from population centers to rural areas, and from business cores out to the “burbs.” At its simplest, cell growth goes through distinct stages of development.

1.) Cluster growth in test markets

2.) Formation of a backbone, linking clusters together

3.) Branches form off of the central backbone

4.) Coverage gaps are eventually filled in with smaller and smaller cell sites, until the

area in question is “filled in” with wireless coverage.

5.) Renewal, as older cells are replaced with newer ones.

Just as with skin cells, as the weave of wireless fibers grow closer together, the gaps of coverage in between these fibers become smaller. In turn, the cell sites being built to fill in those coverage gaps are also getting smaller.

Although a cell site’s radius depends upon its surrounding topography and its capacity to handle calls, cell sites in rural areas generally have a radius between five and eight miles, and cell sites in urban areas typically have a radius between two and five miles.

As call volume increases within a given cell, demand for frequency reuse (in other words, the cell’s ability to handle more calls) will also increase until the cell reaches its maximum processing capacity. Therefore, to preserve wireless coverage and to provide for future growth, carriers are breaking up larger sites into smaller ones. Depending on the specific topography of the area to be covered, a handful of smaller sites at lower elevations could be substituted for one high-elevation site at capacity.

Our need to share information is analogous to the flow of blood for skin cells. As Dr. Emarine pointed out, increased blood flow can lead to faster epithelial-cell growth. Consequently, increased telecom-cell growth is usually the end result of an increased need to share information.

In 1996, the total number of cell sites in service, according to the Cellular Telecommunications and Internet Association (CTIA), was 30,045 sites. One year later, this number rose to 51,600—an increase of 71%. At this time, 38 million cell phones were in use across the country, and the average consumer used his or her phone for 122 minutes per month. By 2003, almost 163,000 cell sites had been built, and the average subscriber was spending more than 300 minutes per month on the phone. According to the latest data from the Cellular Telecommunications and Internet Association, as of 2006, 77.1% of our country’s population had cell phones (up from 61.5% in 2004, and 50% as of 2003), which is slightly higher than Japan’s current saturation rate of 76.5%. In countries like Norway and Sweden, which offer universal mobile coverage, the saturation rate is near 90%. As of 2004, the Czech Republic had a saturation rate of 93%, according to industry researcher IDC. In an April 2007 press release, IDC indicated that “the worldwide telecom billing market will reach $6.6 billion by 2011, increasing steadily at a compound annual growth rate of 6.7% from 2007 to 2011.”