I don’t believe Crown Castle had the wrong idea when it embarked on acquiring fiber assets and diversifying its tower business into fiber and small cells. The strategic decision to diversify the traditional tower business into nascent sectors is not new. However, I think they were early adopters but missed the strategic timing. This led to activist investor Elliott Investment Management running out of patience and urging them to “Reclaim the Crown[1].” Is a fiber company a better suitor for the fiber assets?
Crown Castle began acquiring fiber assets in 2012, and according to Elliott, they paid a premium with some of the highest multiples in fiber transactions. Fiber CAPEX also grew significantly after 2015, with Crown Castle spending more on fiber than on towers. The fiber strategy was intended to be a key enabler for small cells, as fiber is critical for 5G backhaul.
However, 2023 saw a slowdown in both tower leasing activity and small cell deployments, particularly as Tier 1 operators became more cautious with their CAPEX[2] allocations after overspending on the initial 5G rollout. In general, small cell deployments have been falling short of forecasts. At one point, analysts expected more than 800,000 small cells in the U.S. by 2026[3], but by 2022, there were only 142,000 across the country[4].
The challenge for Crown Castle, in my opinion, was not the idea to diversify but the timing and adoption of small cells. Tier 1 operators were, and still are, not ready to fully deploy small cells—but I believe it’s a matter of when, not if.
In my view, several factors are contributing to the timing and adoption of small cells:
- Spectrum: Executing the right spectrum strategy is key. Small cells will be used to densify networks and add capacity in urban areas, where mid-band spectrum is ideal. T-Mobile got it right by focusing its initial 5G rollout on lower-band spectrum and acquiring Sprint[5] for its mid-band spectrum. Verizon had to pivot from a millimeter-wave 5G deployment and purchase mid-band spectrum in the C-Band[6], but it only recently began enabling this after spending $45.5 billion in the auction[7]. AT&T also acquired mid-band spectrum in the same auction.
- Third-Party Control: Trusting a third party to broadcast your spectrum in a densely populated area is challenging. Operators may be reluctant to relinquish a degree of control, which could lead to interference, a lack of feature parity, and reduced control over service quality. There are also limitations with small cells, where operators can control shared networks. For example, a split Remote Radio Unit (RRU) managed by the TowerCo may still be controlled by an operator’s Distribution Unit (DU).
- Multi-Tenancy Business Model: The TowerCo model worked well for operators by allowing them to clean up their balance sheets. TowerCos optimized their business by consolidating physical towers and driving multi-tenancy, which improved returns on assets. However, small cells present a strategic competitive advantage in urban areas. Sharing small cell infrastructure with competitors can erode this advantage when it comes to adding capacity and ensuring high quality of service. Is the timing right for Tier 1 operators to give up this competitive advantage and share infrastructure?
The business model must align with the timing and adoption of small cells. Tier 1 operators will evaluate whether it’s worth saving CAPEX by deploying their own small cells or switching to a leased model in a multi-tenant environment, which could shrink their addressable market.
Rumors suggest that Zayo and TPG are competing for Crown Castle’s fiber network, which also includes the small cell business[8]. I predict that the U.S. will enter a fiber consolidation phase in the coming years, and Zayo’s pursuit of the deal aligns with this trend. Are they better suited to offer small cells? Again, it’s a matter of timing. The right spectrum must be available, and operators must be willing to give up some control over the spectrum and active parts of the network. Most importantly, the TCO must make sense for operators to adopt small cell deployments.
Operators will need to consider their next phase of 5G rollouts, particularly after cutting CAPEX in 2023 and 2024. Adding capacity and densifying networks will become necessary, especially as 5G phone adoption increases and AI drives demand for richer, more immersive content. Leasing Small Cells could be an ideal way forward to manage future CAPEX.
Fixed fiber adoption is also on the rise, and I believe Zayo is better positioned to achieve multi-tenancy from the network—not just for small cells, but also for additional backhaul and enterprise fiber-to-the-X.
If Crown Castle had a bit more runway, I believe they could have gotten the timing right on their strategy. However, shareholders want their returns now.
[1] https://www.prnewswire.com/news-releases/elliott-sends-letter-to-the-board-of-crown-castle-inc-301997894.html
[2] https://www.telecoms.com/telecoms-infrastructure/operators-scaling-back-spending-on-5g-and-fixed-broadband
[3] https://www.lightreading.com/5g/the-small-cell-waiting-game-starts-again
[4] https://www.ctia.org/news/2023-annual-survey-highlights
[5] https://www.t-mobile.com/news/network/tmobile-network-already-getting-bigger-better-with-sprint
[6] https://www.verizon.com/about/news/verizon-c-band-spectrum-mmwave
[7] https://www.pcmag.com/news/verizon-lights-up-rest-of-c-band-5g-spectrum-4-months-early#:~:text=Verizon%20Lights%20Up%20Rest%20of%20C-Band%205G%20Spectrum%204%20Months
[8] https://seekingalpha.com/news/4155523-zayo-tpg-competing-to-purchase-crown-castle-fiber-wireless-assets-valued-at-10b
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