The world is going to need a lot more cell sites for 5G, and it is not clear where the sites are going to come from. Put simply, the networks need to get denser and the path to that densification is not clear.
Amidst all the promotion of the glories that are 5G, the industry tends to lose sight of the challenges facing network planners to get it to work. Much of the benefit of 5G comes from the use of new frequency bands of the radio spectrum. These bands promise lots of bandwidth (yay!), but they do not travel as far (boo!). Read the press coverage of 5G, there is lots of the former and little of the latter.
Operators are planning to use several frequencies for 5G, just as they do with 4G. However, there are two key additional bands they hope to use. So-called ‘mid-band’ at 3500 MHz and mm Wave (above 6 MHz). Long story, short, neither of these travel very far. We have discussed the problem for mmWave, but it is important to remember that 3500 MHz bands have a similar problem.
Greatly oversimplifying, the average cellular base station today covers a range of about 1 mile. There are all sorts of caveats about this number – much longer ranges in open areas, much shorter in urban areas. By contrast, 3500 MHz travels less than half that, probably closer to 1,000 feet. And mmWaves travel a few hundred feet at best.
Looking at it another way. There are about 300,000 base stations in the US today across all the operators. A single network could probably cover the US with 100,000 sites. The mid-band spectrum probably needs 1 million sites and mmWave 10 million. To be clear, many of these will probably never be built, the point is that we need orders of magnitude more sites to provide a level of service that consumers care about or even notice.
This is not a problem of technology it is one of politics and zoning and organization. Getting sites is a business heavy on shoe leather – signing deals, getting approvals and laying cables. Who is going to do all that work?
For years, the US carriers have been slowly exiting the tower business. Today, a large share of cell sites are owned by 3rd party tower companies like Crown Castle and American Tower. This is an efficient way of doing things. The tower companies can specialize in local work (and have tax efficient corporate structures to boot), while the carriers can focus on what they do best, like running a network. Unfortunately, the tower companies do not have enough sites for 5G either. One tower company recently boasted they have 70,000 small sites in their portfolio. That sounds like a big number, and to their credit it is, but in the context of needing a million or two new sites, it is a drop in the bucket. Also, many of the sites that are currently used (roof tops, highway sidings, church spires) do not match the profile of what is needed for the new bands, which need to be close to the ground (e.g. lamp posts and street furniture)
So many of the benefits of 5G depend on these local sites. The next time you hear someone extolling all the great new features of 5G, like private networks and CBRS, ask them how they will get access to sufficiently dense networks.
While these are dark times in many ways, we look at this problem in a very positive light – this is a massive opportunity. We see this analogous to the two prior waves of communications build-outs in the past 50 years – the build-out of the cellular networks and the installation of cable TV strands. For entrepreneurs with the right combination of capital, hard work and luck, there are big companies to be built.
We are in very early stages of this build-out. And we think the path of this build-out will follow those precedents. Small operators will build out a hodge podge of sites and then coalesce through M&A into regional and then national operators.
One of the challenges of this build-out is that the unit economics are much smaller. Today, a typical cell tower site lease is roughly $2,000 a month (plus or minus quite a bit). By contrast, small cells will lease for a fraction of that, say $200/month. So the new builders will need to have highly efficient operations, with ultimate winners decided as much by their processes and orchestration as with their real estate. There are many companies today that could bundle together an inventory of small cell sites, but the successful companies will be the ones who can scale efficiently.