The tower industry offers a lot of potential because the business model is great, and even though the industry isn’t risk-free, it’s pretty darn close in our opinion. Companies are able to take advantage of the fantastic cash flow throughout the industry, along with the skyrocketing wireless data demand, long-term contracts, and the high switching costs that ultimately create a “narrow economic moat despite heavy customer concentration,” Michael Hodel, CFA, at Morningstar explained. Morningstar is an independent investment research firm.
The three public tower companies are essential partners for every carrier in the nation, especially as they continue to buy up tower portfolios left and right. Tower companies increase revenue per tower in three ways: annual escalators built into contracts, contract amendments with existing tenants, and the addition of new tenants, Morningstar explained. Some may think the tower industry is risky, because major carrier consolidation could drastically alter long-term demand and the balance of power between tower owners and the carriers. However, a typical tower site lease runs 10 years or long making this business a marathon, not a sprint.
Shifting to third-party tower ownership also makes sense to Hodel. “Tower firms can manage towers more efficiently than carriers for a variety of reasons, and independence from a carrier allows multiple carriers to locate on each structure without competitive concern,” he explains. “The tower companies can also leverage their deep tower-management expertise across a far larger number of sites than a carrier can.” A critical component Hodel mentions that tower companies pay little in taxes thanks to their REIT status. At least, American Tower and Crown Castle do. Read the rest of Hodel’s thoughts on why the business model for the tower industry is fantastic here.
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