Top 10 Themes To Watch in the Communications Services & Digital Infrastructure Space in 2024
January 16, 2024 | Happy New Year to all the Fritzsche Forum readers. As the calendar turns, we always take our best guess as to the key trends to watch. Here is our best guess for what we believe will be a wild and crazy 2024…
1. CABLE WIRELESS AND TELECOM FWA TUG OF WAR WILL CONTINUE BUT EXPECT ONE WILL PULL THE ROPE HARDER – Cable and wireless telecom players are playing in each other’s sandbox (cable selling wireless and wireless selling fixed wireless broadband). We expect this sparring match to continue in full force this year. But if owner’s economics prevail, it may be the FWA players (who actually OWN the spectrum on which they are operating) that may tug that rope a bit more in their direction this year.
2. NEW TOWER COMPANY CEOS WILL MAKE THEIR MARK – AND MAY ADJUST STRATEGY IN THE PROCESS – Each of the three public tower companies (AMT, CCI and SBAC) is entering 2024 with a new CEO at the helm. Every management change tends to allow a company to have a ‘control / alt / delete’ moment. If recent press is to be believed, CCI will be looking at some options for its fiber business. However, how AMT’s and SBAC’s new captains steer their respective ships will be perhaps the more interesting paths to watch. Key questions include AMT’s data center strategy expansion and if SBA will stay with a pure tower asset mix.
3. THE FATE OF US CELLULAR – There is an expression I learned my first week in banking. It goes like this: “time kills all deals.” Since USM announced that it was exploring strategic options in the Summer of 2023 there has been a meaningful lack of news flow….yet not at all a lack of interest! Who knows how this unfolds but the shelf life is now going on six months. Key lingering questions remain. They include: 1) Would a merger with one of the national wireless carriers be allowed in the current regulatory environment? 2) Is the sale all or nothing? Would towers be separated from a possible network / spectrum sale? 3) If a sale does not commence – what is USM’s going forward plan given subscale nature of operations? 2024 seems to be fish or cut bait time.
4. DISH’S SPECTRUM POKER GAME – WILL FOLD OR RAISE BE NEXT MOVE? - DISH’s spectrum treasure trove is full of attractive jewels at the low, mid and high band levels. Yet, with the DISH stock down 60%+ in 2023, it seems investors do not seem to appreciate the value of these assets. DISH left a lot of investors scratching their heads as to the endgame given the recent move it made to separate some of these unencumbered spectrum licenses into a new formed subsidiary (EchoStar Wireless Holding L.L.C.). It is an interesting time for spectrum. Given the FCC currently has NO authority to auction off new spectrum, there are NO near-term spectrum auctions planned, and operators such as AT&T are calling for more spectrum, the secondary spectrum market may become a more active one this year. If so, one has to wonder if DISH’s spectrum poker game takes on a new turn this year.
5. IN-BUILDING ASSETS WILL NO LONGER BE UNLOVED – Given the lack of new spectrum availability (see point #4), wireless infrastructure will take on even greater importance this year. Simply put, carriers can add capacity by two ways: adding spectrum or spending on more cell splitting to support the networks. Both these options require significantly more infrastructure and, perhaps most importantly, network densification. Macro towers will certainly still play a critical role but to best support the midband spectrum (specifically C-Band and 3.45GHz), in-building densification is a ‘when’ not ‘if.’ Recall, although these spectrum bands will lay the foundation for carriers’ 5G networks, their critical flaw is the inability to fully penetrate buildings. As a result, a build from the ‘inside out’ approach will very much be needed. This network dilemma will bring in-building assets back into the conversation. There are many smaller players here – seeing some join hands to create scale would make a lot of sense.
6. DATA CENTER DEMAND WILL REMAIN STRONG BUT FOCUSED STRATEGY NEEDED TO AVOID PROFITABILITY POTHOLES – The AI demand, which took the data center space by storm in 2023, is showing no signs of abating anytime soon. I would expect the 2024 capex budgets for the cloud service providers (CSPs) to show continued capital bend toward developing AI ecosystems. While this has a trickle-down positive impact for the data centers as they are the ones to provide the space, data centers are servicing very demanding customers who wanted this space yesterday. To help deliver this demand, expect to see more partnerships and joint ventures with private capital players to support this build. The risk, however, is that in this ‘drinking from the fire hose’ time, strategic mistakes in operations and capital deployment can be made. Those that keep the focus and do not chase revenue for the sake of revenue will rise to the top in this environment.
7. ENTERPRISE FIBER ASSETS WILL BE INVITED BACK TO THE DANCE – 2023 was not a great year for enterprise fiber. There were some exceptions (UPN comes to mind) but for the most part, these assets were largely ignored / unloved by the investor community (both public and private). I would expect this to change in 2024. As CCI seemingly has learned the hard way, the key to success for fiber assets is to find a multi-use model (i.e. enterprise, small cell connection, data center connection) for this asset. The easiest (or less painful) way to get this multi-pronged asset model going is by using a fiber asset that is already laid in the ground and has right-of-ways established. These represent the proverbial “rails” to work off of. If the industry accepts this view, many of the orphan enterprise fiber assets may find some Daddy Warbucks out there wanting to adopt them this year!
8. SCARCITY OF US ASSETS WILL KEEP TOWER MULTIPLES AT LOFTY LEVELS – There are few US tower portfolio assets of scale left in the US expected to trade this year. Yet there still remains a significant amount of capital chasing this space. As a result, we would expect to see US tower multiples remain several turns higher than their public peers. And if rates actually do go lower, this may be even more of a boon for those sellers looking to monetize this highly sought after asset class.
9. WIRELESS CARRIERS ARPU TRAJECTORY SHOULD BE PRETTIER THAN THAT OF SUBS – 2024 carriers’ ARPUs should show the benefit of the price increases the Big 3 carriers implemented last year. While this is a positive, the key question is will the rosiness around the ARPU operating metric offset what is expected to be a fairly “meh” sub gain year? On paper, it should as a firmer ARPU has a direct impact on free cash flow generation (the ultimate goal). Yet getting analysts to wean off the sub metric may take more time than management teams hope.
10. 5G: WHERE HAVE YOU GONE? – As carriers pulled back on capex and focused on Free Cash Flow, “5G” mentions saw a precipitous decline on almost every carrier earnings call last year. Expect this to change in 2024. 2024 will be the year when carriers will need justify the spectrum spend they paid billions of dollars for only a few short years ago. Although the 5G consumer killer app may already be here (FWA), the key trend to watch is the development of enterprise solutions for 5G. If carriers can tap into their deep enterprise relationships to play ball here – this 5G thing becomes a lot more real.
As always, we welcome any and all feedback! If we are certain about one thing – we know 2024 will NOT be boring...