In Our Own Words

Ready, Set, Rent!

March 2, 2010

Flashback: The First Race for Market Share in the Wireless Industry

When the A/B Block PCS Auction ended in 1995 an unusual real estate phenomenon occurred. Cellular operators paid way too much to lease it. No, this wasn't driven by low interest rates, the refi boom, Option ARMs or teaser rate mortgages. It was driven by a race for market share.

And, boy, was it a doozy. An analog-based industry had just gone digital. Wall Street was throwing money at this new enterprise as they were starting to inflate the dot-com bubble, and the FCC found a new revenue source for something they had previously given away for free.

Before there was an auction for spectrum, the government had employed an inefficient lottery system to allocate spectrum. When the government realized that they could be the ones making money out of thin air (as economist Peter Cramton quipped after the first auction 15 years ago), the wheels were set in motion for a new industry dynamic that would profoundly affect future operating costs and the way carriers do business.

I know because I was there. I watched as players like WirelessCo, AT&T, PCS PrimeCo, Pacific Telesis, GTE, American Portable Telecommunications, Ameritech Wireless, Western PCS, Powertel PCS Partners and others together paid in excess of $7 billion for spectrum and then turned around and spent billions more to build their network — all before even selling their first PCS phone. They needed the frequency to build the network. They needed the network to sell the phones. They needed to sell the phones to appease the investors. The race was on.

Back then, I was a struggling Oil & Gas Landman in Houston. We were the guys who negotiated mineral leases for drilling oil and gas wells. Given our unique real estate experience in a busted industry, we were looking for new opportunities. While I personally found it negotiating microwave relocation contracts to clear the 1.9 GHz frequency for these new phone companies, many Landmen found it in site acquisition. They were contracting more work than they could manage, as cellular operators were desperately seeking to find sites for their new networks. While there were pre-existing cellular phone companies, the number of carriers had suddenly multiplied and competition to get to the new digital market first was fierce — and it all pivoted on real estate. No one had ever seen anything like what was about to happen in the cellular real estate market. While I may be good-humoredly embellishing this historical period, some of you old timers know there is truth in this story, which goes something like this:

I remember meeting two guys in Tyson's Corner, Virginia from The Staubach Company (at the time, the premier tenant rep agency in the country for office space) who were frustrated because they couldn't figure out how to get a contract to represent these new carriers. In their real estates negotiations it seems the carriers weren't interested in a former Super Bowl MVP quarterback who methodically and aggressively represented tenants in negotiating long-term leases and had a reputation for getting great deals. These two guys had never seen so many companies in the process of amassing so large a corporate real estate portfolio so quickly. And they certainly couldn't understand why speed was more important than smart rents and solid lease terms. They told me we would regret it in the longrun.

I remember laughing at those guys who were smarter and better dressed than me. I told them, "You just don't get it! The PCS operators are in a race for market share and the first one to build their network will be the first one to sell phones. They'll use long-term contracts that won't let their customers keep their unlisted phone numbers if they leave so they can lock them in forever. In other words, the first to market gets the clients forever!"

Back then, that really was smart thinking. We ignored Roger Staubach and conventional wisdom, we overpaid for rents and enabled carriers to secure market share. And it worked very well for the last twelve to fourteen years — until subscriber saturation, low flat-rate calling plans and rapidly increasing OPEX hit the industry. But now, we've got a marketplace with a new set of rules.

Now it's time to change our thinking. "Pay what it takes to get it fast and do whatever it takes to keep it" is no longer viable. Carriers are beginning to once again go against conventional wisdom and reverse the trend of escalating rents. Real estate asset management through tenant representation is a business strategy that enables carriers to evaluate cell site and tower leases in a competitive environment. With sprawling nationwide networks, it's a complex business that requires substantial attention. And carriers are positioning themselves to give it just that.

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