NATE Report Argues Tower Builder Market Is Broken

More than 80% of contractors surveyed said that pricing in current operator contract matrices “fails to cover basic operating costs,” according to the report that the Brattle Group prepared for NATE. Nearly 90% of contractors reported increased costs for managing customer materials and 96% said their contracts don’t “account for site-specific factors like terrain, weather, or local labor markets.”

The report notes that the infrastructure industry is shrinking. Some 54% of survey respondents reported “reduced employee counts in the past three years, and there is evidence that experienced firms are exiting altogether,” the report says. “This workforce attrition threatens the institutional knowledge base required to respond effectively to emergencies and to support the continued deployment of next-generation wireless technologies.”

Paroma Sanyal, Brattle Group principal and former chief economist at the FCC Wireless Bureau, said during a news briefing that the survey found troubling signs for the contractor market. “At the heart of the issue is a market that’s dominated by three mobile providers,” she said. “It creates what we call a classic monopsony,” a structure where one buyer substantially controls the market as the dominant purchaser of goods and services.

In recent years, the major carriers increasingly have structured contracts for tower work as master service agreements (MSAs) with a matrix pricing system, the report said. Under MSAs, “most expenses incurred by contractors to complete a job are paid on a per-unit basis with fixed prices from a pricing matrix set by carriers or on a cost-plus basis where carriers set allowable margin for contractors.”

When buyers and sellers have equal bargaining power, “an MSA is not necessarily unfavorable to one party,” the report found. “When the buyer has disproportionate bargaining power, they can present the terms as ‘take it or leave it’ to the seller.”

“One of the things that really stood out for me was how little success the contractors had had in negotiating these take-it-or-leave-it contacts," Sanyal said. She noted that in the survey, only 7% of respondents said they had successfully renegotiated contracts with Verizon. That was a “red flag,” she said. That’s “rate setting” and “what we should be finding in a monopsony.”

Todd Schlekeway, president and CEO of NATE, said the report is targeted at the FCC but is also aimed at Congress and other agencies. FCC Chairman Brendan Carr has been “a passionate advocate for us,” he said. “We need to continue to press the levers of the government agencies that have jurisdiction over our industry,” he added. Without a push from the FCC, “it would have been hard for NATE to get to the table with the big three” carriers.

The report should be “mandatory reading in the C-suites of Verizon, T-Mobile and AT&T,” Schlekeway added. It “reinforces the need” to make sure negotiations with the carriers continue.

Craig Snyder, NATE co-founder and chairman of Vikor, joked that the report demonstrates that “yeah, it sucks to be part of a monopsony,” but he said there are also threats for the carriers.

"If we don’t have the workforce to build our infrastructure” it could have negative implications for providers, Snyder said. In the 1980s, the big U.S. automakers outsourced more and more components, and then the supply chain collapsed, and they could no longer find alternators, brake pads or other parts, he said. “They had to quickly respond, bring those kinds of things in house,” he said. “For a time, it really hurt them.”

NATE understands that the big three carriers must consider profitability and shareholder value, Snyder said. But “if those are the only things you’re looking at, then you can actually end up harming yourself."

Snyder noted recent agreements with Verizon and T-Mobile tied to FCC transaction approvals. Negotiations are ongoing with Verizon and slated to start with T-Mobile in August, he said. “AT&T is still at the table working on the details of the framework agreement,” he said. “They are negotiating in good faith on that right now." Some changes in agreements with the providers are yet to be seen with no increases in worker pay, Snyder said. “We expect it though.”

The report should provide added pressure for the major carriers to negotiate agreements with Nate members, Snyder said. “If the C-suites read this report, to me, it’s a strategic question for them as much as it is a financial question,” he said. “Things don’t change quickly, especially when it means they’re going to have to pay more."

Victor Drouin, NATE chair and co-owner of Green Mountain Communications, said the major carriers knew the report was coming but may be surprised by some of its findings. Early on, Carr told NATE it must prove its complaints were justified, and “we had to come up with our end of the deal to prove some of our assertions,” Drouin said. “There’s a long way to go with the working groups,” he said. “It is a pretty serious problem and right now the industry is struggling.”