A year ago, none of the major wireless carriers in the United States offered an unlimited data plan to all of their customers. But since T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) introduced unlimited data plans last year, AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) responded with plans of their own. And with the growing demand for data in the U.S., more and more subscribers will opt for these unlimited plans over the tiered plans that preceded them. In fact, T-Mobile only offers new subscribers its unlimited plan.
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While unlimited plans are great for consumers, they can put a lot of pressure on the carriers. Not only are they competing on price, but they have to make sure their networks can support the influx of usage. That means potential increases in capital expenditures to build out network capacity. And one company is well positioned to capitalize on that increased spending: Crown Castle International (NYSE: CCI). The company owns cell towers and other connectivity assets all over the U.S.
Unlimited data plans are an essential option for wireless carriers now. When Verizon resisted offering an unlimited plan, it saw a huge number of subscribers leave for its competitors. Introducing the unlimited plan helped put subscriber numbers on an upward trajectory again.
But if wireless carriers want to offer unlimited plans, their only viable option is to attach more equipment to Crown Castle's towers or one of its competitors'. Crown Castle's towers are concentrated in the U.S., and it's also started investing in fiber and small cell sites to help carriers add density their networks.
Renting space from Crown Castle is much more cost efficient for carriers because the tower company has no qualms about renting space to anyone and everyone. That means it can rent space for significantly less by placing multiple carriers' equipment on a single cell site. Carriers would face a conflict of interest in offering space to competitors, not to mention they'd incur significantly higher expenses to build their own towers.
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As demand for data continues to climb, accelerated by the switch to unlimited data plans (and mobile video services), Crown Castle is well positioned to see strong revenue growth.
A built-in moat
There are a couple of factors that protect Crown Castle from the competition.
First of all, it uses long-term contracts for its rental agreements. These contracts typically last 10 years or longer. Additionally, they include annual ramps in price to ensure revenue growth.
Second, and perhaps more importantly, carriers don't want to move their equipment. It's expensive to place equipment on a tower in the first place. Moving requires a carrier to both take it down and put it up in another location. As such, churn is extremely low, and it ought to remain low for the foreseeable future.
On top of that, Crown Castle's focus on the U.S. market means it's invested in assets like fiber lines and small cell sites while its competitors focus on international markets. That will make Crown Castle a more attractive option for carriers going forward as they look to reduce their costs of installing small cells to improve the density of their network to provide faster speeds and more reliable connections.
One looming risk
The biggest risk to Crown Castle is consolidation in the wireless industry. When AT&T bought Leap Wireless, T-Mobile bought MetroPCS, and Sprint bought Clearwire, Crown Castle saw a spike in churn levels. It's unnecessary for carriers to own redundant equipment on a tower, which can result from big mergers.
With T-Mobile and Sprint once again looking closely at a merger, it could put a huge dent in Crown Castle's renters. For reference, T-Mobile accounts for 23% of revenue and Sprint accounts for 19%. A large number of those rents likely come from the same towers.
One factor offsetting the risk is the potential for a new entrant in the market. Comcast, for example, just launched its own wireless service, capitalizing on a deal with Verizon. It also bought some wireless spectrum at auction earlier this year, and could look to deploy its own network at some point in the future.
Overall, the growing demand for wireless data should help fuel Crown Castle's revenue for years to come as carriers continue to build out their network capacity to accommodate their new unlimited plans. With long-term contracts and high switching costs, that revenue growth should be relatively stable for investors, and the risk of consolidation in the industry is offset by the potential for new entrants. That makes Crown Castle a great investment to capitalize on the unlimited data plan bonanza in the United States.
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Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Crown Castle International and Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.