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American Tower (NYSE: AMT ) and its two publicly traded competitors, Crown Castle (NYSE: CCI ) and SBA Communications (NASDAQ: SBAC ) , use the same business model: They own wireless towers and lease them to telecommunication carriers like Verizon (NYSE: VZ ) on long-term contracts. The tower industry is an oligopoly in the U.S., with these big three accounting for 82% of the market, although the global market is much more fragmented.
As smartphone and tablet penetration increase, and development of mobile Internet applications continue, it becomes even more important to carriers that their wireless networks can handle the increased strain of data use. The carriers have been and will need to continue to invest in their networks by increasing capacity and deploying new technology. This is precisely what drives demand for the tower space offered by American Tower. Check out this video for more:
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A full transcript follows
Hey, Supernova Fools. Billy Kipersztok here — excited to talk to you guys about why American Tower is a great example of a "safety in a storm" type of stock. I will be annotating over these slides like this, so keep an eye out for the telestrations.
This slide demonstrates how key demand drivers for American Tower are seeing absolutely explosive growth. The data comes from a 2013 Cisco VNI (that stands for Visual Networking Index) study and it shows expected growth rates in users, in monthly usage per device and total monthly traffic between 2012 and 2017 for both smartphones and tablets in North America.
As you can see, there are some pretty astounding growth rates across the board. Numbers getting up into the thousands. This reflects the exponential growth trends in data use here in the United States and in North America — and if any of you guys have kids with iPads, you probably won't be surprised to see that total monthly traffic for tablets is expected to increase nearly 4,000% to 561 petabytes by 2017. One petabyte is just over 1 million gigabytes, so that is a lot of data use.
Now with all of that growth in data usage, wireless carriers like Verizon, AT&T, T-Mobile, etc. need to invest in their networks to be able to handle the increased strain resulting from that growing data use. This graph shows the actual and expected capital expenditures from U.S. wireless carriers including — you can see them at the bottom — AT&T, Clearwire, Leap, MetroPCS, Sprint, T-Mobile, U.S. Cellular and Verizon.
The point of this graph here is to show that the carrier spending environment is robust and it's not decelerating. And so you say, "Hey, Billy. You say it's not decelerating, so what's going on here in 2015? It looks like we're getting a decline in 2015." My response to that would be that first off, the 2015 figure is expected, obviously, because 2015 hasn't happened yet and it's subject to change. It could likely be revised upward — just like 2014 estimates were revised upward earlier this year.
Last year if you looked at this figure, Cisco might have given you maybe $32 billion. Now we're seeing $34 billion as 2014 spending figures are more publicized and carriers are talking about their plans for the upcoming year. So, it's possible that this $32 billion figure could increase.
Secondly, carrier network investment happens in waves corresponding to the wireless generations such as 3G and 4G, so you shouldn't be surprised to see carrier capital expenditures be a little bit lumpy and they're not going to go up in a straight line. You're going to see peaks and valleys corresponding to investment and rollout of new generations of technology. That's really what we're seeing here.
This graph is a bit of a narrow view. It only has four data points — four years — but if you were to zoom out, you would see that the graph has a tendency to kind of look like this. It's going to be little bit lumpy and then each of the peaks are going to correspond to different generations. For example, this right here might have been the rollout of 3G and now, in 2013 into 2014 into 2015 and beyond, we're seeing investment in 4G. And you might expect to see, later on in the future once we get to the next generation, whatever they're going to call it ... 5G, maybe ... we might see even higher spending.
That's why I like what I'm seeing from the current demand environment. We're seeing explosive data use growth, we're seeing carriers invest in their networks and all of that bodes well for American Tower and for their demand story.