DNS market strong but new entrants could spark legal backlash, analyst says

Wells Fargo Security analysts predict wireless carriers' near-term budgets will be allocated more toward distributed network systems (DNS) including small cells, DAS and Cloud-RAN (C-RAN), than traditional macro sites.

That's the conclusion drawn by analysts Jennifer Fritzsche, Caleb Stein, and Eric Luebchow after recent meetings with ExteNet including tours of the company's DAS installations in the Ronald Reagan Building and the soon to be opened Trump Hotel in D.C.

"With carriers trying to keep up with the ever-growing demand for wireless data, they are looking at the high traffic dense spots where this presents the biggest challenge. This is especially true as we inch closer to a 5G world," the analysts said in a research note.

Going forward, Wells Fargo says a big role in moving along small cell deployments will be gaining municipal approval, something which the analyst firm says ExteNet and CCI have been successful with. But the analysts also point toward unspecified new entrants being disruptive in the market to the point where it could spark some "legal backlash."

"Frankly, this is not good for any of the players as it could result in greater scrutiny for the process overall and introduce a new layer of regulation which would slow down future launches," Wells Fargo wrote in the note.

Those thoughts gel with recent comments from BTIG speculating that increased awareness by metro market citizens of the higher proliferation of small cells and similar deployments could begin to complicate the process.

Indeed, the Zayo Group, which is currently installing small cells in Wichita, Kansas to help boost Verizon (NYSE: VZ) coverage in the area, put further Kansas deployments on hold while the state's governor considers legislation that would largely cut local municipalities out of the permitting and approval process.

Despite the increased scrutiny, small cell deployments are points of emphasis for all four major U.S. wireless operators as network densification becomes a bigger priority, according to Wells Fargo, pointing out how Sprint (NYSE: S) and Verizon have both been cheerleaders for small cells for the past two years while AT&T (NYSE: T) and T-Mobile (NYSE:TMUS) are also now getting more involved.

"In case of AT&T, we believe the initial step has been setting the fiber foundation in its network. While we still expect this to be a multi-year process, the work it has done there to date should position it to be more ready for a DNS push than it was in the Project VIP period. Our sense is it this area (DAS / small cell spend) where T will prioritize its near-term wireless spend," the analysts said.

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