Dynamics of 4G Marketplace Portend Business Model Upheavals in Mobile

Nicki Palmer, VP, network, Verizon Wireless

Nicki Palmer, VP, network, Verizon Wireless

May 5, 2010 – These are early days for 4G wireless, but it’s increasingly clear that, beyond the high-bandwidth impact on service strategies, the unfolding scenario represents a very different set of challenges from what decision makers are accustomed to dealing with in the mobile environment.

To name a few, these include questions surrounding surging backhaul capacity requirements, the role to be played by femtocells, the need to accommodate roaming requirements through the pre-saturation phase of 4G coverage, the proliferation of devices beyond the handset form factor and what the competitive landscape will look like. Of all these questions, the one most worrisome in any attempt to build investor confidence in big capital spending plans is what the margins will be if, as seems likely, the mobile market of tomorrow becomes saturated with competitors.

Indeed, says Rene Ovbermann, CEO of Deutsche Telekom, the owner of T-Mobile, an entirely new approach to the business is essential if carriers are to recoup their investments in 4G infrastructure. Deutsche Bank issued a report on U.S. carriers’ investment in mobile infrastructure indicating $19 billion would be spent in 2010, Obvermann says, adding, “And 80 percent of that is for mobile broadband.”

“As network based service providers we have to invest a lot of money to serve pent-up demand adequately,” he says. “We can’t frame the question as Google or Apple versus the carriers. It’s a question for vendors and service companies that we become partners and enter into open partnerships.”

T-Mobile has been in the forefront of major carriers embracing the Google Android operating system as an open platform, Obvermann notes. “Open systems such as android or Apple have made a big difference already,” he says. “T-Mobile was the first carrier to deliver unique hardware and software products based on Android, which is now on five devices with support for 20,000 different applications. It’s been very successful for us.”

Success in the future will depend to a large extent on carriers’ ability to work with companies in diverse industries, he says. And it will require cooperation between carriers. “We are dependent on each other,” he stresses.

Already, with the emergence of Clearwire and its set of WiMAX service partners, the number of major players competing for mobile subscribers has jumped significantly. And Clearwire, with Sprint, Comcast, Time Warner Cable, Bright House and Clear on board as retail providers sharing a common infrastructure, is set to take on new retail partners, including at least one unnamed player in the consumer electronics space, in order to more fully exploit the wholesale revenue potential of its access spectrum resources, which average 150 MHz per market. Moreover, Cox Communications will be another 4G player entering mobile from the cable side, in this case on the Long-Term Evolution (LTE) platform.

This represents a very different competitive scenario from the one the major U.S. incumbents have been dealing with, all of whom other than Sprint are moving into 4G via LTE. Nor is the Clearwire juggernaut the only point of pressure emerging on the WiMAX side.

Although it’s tough to discuss the North American WiMAX market without mentioning Clearwire, there are more than 50 other operators – such as DigitalBridge Communications, Open Range Communications and Towerstream – that have launched or committed to the technology.

“There’s a significant number of smaller operators,” says Ron Resnick, president and chairman of the WiMAX Forum. “Right now, there are almost 50 million POPs covered in North America. Clearwire will have about 120 million covered by the end of this year.”

Rural carriers, too, will likely be getting into the 4G act on a larger scale than has been the case with previous generations of mobile, not only because the quadruple play imperative will be greater to serve the multi-device, anywhere-access aspirations of users but also because the new the new technologies afford rural operators another alternative to copper and fiber for bringing broadband to sparsely populated areas.

“I think there are more options available to our members than there ever have been,” says Kevin McGuire, vice president of business and technology at the National Telecommunications Cooperative Association (NTCA), a trade association representing more than 580 small and rural telephone cooperatives and other companies.

Open Access to Devices

For WiMAX players the limited footprints and absence of a large device ecosystem have led to significant changes in the way their side of the mobile business is being structured, which could force changes on the LTE side. For example, almost from the day the technology was announced, WiMAX has promoted open access to devices. Like Wi-Fi and unlike cellular, WiMAX devices would be sold with little or no operator subsidy, and in return, customers would be free to buy service from any carrier.

The open-access philosophy should help make WiMAX attractive to device vendors, such as manufacturers of TVs, PCs and digital cameras. Instead of building a version for each operator and then hoping retailers will stock all of those models, consumer electronics vendors can offer just one.

To help make that vision reality, the WiMAX Forum in mid-April launched the Open Retail Initiative, which aims to make it faster and cheaper for operators to approve devices that want to run on their network. The initiative includes labs that – beginning this month – will independently test and certify devices so that when they try to connect a network for the first time, the carrier can quickly tell whether they support certain levels of interoperability and won’t cause problems. (One similar effort is the GSM ecosystem’s PCS Type Certification Review Board, which has been in place since 1997.)

“Open Retail is a game-changer in the economics of how products are sold,” Resnick says.

But while this approach maximizes the early market reach for manufacturers and therefore promotes greater commitment to generating devices, it also creates a very different service market where users who purchase devices outright aren’t bound to a particular carrier the way they are under the quid pro quos of mobile contracts tied to steep device price discounts offered through carrier retail stores. Greater fluidity in service choices points to a more volatile market.

In many cases, those retail service choices will be on offer from providers using the same underlying network. For example, in a Clearwire market, users could buy service from Clear, an MSO partner in the venture or Sprint. It’s also likely that, as in cellular, some WiMAX carriers will wholesale service to one or more mobile virtual network operators (MVNOs), creating another set of choices.

While WiMAX is leading the way into the new free-for-all open market era, it’s clear that LTE adherents won’t be far behind, given the degree to which 4G disrupts the lines dividing mobile and broadband devices and therefore moves business models in the direction of supporting anywhere, anytime access on any type of device. In fact, it’s already happening, notes Rick Oserloh, vice president for mobile devices at Motorola.

“Big box retailers are doing a very aggressive job and doing reasonably well in marketing and focusing on mobile phones and smartphone products in particular,” Oserloh says. “Google’s [online] direct-to-consumer initiative is really interesting. Some people think it’s a disruptive play. I tend to think of it as another distribution channel and not that different from Amazon. I think it’s a great alternative for consumers.”

Adds Ian Laing, vice president for retail and sales in North America for Nokia: “The distribution landscape will shift as we see other devices come onto the carriers’ networks, such as wireless netbooks, wireless ebooks, etc. Carriers don’t want to sell all those devices; they want to partner with Best Buy. As we see more and more of that happening, it will change the distribution model over time.”

Roaming and Fall Back

Another factor changing the mobile business landscape is the need for better roaming options through at least the limited footprint phase of 4G rollouts. Carriers such as Clearwire, Sprint and Verizon Wireless each will have a few dozen cities blanketed with LTE or WiMAX by the end of 2010, while others plan to launch commercial service next year.

“We will trial LTE in 2010, with deployment expected to begin in 2011,” says Jenny Bridges, an AT%26T spokesperson.

The upshot is that it’s going to be a few more years before LTE, WiMAX and High-Speed Packet Access Plus (HSPA+ – the “3 1/2 G” bridge AT%26T and T-Mobile are building ahead of LTE rollouts) have footprints on par with 3G. During that interim, those incumbent networks will rely on “fallback” technologies. For example, Sprint’s WiMAX devices fall back to its CDMA network.

“At CTIA 2010 in March, Verizon’s CTO, Tony Melone, was quoted as stating ‘every last one’ of its future data-only devices would support both LTE and 3G,” says Horace Kim, director of program management at Franklin Wireless, whose CDMA-WiMAX modems are sold by carriers such as Clearwire, Cox, Comcast, Sprint and Time Warner. “That appears to be a stamp of approval for dual-mode devices for many years to come. If history is any indication, we will probably be talking about 5G trials long before 4G has hit 100 percent coverage in the U.S.”

But not all 4G carriers own a 3G network, so they’ll need to set up roaming agreements with 3G carriers in order to have enough coverage to appeal to a bigger pool of potential customers, particularly business travelers. The result is somewhat ironic: Although 4G will siphon off 3G customers, in the short term, some of those losses will be offset by revenue that 3G carriers get from 4G roamers.

One wild card is the customer experience. For example, if a service – say, HD video – works best at 4G speeds, then the experience likely will deteriorate when the device falls back to a slower network.

“For certain devices and applications, 3G roaming won’t be a useful experience, and I’m specifically talking about laptops and mobile computing devices [such as the] iPad,” says Lars Johnsson, vice president of marketing at Beceem Communications, which makes LTE and WiMAX chipsets.

The alternative is to have 4G devices roam only on other 4G networks, resorting to 3G only when there’s no other option. That’s why, for example, Beceem is developing device chipsets that can switch between WiMAX – including 802.16m – and LTE. The company plans to offer samples by year’s end and start commercial production by mid-2011.

Roaming could affect where and how quickly 4G comes to rural areas and small towns. For example, although many wireless and wired operators in those areas are already considering 4G as a way to bring broadband to more people and businesses, some want to see more progress toward a roaming ecosystem on par with 3G.

“That’s one of the biggest challenges with our members,” says the NTCA’s McGuire. “If we’re going to get into the cellular space, they need to have access to data roaming. That may be a game-changer in terms of making some of our members look at offering a wireless service.”

Why? For urban and rural carriers alike, 2G and 3G inbound roaming is a major revenue source. In fact, some rural operators believe they can make enough money just from 4G roaming to make a business case for building a network.

“There is talk among some of our members about using the spectrum that they have and purely just having a roaming play to eke out some of that revenue,” McGuire says.

Femtocells and the Backhaul Conundrum

The burgeoning growth in data traffic occasioned by mobile broadband in the 3G era has already generated big headlines about the impact backhaul capacity shortages have had on service performance. It will only get worse, of course, with the coming of 4G, especially considering that the first iterations of what carriers are calling “4G,” notwithstanding multi-megabit access speeds, are not yet compliant with the data rates set by the International Telecommunications Union for certification as a 4G network.

Technically there are no 4G technologies because the ITU won’t award that designation until this fall. The ITU says the current, commercially available version of WiMAX – 802.16e – fits its definition of 3G, with a forthcoming version – 802.16m – among the technologies applying for 4G status.

A jump beyond the new 3 1/2 data rates is sobering when it comes to considering what’s already in play. “The first release [of HSPA+] would be downlink 1.5-7 Mbps and uplink 1-4 Mbps – and that’s very conservative,” says Chris Pearson, president of 3G Americas, a trade association for carriers that use the GSM family of technologies. “I’ve talked with some analyst firms, and they’ve said it’s going to be faster than that most of the time.”

The escalating pressure on backhaul capacity may be a big concern for mobile carriers, but at least it’s a boon for the wireline side of the business as the wireless players scramble to get beyond the capacity limits of legacy T1 backhaul links. In March, every carrier that Infonetics Research surveyed said it will deploy Ethernet this year.

“We’re using fiber wherever possible,” says Nicki Palmer, vice president of network at Verizon Wireless. “That’s our first choice. We anticipate that we’ll have some Ethernet microwave, as well, as we move out to some more remote sites.”

In 2009, some carriers – such as Sprint Nextel – complained that Ethernet buildouts weren’t keeping up with their needs in terms of being everywhere their cell sites are. Verizon Wireless says that hasn’t been the case in the roughly 30 markets that will be home to the first phase of its LTE launch.

“If we talked 12-18 months ago, I would have told you that this was one of the areas I was concerned about,” Palmer says. “We’ve been very pleased with our providers and how they’ve been able to deliver. We’re using telcos. We’re using cable companies. We’re using all sorts of providers.”

The industry wide shift to Ethernet has one drawback for wired operators: By reducing 4G’s opex, wireless carriers should be better able to compete with wired broadband in terms of retail price.

The backhaul issue is a big driver to carriers’ interest in femtocells, which represent another way in which the 4G mobile business is shaping up to be dramatically different from the past. Like 3G, 4G will use femtocells, which are mini cell sites that plug into the customer’s broadband connection and cover an area the size of a home or small office. But some vendors and carriers believe that 4G will be even more reliant on femtocells because, they say, it’s impractical and expensive for the macrocellular network to deliver multi-megabit connections to so many users.

Plus, 4G customers use enormous amounts of bandwidth – often more than 3G customers and sometimes more than DSL users. An extreme example is Yota, a Russian WiMAX operator that’s recently expanded into Latin America. Its Moscow and St. Petersburg networks together handle about 300 terabytes of traffic per month, which is more than all of its 3G rivals combined.

“The average Yota user is using 12 gigabytes per month,” says the WiMAX Forum’s Resnick. “That’s almost 100 times more than 3G.”

Even with the migration from T1s to Ethernet, the backhaul for each WiMAX or LTE site still is expensive. Plus there’s the cost of radios. All of that capex and opex makes it difficult for a 4G service to compete with 3G in terms of price, especially when 3G has a multi-year head start down the cost curve.

A femtocell strategy could include an “inside-out” design: The carrier builds a bare-bones 4G macro network and provides each customer with a femtocell in order to make the macro network’s workload as light as possible. After all, it can be cheaper to deeply subsidize femtocells by $100 or more per unit than to build thousands of additional cell sites at $250,000-plus apiece.

With most carriers – particularly ones using LTE – keeping their design plans close to their vest, it’s too early to predict how many will go with an inside-out strategy. One decisive factor is that unlike 3G, the selection of LTE and WiMAX femtocells is virtually nil, although that will change as networks launch, breaking the chicken-and-egg stalemate.

If 4G carriers use femtocells heavily, they’ll have a significant impact on MSOs, telcos and other broadband providers. (See “Upstream Bandwidth Surge in Offing as Femtocells Link Mobile to Fixed” in the April issue.) On the plus side, they could encourage customers to upgrade from dial-up to broadband, or from single-digit broadband to 15 or 50 mbps tiers. But as with 3G, the reliable, flat-rate voice coverage also could prompt them to drop the telephony portion of their triple-play bundle.

Clearly, the combination of huge investments, intensifying competition and the vast changes in user experience attending ubiquitous availability of broadband over wireless make for an emerging business environment that is beyond anyone’s ability to fully understand. As service providers plunge into this great unknown there’s at least comfort in knowing nobody has an inside track on gaming the future.