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The Coming Gold Rush: Wireless Fourth Generation?

Not before the markets have spoken


Published in "Think!", DMR 04/2010 Online: http://www.detecon-dmr.com/en/article/the-coming-gold-rush-wirelessfourth-generation_2010_12_14 Deniz Boztepe Marwan Mazraani Ulrike Eberhard Although LTE is about to claim the battle of standards for the title of the fourth generation wireless technology, it will take a while before it claims much more than that. Unlike the third generation, which was heralded by prophecies about its ability to change the way we communicate forever, the fourth generation will face a much more conservative stance from operators who, by now, have learned their lessons the hard way. We examine the influencing factors that need to be analyzed and thinking pattern behind the sound decision of investing in a 4G infrastructure.

Around August this year, it was circulated in the press that T-Mobile USA will not be investing in an LTE network in the short term thus lagging market leaders, Verizon and AT&T. Verizon, for example, has announced its plans to launch 4G services based on LTE in 2011. At first sight, T-Mobiles decision sounds as if it is against the traditional wisdom of mobile operator competitive rules of engagement. A deeper look reveals a different reality. T-Mobile is not alone in delaying plans for LTE and although the LTE adoption is not an established trend considering the newness of the technology (in its packaged commercial form at least), T-Mobiles decision, combined with the collective experience of the market over the last couple of wireless access technology introductions, are early signs that a new and unexpected trend is developing for 4G. The adoption of 4G for the majority of mobile operators is not a straightforward decision and not a for-granted path, as technology enthusiasts

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would wish. The role of infrastructure vendors Infrastructure vendors play a major role in hyping and pushing 4G to further their own interests. They created the same hype for 3G, successfully, resulting in over-excitement about UMTS that resulted in many disappointments when forecasted revenues did not materialize. The success of 3G took around 5 years to materialize, supported by improved releases of the technology (i.e. HSPA) and introduction of interesting devices and services for the end user. But the front face of the hype, video telephony, did not make it far, whereas good-old internet browsing and email remained the main drivers of adoption. The WiMAX camp, attempting to place higher bids, was not as lucky. Even after 5 years of hyping their new mix, the influence of the technology on the general market, especially in mobility, is minimal. The continuous attempt of the vendors to push technologies prematurely to the market is quite understandable. They have been over-estimating their market and missing their targets, while new aggressive players enter and create more pressure on existing ones. Their frustration has resulted in significant industry consolidation over the last five years: three major vendors, Nokia, Siemens and Motorola, became one company, and one major competitor, Nortel, ceased to exist. For vendors, 4G is a new opportunity for infrastructure upgrades and the drums of the new-old hype are beating again. This time the face of the hype is streaming video on the go. Will the markets buy-in? Be it the fight of access standards (recall GSM vs. CDMA or LTE vs. WiMAX), or be it the massive over-hyping of one technology by vendors (recall 3G), operators have learned their lesson. Sticking to one access standard and an established technology is beneficial for all parties. They also learned that listening to their customers is much more profitable than listening to their infrastructure vendors. It does not matter if vendors believe that everybody will walk down the street streaming video, operators want to hear from customers which services they like and, more importantly, which services they are willing to pay for. The role of competing technologies The emergence of LTE, rather than WiMAX, as the likely choice of the majority of operators might create the false impression that LTE rollouts will become widespread once the technology is available. This is backed by the fact that many operators have declined WiMAX investment with the excuse that they will be investing in LTE as their 4G choice. But, that is only half the truth. The other half is that LTE was not the only winer. The real winner is, in fact, the HSPA clan. WiMAX could not present itself as a necessity in the presence of HSPA in many markets (WiMaxs other flaws only served to

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worsen its case). As many said, WiMAX had the wrong timing and the wrong audience. Although LTE has a better chance, in terms of the timing of its market introduction, it still shares some of WiMAXs challenges and some new ones of its own. In its role as a wireless technology and the successor of 3.5G technologies, LTE continues the path of being a fixed alternative in many markets as well as the ultimate data connectivity for nomadic and mobile applications. As a fixed substitute, wireless technologies, in general, remain an alternative only in the absence of a reliable fixed infrastructure as feedback from the market has proven time and again. For example, WiMAX has had its major success in emerging countries with historically low investment in fixed infrastructure, such as India, or in areas with low population density, such as Russia. In these parts of the world, wireless infrastructure has provided higher coverage efficiency and faster time-to-market. In this regard, LTE will compete partially with WiMAX, which still remains a cheaper alternative for fixed broadband wireless access (FBWA), and partially with HSPA which, for many operators, has turned out to be the golden goose able to serve the mobile and fixed markets with the same infrastructure. In countries where fixed infrastructure is well established, LTE is at a disadvantage as FTTx and Cable provide faster speeds needed for video applications such as IPTV and residential services. Such is the case in Germany where the regulator advised LTE bidders to fill digital gaps in rural areas first. As a mobile technology, LTE faces its older cousin, HSPA+. Many operators have already announced their continued commitment in HSPA even they will trial LTE over the next two years. The reasons vary for different operators but most common are the monetization of their investments in 3/3.5G, the maturity of HSPA and its ecosystem, and the fear of replacing a working technology that fulfills market demands with a new one just for the purpose of change. Nonetheless, as we saw with the marriage achieved between 2.5G and 3.5G, through multi-band devices and seamless roaming between the two networks, LTE will eventually surf over the 3.5G wave with a more focused and slower time-to-market. The missing killer application The wireless industry has long buzzed about the day when nearly everything we see will be connected in one form or another by wireless communications: cars, houses, medical devices, parking meters, machines, robots, and even clothing. Although we are taking steps in this direction and very useful applications have emerged, the fact remains that, until recently, the majority of operators so-called non-voice revenue was generated by SMS, an application that requires minimal bandwidth and that was introduced with 2G more than ten years ago. Only lately and in some developed markets has revenue from

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data plans surpassed SMS revenue. Even when lamps in the street start communicating with pedestrians, as implemented in the so called dial4light technology aimed at saving energy, the fact remains that such applications do not require more than a narrow bandwidth link. Of course, higher speed will make some existing applications more enjoyable, but that will not be enough to acquire premium pricing. The long sought-after killer app that justifies higher bandwidth is yet to be found. For now, video content is the number one contributor to internet traffic worldwide, be it live streaming or downloading, and be it through fixed or wireless access technologies. The fact that this boom is not being accompanied by an equal boom of carrier revenue has raised the question of whether operators should encourage or hinder video adoption in all forms. This, in turn, raises doubt about the claim that video content can be the driver of mass usage and thus be the sought-after killer application. Rich communication, such as video content, is characteristic of the web 2.0 era, and, as its applications go mobile, so does the corresponding traffic. It is not clear yet, though, whether mobile bandwidth consumption will be used heavily beyond short videos and small bites of information. For now, users who watch longer videos on their portables, of all sizes, load or download them at home or in the presence of a cheaper connection such as WiFi. The question will always remain: how many people will be engaging in heavy bandwidth applications on the go and how much are they willing to pay to use them? Operators that are already planning for 4G are aware of the challenges around applications and realize that investing in the 4G infrastructure by itself will not create the market. Verizon, for example, has set-up an innovation center to mock-up LTE services in a real environment, is working with manufacturers to develop devices that utilize 4G and is dedicating a $1,5 Billion fund for investing in start-ups developing 4G-related products. Nevertheless, one should keep in mind as further pitches of bandwidth-hungry applications surface around the world, that 6,8 Billion people on this planet love to talk, but a much smaller number than that would like to browse on the go and a much smaller number than that would like to stream videos while walking or driving. There will be very creative data applications for the consumer market, but they wont necessarily address the mass market. The diluted brand value of infrastructure When 3G took off, several operators that rolled out 3G infrastructure ahead of their national competitors utilized the advantage to boost their market image and, eventually, brand value. The jump from 2G to 3G was supposed to be an event by itself, and the hype from vendors seeped to operators which, in turn, passed it on to the consumer market. In many markets consumers got excited about the idea of something new and imagined what 3G could bring to their

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lives. The early years of 3G were disappointing for users, and the infrastructure itself proved not to be the best branding tool. On the other hand, devices, such as Blackberry and iPhone, proved to have a more powerful branding effect even though they ran on 2.5G networks when they were first introduced. Eventually, 3G picked up as a sign of reliability in the network once the applications and services that run over 3G became obvious and popular. Nevertheless, the branding effect was gone as 3G became the norm in the network and users cared more about the apps on their smartphones rather than about the network on which they run. The operators rolling out 4G first are likely to make a similar attempt to utilize the infrastructure investment to boost their perceived brand value and position and to raise consumer interest in what could come next. This is in line with operators strategies that follow a first-mover approach in adopting major technology advances. Some are even racing to that status although their claim can be questioned. One such operator is Sprint in the USA. They claim to be the First and Only Wireless 4G National Carrier. Sprint launched a WiMAX network and markets products such as the HTC EVO 4G, a 3G/4G dual mode USB stick for laptops, as well as a portable WiFi router backhauling also on its 3G or 4G networks. However, the claimed 4G coverage is still limited and whether the experience offered merits the 4G name is material for discussions among analysts. TeliaSonera claims to be the first commercial LTE rollout in the world with limited edition coverage in Norway and Sweden. The move is a pure bid to improve their image which led many analysts to call it a major marketing coupe. It has little to do with enhancing user functionality considering that they have to deal with the caveats of the immature technology for now. A more tricky yet interesting branding approach was laid forth by Cell C in South Africa with its 4Gs campaign. In an ambiguous approach to unofficially brand its HSPA+ network as 4G, Cell C promoted its network as standing for 4Gs for Great Speed and Great Service. The claim has been disputed by competitors, and the advertising standards authority ruled early this month that Cell C must stop using the slogan and related advertising material.

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Operators have traditionally engaged in arms races, attempting to utilize first-mover advantages for branding power although they may not end up providing the best service in that field. It is doubtful, though, that in the case of 4G be it the Sprint WiMAX approach, the TeliSonera LTE rush or the more controversial Cell C spin the branding claim will have a major impact on operator market share or be sufficient to justify the investment. For now, the move from 3G to 4G has no clear advantage to the end user. Operators running out of capacity in congested areas could benefit from the higher spectral efficiency and quality of signal for data coverage assuming the spectrum resources are available. The challenge is also tied to the overall shift in power from infrastructure providers, such as operators, to more consumer visible product providers such as devices, content and applications. Added to that, unlike the jump from 2G to 3G, which meant a fundamental move from voice networks to data networks enabling a myriad of new services, the move from 3G to 4G enables marginally higher speeds which are not currently universally advantageous. Making sense of LTE: implementation scenarios So considering the collective learning of the operators in terms of infrastructure investments and the unique positioning of LTE in the market compared to existing technologies, who are the likely early adopters and what implementation scenarios will develop first? The analysis put forth leads us to

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believe that the most likely early adopters are market leaders. They are most likely to have invested in 3.5G technology early on and grew a base of technology savvy and affluent subscribers that have a higher willingness to pay for higher speeds. They are also most likely to be integrated operators, running fixed and mobile operations, and moving to provide some form of high-speed fixed access (VDSL, FTTx, or Cable). For them, LTE is a natural move and can be economically justified considering the marginal benefits and marginal costs incurred utilizing their existing market position and infrastructure. The case for start-ups or green field operators utilizing a pure-play LTE network to challenge established operators is likely to stay weak in most markets, similar to what happened with WiMAX pure-plays. LTE has the role of being a complimentary technology, especially in the early years. Fixed operators, for whom building a mobile network is a strategy to protect their fixed asset investment, may look to a future-proof technology, such as LTE, to better position themselves to compete. This is more likely to be the case in emerging markets where there still exist stand-alone fixed operators that have not merged with or acquired a mobile operator. Nevertheless, this becomes more challenging with an increasing number of existing telecom players in the particular market. Similarly, mobile challengers are less likely to consider an early investment in LTE being on the other side of the table. Most challengers have rolled out their 3G networks recently and are still looking to monetize them. For these operators, a network sharing or national roaming arrangement to benefit from LTE services would make sense. This is very feasible considering the acceptance of network sharing nowadays. In many markets, especially those with established fixed and mobile infrastructure, the market might economically justify one or two LTE networks, in which case network sharing might be a commonly-accepted solution. In summary, we foresee 3 main deployment scenarios of LTE in the take-up period following trials: Data overlay above 3G networks aimed at speed boosting: The most likely scenario for market leaders, similar to what Sprint implemented with its WiMAX network in the limited coverage so far. Users in such networks will appreciate the higher bandwidth in the 4G areas and will not feel discontinuity when out in a 3G area. This allows for a highly targeted return on investment considering that these operators have developed expertise regarding the location-dependent bandwidth requirements of their subscriber base. This scenario requires the availability of multi-band/multi-standard devices which is likely to imitate what happened within the 2.5G/3.5G coupling. As a fixed broadband alternative: Continuing on the WiMAX path in countries where fixed infrastructure is nonexistent or is not economically justified, LTE

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can be deployed as a FBWA solution. The main advantage of LTE will be the choice of frequencies that are made available to this profile (lower spectrum compared to WiMAX and to 3G in some countries) allowing for deeper indoor penetration with lower capital expenditures. This scenario is likely to be taken up by fixed operators or current FBWA operators. In countries where there is no separation between fixed and mobile services, this option can be provided on the same infrastructure for mobile LTE services. As a capacity booster: For operators that are currently suffering with a capacity crunch due to bandwidth-hungry devices like the iPhone and content such as video, moving to LTE as a higher spectral efficiency solution might be a better solution than increasing 3G sights or acquiring additional 3G spectrum. This implementation is similar to the first scenario although the driver here is capacity, and the operator is more likely to have a wider and thicker LTE coverage compared to the speed-boosting scenario. This option requires a developed ecosystem to match that of 3.5G and eventually outpace it as a main adoption driver. Key success factors LTE (as a pre-4G technology and its follow-up LTE-Advanced as official 4G) will make its debuts around the world over the next two years. Adoption and usage will vary greatly from one country to the other and from one operator to the other. Unlike 3G/3.5G networks that made 2G networks obsolete, and thus gained widespread popularity in the meantime, the decision to launch 4G services and the timing of this launch requires a holistic market-driven approach that builds on several input elements.

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Besides general industry factors, such as the development of the ecosystem and the maturity of the technology as well as regulatory factors such as availability of spectrum and flexible licensing such as standard agnostic licensing, there are factors that are innate to the operator and the country in which it operates. These differ greatly from one operator to the other and the difference is increasing as we advance in the technology generations. A

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deeper inspection of these elements is needed every time an economically sensible investment decision in LTE is needed. There are three clusters of key success factors: User Preferences: The digital mobility and affinity of users in a certain country varies with demographic structure, traditions and social habits. User preferences and segmented understanding of these preferences is needed to understand the role an operator with a 4G technology can play for these users. A more direct outcome of this analysis and an important input to the decision making is whether these users, expected to follow the traditional adoption patterns of new technologies, can potentially fall under the influence boundaries of the operator. This, by far, is the main driver for implementing 4G. The implementation would be driven by a user need that secures a willingness-to-pay for services which, in turn, justifies the investment. Existing Infrastructure and Services: In many countries, the age of open demand for connectivity, be it speech or data, is long gone. In these countries, 4G will replace or compliment an existing technology. The potential success and expected return on investment for a given operator with 4G depends on the successful positioning of its rollout given the existing infrastructure and services in the country at the time. Operator Competitiveness: This is the element which is likely to create the most pressure for operators to decide how they want to engage with 4G. In the past, competitive pressure also resulted in missteps and ill-timed moves on the part of operators. Particularly in 4G, and considering the maturity of the telecom markets, it is important to understand the competitive terrain in the country and the likely impact of the introduction of 4G services. Of course it is not only the branding power of 4G that has to be questioned, but also the differentiation abilities of the proposed services and the potential stickiness and long term lock-in they are able to offer to one operator over another.

Deniz Boztepe Deniz Boztepe is Consultant in the Strategic Marketing Group. Before joining Detecon two years ago he worked several years in different positions for one of the world's largest multinational telco operator in its subsidiaries in Germany and Turkey. His main expertises are in the areas of marketing strategy development, financial evaluations of commercial matters and business modelling. He has delivered projects in Europe, Middle East, Asia and Africa. Marwan Mazraani Marwan Mazraani is Senior Consultant in the Strategic Marketing Group. He

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specializes in marketing strategies for entrants and new product introductions. His areas of interest cover the development of the modern telecom operator as well as the evolution of the communication consumption by users in enterprise and consumer markets. Over the last thirteen years he has delivered ICT projects in Middle East, Europe and North America. Ulrike Eberhard Ulrike Eberhard is Managing Partner and Head of Strategic Marketing Group at Detecon International. She focuses primarily on business modeling, marketing strategies for different market phases, marketing performance programs, portfolio planning, and pricing. During the last twelve years, she has developed and implemented such strategies successfully for telco carriers and ISPs either as interim manager or project manager of large scale consultancy projects throughout Europe, Middle East, Asia, and Africa.

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