Short Message Service or SMS for short, one of the corner stones of mobile services, just turned 20 years old in 2012.
Talk about “Live Fast, Die Young” and the chances are that you are talking about SMS!
The demise of SMS has already been heralded … Mobile operators rightfully are shedding tears of the (taken-for-granted?) decline of the most profitable 140 Bytes there ever was and possible ever will be.
Before we completely kill off SMS, let’s have a brief look at
The average SMS user (across the world) consumed 136 SMS (ca. 19kByte) per month and paid 4.6 US$-cent per SMS and 2.6 US$ per month. Of course this is a worldwide average and should not be over interpreted. For example in the Philippines an average SMS user consumes 650+ SMS per month pays 0.258 US$-cent per SMS or 1.17 $ per month.The other extreme end of the SMS usage distribution we find in Cameroon with 4.6 SMS per month paying 8.19 US$-cent per SMS.
We have all seen the headlines throughout 2012 (and better part of 2011) of SMS Dying, SMS Disaster, SMS usage dropping and revenues being annihilated by OTT applications offering messaging for free, etcetcetc… & blablabla … “Mobile Operators almost clueless and definitely blameless of the SMS challenges” … Right? … hmmmm maybe not so fast!
All major market regions (i.e., WEU, CEE, NA, MEA, APAC, LA) have experienced a substantial slow down of SMS revenues in 2011 and 2012. A trend that is expected to continue and accelerate with mobile operators push for mobile broadband. Last but not least SMS volumes have slowed down as well (though less severe than the revenue slow down) as signalling-based short messaging service assimilates to IP-based messaging via mobile applications.
Irrespective of all the drama! SMS phase-out is obvious (and has been for many years) … with the introduction of LTE, SMS will be retired.
Resistance is (as the Borg’s would say) Futile!
It should be clear that the phase out of SMS does Absolutely Not mean that messaging is dead or in decline. Far far from it!
Messaging is Stronger than Ever and just got so many more communication channels beyond the signalling network of our legacy 2G & 3G networks.
Its however important to understand how long the assimilation of SMS will take and what drivers impact the speed of the SMS assimilation. From an operator strategic perspective such considerations will provide insights into how quickly they will need to replace SMS Legacy Revenues with proportional Data Revenues or suffer increasingly on both Top and Bottom line.
SMS2012 AND ITS GROWTH DYNAMICS
So lets just have a look at the numbers (with the cautionary note that some care needs to be taken with exchange rate effects between US Dollar and Local Currencies across the various markets being wrapped up in a regional and a world view. Further, due to the structure of bundling propositions, product-based revenues such as SMS Revenues, can be and often are somewhat uncertain depending on the sophistication of a given market):
2012 is expected worldwide to deliver more than 100 billion US Dollars in SMS revenues on more than 7 trillion revenue generating SMS.
The 100 Billion US Dollars is ca. 10% of total worldwide mobile turnover. This is not much different from the 3 years prior and 1+ percentage-point up compared to 2008. Data revenues excluding SMS is expected in 2012 to be beyond 350 Billion US Dollar or 3.5 times that of SMS Revenues or 30+% of total worldwide mobile turnover (5 years ago this was 20% and ca. 2+ times SMS Revenues).
SMS growth has slowed down over the last 5 years. Last 5 years SMS revenues CAGR was ca. 7% (worldwide). Between 2011 and 2012 SMS revenue growth is expected to be no more than 3%. Western Europe and Central Eastern Europe are both expected to generate less SMS revenues in 2012 than in 2011. SMS Volume grew with more than 20% per annum the last 5 years but generated SMS in 2012 is not expected to more than 10% higher than 2012.
For the ones who like to compare SMS to Data Consumption (and please safe us from ludicrous claims of the benefits of satellites and other ideas out of too many visits to Dutch Coffee shops)
2012 SMS Volume corresponds to 2.7 Terra Byte of daily data (not a lot! Really it is not!)
Don’t be terrible exited about this number! It is like Nano-Dust compared to the total mobile data volume generated worldwide.
The monthly Byte equivalent of SMS consumption is no more than 20 kilo Byte per individual mobile user in Western Europe.
Let us have a look at how this distributes across the world broken down in Western Europe (WEU), Central Eastern Europe (CEE), North America (NA), Asia Pacific (APAC), Latin America (LA) and Middle East & Africa (MEA):
From the above chart we see that
Western Europe takes almost 30% of total worldwide SMS revenues but its share of total SMS generated is less than 10%.
And to some extend also explains why Western Europe might be more exposed to SMS phase out than some other markets. We have already seen the evidence of Western Europe sensitivity to SMS revenues back in 2011, a trend that will spread in many more markets in 2012 and lead to an overall negative SMS revenue story of Western Europe in 2012. We will see that within some of the other regions there are countries that substantially more exposed to SMS phase-out than others in terms of SMS share of total mobile turnover.
In Western Europe a consumer would for an SMS pay more than 7 times the price compared to a consumer in North America (i.e., Canada or USA). It is quiet clear that Western Europe has been very successful in charging for SMS compared to any other market in the World. An consumers have gladly paid the price (well I assume so;-).
SMS Revenues in Western Europe are proportionally much more important in Western Europe than in other regions (maybe with the exception of Latin America).
In 2012 17% of Total Western Europe Mobile Turnover is expected to come from SMS Revenues (was ca. 13% in 2008).
WHAT DRIVES SMS GROWTH?
It is interesting to ask what drives SMS behaviour across various markets and countries.
Prior to reasonable good quality 3G networks and as importantly prior to the emergence of the Smartphone the SMS usage dynamics between different markets could easily be explained by relative few drivers, such as
(1) Price decline year on year (the higher decline the faster does SMS per user grow, though rate and impact will depend on Smartphone penetration & 3G quality of coverage).
(2) Price of an SMS relative to the price of a Minute (the lower the more SMS per User, in many countries there is a clear arbitrage in sending an SMS versus making a call which on average last between 60 – 120 seconds).
(3) Prepaid to Contract ratios (higher prepaid ratios tend to result in fewer SMS, though this relationship is not per se very strong).
(4) SMS ARPU to GDP (or average income if available) (The lower the higher higher the usage tend to be).
(5) 2G penetration/adaptation and
(6) literacy ratios (particular important in emerging markets. the lower the literacy rate is the lower the amount of SMS per user tend to be).
Finer detailed models can be build with many more parameters. However, the 6 given here will provide a very decent worldview of SMS dynamics (i.e., amount and growth) across countries and cultures. So for mature markets we really talk about a time before 2009 – 2010 where Smartphone penetration started to approach or exceed 20% – 30% (beyond which the model becomes a bit more complex).
In markets where the Smartphone penetration is beyond 30% and 3G networks has reached a certain coverage quality level the models describing SMS usage and growth changes to include Smartphone Penetration and to a lesser degree 3G Uptake (not Smartphone penetration and 3G uptake are not independent parameters and as such one or the other often suffice from a modelling perspective).
Looking SMS usage and growth dynamics after 2008, I have found high quality statistical and descriptive models for SMS growth using the following parameters;
(a) SMS Price Decline.
(b) SMS price to MoU Price.
(c) Prepaid percentage.
(d) Smartphone penetration (Smartphone penetration has a negative impact on SMS growth and usage – unsurprisingly!)
(e) SMS ARPU to GDP
(f) 3G penetration/uptake (Higher the 3G penetration combined with very good coverage has a negative impact on SMS growth and usage. Less important though than Smartphone penetration).
It should be noted that each of these parameters are varying with time and there for in extracting those from a comprehensive dataset time variation should be considered in order to produce a high quality descriptive model for SMS usage and growth.
If a Market and its Mobile Operators would like to protect their SMS revenues or at least slow down the assimilation of SMS, the mobile operators clearly need to understand whether pushing Smartphones and Mobile Data can make up for the decline in SMS revenues that is bound to happen with the hard push of mobile broadband devices and services.
EXPOSURE TO LOSS OF SMS REVENUE – A MARKET BY MARKET VIEW!
As we have already seen and discussed it is not surprising that SMS is declining or stagnating. At least within its present form and business model. Mobile Broadband, the Smartphone and its many applications have created a multi-verse of alternatives to the SMS. Where in the past SMS was a clear convenience and often a much cheaper alternative to an equivalent voice call, today SMS has become in-convenient and not per se a cost-efficient alternative to Voice and certainly not when compared with IP-based messaging via a given data plan.
As Mobile operators push hard for mobile broadband and inevitably increases rapidly the Smartphone penetration, SMS will decline. In the “end-game” of LTE, SMS has been altogether phased out.
Based on 2012 expectations lets look at the risk exposure that SMS phase-out brings in a market by market out-look;
We see from the above analysis that 9 markets (out of a total 74 analyzed), with Philippines taking the pole position, are having what could be characterized as a very high exposure to SMS Decline. The UK market, with more than 30% of revenues tied up in SMS, have aggressively pushed for mobile broadband and LTE. It will be very interesting to follow how UK operators will mitigate the exposure to SMS decline as LTE is penetrating the market. We will see whether LTE (and other mobile broadband propositions) can make up for the SMS decline.
More than 40 markets have an SMS revenue dependency of more than 10% of total mobile turnover and thus do have a substantial exposure to SMS decline that needs to be mitigated by changes to the messaging business model.
Mobile operators around the world still need to crack this SMS assimilation challenge … a good starting point would be to stop blaming OTT for all the evils and instead either manage their mobile broadband push and/or start changing their SMS business model to an IP-messaging business model.
IS THERE A MARGIN EXPOSURE BEYOND LOSS OF SMS REVENUES?
There is no doubt that SMS is a high-margin service, if not the highest, for The Mobile Industry.
A small de-tour into the price for SMS and the comparison with the price of mobile data!
The Basic: an SMS is 140 Bytes and max 160 characters.
On average (worldwide) an SMS user pays (i.e., in 2012) ca. 4.615 US$-cent per short message.
A Mega-Byte of data is equivalent to 7,490 SMSs which would have a “value” of ca. 345 US Dollars.
Yes! It would be if that was the price a user would pay for mobile broadband data (particular for average consumptions of 100 Mega Bytes per month of Smartphone consumption) …
However, remember that an average user (worldwide) consumes no more than 20 kilo Byte per Month.
One Mega-Byte of SMS would supposedly last for more than 50 month or more than 4 years.
This is just to illustrate the silliness of getting into SMS value comparison with mobile data.
A Byte is not just a Byte but depends what that Byte caries!
Its quiet clear that an SMS equivalent IP-based messaging does not pose much of a challenge to a mobile broadband network being it either HSPA-based or LTE-based. To some extend IP-based messaging (as long as its equivalent to 140 Bytes) should be able to be delivered at better or similar margin as in a legacy based 2G mobile network.
Thus, in my opinion a 140 Byte message should not cost more to deliver in an LTE or HSPA based network. In fact due to better spectral efficiency and at equivalent service levels, the cost of delivering 140 Bytes in LTE or HSPA should be a lot less than in GSM (or CS-3G).
However, if the mobile operators are not able to adapt their messaging business models to recover the SMS revenues (which with the margin argument above might not be $ to $ recovery but could be less) at risk of being lost to the assimilation process of pushing mobile data … well then substantial margin decline will be experienced.
Operators in the danger zone of SMS revenue exposure, and thus with the SMS revenue share exceeding 10% of the total mobile turnover, should urgently start strategizing on how they can control the SMS assimilation process without substantial financial loss to their operations.
I have made extensive use of historical and actual data from Pyramid Research country data bases. Wherever possible this data has been cross checked with other sources. Pyramid Research have some of the best and most detailed mobile technology projections that would satisfy most data savvy analysts. The very extensive data analysis on Pyramid Research data sets are my own and any short falls in the analysis clearly should only be attributed to myself.
By now the biggest challenge of the “1,000x challenge” is to read yet another story about the “1,000x challenge”.
This said, Qualcomm has made many beautiful presentations on The Challenge. It leaves the reader with an impression that it is much less of a real challenge, as there is a solution for everything and then some.
So bear with me while we take a look at the Economics and in particular the Economical Boundaries around the Thousand Times “Challenge” of providing (1) More spectrum, (2) Better efficiency and last but not least (3) Many more Small Cells.
THE MISSING LINK
While (almost) every technical challenge is solvable by clever engineering (i.e., something Qualcomm obviously have in abundance), it is not following naturally that such solutions are also feasible within the economical framework imposed by real world economics. At the very least, any technical solution should also be reasonable within the world of economics (and of course within a practical time-frame) or it becomes a clever solution but irrelevant to a real world business.
A Business will (maybe should is more in line with reality) care about customer happiness. However a business needs to do that within healthy financial boundaries of margin, cash and shareholder value. Not only should the customer be happy, but the happiness should extend to investors and shareholders that have trusted the Business with their livelihood.
While technically, and almost mathematically, it follows that massive network densification would be required in the next 10 years IF WE KEEP FEEDING CUSTOMER DEMAND it might not be very economical to do so or at the very least such densification only make sense within a reasonable financial envelope.
Its obvious that massive network densification, by means of macro-cellular expansion, is unrealistic, impractically as well as uneconomically. Thus Small Cell concepts including WiFi has been brought to the Telecoms Scene as an alternative and credible solution. While Small Cells are much more practical, the question whether they addresses sufficiently the economical boundaries, the Telecommunications Industry is facing, remains pretty much unanswered.
The Thousand Times Challenge, as it has been PR’ed by Qualcomm, states that the cellular capacity required in 2020 will be at least 1,000 times that of “today”. Actually, the 1,000 times challenge is referenced to the cellular demand & supply in 2010, so doing the math
the 1,000x might “only” be a 100 times challenge between now and 2020 in the world of Qualcomm’s and alike. Not that it matters! … We still talk about the same demand, just referenced to a later (and maybe less “sexy” year).
In my previous Blogs, I have accounted for the dubious affair (and non-nonsensical discussion) of over-emphasizing cellular data growth rates (see “The Thousand Times Challenge: The answer to everything about mobile data”) as well as the much more intelligent discussion about how the Mobile Industry provides for more cellular data capacity starting with the existing mobile networks (see “The Thousand Time Challenge: How to provide cellular data capacity?”).
As it turns out Cellular Network Capacity C can be described by 3 major components; (1) available bandwidth B, (2) (effective) spectral efficiency E and (3) number of cells deployed N.
The SUPPLIED NETWORK CAPACITY in Mbps (i.e., C) is equal to the AMOUNT OF SPECTRUM, i.e., available bandwidth, in MHz (i..e, B) multiplied with the SPECTRAL EFFICIENCY PER CELL in Mbps/MHz (i.e., E) multiplied by the NUMBER OF CELLS (i.e., N). For more details on how and when to apply the Cellular Network Capacity Equation read my previous Blog on “How to provide Cellular Data Capacity?”).
SK Telekom (SK Telekom’s presentation at the 3GPP workshop on “Future Radio in 3GPP” is worth a careful study) , Mallinson (@WiseHarbor) and Qualcomm (@Qualcomm_tech, and many others as of late) have used the above capacity equation to impose a Target amount of cellular network capacity a mobile network should be able to supply by 2020: Realistic or Not, this target comes to a 1,000 times the supplied capacity level in 2010 (i.e., I assume that 2010 – 2020 sounds nicer than 2012 – 2022 … although the later would have been a lot more logical to aim for if one really would like to look at 10 years … of course that might not give 1,000 times which might ruin the marketing message?).
So we have the following 2020 Cellular Network Capacity Challenge:
Thus a cellular network in 2020 should have 3 times more spectral bandwidth B available (that’s fairly easy!), 6 times higher spectral efficiency E (so so … but not impossible, particular compared with 2010) and 56 times higher cell site density N (this one might be a “real killer challenge” in more than one way), compared to 2010!.
Personally I would not get too hanged up about whether its 3 x 6 x 56 or 6 x 3 x 56 or some other “multiplicators” resulting in a 1,000 times gain (though some combinations might be a lot more feasible than others!)
Obviously we do NOT need a lot of insights to see that the 1,000x challenge is a
Rally call for Small & then Smaller Cell Deployment!
Also we do not need to be particular visionary (or have visited a Dutch Coffee Shop) to predict that by 2020 (aka The Future) compared to today (i.e., October 2012)?
Data demand from mobile devices will be a lot higher in 2020!
Cellular Networks have to (and will!) supply a lot more data capacity in 2020!
Footnote: the observant reader will have seen that I am not making the claim that there will be hugely more data traffic on the cellular network in comparison to today. The WiFi path might (and most likely will) take a lot of the traffic growth away from the cellular network.
how economical will this journey be for the Mobile Network Operator?
THE ECONOMICS OF THE THOUSAND TIMES CHALLENGE
Mobile Network Operators (MNOs) will not have the luxury of getting the Cellular Data Supply and Demand Equation Wrong.
The MNO will need to balance network investments with pricing strategies, churn & customer experience management as well as overall profitability and corporate financial well being:
Growth, if not manage, will lead to capacity & cash crunch and destruction of share holder value!
So for the Thousand Times Challenge, we need to look at the Total Cost of Ownership (TCO) or Total Investment required to get to a cellular network with 1,000 times more network capacity than today. We need to look at:
Investment I(B) in additional bandwidth B, which would include (a) the price of spectral re-farming (i.e., re-purposing legacy spectrum to a new and more efficient technology), (b) technology migration (e.g., moving customers off 2G and onto 3G or LTE or both) and (c) possible acquisition of new spectrum (i..e, via auction, beauty contests, or M&As).
Improving a cellular networks spectral efficiency I(E) is also likely to result in additional investments. In order to get an improved effective spectral efficiency, an operator would be required to (a) modernize its infrastructure, (b) invest into better antenna technologies, and (c) ensure that customer migration from older spectral in-efficient technologies into more spectral efficient technologies occurs at an appropriate pace.
Last but NOT Least the investment in cell density I(N):
Needing 56 times additional cell density is most likely NOT going to be FREE,
even with clever small cell deployment strategies.
Though I am pretty sure that some will make a very positive business case, out there in the Operator space, (note: the difference between Pest & Cholera might come out in favor of Cholera … though we would rather avoid both of them) comparing a macro-cellular expansion to Small Cell deployment, avoiding massive churn in case of outrageous cell congestion, rather than focusing on managing growth before such an event would occur.
The Real “1,000x” Challenge will be Economical in nature and will relate to the following considerations:
In other words:
Mobile Networks required to supply a 1,000 times present day cellular capacity are also required to provide that capacity gain at substantially less ABSOLUTE Total Cost of Ownership.
I emphasize the ABSOLUTE aspects of the Total Cost of Ownership (TCO), as I have too many times seen our Mobile Industry providing financial benefits in relative terms (i.e., relative to a given quality improvement) and then fail to mention that in absolute cost the industry will incur increased Opex (compared to pre-improvement situation). Thus a margin decline (i.e., unless proportional revenue is gained … and how likely is that?) as well as negative cash impact due to increased investments to gain the improvements (i.e., again assuming that proportional revenue gain remains wishful thinking).
Never Trust relative financial improvements! Absolutes don’t Lie!
THE ECONOMICS OF SPECTRUM.
Spectrum economics can be captured by three major themes: (A) ACQUISITION, (B) RETENTION and (C) PERFECTION. These 3 major themes should be well considered in any credible business plan: Short, Medium and Long-term.
It is fairly clear that there will not be a lot new lower frequency (defined here as <2.5GHz) spectrum available in the next 10+ years (unless we get a real breakthrough in white-space). The biggest relative increase in cellular bandwidth dedicated to mobile data services will come from re-purposing (i.e., perfecting) existing legacy spectrum (i.e., by re-farming). Acquisition of some new bandwidth in the low frequency range (<800MHz), which per definition will not be a lot of bandwidth and will take time to become available. There are opportunities in the very high frequency range (>3GHz) which contains a lot of bandwidth. However this is only interesting for Small Cell and Femto Cell like deployments (feeding frenzy for small cells!).
As many European Countries re-auction existing legacy spectrum after the set expiration period (typical 10 -15 years), it is paramount for a mobile operator to retain as much as possible of its existing legacy spectrum. Not only is current traffic tied up in the legacy bands, but future growth of mobile data will critical depend on its availability. Retention of existing spectrum position should be a very important element of an Operators business plan and strategy.
Most real-world mobile network operators that I have looked at can expect by acquisition & perfection to gain between 3 to 8 times spectral bandwidth for cellular data compared to today’s situation.
For example, a typical Western European MNO have
- Max. 2x10MHz @ 900MHz primarily used for GSM. Though some operators are having UMTS 900 in operation or plans to re-farm to UMTS pending regulatory approval.
- 2×20 MHz @ 1800MHz, though here the variation tend to be fairly large in the MNO spectrum landscape, i.e., between 2x30MHz down-to 2x5MHz. Today this is exclusively in use for GSM. This is going to be a key LTE band in Europe and already supported in iPhone 5 for LTE.
- 2×10 – 15 MHz @ 2100MHz is the main 3G-band (UMTS/HSPA+) in Europe and is expected to remain so for at least the next 10 years.
- 2×10 @ 800 MHz per operator and typically distributed across 3 operator and dedicated to LTE. In countries with more than 3 operators typically some MNOs will have no position in this band.
- 40 MHz @ 2.6 GHz per operator and dedicated to LTE (FDD and/or TDD). From a coverage perspective this spectrum would in general be earmarked for capacity enhancements rather than coverage.
Note that most European mobile operators did not have 800MHz and/or 2.6GHz in their spectrum portfolios prior to 2011. The above list has been visualized in the Figure below (though only for FDD and showing the single side of the frequency duplex).
The 700MHz will eventually become available in Europe (already in use for LTE in USA via AT&T and VRZ) for LTE advanced. Though the time frame for 700MHz cellular deployment in Europe is still expected take maybe up to 8 years (or more) to get it fully cleared and perfected.
Today (as of 2012) a typical European MNO would have approximately (a) 60 MHz (i.e., DL+UL) for GSM, (b) 20 – 30 MHz for UMTS and (c) between 40MHz – 60MHz for LTE (note that in 2010 this would have been 0MHz for most operators!). By 2020 it would be fair to assume that same MNO could have (d) 40 – 50 MHz for UMTS/HSPA+ and (e) 80MHz – 100MHz for LTE. Of course it is likely that mobile operators still would have a thin GSM layer to support roaming traffic and extreme laggards (this is however likely to be a shared resource among several operators). If by 2020 10MHz to 20MHz would be required to support voice capacity, then the MNO would have at least 100MHz and up-to 130MHz for data.
Note if we Fast-Backward to 2010, assume that no 2.6GHz or 800MHz auction had happened and that only 2×10 – 15 MHz @ 2.1GHz provided for cellular data capacity, then we easily get a factor 3 to 5 boost in spectral capacity for data over the period. This just to illustrate the meaningless of relativizing the challenge of providing network capacity.
So what’s the economical aspects of spectrum? Well show me the money!
- needs to be Acquired (including re-acquired = Retention) via (a) Auction, (b) Beauty contest or (c) Private transaction if allowed by the regulatory authorities (i.e., spectrum trading); Usually spectrum (in Europe at least) will be time-limited right-to-use! (e.g., 10 – 15 years) => Capital investments to (re)purchase spectrum.
- might need to be Perfected & Re-farmed to another more spectral efficient technology => new infrastructure investments & customer migration cost (incl. acquisition, retention & churn).
- new deployment with coverage & service obligations => new capital investments and associated operational cost.
- demand could result in joint ventures or mergers to acquire sufficient spectrum for growth.
- often has a re-occurring usage fee associate with its deployment => Operational expense burden.
First 3 bullet points can be attributed mainly to Capital expenditures and point 5. would typically be an Operational expense. As we have seen in US with the failed AT&T – T-Mobile US merger, bullet point 4. can result in very high cost of spectrum acquisition. Though usually a merger brings with it many beneficial synergies, other than spectrum, that justifies such a merger.
Above Figure provides a historical view on spectrum pricing in US$ per MHz-pop. As we can see, not all spectrum have been borne equal and depending on timing of acquisition, premium might have been paid for some spectrum (e.g., Western European UMTS hyper pricing of 2000 – 2001).
Some general spectrum acquisition heuristics can be derived by above historical overview (see my presentation “Techno-Economical Aspects of Mobile Broadband from 800MHz to 2.6GHz” on @slideshare for more in depth analysis).
Most of the operator cost associated with Spectrum Acquisition, Spectrum Retention and Spectrum Perfection should be more or less included in a Mobile Network Operators Business Plans. Though the demand for more spectrum can be accelerated (1) in highly competitive markets, (2) spectrum starved operations, and/or (3) if customer demand is being poorly managed within the spectral resources available to the MNO.
WiFi, or in general any open radio-access technology operating in ISM bands (i.e., freely available frequency bands such as 2.4GHz, 5.8GHz), can be a source of mitigating costly controlled-spectrum resources by stimulating higher usage of such open-technologies and open-bands.
The cash prevention or cash optimization from open-access technologies and frequency bands should not be under-estimated or forgotten. Even if such open-access deployment models does not make standalone economical sense, is likely to make good sense to use as an integral part for the Next Generation Mobile Data Network perfecting & optimizing open- & controlled radio-access technologies.
The Economics of Spectrum Acquisition, Spectrum Retention & Spectrum Perfection is of such tremendous benefits that it should be on any Operators business plans: short, medium and long-term.
THE ECONOMICS OF SPECTRAL EFFICIENCY
The relative gain in spectral efficiency (as well as other radio performance metrics) with new 3GPP releases has been amazing between R99 and recent HSDPA releases. Lots of progress have been booked on the account of increased receiver and antenna sophistication.
If we compare HSDPA 3.6Mbps (see above Figure) with the first Release of LTE, the spectral efficiency has been improved with a factor 4. Combined with more available bandwidth for LTE, provides an even larger relative boost of supplied bandwidth for increased capacity and customer quality. Do note above relative representation of spectral efficiency gain largely takes away the usual (almost religious) discussions of what is the right spectral efficiency and at what load. The effective (what that may be in your network) spectral efficiency gain moving from one radio-access release or generation to the next would be represented by the above Figure.
Theoretically this is all great! However,
Having the radio-access infrastructure supporting the most spectral efficient technology is the easy part (i.e., thousands of radio nodes), getting your customer base migrated to the most spectral efficient technology is where the challenge starts (i.e., millions of devices).
In other words, to get maximum benefits of a given 3GPP Release gains, an operator needs to migrate his customer-base terminal equipment to that more Efficient Release. This will take time and might be costly, particular if accelerated. Irrespective, migrating a customer base from radio-access A (e.g., GSM) to radio-access B (e.g., LTE), will take time and adhere to normal market dynamics of churn, retention, replacement factors, and gross-adds. The migration to a better radio-access technology can be stimulated by above-market-average acquisition & retention investments and higher-than-market-average terminal equipment subsidies. In the end competitors market reactions to your market actions, will influence the migration time scale very substantially (this is typically under-estimate as competitive driving forces are ignored in most analysis of this problem).
The typical radio-access network modernization cycle has so-far been around 5 years. Modernization is mainly driven by hardware obsolescence and need for more capacity per unit area than older (first & second) generation equipment could provide. The most recent and ongoing modernization cycle combines the need for LTE introduction with 2G and possibly 3G modernization. In some instances retiring relative modern 3G equipment on the expense of getting the latest multi-mode, so-called Single-RAN equipment, deployed, has been assessed to be worth the financial cost of write-off. This new cycle of infrastructure improvements will in relative terms far exceed past upgrades. Software Definable Radios (SDR) with multi-mode (i.e., 2G, 3G, LTE) capabilities are being deployed in one integrated hardware platform, instead of the older generations that were separated with the associated floor space penalty and operational complexity. In theory only Software Maintenance & simple HW upgrades (i.e., CPU, memory, etc..) would be required to migrate from one radio-access technology to another. Have we seen the last HW modernization cycle? … I doubt it very much! (i.e., we still have Cloud and Virtualization concepts going out to the radio node blurring out the need for own core network).
Multi-mode SDRs should in principle provide a more graceful software-dominated radio-evolution to increasingly more efficient radio access; as cellular networks and customers migrate from HSPA to HSPA+ to LTE and to LTE-advanced. However, in order to enable those spectral-efficient superior radio-access technologies, a Mobile Network Operator will have to follow through with high investments (or incur high incremental operational cost) into vastly improved backhaul-solutions and new antenna capabilities than the past access technologies required.
Whilst the radio access network infrastructure has gotten a lot more efficient from a cash perspective, the peripheral supporting parts (i.e., antenna, backhaul, etc..) has gotten a lot more costly in absolute terms (irrespective of relative cost per Byte might be perfectly OKAY).
Thus most of the economics of spectral efficiency can and will be captured within the modernization cycles and new software releases without much ado. However, backhaul and antenna technology investments and increased operational cost is likely to burden cash in the peak of new equipment (including modernization) deployment. Margin pressure is therefor likely if the Opex of supporting the increased performance is not well managed.
To recapture the most important issues of Spectrum Efficiency Economics:
- network infrastructure upgrades, from a hardware as well as software perspective, are required => capital investments, though typically result in better Operational cost.
- optimal customer migration to better and more efficient radio-access technologies => market invest and terminal subsidies.
Boosting spectrum much beyond 6 times today’s mobile data dedicated spectrum position is unlikely to happen within a foreseeable time frame. It is also unlikely to happen in bands that would be very interesting for both providing both excellent depth of coverage and at the same time depth of capacity (i.e., lower frequency bands with lots of bandwidth available). Spectral efficiency will improve with both next generation HSPA+ as well as with LTE and its evolutionary path. However, depending on how we count the relative improvement, it is not going to be sufficient to substantially boost capacity and performance to the level a “1,000 times challenge” would require.
This brings us to the topic of vastly increased cell site density and of course Small Cell Economics.
THE ECONOMICS OF INCREASED CELL SITE DENSITY
It is fairly clear that there will not be a lot new spectrum available in the next 10+ years. The relative increase in cellular bandwidth will come from re-purposing & perfecting existing legacy spectrum (i.e., by re-farming) and acquiring some new bandwidth in the low frequency range (<800MHz) which per definition is not going to provide a lot of bandwidth. The very high-frequency range (>3GHz) will contain a lot of bandwidth, but is only interesting for Small Cell and Femto-cell like deployments (feeding frenzy for Small Cells).
Financially Mobile Operators in mature markets, such as Western Europe, will be lucky to keep their earning and margins stable over the next 8 – 10 years. Mobile revenues are likely to stagnate and possible even decline. Opex pressure will continue to increase (e.g., just simply from inflationary pressures alone). MNOs are unlikely to increase cell site density, if it leads to incremental cost & cash pressure that cannot be recovered by proportional Topline increases. Therefor it should be clear that adding many more cell sites (being it Macro, Pico, Nano or Femto) to meet increasing (often un-managed & unprofitable) cellular demand is economically unwise and unlikely to happen unless followed by Topline benefits.
Increasing cell density dramatically (i.e., 56 times is dramatic!) to meet cellular data demand will only happen if it can be done with little incremental cost & cash pressure.
I have no doubt that distributing mobile data traffic over more and smaller nodes (i.e., decrease traffic per node) and utilize open-access technologies to manage data traffic loads are likely to mitigate some of the cash and margin pressure from supporting the higher performance radio-access technologies.
So let me emphasize that there will always be situations and geographical localized areas where cell site density will be increased disregarding the economics, in order to increase urgent capacity needs or to provide specialized-coverage needs. If an operator has substantially less spectral overhead (e.g., AT&T) than a competitor (e.g., T-Mobile US), the spectrum-starved operator might decide to densify with Small Cells and/or Distributed Antenna Systems (DAS) to be able to continue providing a competitive level of service (e.g., AT&T’s situation in many of its top markets). Such a spectrum starved operator might even have to rely on massive WiFi deployments to continue to provide a decent level of customer service in extreme hot traffic zones (e.g., Times Square in NYC) and remain competitive as well as having a credible future growth story to tell shareholders.
Spectrum-starved mobile operators will move faster and more aggressively to Small Cell Network solutions including advanced (and not-so-advanced) WiFi solutions. This fast learning-curve might in the longer term make up for a poorer spectrum position.
In the following I will consider Small Cells in the widest sense, including solutions based both on controlled frequency spectrum (e.g., HSPA+, LTE bands) as well in the ISM frequency bands (i.e., 2.4GHz and 5.8GHz). The differences between the various Small Cell options will in general translate into more or less cells due to radio-access link-budget differences.
As I have been involved in many projects over the last couple of years looking at WiFi & Small Cell substitution for macro-cellular coverage, I would like to make clear that in my opinion:
A Small Cells Network is not a good technical (or economical viable) solution for substituting macro-cellular coverage for a mobile network operator.
However, Small Cells however are Great for
- Specialized coverage solutions difficult to reach & capture with standard macro-cellular means.
- Localized capacity addition in hot traffic zones.
- Coverage & capacity underlay when macro-cellular cell split options have been exhausted.
The last point in particular becomes important when mobile traffic exceeds the means for macro-cellular expansion possibilities, i.e., typically urban & dense-urban macro-cellular ranges below 200 meters and in some instances maybe below 500 meters pending on the radio-access choice of the Small Cell solution.
Interference concerns will limit the transmit power and coverage range. However our focus are small localized and tailor-made coverage-capacity solutions, not a substituting macro-cellular coverage, range limitation is of lesser concern.
For great accounts of Small Cell network designs please check out Iris Barcia (@IBTwi) & Simon Chapman (@simonchapman) both from Keima Wireless. I recommend the very insightful presentation from Iris “Radio Challenges and Opportunities for Large Scale Small Cell Deployments” which you can find at “3G & 4G Wireless Blog” by Zahid Ghadialy (@zahidtg, a solid telecom knowledge source for our Industry).
When considering small cell deployment it makes good sense to understand the traffic behavior of your customer base. The Figure below illustrates a typical daily data and voice traffic profile across a (mature) cellular network:
- up-to 80% of cellular data traffic happens either at home or at work.+
Currently there is an important trend, indicating that the evening cellular-data peak is disappearing coinciding with the WiFi-peak usage taking over the previous cellular peak hour.
A great source of WiFi behavioral data, as it relates to Smartphone usage, you will find in Thomas Wehmeier’s (Principal Analyst, Informa: @Twehmeier) two pivotal white papers on “Understanding Today’s Smatphone User” Part I and Part II.
The above daily cellular-traffic profile combined with the below Figure on cellular-data usage per customer distributed across network cells
shows us something important when it comes to small cells:
- Most cellular data traffic (per user) is limited to very few cells.
- 80% (50%) of the cellular data traffic (per user) is limited to 3 (1) main cells.
- The higher the cellular data usage (per user) the fewer cells are being used.
It is not only important to understand how data traffic (on a per user) behaves across the cellular network. It is likewise very important to understand how the cellular-data traffic multiplex or aggregate across the cells in the mobile network.
We find in most Western European Mature 3G networks the following trend:
- 20% of the 3G Cells carries 60+% of the 3G data traffic.
- 50% of the 3G Cells carriers 95% or more of the 3G data traffic.
Thus relative few cells carries the bulk of the cellular data traffic. Not surprising really as this trend was even more skewed for GSM voice.
The above trends are all good news for Small Cell deployment. It provides confidence that small cells can be effective means to taking traffic away from macro-cellular areas, where there is no longer an option for conventional capacity expansions (i.e., sectorization, additional carrier or conventional cell splits).
For the Mobile Network Operator, Small Cell Economics is a Total Cost of Ownership exercise comparing Small Cell Network Deployment to other means of adding capacity to the existing mobile network.
The Small Cell Network needs (at least) to be compared to the following alternatives;
- Greenfield Macro-cellular solutions (assuming this is feasible).
- Overlay (co-locate) on existing network grid.
- Sectorization of an existing site solution (i.e., moving from 3 sectors to 3 + n on same site).
Obviously, in the “extreme” cellular-demand limit where non of the above conventional means of providing additional cellular capacity are feasible, Small Cell deployment is the only alternative (besides doing nothing and letting the customer suffer). Irrespective we still need to understand how the economics will work out, as there might be instances where the most reasonable strategy is to let your customer “suffer” best-effort services. This would in particular be the case if there is no real competitive and incremental Topline incentive by adding more capacity.
Competitive circumstances could force some spectrum-starved operators to deploy small cells irrespective of it being financially unfavorable to do so.
Lets begin with the cost structure of a macro-cellular 3G Greenfield Rooftop Site Solution. We take the relevant cost structure of a configuration that we would be most likely to encounter in a Hot Traffic Zone / Metropolitan high-population density area which also is likely to be a candidate area for Small Cell deployment. The Figure below shows the Total Cost of Ownership, broken down in Annualized Capex and Annual Opex, for a Metropolitan 3G macro-cellular rooftop solution:
Note 1: The annualized Capex has been estimated assuming 5 years for RAN Infra, Backaul & Core, and 10 years for Build. It is further assumed that the site is supported by leased-fiber backhaul. Opex is the annual operational expense for maintaining the site solution.
Note 2: Operations Opex category covers Maintenance, Field-Services, Staff cost for Ops, Planning & optimization. The RAN infra Capex category covers: electronics, aggregation, antenna, cabling, installation & commissioning, etc..
Note 3: The above illustrated cost structure reflects what one should expect from a typical European operation. North American or APAC operators will have different cost distributions. Though it is not expected to change conclusions substantially (just redo the math).
When we discuss Small Cell deployment, particular as it relates to WiFi-based small cell deployment, with Infrastructure Suppliers as well as Chip Manufacturers you will get the impression that Small Cell deployment is Almost Free of Capex and Opex; i.e., hardly any build cost, free backhaul and extremely cheap infrastructure supported by no site rental, little maintenance and ultra-low energy consumption.
Obviously if Small Cells cost almost nothing, increasing cell site density with 56 times or more becomes very interesting economics … Unfortunately such ideas are wishful thinking.
For Small Cells not to substantially pressure margins and cash, Small Cell Cost Scaling needs to be very aggressive. If we talk about a 56x increase in cell site density the incremental total cost of ownership should at least be 56 times better than to deploy a macro-cellular expansion. Though let’s not fool ourselves!
No mobile operator would densify their macro cellular network 56 times if absolute cost would proportionally increase!
No Mobile operator would upsize their cellular network in any way unless it is at least margin, cost & cash neutral.
(I have no doubt that out there some are making relative business cases for small cells comparing an equivalent macro-cellular expansion versus deploying Small Cells and coming up with great cases … This would be silly of course, not that this have ever prevented such cases to be made and presented to Boards and CxOs).
The most problematic cost areas from a scaling perspective (relative to a macro-cellular Greenfield Site) are (a) Site Rental (lamp posts, shopping malls,), (b) Backhaul Cost (if relying on Cable, xDSL or Fiber connectivity), (c) Operational Cost (complexity in numbers, safety & security) and (d) Site Build Cost (legal requirements, safety & security,..).
In most realistic cases (I have seen) we will find a 1:12 to 1:20 Total Cost of Ownership difference between a Small Cell unit cost and that of a Macro-Cellular Rooftop’s unit cost. While unit Capex can be reduced very substantially, the Operational Expense scaling is a lot harder to get down to the level required for very extensive Small Cell deployments.
For a typical metropolitan rooftop (in Western Europe) we have the annualized capital expense (Capex) of ca. 15,000 Euro and operational expenses (Opex) in the order of 30,000 Euro per annum. The site-related Opex distribution would look something like this;
- Macro-cellular Rooftop 3G Site Unit Annual Opex:
- Site lease would be ca. 10,500EUR.
- Backhaul would be ca. 9,000EUR.
- Energy would be ca. 3,000EUR.
- Operations would be ca. 7,500EUR.
- i.e., total unit Opex of 30,000EUR (for average major metropolitan area)
Assuming that all cost categories could be scaled back with a factor 56 (note: very big assumption that all cost elements can be scaled back with same factor!)
- Target Unit Annual Opex cost for a Small Cell:
- Site lease should be less than 200EUR (lamp post leases substantially higher)
- Backhaul should be less than 150EUR (doable though not for carrier grade QoS).
- Energy should be less than 50EUR (very challenging for todays electronics)
- Operations should be less than 150EUR (ca. 1 hour FTE per year … challenging).
- Annual unit Opex should be less than 550EUR (not very likely to be realizable).
Similar for the Small Cell unit Capital expense (Capex) would need to be done for less than 270EUR to be fully scalable with a macro-cellular rooftop (i.e., based on 56 times scaling).
- Target Unit Annualized Capex cost for a Small Cell:
- RAN Infra should be less than 100EUR (Simple WiFi maybe doable, Cellular challenging)
- Backhaul would be less than 50EUR (simple router/switch/microwave maybe doable).
- Build would be less than 100EUR (very challenging even to cover labor).
- Core would be less than 20EUR (doable at scale).
- Annualized Capex should be less than 270EUR (very challenging to meet this target)
- Note: annualization factor: 5 years for all including Build.
So we have a Total Cost of Ownership TARGET for a Small Cell of ca. 800EUR
Inspecting the various capital as well as operational expense categories illustrates the huge challenge to be TCO comparable to a macro-cellular urban/dense-urban 3G-site configuration.
Massive Small Cell Deployment needs to be almost without incremental cost to the Mobile Network Operator to be a reasonable scenario for the 1,000 times challenge.
Most the analysis I have seen, as well as carried out myself, on real cost structure and aggressive pricing & solution designs shows that the if the Small Cell Network can be kept between 12 to 20 Cells (or Nodes) the TCO compares favorably to (i.e., beating) an equivalent macro-cellular solution. If the Mobile Operator is also a Fixed Broadband Operator (or have favorable partnership with one) there are in general better cost scaling possible than above would assume (e.g., another AT&T advantage in their DAS / Small Cell strategy).
In realistic costing scenarios so far, Small Cell economical boundaries are given by the Figure below:
Let me emphasize that above obviously assumes that an operator have a choice between deploying a Small Cell Network and conventional Cell Split, Nodal Overlay (or co-location on existing cellular site) or Sectorization (if spectral capacity allows). In the Future and in Hot Traffic Zones this might not be the case. Leaving Small Cell Network deployment or letting the customers “suffer” poorer QoS be the only options left to the mobile network operator.
So how can we (i.e., the Mobile Operator) improve the Economics of Small Cell deployment?
Having access fixed broadband such as fiber or high-quality cable infrastructure would make the backhaul scaling a lot better. Being a mobile and fixed broadband provider does become very advantageous for Small Cell Network Economics. However, the site lease (and maintenance) scaling remains a problem as lampposts or other interesting Small Cell locations might not scale very aggressively (e.g., there are examples of lamppost leases being as expensive as regular rooftop locations). From a capital investment point of view, I have my doubts whether the price will scale downwards as favorable as they would need to be. Much of the capacity gain comes from very sophisticated antenna configurations that is difficult to see being extremely cheap:
Small Cell Equipment Suppliers would need to provide a Carrier-grade solution priced at maximum 1,000EUR all included! to have a fighting chance of making massive small cell network deployment really economical.
We could assume that most of the “Small Cells” are in fact customers existing private access points (or our customers employers access points) and simply push (almost) all cellular data traffic onto those whenever a customer is in vicinity of such. All those existing and future private access points are (at least in Western Europe) connected to at least fairly good quality fixed backhaul in the form of VDSL, Cable (DOCSIS3), and eventually Fiber. This would obviously improve the TCO of “Small Cells” tremendously … Right?
Well it would reduce the MNOs TCO (as it shift the cost burden to the operator’s customer or employers of those customers) …Well … This picture also would not really be Small Cells in the sense of proper designed and integrated cells in the Cellular sense of the word, providing the operator end-2-end control of his customers service experience. In fact taking the above scenario to the extreme we might not need Small Cells at all, in the Cellular sense, or at least dramatically less than using the standard cellular capacity formula above.
In Qualcomm (as well as many infrastructure suppliers) ultimate vision the 1,000x challenge is solved by moving towards a super-heterogeneous network that consist of everything from Cellular Small Cells, Public & Private WiFi access points as well as Femto cells thrown into the equation as well.
Such an ultimate picture might indeed make the Small Cell challenge economically feasible. However, it does very fundamentally change the current operational MNO business model and it is not clear that transition comes without cost and only benefits.
Last but not least it is pretty clear than instead of 3 – 5 MNOs all going out plastering walls and lampposts with Small Cell Nodes & Antennas sharing might be an incredible clever idea. In fact I would not be altogether surprised if we will see new independent business models providing Shared Small Cell solutions for incumbent Mobile Network Operators.
Before closing the Blog, I do find it instructive to pause and reflect on lessons from Japan’s massive WiFi deployment. It might serves as a lesson to massive Small Cell Network deployment as well and an indication that collaboration might be a lot smarter than competition when it comes to such deployment:
CELLULAR DATA CAPACITY … A THOUSAND TIMES CHALLENGE?
It should be obvious that I am somewhat skeptical about all the excitement around cellular data growth rates and whether its a 1,000x or 250x or 42x (see my blog on “The Thousand Times Challenge … The answer to everything about mobile data?”). In this I share very much Dean Bubley’s (Disruptive Wireless) critical view on the “cellular growth rate craze”. See Dean’s account in his recent Blog “Mobile data traffic growth – a thought experiment and forecast”.
This obsession with cellular data growth rates is Largely Irrelevant or only serves Hysteria and Cool Blogs, Twittter and Press Headlines (which is for nothing else occasionally entertaining).
What IS Important! is how to provide more (economical) cellular capacity, avoiding;
- Massive Congestion and loss of customer service.
- Economical devastation as operator tries to supply network resources for an un-managed cellular growth profile.
(Source: adapted from K.K. Larsen “Spectrum Limitations Migrating to LTE … a Growth Market Dilemma?“)
To me the discussion of how to Increase Network Capacity with a factor THOUSAND is an altogether more interesting discussion than what the cellular growth rate might or might not be in 2020 (or any other arbitrary chosen year).
Mallinson article “The 2020 Vision for LTE” in FierceWirelessEurope gives a good summary of this effort. Though my favorite account on how to increase network capacity focusing on small cell deployment is from Iris Barcia (@ibtwi) & Simon Chapman (@simonchapman) from Keima Wireless.
So how can we simply describe cellular network capacity?
Well … it turns out that Cellular Network Capacity C can be described by 3 major components; (1) available bandwidth B, (2) (effective) spectral efficiency E and (3) number of cells deployed N.
The SUPPLIED NETWORK CAPACITY in Mbps (i.e., C) is equal to the AMOUNT OF SPECTRUM, i.e., available bandwidth, in MHz (i..e, B) multiplied with the SPECTRAL EFFICIENCY PER CELL in Mbps/MHz (i.e., E) multiplied by the NUMBER OF CELLS (i.e., N).
It should be understood that the best approach is to apply the formula on a per radio access technology basis, rather than across all access technologies. Also separate the analysis in Downlink capacity (i.e., from Base Station to Customer Device) and in Uplink (from consumer Device to Base Station). If averages across many access technologies or you are considering the total bandwidth B including spectrum both for Uplink and for Downlink, the spectral efficiency B needs to be averaged accordingly. Also bear in mind that there could be some inter-dependency between the (effective) spectral efficiency and number cells deployed. Though it depends on what approach you choose to take to Spectral Efficiency.
It should be remembered that not all supplied capacity is being equally utilized. Most operators have 95% of their cellular traffic confined to 50% of less of their Cells. So supplied capacity in half (or more) of most cellular operator’s network remains substantially under-utilized (i.e., 50% or more of radio network carries 5% or less of the cellular traffic … if you thought that Network Sharing would make sense … yeah it does … but its a different story;-).
Therefore I prefer to apply the cellular capacity formula to geographical limited areas of the mobile network, rather than network wide. This allows for more meaningful analysis and should avoid silly averaging effects.
So we see that providing network capacity is “pretty easy”: The more bandwidth or available spectrum we have the more cellular capacity can be provided. The better and more efficient air-interface technology the more cellular capacity and quality can we provide to our customers. Last (but not least) the more cells we have build into our mobile network the more capacity can be provided (though economics does limit this one).
The Cellular Network Capacity formula allow us to breakdown the important factors to solve the “1,000x Challenge”, which we should remember is based on a year 2010 reference (i.e., feels a little bit like cheating! right?;-) …
The Cellular Capacity Gain formula:
Basically the Cellular Network Capacity Gain in 2020 (over 2010) or the Capacity we can supply in 2020 is related to how much spectrum we have available (compared to today or 2010), the effective spectral efficiency relative improvement over today (or 2010) and the number of cells deployed in 2020 relative to today (or 2010).
According with Mallinson’s article the “1,000x Challenge” looks the following (courtesy of SK Telekom);
According with Mallinson (and SK Telekom, see “Efficient Spectrum Resource Usage for Next Generation NW” by H. Park, presented at 3GPP Workshop “on Rel.-12 and onwards”, Ljubljana, Slovenia, 11-12 June 2012) one should expect to have 3 times more spectrum available in 2020 (compared to 2010 for Cellular Data), 6 times more efficient access technology (compared to what was available in 2010) and 56 times higher cell density compared to 2010. Another important thing to remember when digesting the 3 x 6 x 56 is: this is an estimate from South Korea and SK Telekom and to a large extend driven by South Korean conditions.
Above I have emphasized the 2010 reference. It is important to remember this reference to better appreciate where the high ratios come from in the above. For example in 2010 most mobile operators where using 1 to maximum 2 carriers or in the process to upgrade to 2 carriers to credible support HSPA+. Further many operators had not transitioned to HSPA+ and few not even added HSUPA to their access layer. Furthermore, most Western European operators had on average 2 carriers for UMTS (i.e., 2×10 MHz @ 2100MHz). Some operators with a little excess 900MHz may have deployed a single carrier and either postponed 2100MHz or only very lightly deployed the higher frequency UMTS carrier in their top cities. In 2010, the 3G population coverage (defined as having minimum HSDPA) was in Western Europe at maximum 80% and in Central Eastern & Southern Europe most places maximum 60%. 3G geographical coverage always on average across the European Union was in 2010 less than 60% (in Western Europe up-to 80% and in CEE up-to 50%).
Take an European Operator with 4,000 site locations in 2010.
In 2010 this operator had deployed 3 carriers supporting HSPA @ 2100MHz (i..e, total bandwidth of 2x15MHz)
Further in 2010 the Operator also had:
- 2×10 MHz GSM @ 900MHz (with possible migration path to UMTS900).
- 2×30 MHz GSM @ 1800MHz (with possible migration path to LTE1800).
By 2020 it retained all its spectrum and gained
- 2×10 MHz @ 800MHz for LTE.
- 2×20 MHz @ 2.6GHz for LTE.
For simplicity (and idealistic reasons) let’s assume that by 2020 2G has finally been retired. Moreover, lets concern ourselves with cellular data at 3G and above service levels (i.e., ignoring GPRS & EDGE). Thus I do not distinguish between whether the air-interface is HSPA+ or LTE/LTE advanced.
OPERATOR EXAMPLE: BANDWIDTH GAIN 2010 – 2020:
The Bandwidth Gain part of the “Cellular Capacity Gain” formula is in general specific to individual operators and the particular future regulatory environment (i.e., in terms of new spectrum being released for cellular use). One should not expect a universally applicable ratio here. It will vary with a given operator’s spectrum position … Past, Present & Future.
In 2010 our Operator had 15MHz (for either DL or UL) supporting cellular data.
In 2020 the Operator should have 85MHz (for either DL or UL), which is a almost a factor 6 more than in 2010. Don’t be concerned about this not being 3! After all why should it be? Every country and operator will face different constraints and opportunities and therefor there is no reason why 3 x 6 x 56 would be a universal truth!
If Regulator’s and Lawmakers would be more friendly towards spectrum sharing the boost of available spectrum for cellular data could be a lot more.
SPECTRAL EFFICIENCY GAIN 2010 – 2020:
The Spectral Efficiency Gain part of the “Cellular Capacity Gain” formula is more universally applicable to cellular operators at the same technology stage and with a similar customer mix. Thus in general for apples and apple comparison more or less same gains should be expected.
In my experience Spectral Efficiency almost always gets experts emotions running high. More often than not there is a divide between those experts (across Operators, Suppliers, etc.) towards what would be an appropriate spectral efficiency to use in capacity assessments. Clearly everybody understands that the theoretical peak spectral efficiency is not reflecting the real service experience of customers or the amount of capacity an operator has in his Mobile Network. Thus, in general an effective (or average) spectral efficiency is being applied often based on real network measurements or estimates based on such.
When LTE was initially specified its performance targets was referenced to HSxPA Release 6. The LTE aim was to get 3 -4 times the DL spectral efficiency and 2 – 3 times the UL spectral efficiency. LTE advanced targets to double the peak spectral efficiency for both DL and UL.
At maximum expect the spectral efficiency to be:
- @Downlink to be 6 – 8 times that of Release 6.
- @Uplink to be 4 – 6 times that of Release 6.
Note that this comparison is assuming an operator’s LTE deployment would move 4×4 MiMo to 8×8 MiMo in Downlink and from 64QAM SiSo to 4×4 MiMo in Uplink. Thus a quantum leap in antenna technology and substantial antenna upgrades over the period from LTE to LTE-advanced would be on the to-do list of the mobile operators.
In theory for LTE-advanced (and depending on the 2010 starting point) one could expect a factor 6 boost in spectral efficiency by 2020 compared to 2010, as put down in the “1,000x challenge”.
However, it is highly unlikely that all devices by 2020 would be LTE-advanced. Most markets would be have at least 40% 3G penetration, some laggard markets would still have a very substantial 2G base. While LTE would be growing rapidly the share of LTE-advanced terminals might be fairly low even at 2020.
Using a x6 spectral efficiency factor by 2020 is likely being extremely optimistic.
A more realistic assessment would be a factor 3 – 4 by 2020 considering the blend of technologies in play at that time.
The critical observer sees that we have reached a capacity gain (compared to 2010) of 6 x (3-4) or 18 to 24 times. Thus to reach 1,000x we still need between 40 and 56 times the cell density.
and that translate into a lot of additional cells!
CELL DENSITY GAIN 2010 – 2020:
The Cell Density Gain part of the “Cellular Capacity Gain” formula is in general specific to individual operators and the cellular traffic demand they might experience, i.e., there is no unique universal number to be expected here.
So to get to 1,000x the capacity of 2010 we need either magic or a 50+x increase in cell density (which some may argue would amount to magic as well) …
Obviously … this sounds like a real challenge … getting more spectrum and high spectral efficiency is piece of cake compared to a 50+ times more cell density. Clearly our Mobile Operator would go broke if it would be required to finance 50 x 4000 = 200,000 sites (or cells, i.e., 3 cells = 1 macro site ). The Opex and Capex requirements would simply NOT BE PERMISSIBLE.
50+ times site density on a macro scale is Economical & Practical Nonsense … The Cellular Network Capacity heuristics in such a limit works ONLY for localized areas of a Mobile Network!
The good news is that such macro level densification would also not be required … this is where Small Cells enter the Scene. This is where you run to experts such as Simon Chapman (@simonchapman) from Keima Wireless or similar companies specialized in providing intelligent small cell deployment. Its clear that this is better done early on in the network design rather than when the capacity pressure becomes a real problem.
Note that I am currently assuming that Economics and Deployment Complexity will not become challenging with Small Cell deployment strategy … this (as we shall see) is not necessarily a reasonable assumption in all deployment scenarios.
Traffic is not equally distributed across a mobile network as the chart below clearly shows (see also Kim K Larsen’s “Capacity Planning in Mobile Data Networks Experiencing Exponential Growh in Demand”):
20% of the 3G-cells carries 60% of the data traffic and 50% of the 3G-cells carries as much as 95% of the 3G traffic.
Good news is that I might not need to worry too much about half of my cellular network that only carries 5% of my traffic.
Bad news is that up-to 50% of my cells might actually give me a substantial headache if I don’t have sufficient spectral capacity and enough customers on the most efficient access technology. Leaving me little choice but to increase my cellular network density, i.e., build more cells to my existing cellular grid.
Further, most of the data traffic is carried within the densest macro-cellular network grid (at least if an operator starts exhausting its spectral capacity with a traditional coverage grid). In a typical European City ca. 20% of Macro Cells will have a range of 300 meter or less and 50% of the Macro Cells will have a range of 500 meter or less (see below chart on “Cell ranges in a typical European City”).
Finding suitable and permissible candidates for Macro cellular cell splits below 300 meter is rather unlikely. Between 300 and 500 meter there might still be macro cellular split optionallity and if so would make the most sense to commence on (pending on future anticipated traffic growth). Above 500 meter its usually fairly likely to find suitable macro cellular site candidates (i.e., in most European Cities).
Clearly if the cellular data traffic increase would require a densification ratio of 50+ times current macro-cellular density a macro cellular alternative might be out of the question even for cell ranges up-to 2 km.
A new cellular network paradigm is required as the classical cellular network design brakes down!
Small Cell implementation is often the only alternative a Mobile Operator has to provide more capacity in a dense urban or high-traffic urban environment.
As Mobile Operators changes their cellular design, in dense urban and urban environments, to respond to the increasing cellular data demand, what kind of economical boundaries would need to be imposed to make a factor 50x increase in cell density work out.
No Mobile Operator can afford to see its Opex and Capex pressure rise! (i.e., unless revenue follows or exceed which might not be that likely).
For a moment … remember that this site density challenge is not limited to a single mobile operator … imagining that all operators (i.e., typical 3 -5 except for India with 13+;-) in a given market needs to increase their cellular site density with a factor 50. Even if there is (in theory) lots of space on the street level for Small Cells … one could imagine the regulatory resistance (not to mention consumer resistance) if a city would see a demand for Small Cell locations increase with a factor 150 – 200.
Thus, Sharing Small Cell Locations and Supporting Infrastructure will become an important trend … which should also lead to Better Economics.
This bring us to The Economics of the “1,000x Challenge” … Stay tuned!
This is not PART 2 of “Mobile Data Growth…The Perfect Storm” … This is the story of the Thousand Times Challenge!
It is not unthinkable that some mobile operators will face very substantial problems with their cellular data networks due to rapid, uncontrollable or un-managed cellular data growth. Once cellular data demand exceeds the installed base supply of network resources, the customer experience will likely suffer and cellular data consumers will no longer get the same service level that they had prior to the onset of over-demand.
One might of course argue that consumers were (and in some instances still are) spoiled during the period when mobile operators had plenty of spectral capacity available (relative to their active customer base) with unlimited data plans and very little cellular network load . As more and more customers migrate to smartphones and 3G data services, it follows naturally that there will be increasingly less spectral resources available per customer.
The above chart (from “Capacity Planning in Mobile Data Networks Experience Exponential Growth in Demand” illustrates such a situation where customers cellular data demand eventually exceeds the network capacity … which leads to a congested situation and less network resources per customer.
A mobile operator have several options that can mitigate emergence of capacity and spectrum crunch:
- Keep expand and densify the cellular network.
- Free up legacy (i.e. “old-technology”) spectrum and deploy for technology facing demand pressure.
- Introduce policy and active demand management on per user / segment level.
- Allow customers service to degrade as provider of best-effort cellular data.
- Stimulate and design for structural off-loading (levering fixed as well as cellular networks).
DEMAND … A THOUSAND TIMES FABLE?
Let me start with saying that cellular data growth does pose a formidable challenge for many mobile operators … already today … its easy to show that even at modest growth rates cellular data demand gets pretty close or beyond cellular network resources available today and in the future. Unless we fundamentally changes the way we design, plan and build networks.
However, Today The Challenge is Not network wide … At present, its limited to particular areas of the cellular networks … though as the cellular data traffic growths, the demand challenge does spread outwards and addresses an ever higher share of the cellular network.
Lately 1,000 has become a very important number. It has become the answer to the Smartphone Challenge and exponential growth of mobile data. 1000 seems to represent both demand as well as supply. Qualcomm has made it their “mission in life” (at at least the next 8 years) to solve the magic 1000 challenge. Mallinson article “The 2020 Vision for LTE” in FierceWirelessEurope gives a slightly more balanced view on demand and target supply of cellular resources: “Virtually all commentators expect a 15 to 30-fold traffic increase over five years and several expect this growth trend to last a decade to 2020, representing a 250-1,000-fold increase.” (note: the cynic in wonders about the several, its more than 2, but is it much more than 3?)
The observant reader will see that the range between minimum and maximum to be a factor of 4 … a reasonably larger error of margin to plan for. If by 2020 the demand would be 1,000 times that of demand in 2010, our Technologies better be a lot better than that as that would be an average with a long tail.
Of course most of us know that the answer really is 42! NOT 1000!
Joke aside … And let’s get serious about this 1000 Fable!
Firstly, 1,000 is (according with Qualcomm) the expected growth of data between 2010 and 2020 … Thus if data was 42 in 2010 it would be 1000×42 by 2020. That would be a CAGR of 100% over the period or a doubling of demanded data year in year our for 10 years.
… Well not really!
Qualcomm states that data demand in 2012 would be 10x that of 2010 . Thus, it follows that data demand between 2012 and 2020 “only” would be 100x or a CAGR of 78% over that period.
So in 2021 (1 year after we had 1,000x) we would see demand of ca. 1,800x, in 2022 (2 years after we solved the 1000x challenge) we would experience a demand of more than 3,000x, and so forth …
So great to solve the 1,000x challenge by 2020 but it’s going to be like “peeing in your trouser on a cold winter day” . Yes it will be warm, for a little while. Then its going to be really cold. In other words not going to help much structurally.
Could it be that this 1,000x challenge might be somewhat flawed?
- If All Commentators and Several Experts are to be believed, the growth worldwide is almost perfectly exponential with an annual growth rate between 70% and 100%.
- Growth is “unstoppable” -> unlimited sources for growth.
Actually most projections (from several expert sources;-) that I have seen does show substantial deceleration as the main source for growth exhaust, i.e., as Early & Late Majority of customers adapt to mobile data. Even Cisco own “Global Mobile Data Traffic Forecast Update, 2011 – 2016” shows an average deceleration of growth with an average of 20% per anno between 2010 and their 2014 projections (note: it’s sort of “funny” that Cisco then decide that after 2014 growth no longer slows down but stays put at 78% … alas artistic freedom I suppose?).
CELLULAR CUSTOMER MIGRATION
The following provides projection of 2G, 3G and LTE uptake between 2010 (Actual) and 2020 (Expected). The dynamics is based on latest Pyramid Research cellular projections for WEU, US, APAC, LA & CEE between 2010 to 2017. The “Last Mile”, 2018 – 2020, is based on reasonable dynamic extrapolations based on the prior period with a stronger imposed emphasis on LTE growth. Of course Pyramid Research provides one view of the technology migration and given the uncertainty on market dynamics and pricing policies are simply one view on how the cellular telco world will develop. This said, I tend to find Pyramid Research getting reasonably close to actual developments and the trends across the various markets are not that counter-intuitive.
For the US Market LTE is expected to grow very fast and reach a penetration level beyond 60% by 2020. For the other markets LTE is expected to evolve relative sluggish with an uptake percentage of 20%+/-5% by 2020. It should be remembered that all projections are averages. Thus within a market, for a specific country or operator, the technology shares could very well differ somewhat from the above.
The growth rates for LTE customer uptake over the period; 2010/2011 – 2020, 2015 – 2020 and respective LTE share in 2020.
WEU 2010-2020: 87%, 2015 – 2020: 24%, share in 2020: 20%.
USA 2010-2020: 48%, 2015 – 2020: 19%, share in 2020: 62%.
APAC 2010-2020: 118%, 2015 – 2020: 61%, share in 2020: 30%.
CEE 2011-2020: 168%, 2015 – 2020: 37%, share in 2020: 20%.
LA 2010-2020: 144%, 2015 – 2020: 37%, share in 2020: 40%.
Yes the LTE growth rates are very impressive when compared to the initial launch year with the very initial uptake. As already pointed out in my Blog …. growth rates in referenced back to a penetration less than 2% has little practical meaning. The average LTE uptake rate across all the above markets between 2012 to 2020 is 53%+/-17% (highest being APAC and Lowest being USA).
What should be evident from the above technology uptake charts are that
- 3G remains strong even in 2020 (though likely dominated by prepaid at that time).
- 2G will remain for a longtime in both CEE & APAC, even toward 2020.
In the scenario where we have a factor 100 in growth of usage between 2012 and 2020, which is a CAGR of 78%, the growth of usage per user would to be 16% pa at an annual uptake rate of 53%. However, without knowing the starting point of the LTE data usage (which initially will be very low as there is almost not users), these growth rates are not of much use and certainly cannot be used to make up any conclusions about congestion or network dire straits.
Example based on European Growth Figures:
A cellular networks have 5 mio customers, 50% Postpaid.
Network has 4,000 cell sites (12,000 sectors) that by 2020 covers both UMTS & LTE to the same depth.
in 2020 the operator have allocated 2×20 MHz for 3G & 2×20 MHz for LTE. Remaining 2G customers are one a single shared GSM network support all GSM traffic in country with no more than 2x5MHz.
By 2020 the cellular operator have ca. 4Mio 3G users and ca. 0.9Mio LTE users (remaining 100 thousand GSM customers are the real Laggards).
The 3G uptake growth rate ‘2010 – ‘2020 was 7%, between ’10 – ’12 it was 25%. 3G usage growth would not be very strong as its a blend of Late Majority and Laggards (including a fairly large Prepaid segment that appear hardly to use Cellular data).
The LTE uptake growth rate ‘2010 – ‘2020 was 87%, between ’10 – ’12 it was 458%. The first 20% of LTE would like be consisting of Innovators and Early Adopters. Thus, usage growth of LTE should be expected to be more aggressive than for 3G.
Let’s assume that 20% of the cell sites carries 50% of the devices and for simplicity also data traffic (see for example my Slideshare presentation “Capacity Planning in Mobile Data Networks Experiencing Exponential Growth in Demand” which provides evidence for such distribution).
So we have ca. 800 3G users per sector (or ca. 40 3G users per sector per MHz). By 2020, one would likewise for LTE anticipate ca. 200 LTE users per sector (or ca. 10 LTE users per sector per MHz). Note that no assumptions of activity rate has been imposed.
Irrespective of growth rate we need to ask ourselves whether 10 LTE users per sector per MHz would pose a congested situation (in the busy hour). Assume that the effective LTE spectral efficiency across a macro cellular cell would be 5Mbps/MHz/Sector. So the 10 LTE users could on average share up-to 100Mbps (@ 20MHz DL).
For 3G, where we would have 40 3G users per sector per MHz. Similar (very simple) considerations allows to conclude that the 40 4G users would have no more than 40Mbps (under semi-ideal radio conditions and @ 20MHz DL). This could be a lot more demanding and customer affecting than the resulting LTE demand, despite LTE having substantially higher growth rate than we saw for 3G over the same period.
High growth rates does not default result in cellular network breakdown. It is the absolute traffic load (in the Busy Hour) that matters.
The growth of of cellular data usage between 2010 and 2020 is likewise going to be awesome (it would be higher than above technology uptake rates).. but also pretty meaningless.
Growth rates only matter in as much as growth brings an absolute demanded traffic level above the capability of the existing network and spectral resources (supplied traffic capacity).
Irrespective of a growth rate is high, medium or low … all can cause havoc in a cellular network … some networks will handle a 1,000x without much ado, others will tumble at 250x whatever the reference point level (which also includes the network design and planning maturity levels).
However, what is important is how to provide more (economical) cellular capacity avoiding;
- Massive Congestion and loss of customer service.
- Economical devastation as operator tries to supply network resources for an un-managed cellular growth profile.
(Source: adapted from K.K. Larsen “Spectrum Limitations Migrating to LTE … a Growth Market Dilemma?“)
The Perfect Mobile Data Storm … Smartphone Challenge and by that the Signalling Storm …
Mobile Operators hit by the Mobile Data Tsunami … tumbling over mobile networks … leading to
Financial disaster (as cost of providing mobile data exceeds the revenues earned from mobile data).
as Mobile Operators tries to cope with hyper-inflationary growth of data usage.
Will LTE be ready in time?
Will LTE be sufficient remedying the mobile data growth observed the last couple of years?
The Mobile Industry would have been better off if Data Consumption had stayed “Fixed”? Right! …Right?
At this time my Twitter Colleague Dean Bubley (@Disruptivedean) will be near critical meltdown 😉 …
Dean Bubley (Disruptive Wireless) is deeply skeptical about the rhetoric around the mobile data explosion and tsunamis, as he has accounted for in a recent Blog “Mobile data traffic growth – a thought experiment and forecast”. Dean hints at possible ulterior motives behind the dark dark picture of the mobile data future painted by the Mobile Industry.
I do not share Dean’s opinion (re:ulterior motives in particular, most of his other thoughts on cellular data growth are pretty OK!). It almost suggest a Grand Mobile Industry Conspiracy in play … Giving the Telco Industry a little too much credit … Rather than the simple fact that we as an industry (in particular the Marketing side of things) tends to be govern by the short term. Being “slaves of anchoring bias” to the most recent information available to us (i.e, rarely more than the last 12 or so month).
Of course Technology Departments in the Mobile Industry uses the hyper-growth of Cellular Data to get as much Capex as possible. Ensure sufficient capacity overhead can be bought and build into the Mobile Networks, mitigating the uncertainty and complexity of Cellular data growth.
Cellular Data is by its very nature a lot more difficult to forecast and plan for than the plain old voice service.
The Mobile Industry appears to suffer from Mobile Data Auctusphopia … The Fear of Growth (which is sort of “funny” as the first ca. 4 – 5 years of UMTS, we all were looking for growth of data, and of course the associated data revenues, that would make our extremely expensive 3G spectrum a somewhat more reasonable investment … ).
The Mobile Industry got what it wished for with the emergence of the Smartphone (Thanks Steve!).
Why Data Auctusphopia? … ?
Let’s assume that an operator experienced a Smartphone growth rate of 100+% over the last 12 month. In addition, the operator also observes the total mobile data volume demand growing with 250+% (i.e., not uncommon annual growth rates between 2010 and 2011). Its very tempting (i.e., it is also likely to be very wrong!) to use the historical growth rate going forward without much consideration for the underlying growth dynamics of technology uptake, migration and usage-per-user dynamics. Clearly one would be rather naive NOT to be scared about the consequences of a sustainable annual growth rate of 250%! (irrespective of such thinking being flawed).
Problem with this (naive) “forecasting” approach is that anchoring on the past is NOT likely to be a very good predictor for longer/long term expectations.
THE GROWTH ESSENTIALS – THE TECHNOLOGY ADAPTATION.
To understand mobile data growth, we need to look at minimum two aspects of Growth:
- Growth of users (per segment) using mobile data (i.e., data uptake).
- Growth of data usage per user segment (i.e., segmentation is important as averages across a whole customer base can be misleading).
i.e., Growth can be decomposed into uptake rate of users and growth of these users data consumption, i.e., CAGR_Volume = (1 + CAGR_Users) x (1+CAGR_Usage) – 1.
The segmentation should be chosen with some care, although a split in Postpaid and Prepaid should be a minimum requirement. Further refinements would be to include terminal type & capabilities, terminal OS, usage categories, pricing impacts, etc.. and we see that the growth prediction process very rapidly gets fairly complex, involving a high amount of uncertain assumptions. Needless to say that Growth should be considered per Access Technology, i.e., split in GPRS/EDGE, 3G/HSPA, LTE/LTE-a and WiFi.
Let’s have a look at (simple) technology growth of a new technology or in other words the adaptation rate.
The above chart illustrates the most common uptake trend that we observe in mobile networks (and in many other situations of consumer product adaptation). The highest growth rates are typically observed in the beginning. Over time the growth rate slows down as saturation is reached. In other words the source of growth has been exhausted.
At Day ZERO there where ZERO 3G terminals and their owners.
At Day ONE some users had bought 3G terminals (e..g, Nokia 6630).
Between Zero and Some, 3G terminals amounts to an Infinite growth rate … So Wow! … Helpful … Not really!
In most countries it has taken on average 5 years to reach a 20% 3G penetration.
The KA moment of 3G uptake really came with the introduction of the iPhone 3 (June 9 2008) and HTC/Google G1 (October 2008) smartphones.
Simplified example: in 4 years a Mobile Operator’s 3G uptake went from 2% to 20%. An compounded annual growth rate (CAGR) of at least 78%. Over the same period the average mobile (cellular!) data consumption per user increased by a factor 15 (e.g., from 20MB to 300MB), which gives us a growth rate of 97% per anno. Thus the total volume today is at least 150 times that of 4 years ago or equivalent to an annual growth rate 250%!
Geoffrey A. Moore’s book “Crossing the Chasm” (on Marketing and Selling High-Tech products to mainstream customers) different segmentation of growth have been mapped out in (1) Innovators (i.e., first adopters), (2) Early Adoptors, (3) Early Majority, (4) Late Majority and (5) The Laggards.
It is fairly common to ignore the Laggards in most analysis, as these do not cause direct problems for new technology adaptation. However, in mobile networks Laggards can become a problem if they prevent the operator to re-farm legacy spectrum by refusing to migrate, e.g., preventing GSM 900MHz spectrum to be re-purposed to UMTS or GSM 1800 to be re-purposed to LTE.
Each of the stages defined by Geoffrey Moore correspond to a different time period in the life cycle of a given product and mapped to above chart on technology uptake looks like this:
In the above “Crossing the Chasm” chart I have imposed Moore’s categories on a logistic-like (or S-curve shaped) cumulative distribution function rather than the Bell Shaped (i.e., normal distribution) chosen in his book.
3G adaptation has typically taken ca. 5+/-1 years from launch to reach the stage of Early Majority.
In the mobile industry its fairly common for a user to have more than 1 device (i.e., handset typically combined with data stick, tablet, as well as private & work related device split, etc..). In other words, there are more mobile accounts than mobile users.
In 2011, Western Europe had ca. 550 Million registered mobile accounts (i.e., as measured by active SIM Cards) and a population of little over 400 Million. Thus a mobile penetration of ca. 135% or if we consider population with a disposable income 160+%.
The growth of 3G users (i.e., defined as somebody with a 3G capable terminal equipment) have been quiet incredible with initial annual growth rates exceeding 100%. Did this growth rate continue? NO it did NOT!
As discussed previously, it is absolutely to be expected to see very high growth rates in the early stages or technology adaptation. The starting is Zero or Very Low and incremental additions weight more in the beginning than later on in the adaptation process.
The above chart (“CAGR of 3G Customer Uptake vs 3G Penetration”) illustrates the annual 3G uptake growth rate data points, referenced to the year of 10% penetration, for Germany, Netherlands and USA (i.e., which includes CDMA2000). It should be noted that 3G Penetration levels above 50+% are based on Pyramid Research projections.
The initial growth rates are large and then slows down as the 3G penetration increases.
As saturation is reached the growth rate comes almost to a stop.
3G saturation level is expected to be between 70% and 80+% … When LTE takes over!
For most Western European markets the saturation is expected to be reached between 2015 – 2018 and sooner in the USA … LTE takes over!
The (diffusion) process of Technology uptake can be described by S-shaped curves (e.g., as shown in “Crossing the Chasm”). The simplest mathematical description is a symmetric logistic function (i..e, Sigmoid) that only depends on time. The top solid (black) curve shows the compounded annual growth rate, referenced to the Year of 10% 3G penetration, vs 3G penetration. Between 10% and 15% 3G penetration the annual growth rate is 140%, between 10% and 50% its “only” 108% and drops to 65% at 90% 3G penetration (which might never be reached as users starts migrating to LTE).
The lower dashed (black) curve is a generalized logistic function that provides a higher degree of modelling flexibility accounting for non-symmetric adaptation rate pending on the 3G penetration. No attempt of curve fitting to the data has been applied in the chart above. I find the generalized logistic function in general can be made to agree well with actual uptake data. Growth here is more modest with 72% (vs 140% for the Simple Logistic representation), 57% (vs 108%) and 35% (vs 65%). Undershooting in the beginning of the growth process (from 10% ->;20%: Innovators & Early Adopters phase) but representing actual data after 20% 3G penetration (Early and Late Majority).
Finally, I have also included the Gomperz function (also sigmoid) represented by light (grey) dashed line in between the Simple and Generalized Logistic Functions. The Gomperz function has found many practical applications describing growth. The parameters of the Gormperz function can be chosen so growth near lower and upper boundaries are different (i.e., asymmetric growth dynamics near the upper and lower asymptotes).
As most mature 3G markets have passed 50% 3G penetration (i.e., eating into the Late Majority) and approaching saturation, one should expect to see annual growth rates of 3G uptake to rapidly reduce. The introduction of LTE will also have a substantial impact of the 3G uptake and growth.
Of course the above is a simplification of the many factors that should be considered. It is important that you;
- Differentiate between Prepaid & Postpaid.
- Consider segmentation (e.g., Innovator, First Adopter, Early Majority & Late Majority).
- Projections should Self-consistent with market dynamics: i.e., Gross Adds, Churn, hand-down and upgrade dynamics within Base, etc…
THE GROWTH ESSENTIALS – THE CELLULAR USAGE.
In the following I will focus on Cellular (or Mobile) data consumption. Thus any WiFi consumption on public, corporate or residential access points are deliberately not considered in the following. Obviously, in cellular data demand forecasting WiFi usage can be important as it might be a potential source for cellular consumption via on-loading. In particular with new and better performing cellular technologies are being introduced (i.e., LTE / LTE advanced). Also price plan policy changes might result in higher on-load of the cellular network (at least if that network is relative unloaded and with lots of spare capacity).
It should come as no surprise that today the majority of mobile data consumers are Postpaid.
Thus, most of the average data usage being reported are based on the Postpaid segment. This also could imply that projecting future usage based on past and current usage could easily overshoot. Particular if Prepaid consumption would be substantially lower than Postpaid data consumption. The interesting and maybe somewhat surprising is that Active Prepaid mobile data consumers can have a fairly high data consumption (obviously pending price plan policy). In the example shown below, for an Western European Operator with ca. 50%:50% Postpaid – Prepaid mix, the Postpaid active mobile data consumers are 85% of total Postpaid Base. The Mobile Data Active Prepaid base only 15% (though growing fast).
The illustrated data set, which is fairly representative for an aggressive smartphone operation, have an average data consumption of ca. 100MB (based on whole customer base) and an Active Average consumption of ca. 350MB. Though fairly big consumptive variations are observed within various segments of the customer base.
The first 4 Postpaid price plans are Smartphone based (i.e., iOS and Android) and comprises 80% of all active devices on the Network. “Other Postpaid” comprises Basic Phones, Symbian and RIM devices. The Active Prepaid device consumption are primarily Android based.
We observe that the following:
- Unlimited price plan results in the highest average volumetric usage (“Unlimited Postpaid” & “Postpaid 1″ price plans are comparable in device composition. The difference is in one being unlimited the other not).
- Unlimited average consumption dominated by long tail towards extreme usage (see chart below).
- Smartphone centric postpaid price plans tend to have a very high utilization percentage (90+%).
- Active Prepaid Data Consumption (200MB) almost as high as less aggressive smartphone (210MB) price plans (this is however greatly depending on prepaid price policy).
The above chart “Cellular Data Consumption Distribution” illustrates the complexity of technology and cellular data consumption even within different price plan policies. Most of the distributions consist of up-to 4 sub-segments of usage profiles.Most notably is the higher consumption segment and the non-/very-low consumptive segment.
There are several observations worth mentioning:
- Still a largely untapped Prepaid potential (for new revenue as well as additional usage).
- 15% of Postpaid consumers are data inactive (i.e., Data Laggards).
- 40% of active Postpaid base consumes less than 100MB or less than 1/4 of the average high-end Smartphone usage.
Clearly, the best approach to come to a meaningful projection of cellular data usage (per consumer) would be to consider all the above factors in the estimate.
However, there is a problem!
The Past Trends may not be a good basis for predicting Future Trends!
Using The Past we might risk largely ignoring:
- Technology Improvements that would increase cellular data consumption.
- New Services that would boost cellular data usage per consumer.
- New Terminal types that would lead to another leapfrog in cellular data consumption.
- Cellular Network Congestion leading to reduced growth of data consumption (i.e., reduced available speed per consumer, QoS degradation, etc..).
- Policy changes such as Cap or allowing Unlimited usage.
Improvements in terminal equipment performance (i.e., higher air interface speed capabilities, more memory, better CPU performance, larger / better displays, …) should be factored into the cellular data consumption as the following chart illustrates (for more details see also Dr. Kim’s Slideshare presentation on “Right Pricing Mobile Broadband: Examing The Business Case for Mobile Broadband”).
I like to think about every segment category has its own particular average data usage consumption. A very simple consideration (supported by real data measurements) would to expect to find the extreme (or very high) data usage in the Innovator and Early Adopter segments and as more of the Majority (Early as well as Late) are considered the data usage reduces. Eventually at Laggards segment hardy any data usage is observed.
It should be clear that the above average usage-distribution profile is dynamic. As time goes by the distribution would spread out towards higher usage (i.e., the per user per segment inflationary consumption). At the same time as increasingly more of the customer base reflects the majority of the a given operators customer base (i.e., early and late majority)
Thus over time it would be reasonable to expect that?
The average volumetric consumption could develop to an average that is lower than when Innovators & Early Adopters dominated.
Well maybe!? Maybe not?!
The usage dynamics within a given price plan is non-trivial (to say the least) and we see in general a tendency towards higher usage sub-segment (i.e., within a given capped price plan). The following chart (below) is a good example of the data consumption within the same Capped Smartphone price plan over an 12 month period. The total amount of consumers in this particular example have increased 2.5 times over the period.
It is clear from above chart that over the 12 month period the higher usage sub-segment has become increasingly popular. Irrespective the overall average (including non-active users of this Smartphone price plan) has not increased over the period.
Though by no means does this need to be true for all price plans. The following chart illustrates the dynamics over a 12 month period of an older Unlimited Smartphone price plan:
Here we actually observe a 38% increase in the average volumetric consumption per customer. Over the period the ca. 50% of customers in this price plan have dropped out leaving primarily heavy users enjoy the benefits on unlimited consumption.
There is little doubt that most mature developed markets with a long history of 3G/HSPA will have reached a 3G uptake level that includes most of the Late Majority segment.
However, for the prepaid segment it is also fair to say that most mobile operators are likely only to have started approach and appeal to Innovators and Early Adopters. The chart below illustrates the last 12 month prepaid cellular consumptive behavior.
In this particular example ca. 90% of the Prepaid customer base are not active cellular data consumers (this is not an unusual figure). Even over the period this number has not changed substantially. The Active Prepaid consumes on average 40% more cellular data than 12 month ago. There is a strong indication that the prepaid consumptive dynamics resembles that Postpaid.
Data Consumption is a lot more complex than Technology Adaptation of the Cellular Customer.
The data consumptive dynamics is pretty much on a high level as follows;
- Late (and in some case Early) Majority segments commence consuming cellular data (this will drag down the overall average).
- Less non-active cellular data consumers (beside Laggards) ->; having an upward pull on the average consumption.
- (in particular) Innovator & Early Adopters consumption increases within limits of given price plan (this will tend to pull up the average).
- General migration upwards to higher sub-segmented usage (pulling the overall average upwards).
- If Capped pricing is implemented (wo any Unlimited price plans in effect) growth will slow down as consumers approach the cap.
We have also seen that it is sort of foolish to discuss a single data usage figure and try to create all kind of speculative stories about such a number.
BRINGING IT ALL TOGETHER.
So what’s all this worth unless one can predict some (uncertain) growth rates!
WESTERN EUROPE (AT, BE, DK, FIN, F, DE,GR,IRL,IT,NL,N,P, ESP, SE, CH, UK,)
3G uptake in WEU was ca. 60% in 2011 (i.e., ca. 334 Million 3G devices). This correspond to ca. 90% of all Postpaid customers and 32% of all Prepaid users have a 3G device. Of course it does not mean that all of these are active cellular data users. Actually today (June 2012) ca. 35% of the postpaid 3G users can be regarded as non-active cellular user and for prepaid this number may be as high as 90%.
For Western Europe, I do not see much more 3G additions in the Postpaid segment. It will be more about replacement and natural upgrade to higher capable devices (i.e., higher air interface speed, better CPU, memory, display, etc..). We will see an increasing migration from 3G Postpaid towards LTE Postpaid. This migration will really pick-up between 2015 and 2020 (Western Europe lacking behind LTE adaptation in comparison with for example USA and some of the Asian Pacific countries). In principle this could also mean that growth of 3G postpaid cellular data consumption could rapidly decline (towards 2020) and we would start seeing overall cellular data usage decline rather than increase of 3G Postpaid data traffic.
Additional Cellular data growth may come from the Prepaid segment. However, still a very large proportion of this segment is largely data in-active in Western Europe. There are signs that, depending on the operator prepaid price plan policy, prepaid consumption appears to be fairly similar to Postpaid on a per user basis.
3G Growth Projections for Western Europe (reference year 2011):
Above assumes that usage caps will remain. I have assumed this to be 2GB (on average for WEU). Further in above it is assumed that the Prepaid segment will remain largely dominated by Laggards (i.e., in-active cellular data users) and that the active Prepaid cellular data users have consumption similar to Postpaid.
Overall 3G Cellular data growth for Western Europe to between 3x to no more than 4x (for very aggressive prepaid cellular data uptake & growth) over the period 2011 to 2016.
Postpaid 3G Cellular data growth will flatten and possible decline towards the end of 2020.
More agresive LTE Smartphone uptake (though on average across Western European appears unlikely) could further release 3G growth pains between 2015 – 2020.
Innovators & Early Adopters, who demand the most of the 3G Cellular Networks, should be expected to move quickly to LTE (as coverage is provided) off-loading the 3G networks over-proportionally.
The 3G cellular growth projections are an Average consideration for Western Europe where most of the postpaid 3G growth has already happen with an average of 60% overall 3G penetration. As a rule of thumb: the lower the 3G penetration the higher the CAGR growth rates (as measured from a given earlier reference point).
In order to be really meaningful and directly usable to a Mobile Operator, the above approach should be carried out for a given country and a given operator conditions.
The above growth rates are lower but within range of my Twitter Colleague Dean Bubley (@Disruptivedean) states as his expectations for Developed Markets in his Blog “Mobile data traffic growth – a thought experiment and forecast”. Not that it makes it more correct or more wrong! Though for any one who spend a little time on the growth fundamentals of existing Western European mobile data markets would not find this kind of growth rate surprising.
So what about LTE growth? … well given that we today (in Western Europe) have very very little installed base LTE devices on our networks … the growth or uptake (seen as on its own) is obviously going to be very HIGH the first 5 to 7 years (depending on go to market strategies).
What will be particular interesting with the launch of LTE is whether we will see an on-loading effect of the cellular LTE network from todays WiFi usage. Thomas Wehmeier (Principal Analyst, Telco Strategy, Informa @Twehmeier) has published to very interesting and study worthy reports on Cellular and WiFi Smartphone Usage (see “Understanding today’s smartphone user: Demystifying data usage trends on cellular & Wi-Fi networks” from Q1 2012 as well as Thomas’s sequential report from a couple of weeks ago “Understanding today’s smartphone user: Part 2: An expanded view by data plan size, OS, device type and LTE”).
Given the dramatic beginning of my Blog concerning the future of the Mobile Industry and Cellular data … and to be fair to many of the valid objections that Dean Bubley‘s has raised in his own Blog and in his Tweets … I do owe the reader who got through this story some answer …
I have no doubt (actually I know) that there mobile operators (around the world) that already today are in dire straits with their spectral resources due to very aggressive data growth triggered by the Smartphone. Even if growth has slowed down as their 3G customers (i.e., Postpaid segment) have reached the Late Majority (and possible fighting Laggards) that lower growth rate still causes substantial challenges to provide sufficient capacity & not to forget quality.
Yes … 3G/HSPA+ Small Cells (and DAS-like solutions) will help mitigate the growing pains of mobile operators, Yes … WiFi off-load too, Yes … LTE & LTE-advanced too will help. Though the last solution will not be much of a help before critical mass of LTE terminals have been reached (i.e., ca. 20% = Innovators + Early Adopters).
Often forgotten is traffic management and policy remedies (not per see Fair Use Policy though!) are of critical importance too in the toolset of managing cellular data traffic.
Operators in emerging markets and in markets with a relative low 3G penetration, better learn the Growth Lessons from the AT&T’s and other similar Front Runners in the Cellular Data and Smartphone Game.
- Unless you manage cellular data growth from the very early days, you are asking for (in-excusable) growth problems.
- Being Big in terms of customers are not per see a blessing if you don’t have proportionally the spectrum to support that Base.
- Don’t expect to keep the same quality level throughout your 3G Cellular Data life-cycle,!
- Accept that spectral overhead per customer obviously will dwindle as increasingly more customers migrate to 3G/HSPA+.
- Technology Laggards should be considered as the pose an enormous risk to spectral re-farming and migration to more data efficient technologies.
- Short Term (3 – 5 years) … LTE will not mitigate 3G growing pains (you have a problem today, its going to get tougher and then some tomorrow).
Is Doom knocking on Telecom’s Door? … Not very Likely (or at least we don’t need to open the door if we are smart about it) … Though if an Operator don’t learn fast and be furiously passionate about economical operation and pricing policies … things might look a lot more gloomy than what needs to be.
STAY TUNED FOR A PART 2 … taking up the last part in more detail.
To great friends and colleagues that have challenged, suggested, discussed, screamed and shouted (in general shared the passion on this particular topic of Cellular Data Growth) about this incredible important topic for our Mobile Industry (and increasingly Fixed Broadband). I am in particular indebted to Dejan Radosavljevik for bearing with my sometimes crazy data requests (at odd h0urs and moments) and last but not least thinking along with me on what mobile data (cellular & WiFi) really means (though we both have come to the conclusion that being mobile is not what it means. But that is a different interesting story for another time).
“Figures often beguile me” leading to the statement that “There are three kinds of lies: lies, damned lies, and statistics.” (Mark Twain, 1906).
We are so used to averages … Read any blog or newspaper article trying to capture a complex issue and its more than likely that you are being told a story of averages … Adding to Mark Twain’s quote on Lies, in our data intense world ” The Average is often enough the road to an un-intentional Lie” .. or just about “The Average Lie” .
Imagine this! Having (at the same time) your feet in the oven at 80C and you head in the freezer at -6C … You would be perfectly OK! On average! as your average temperature would equal 80C + (-6C) divided by 2 which is 37C, i.e., the normal and recommended body temperature for an adult human being. However both your feet and your head is likely to suffer from such an experiment (and therefore really should not be tried out … or left to Finns used to Sauna and Icy water … though even the Finns seldom enjoyed this simultaneously).
Try this! Add together the age of the members your household and divide by the number of members. This would give you the average age of your household … does the average age you calculated have any meaning? … if you have young children or grandparents living with you, I think that there is a fairly high chance that the answers to that question is NO! … The average age of my family”s household is 28 years. However, this number is a meaningless average representation of my household. It is 20 times higher than my sons age and about 40% lower than my own age.
Most numbers, most conclusions, most stories, most (average) analysis are based on an average representation of one or another Reality …. and as such can easily lead to Reality Distortion.
When we are presented with averages (or mean values as it is also called in statistics), we tend to substitute Average with Normal and believe that the story represents most of us (i.e., statistically this means about 68% of us all). More often than not we sit back with the funny feeling that if what we just read is “normal” then maybe we are not.
On mobile data consumption (I ll come back to Smartphone data consumption a bit later) … There is one (non-average) truth about mobile data consumption that has widely (and correctly) been communicated …
Very few mobile customers (10%) consumes the very most of the mobile data traffic (90%).
Lets just assume that a mobile operator make claim to an average 200MB monthly consumption (source: http://gigaom.com/broadband/despite-critics-cisco-stands-by-its-data-deluge/). Lets assume that 10% of customer base generating 90% of the traffic. It follows that the high usage segment has an average volumetric usage of 1,800MB and the low usage segment an average volumetric usage of only 22MB. In other words 10% of the customer base have 80+ times higher consumption than the remaining 90%. The initial average consumption (taken across the whole customer base) of 200MB communicated is actually 9 times higher than the average consumption of 90% of the customer base. It follows (with some use case exceptions) that the 10% high usage segment spends a lot more Network Resources and Time. The time the high usage segment spend actively with their device are likely to be a lot higher than the 90% low usage segment.
The 200MB is hardly normal! It is one of many averages that can be calculated. Obviously 200MB is a lot more “sexy” than to state that 90% of the customer base consumes typically 22MB.
Do Care about Measurement and Data Processing!
What further complicates consumptive values being quoted is how the underlying data have been measured, processed and calculated!
- Is the averaging done over the whole customer base?,
- Is the averaging done over active customers?, or
- A subset of active customers (i.e., 2G vs 3G, 3G vs HSPA+ vs LTE vs WiFi, smartphone vs basic phone, iPad vs iPhone vs Laptop, prepaid vs postpaid, etc..) or
- A smaller subset based on particular sample criteria (i.e., iOS, Android, iPad, iPhone, Galaxy, price plan, etc..) or availability (mobile Apps installed, customer approval, etc..). or …
Without knowing the basis of a given average number any bright analysis or cool conclusion might be little more than Conjecture or Clever Spin.
On Smartphone Usage
One the most recent publicized studies on Smartphone usage comes from O2/Telefonica UK (Source: http://mediacentre.o2.co.uk/Press-Releases/Making-calls-has-become-fifth-most-frequent-use-for-a-Smartphone-for-newly-networked-generation-of-users-390.aspx). The O2 data provides an overview of average daily Smartphone usage across 10 use case categories.
The O2’s Smartphone statistics have been broken down in detail by one of our industry”s brightest Tomi Ahonen (A Must Read http://www.communities-dominate.blogs.com/ though it is drowning in his Nokia/Mr. Elop “Howler Letters”). Tomi points out the Smartphone’s disruptive replacement potential of many legacy consumer products (e.g., think: watch, alarm clock, camera, etc..).
The O2 Smartphone data is intuitive and exactly what one would expect! Boring really! Possible with the exception of Tomi’s story telling (see above reference)! The data was so boring that The Telegraph (source: http://www.telegraph.co.uk/technology/mobile-phones/9365085/Smartphones-hardly-used-for-calls.html) had to conclude that “Smartphones Hardly Used for Calls”. Relative to other uses of course not really an untruth.
Though The Telegraph did miss 9or did not care) the fact that both Calls and SMS appeared to be what one would expect (and why would a Smartphone generate more Voice and SMS than Normal? … hmmmm). Obviously, the Smartphone is used for a lot of other stuff than calling and SMSing! The data tells us that an average Smartphone user (whatever that means) spend ca. 42 minutes on web browsing and social networking while “only” 22 minutes on Calls and SMS (i.e., actually 9 minutes of SMS sounds more like a teenager than a high-end smartphone user … but never mind that!). There are lots of other stuff going on with that Smartphone. In fact out of the total daily usage of 128 minutes only 17% of the time (i.e., 22 minutes) is used for Plain Old Mobile Telephony Services (The POMTS). We do however find that both voice minutes and legacy messaging consumption are declining faster in the Smartphone segment than for Basic Phones (which are declining rapidly as well) as OTT Mobile Apps alternatives substitute POMTS (see inserted chart from http://www.slideshare.net/KimKyllesbechLarsen/de-risking-the-broadband-business-model-kkl2411201108x).
I have no doubt that the O2 data represents an averaging across a given Smartphone sample, the question is how does this data help us to understand the Real Smartphone User and his behavior.
So how did O2 measure this data?
(1) To be reliable and reasonable, data collection should be done by an App residing in the O2 customer’s smartphone. An alternative (2) would be deep packet inspection (dpi) but this would only capture network usage which can (and in most cases will be) very different from the time the customer actively uses his Smartphone. (3) Obviously the data could also be collected by old fashion Questionnaires being filled in. This would be notoriously unreliable and I cannot imagine this being the source.
Thus, I am making the reasonable guess that the Smartphone Data Collection is mobile App based.
“Thousand and 1 Questions”: Does the data collected represents a normal O2 Smartphone user? or a particular segment that don’t mind having a Software Sniffer (i.e., The Sniffer) on the used device reporting his behavior? Is “The Sniffer” a standard already installed (and activated?) App on all Smartphone devices?, only on a certain segment? or is it downloadable? (i..e, which would require a certain effort from the customer), is the collection done for both prepaid & contract customers, both old and new smartphones (i.e., usage patterns depends on OS version/type, device capabilities such as air interface speed DL & UL, CPU, memory management, etc..) … is WiFi included or excluded?, what about Apps running in the background (are these included), etc…
I should point out that it is always much easier to poke at somebody else data analysis than it often is to collect, analyse and present such data. Though, depending on the answer to the above “1,000 + 1” questions the O2 data either becomes a fair representation of an O2 Smartphone customer or “just” an interesting data point for one of their segments.
If the average Smartphone cellular (i.e., no WiFi blend) monthly consumption in UK is ca. 450MB (+/-50MB) and if the consumer had on average cellular speed of 0.5Mbps (i.e., likely conservative with exception of streaming services which could be lower), one would expect that Time spend consuming Network Resources would be no more than 120 minutes per month or 5 minutes per day (@ R99 384kbps this would be ca. 6 min per day). If I would chose a more sophisticated QoS distribution, the Network Consumption Time would anyway not change with an order of magnitude or more.
So we have 5 minutes of Mobile Data Network Time Consumption daily versus O2’s Smartphone usage time of 106 minutes (wo Calls & SMS) … A factor 22 in difference!
For every minutes of mobile data network consumption the customer spends 20+ minutes actively with his device (i.e., reading, writing, playing, etc..).
So …. Can we trust the O2 Smartphone data?
Trend wise the data certainly appear reasonable! Whether the data represents a majority of the O2 smartphone users or not … I doubt somewhat. However, without having a more detailed explanation of data collection, sampling, and analysis it’s difficult to conclude how representable the O2 Smartphone data really is for their Smartphone customers.
Alas this is the problem with most of the mobile data user and usage statistics being presented to the public as an average (i.e., have had my share of this challenge as well).
Clearly we spend a lot more time with our device than the device spends actively at the mobile network. This trend has been known for a long time from the fixed internet. O2 points out that the Smartphone, with its mobile applications, has become the digital equivalent to a “Swiss Army Knife” and as a consequence (as Tomi also points out in his Blog) already in the process of replacing a host of legacy consumer devices, such as the watch, alarm clock, camera (both still pictures and video), books, music radios, and of course last but not least substituting The POMTS.
I have made argued and shown examples that Average Numbers we are presented with are notorious by character. What other choices do we have? Would it be better to report the Median? rather than the Average (or Mean)? The Median divides a given consumptive distribution in half (i.e., 50% of customers have a consumption below the Median and 50% above). Alternative we could report the Mode which would give us the most frequent consumption across our consumer distribution.
Of course if consumer usage was distributed normally (i.e., symmetric bell shaped) Mean, Median and Mode would be one and the same (and we would all be happy and bored). Not so much luck!
Most consumptive behaviors tends to be much more skewed and asymmetric (i.e., “the few takes the most”) than the normal distribution (that most of us instinctively uses when we are presented with figures). Most people are not likely to spend much thought on how a given number is calculated. However, it might be constructive to provide a %tage of the customers for which their usage is below the reported average. The reader should however note that in case the percentage figure is different from 50%, the consumptive distribution is skewed and
onset of Reality Distortion has occurred.
In case you are contemplating starting a wireless broadband, maybe even mobile broadband, greenfield operation in Europe there will be plenty of opportunity the next 1 to 2 years.Will it be a great business in Western Europes mature market? – probably not – but it still might be worth pursuing. The mobile incumbants will have a huge edge when it comes to spectrum and capacity for growth which will be very difficult to compete against for a Greenfield with comparable limited spectrum.Upcoming 2.50 GHz to 2.69 GHz spectrum (i.e., 2.6 GHz for short) auctions, often refered to as the UMTS extension band spectrum, are being innitiated in several European countries (United Kingdom, The Netherlands, Sweden, etc..). Thus, we are talking about 190 MHz of bandwidth up for sale to the highest bidder(s). Compared this with the UMTS auction at the 2.1 GHz band which was 140 Mhz. The European Commission has recommended to split up the 190 MHz into 2×70 MHz for FDD operations (basically known as UMTS extension band in some countries) and a (minimum ) 1×50 MHz part for TDD operation.
In general it is expected that incumbent mobile operators (e.g., Vodafone, T-Mobile, KPN, Orange, Telefonica/O2, etc..) will bid for the 2.6 GHz FDD spectrum, supplementing their existing UMTS 2.10 GHz spectrum mitigating possible growth limitation they might foresee in the future. The TDD spectrum is in particular expected to be contended by new companies, greenfield operations as well as fixed-line operators (i.e, BT) with the ambition to launch broadband wireless access BWA (i..e, WiMAX) networks. Thus, new companies which intend to compete with today’s mobile operators and their mobile broadband data proporsitions. Furthermore, just as mobile operators with broadband data competes with fixed broadband business (i.e., DSL & cable); so is it expected that the new players would likewise compete with both existing fixed and mobile broadband data proporsitions. Obviously, new business might not limit their business models to broadband data but also provide voice offerings.
Thus, the competive climate would become stronger as more players contend for the same customers and those customer’s wallet.
Let’s analyse the Greenfields possible business model as the economical value of starting up a broadband data business in mature markets of Western Europe. The analysis will be done on a fairly high level which would give us an indication of the value of the Greenfield Business model as well as what options a new business would have to optimize that value.
FDD vs TDD Spectrum
The 2.6 GHz auction is in its principles assymetric, allocating more bandwidth to FDD based operation than to TDD-based Broadband Wireless Access (BWA) deployment; 2×70 MHz vs 1×50 MHz. It appears fair to assuming that most incumbent operators will target 2×20 MHz FDD which coincide with the minimum bandwidth target for the Next-Generation Mobile Network (NGMN)/Long-Term Evolution (LTE) Network vision (ref: 3GPP LTE).
For the entrant interested in the part of the 1×50 MHz TDD spectrum would in worst case need 3x the FDD spectrum to get an equivalent per sector capacity as an FDD player, i.e., 2×20 MHz FDD equivalent to 1×60 MHz TDD with a frequency re-use of 3 used by the TDD operator. Thus, in a like-for-like a TDD player would have difficulty matching the incumbants spectrum position at 2.6 GHz (ignoring the incumbant having a significantly stronger spectrum position from the beginning).
Of course better antenna systems (moving to re-use 1), improved radio resource management, higher spectral efficiency (i.e., Mbps/MHz) as well as improved overall link budgets might mitigate possible disadvantage in spectral assymmetry benefiting the TDD player. However, those advantages are more a matter of time before competing access technologies bridge an existing performance gab (technology equivalent tit-for-tat).
Comparing actual network performance of FDD-based UMTS/HSPA (High-Speed Packet Access) with WiMAX 802.16e-2005 the performance is roughly equivalent in terms of spectral efficiency. However, in general in Europe there has been allocated far more FDD-based spectrum than TDD-based which overall does result in a considerable capacity and growth issues for TDD-based business models. Long-Term Evolution (LTE) path is likely to be developed both for FDD and TDD based access and equivalent performance might be expected in terms of bits-per-second to Hz performance.
Thus, it is likely that a TDD-based network would become capacity limited sooner than a mobile operator having a full portfolio of FDD-based spectrum (i.e., 900 MHz (GSM), 1800 MHz (GSM), 2,100 MHz (FDD UMTS) and 2,500 MHz (FDD – UMTS/LTE) to its disposition. Therefore, a TDD based business model could be expected to look differently than an incumbants mobile operators existing business model.
The Greenfield BWA Business Case
Assume that Greenfield BWA intends to start-up its BWA business in a market with 17 million inhabitants, 7.4 million households, and a surface area of 34,000 km2. The Greenfield’s business model is based on house-hold coverage with focus on Urban and Sub-Urban areas covering 80% of the population and 60% of the surface area.
It is worth mentioning that the valuation approach presented here is high-level and should not replace proper financial modelling and due dilligence. This said, the following approach does provide a good guidance to the attractiveness of a business proporsition.
Greenfield BWA – The Technology Part
The first exercise the business modeller is facing is to size the network needed consistent with the business requirements and vision. How many radio nodes would be required to provide coverage and support the projected demand – is the question to ask! Given frequency and radio technology it is relative straightforward to provide a business model estimate of the site numbers needed.
Using standard radio engineering framework (e.g., Cost231 Walfish-Ikegami cell range model (Ref.:Cost321)) a reasonable estimate for a typical maximum cell range which can be expected subject to the radio environment (i.e, dense-city, urban, sub-urban and rural). Greenfield BWA intends to deploy (mobile) WiMAX at 2.6 GHz. Using the standard radio engineering formula a 1.5 km @ 2.6 GHz Uplink limited cell range is estimated. Uplink limited implies that the range between the Customer Premise Equipment (CPE) and the Basestation (BS) is shorter than the other direction from BS to CPE. This is a normal situation as the CPE equipment often is the limiting factor in network deployment considerations.
The 1.5-km cell range we have estimated above should be compared with typical cell ranges observed in actual mobile networks (e.g., GSM900, GSM1800 and UMTS2100). Typically in dense-city (i.e., Top-3 cities) areas, the cell range is between 0.5 and 0.7 km depending on load. In urban/metropolitan radio environment we often find an average between 2.0 – 2.5 km cell range depending on deployed frequency, cell load and radio environment. In sub-urban and rural areas one should expect an average cell range between 2.0 – 3.5 km depending on frequency and radio environment. Typically cell load would be more important in city and urban areas (i.e., less frequency dependence) while the frequency will be most important in sub-urban and rural areas (i.e., low-frequency => higher cell range => fewer sites; higher frequency => lower cell range => higher number of sites).The cell range (i.e., 1.5 km) and effective surface area targeted for network deployment (i.e., 20,000 km2) provides an estimate for the number of coverage driven sites of ca. 3,300 BWA nodes. Whether more sites would be needed due to capacity limitations can be assessed once the market and user models have been defined.
Using typical infrastructure pricing and site-build cost the investment level for Western Europe (i.e., Capital expenses, Capex) should not exceed 350 million Euro for the network deployment all included. Assuming that the related network operational expense can be limited to 10%(excluding personnel cost) of the cumulated Capex, we have a yearly Network related opex of 35 million Euro (after rollout target has been reached). After the the final deployment target has been reached the Greenfield should assume a capital expense level of minimum 10% of their service revenue.
It should not take Greenfield BWA more than 4 years to reach their rollout target. This can further be accelerated if Greenfield BWA can share existing incumbant network infrastructure (i.e., site sharing) or use independent tower companies services. In the following assume that the BWA site rollout can be done within 3 years of launch.
Greenfield BWA the Market & Finance Part
Greenfield BWA will target primarily the house-hold market with broadband wireless access services based on the WiMAX (i.e., 802.16e standard). Voice over IP will be supported and offered with the subscription.
Furthermore, the Greenfield BWA intends to provide stationary as well as normadic services to the house-hold segment. In addition Greenfield BWA also will provide some mobility in the areas they provide coverage. However, this would not be their primary concern and thus national roaming would not be offered (reducing roaming charges/cost).
Greenfield BWA reaches a steady-state (i.e., after final site rollout) customer market-share of 20% of the Household base; ca. 1.1 million household subscriptions on which they have a blended revenue per household €20 per month can be expected. Thus, a yearly service revenue of ca. 265 million Euro. From year 4 and onwards a maintenance Capex level of 25 million Euro is kept (i.e., ca. 10% of revenue).
Greenfield BWA manage its cost strictly and achieve an EBITDA margin of 40% from year 4 onwards (i.e, total annual operational cost of 160 million Euro).
Depreciation & Amortisation (D&A) level is kept at a level of $40 million annually (steady-state). Furthermore, Greenfield Inc has an effective tax rate of 30%.
Now we can actually estimate the free cash flow (FCF) Greenfield Inc would generate from the 4th year forward:
(all in million Euro)
– D&A €40 (ignoring spectrum amortization)
– Tax €20 (i.e., 30%)
+ D&A €40
=Gross Cash Flow €86
assuming zero percent FCF growth rate and operating with a 10% (i.e., this could be largely optimistic for a pure Greenfield operation. Having 15% – 25% is not unheard off to reflect the high risks) Weighted Average Cost of Capital (i.e., WACC) the perpetuity value from year 4 onwards would be €610 million. In Present Value this is €416 million, net €288 million for the initial 3 years discounted capital investment (for network deployment) and considering the first 3 years cumulated discounted EBITDA 12 million provides
a rather weak business case of ca. 140 million (upper) valuation prior to spectrum investment where-of bulk valuation arises from the continuation value (i.e., 4 year onwards).
Alternative valuation would be to take a multiple of the EBITDA (4th year) as a sales price valuation equivalent; typically one would expect between 6x and 10x the (steady-state) EBITDA and thus €636 mio (6x) to €1,000 mio (10x).
The above valuation assumptions are optimistic and it is worthwhile to note the following;
2. 20% market share is ambitious particular after 3 years operation.
3. 40% margin with 15% customer share and 3,300 radio nodes is optimistic but might be possible if Greenfield BWA can make use of Network Sharing and other cost synergies in relation to for example outsourcing.
4. 10% WACC is assumed. This is rather low given start-up scenario. Would not be surprised that this could be estimated to be as high as 15% to 20%.If point 1 to 4 lower boundaries would be applied to above valuation logic the business case would very quickly turn in red (i.e., negative); leading to the conclusion of a significant business risk given the scope of above business model.Our hypothetical Greenfield BWA should target paying minimum license fee for the TDD spectrum; upper boundary should not exceed €50 million to mitigate too optimistic business assumptions.The City-based Operation Model
Greenfield BWA could choose to focus their business model on the top-10 cities and their metropolitan areas. Lets assume that by this 50% of population or house-holds are captured as well as 15% of the surface area. This should be compared with the above assumptions 80% population and 60% surface area coverage.
The key business drivers would look as follows (in paranthesis the previous values have been shown for reference).
Sites 850 (3,300) rollout within 1 to 2 years (3 years).
Capex €100 mio (€350) for initial deployment; afterwhich €18 mio (€25).
Customer 0.74 mio (1.1)
Revenue €178 mio (€264)
EBITDA €72 mio (€106)
Opex €108 mio (€160)
FCF €38 mio (€61)
Value €210 mio (€140)
The city-based network strategy is about 50% more valuable than a more extensive coverage strategy would be.
Alternative valuation would be to take a multiple of the EBITDA (3rd year) as the sales price valuation equivalent; typically one would expect between 6x and 10x the (steady-state) EBITDA and thus €432 mio (6x) to €720 mio (10x).
Interestingly (but not surprising!) Greenfield BWA would be better of focusing on smaller network but in areas of high population density is financially more attractive. Greenfield BWA should avoid coverage based rollout strategy known from the mobile operator business model.
The question is how important is it for the Greenfield BWA to provide coverage everywhere? if their target is primarily households based customers with normadic and static mobility requirements then such a “coverage where the customer is” business model might actually work?
In 2007 the European average mobile revenue per user (ARPU per month) was €28+/-€6; a drop of ca. 4% compared to 2006 (the EU inflation level in 2007 was ca. 2.3%).
of the €28 ARPU, ca. 16% could be attributed to non-voice usage (i.e,. €4.5).
of the €4.5 Non-Voice ARPU, ca. 65% could be attributed to SMS usage (i.e, €3.0).
Thus, leaving €1.5 for non-voice (mobile) data service (i.e., 5.4% of total ARPU).
The increase that most European countries have seen in their mobile Non-Voice Revenue has by far not been able to compensate for the drop in ARPU across most countries over the last 5 to 6 years.
Adding advanced data (e.g., UMTS and HSPA) capabilities to the mobile networks around Europe has not resulted in getting more money out of the mobile customer (but absolute revenue has grown due to customer intake).
Although most European UMTS/HSPA operators report a huge uptake (in relative terms) of Bytes generated by the customers, this is not reflected in the ARPU development.
Maybe it really does not matter as long as the mobile operators overall financial performance remains excelent (i.e., Revenues, Customers, EBITDA, Cash, ….)?
Is it possible to keep healthy financial indicators with decreasing ARPU, huge data usage growth and investments into brand-new radio access technologies targeting the €1.5 per month per user?