At a recent dinner party in Munich a US start-up that makes short-length videos was explaining to Informilo how business was booming. The start-up's videos have been downloaded 500 million times, 30% onto mobile devices. Asked what mobile operators the company works with, the reply was: "None, we deal with Google and YouTube." Such over-the-top (OTT) services are clogging operators’networks. And it is only going to get worse. Mobile data traffic is doubling every year. Upgrading to the fourth-generation, Long Term Evolution (LTE) cellular standard will give operators the most efficient technology for transporting the growing tsunami of bits over precious radio spectrum. But LTE represents a challenge as operators wrestle with how best to embrace and make money from the technology.
While there is industry consensus regarding LTE's importance and some 49 mobile operators worldwide have deployed LTE services, according to the Global mobile Suppliers Association (GSA), it does not mean the wireless technology will be deployed widely soon. Operators have already spent billions on 3G and are only now getting a return on their investment. And, they don’t want to foot the bill for infrastructure only to see the so-called OTT players generate the bulk of the revenues from services that piggyback on their investments.
But operators find themselves in a bind because the more conservative adopters of LTE run the risk of a subscriber backlash, says Mark Heath, a partner at wireless consultancy Unwired Insight. Apple's iPad3, which is expected to be launched in March, is said to support LTE, as is the iPhone5, which will appear later this year. These devices are setting a requirement on which operators will be judged. “If operators only have a press release rather than a full LTE network, there is going to be a lot more [user] pressure,”says Heath.
LTE packs three times the capacity of 3G's High Speed Packet Access (HSPA) for a given spectrum. LTE equipment, based on Internet Protocol networking, is also simpler to install and cheaper to operate. Operators can therefore expect at least a threefold reduction in data transport costs using LTE, says Unwired Insight’s Heath.
Given the huge growth in data and with data services now overtaking voice as the operators' predominant revenue stream, such cost savings are paramount, says Thomas Norén, head of LTE product line at global telecom equipment maker Ericsson.
The US and South Korean markets are where LTE is being deployed widely, mainly due to fierce local competition. More common is for operators to deploy LTE conservatively. In Europe, some operators have created pricing models that are limiting LTE subscriber adoption.
Availability of spectrum is another important barrier for LTE uptake. In the UK, for example, LTE deployments must first wait for spectrum auctions to occur before deployments can begin. And, spectrum is holding back the LTE industry in other ways. For starters, availability varies by country. "In Europe the spectrum is so fragmented, it is unbelievable,”says Malik Saadi, an analyst at consultancy Informa Telecoms & Media.
The value of the spectrum also varies. LTE at 700MHz requires fewer base stations for a given area than at 2.6GHz. An LTE roll-out at 700MHz is thus much cheaper than at 2.6GHz due to the laws of radio propagation.
There is also a split in how spectrum is parceled for sending and receiving data. It can be a single band (time division duplex – TDD, dubbed TD-LTE) or split (frequency division duplex – FDD, as in FD-LTE). "We have two variants of LTE and they are not going away," says Wim Sweldens, president of Alcatel-Lucent’s wireless division. "Does it add an extra layer of complexity? Absolutely. It is two different types of radio interface."
China is adopting TDD whereas Western Europe and the US are primarily using FDD. China Mobile has conducted a wide-scale pilot of its TD-LTE technology involving more than 850 base stations in six major cities, says Ying Weimin, president of GSM, UMTS and LTE networks at Huawei. The pilot's second phase, to be completed in July, will demonstrate TD-LTE's capabilities to China Mobile's customers and partners, he says.
Meanwhile, South Korean mobile operator SK Telecom will complete its nationwide LTE rollout to 95% of the population by April. The operator is also upgrading one million signal repeaters to provide LTE coverage in places such as the underground and within buildings, says Kim Seung-Hoon of the network division at SK Telecom. One million subscribers have signed up for LTE since the service launched in July 2011.
In the US, Verizon Wireless's LTE network is available in 195 major markets, covering 200 million people. Verizon's nationwide rollout is scheduled for completion by year-end 2013. AT&T will complete its deployment at the same time. At present AT&T has deployed LTE in 26 cities, covering 74 million people. Both US operators are using Ericsson and Alcatel-Lucent as their LTE vendors.
Already 21 smartphones are targeted at the US market, says Informa, whereas only a handful of handsets are available for the South Korean and Japanese markets. Moreover, Verizon does not discriminate on pricing between 3G and LTE. “They are pushing LTE adoption aggressively," says Dimitris Mavrakis, an analyst at Informa Telecoms & Media.
In Europe, Vodafone Germany has chosen LTE to deliver the Digital Dividend 800MHz (DD800) mobile broadband services in rural areas still not covered by fixed broadband. Subscribers can download up to 30 Gigabytes of data a month at up to 50 Megabits-per-second for €59.99. "This LTE DD800 project shows that mobile broadband is becoming a real alternative to fixed line," says Ying of Huawei, which is working with Vodafone Germany.
The equipment makers stress their latest optimized platforms that support LTE and existing wireless standards will reduce operational costs. The vendors believe they can also aid the operators' business case for LTE by moving away from unlimited data plans to chargeable services.
In one Asia Pacific market 3G competition has driven operators to offer a huge 12 gigabytes of download a month. Unlike 3G where operators have already got a return on their investment, LTE's rollout will require new and significant expenditure. "While LTE is much faster and more efficient, I expect these Far Eastern operators will only allow two or three, or at most five gigabytes, or they will offer LTE as a premium service," says Informa’s Mavrakis.
However, "if LTE is just going to be a bigger, dumber pipe then there is not going to be a lot of appetite for the operators to embrace it," says Alcatel-Lucent’s Sweldens.
Tiered pricing is one obvious step for LTE, says Sweldens, but it does not stop there. "What we can do with LTE and application enablement is differentiate traffic," he says. "All the bits going over the network are not the same; certain bits are more important than others." For example, if a customer downloads a video over LTE, operators could charge a delivery fee, much in the way Amazon adds a mailing charge to items bought online.
"The premium bandwidth of LTE will open a wide variety of revenue opportunities," says Informa’s Saadi. "Then you will see operators create new business models." Informa argues that the best strategy for operators is to partner with third-party communication application providers such as Viber and WhatsApp or even buy those developers that directly benefit their business.
But Unwired Insight’s Heath argues that operators should stick to what they do best –providing connectivity. The only viable strategy is for operators to become as big as they can to gain economies of scale. "The operators that create this very big network, that get costs down to a tenth of the level they are now, will be the winners,”says Heath. Market consolidation is thus inevitable.
Over-to-top service providers such as Google, Facebook and application developers will continue to be nimbler in service creation than the operators. Let the operators make money from the connectivity and encourage others to create the services, says Heath. ”LTE is just one piece of the jigsaw,”he says. “Mobile is far too important to be left to the mobile operators.”