Wi-Fi offload won’t reduce the need for more mobile spectrum

During the Wi-Fi Offload Summit in Frankfurt on Jan. 23, a number of interesting developments in the Wi-Fi space were presented. A key question for mobile operators is whether Wi-Fi offload reduces the growth in mobile broadband (HSPA and LTE) traffic and thus the need for more mobile spectrum.

Research presented by Deutsche Telecom from tests in Hamburg and Rotterdam showed that when Wi-Fi is advertised and available free of charge in a particular area, this immediately generates substantial Wi-Fi traffic but does not reduce the volume of mobile data traffic. Towerstream Inc. presented conflicting evidence from its outdoor Wi-Fi offload network in New York.

From other findings presented, it is clear that both Wi-Fi and LTE traffic are increasing dramatically. Perhaps what is at work here is the Jevons paradox, which proposes that as technology progresses, the increase in efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource. The increasing availability of free Wi-Fi coupled with a rapid uptake of smartphones and cheap tablets would underpin this theory as one feeds off the other.

The growth in Wi-Fi is also driven by the desire of shops and malls to engage with shoppers on their in-store Wi-Fi networks. There is marketing value for retailers to have shoppers on their Wi-Fi network as soon as the shopper walks into the store. EE in the U.K. is turning this into a small business line, equipping supermarkets such as ASDA with a Wi-Fi infrastructure. Rather than identifying shoppers at the checkout when they swipe their loyalty card, ASDA hopes to be able to identify and engage with shoppers from the minute they are within the store’s Wi-Fi coverage. For example, coupons could be sent to a handset at the beginning of the shopping trip and can be used right away rather than languishing at the bottom of a shopping bag. This is just one of the many marketing benefits of free in-store Wi-Fi.

The simultaneous growth in Wi-Fi and LTE traffic may also be explained by the fact that Wi-Fi has other uses compared to cellular. The proliferation of TV Anywhere apps turns tablets and laptops into TV outlets, and in Canada, Bell has launched the first wireless TV proposition. TV over Wi-Fi creates a surge of Wi-Fi traffic in residential areas. Other devices in offices, public indoor spaces and outdoors rely increasingly on Wi-Fi connectivity because it is cheaper and more flexible than cable connections. This all takes Wi-Fi capacity in cities and raises the Wi-Fi noise floor.

In regard to the rapid adoption of tablets, all are Wi-Fi-enabled, but few are 3G (HSPA) or LTE-enabled. As people take these tablets out of their homes they will look for Wi-Fi access, thus increasing Wi-Fi hotspot usage. However, smartphones have a personal hotspot feature and where tablets are not in Wi-Fi coverage, we are seeing “cellular on-loading” from Wi-Fi devices.

Having paid for a shiny new LTE device, some customers would prefer to pay another €10-20 a month rather than having to faff about with logging onto Wi-Fi. Asking smartphone users to choose between LTE and Wi-Fi is the antithesis of a ubiquitous mobile broadband experience. However, Wi-Fi 2.0 with SIM-based authentication increases the ease of Wi-Fi access and may even be transparent to the user.

Another factor which determines the amount of LTE vs. Wi-Fi traffic are the policies for applications set in smartphones. For example, which bearer is allowed or preferred for which application. Some apps do not work via LTE; for example. FaceTime on the iPhone. In the U.S., the first version of the iPhone 5 with iOS 6 did allow FaceTime over LTE. This came as a bit of a shock to cellular operators as AT&T blocked FaceTime over cellular on most plans, but subsequently changed the policy. What cellular operators really want is to be able to set policies dynamically based on the app, the location, time of day and perhaps even the type of customer.

Nevertheless, most mobile operators have some Wi-Fi offload strategy. The focus is not so much on relieving congestion in busy areas but to deliver an “always best connected” value proposition. In short, LTE and Wi-Fi complement each other. The growth in Wi-Fi does not reduce the need for more cellular spectrum to serve the growth in mobile broadband traffic.

Written by Stefan Zehle, CEO Coleago Consulting

Could mobile operators become the prime real estate landlords for the digital economy?

Finally it is here: The mobile data equivalent of toll-free numbers. Last week AT&T unveiled a “Sponsored Data service”, meaning that their customers are able to use participating services without eating in to their data allowance. AT&T will treat Sponsored Data traffic no differently to regular data traffic, thus providing digital retailers and OTT service providers with an efficient way to communicate and trade with their customers.

Coleago has long argued that with the growth in the digital economy, sellers of physical and digital goods and services are looking for the mobile data equivalent of a toll-free number. In the past many businesses encouraged consumers to trade with them over the phone by publishing toll-free numbers. The growth of online shopping with mobile devices provides impetus for extending the concept to mobile data. The message from retailers to consumers is “it does not cost you anything to visit our digital store”.

The good news for mobile operators is that this provides an additional revenue stream. But the concept could be taken further. In Europe, North America and other markets where most people purchase their smartphone from mobile operators, these operators can control what consumers see on the screen of their new smartphone when they take it out of the box and switch it on. A smartphone screen provides the digital real estate for sponsored apps.  Apps placed on the home screen would be the most valuable, and the giants of ecommerce such as Amazon may have the scale to pay to have their app on the home screen. EBay, travel and financial sites and many other e-tailers may also be interested in sponsoring apps placed on subsequent screens.

Of course users can delete and move smartphone apps. However, judging by how many people do not bother or do not understand how to change their browser home page, it is likely that many of the preloaded apps will stay where they were first placed. This effectively means that mobile operators become landlords in the digital economy.

Written by Stefan Zehle, CEO, Coleago Consulting

Overcoming Objections to AT&T’s Acquisition of T-Mobile USA

AT&T’s announcement last week of a $4bn charge in respect of the $39bn take-over of T-Mobile USA indicates a high likelihood that the transaction will not go ahead. This is not necessarily good news for US consumers and shareholders.

Telecoms markets in developed countries are maturing and in some markets revenues are already declining. At this stage of the industry life cycle consolidation would be expected. If there is no further revenue growth the only way in which returns can be maintained without increasing prices is by taking costs out of a business. This is likely to have been the principal driver behind the proposed acquisition.

Much of the opposition to the merger is on grounds of the negative impact on competition at retail level. A solution could be for AT&T to acquire T-Mobile’s network assets but not the rest of its operation, effectively turning T-Mobile into an MVNO. After all, much of the passive infrastructure is probably already owned by tower companies who lease tower space to several mobile operators. Traditionally a very high proportion of a mobile operator’s assets were in the non-active infrastructure – it typically accounted for two thirds of the capital cost of a cell site. The next step would be to share the active RAN and even the whole network. If T-Mobile USA continues to operate as an MVNO this would not affect competition at retail level.

In persuading the US Department of Justice and the FCC to drop their objections to the deal, AT&T might consider introducing accounting separation between its mobile network operating business and its retail business. AT&T’s retail business would buy capacity from the network operating company at the same terms as T-Mobile USA.

The net effect may be positive for all stakeholders:

• One merged network will have lower operating costs than two networks, i.e. costs are taken out of the industry. This benefit is likely to be shared between consumers in the form of lower prices and shareholders.

• Although some spectrum may have to be divested, the merging of AT&T’s and T-Mobile’s spectrum assets would make it easier to refarm spectrum to LTE and deploy wide carriers earlier. This means existing spectrum will be used more efficiently in terms of bits per Hertz. With the growth of mobile broadband this yields an economic and societal benefit, as is well documented.

• There will be a number of further spectrum auctions. With one operator less bidding for spectrum, demand at auction is reduced and prices paid for spectrum are likely to be lower. This will benefit all players in the market.

Written by Stefan Zehle, CEO, Coleago Consulting

Wireless Industry Consolidation in the USA: AT&T’s blocked acquisition of T-Mobile

The troubles of T-Mobile go back many years and are related to inferior spectrum holdings: “We were late with 3G”, said Neville Ray, SVP, engineering and operations T-Mobile USA, in March 2009. Since then T-Mobile acquired spectrum in several auctions and launched 3G, but it still has an inferior spectrum position. Spectrum auctions, beloved by the FCC, often cause reduced competition in wireless markets because the business case for spectrum auctions always looks better for larger operators. One of the largest components in deciding how much to bid for spectrum is the value arising from denying spectrum to rivals. If the US government had wanted more competition at network level it could have chosen a method of spectrum allocation other than unfettered auctions.

However, developments in the wireless industry have moved the goalposts and sooner or later the Justice Department will have to relent on its opposition to the proposed acquisition.  In developed wireless markets there is now very little growth in the wireless industry revenue, i.e. the industry is mature.  At this point of the industry life cycle management focus shifts from seeking revenue growth to taking out costs, for example through consolidation.

The physical network is increasingly a commodity, whereas there is increasingly fierce competition at retail level. In many markets consolidation at network level went hand in hand with increased competition at retail level with the launch of multiple Mobile Virtual Network Operators (MVNOs) and branded resellers. If the Justice Department and the FCC are concerned with competition they could make approval conditional on incorporating provisions into the acquisition that make it easier for MVNOs to enter the US market. Having said that, T-Mobile’s case is not helped by the smoking gun in T-Mobile’s past: In October 2009 Deutsche Telekom’s CFO Timotheus Hoettges insisted there was no need for further consolidation of the US wireless market: “There are four national players in the US market for 300 million households, while in Europe, where we have 350 million households, there are 50-70 operators.”

Written by Stefan Zehle, CEO, Coleago Consulting

AT&T’s tiered mobile data pricing is just the start of an essential re-pricing of mobile data

AT&T, the only US carrier offering customers Apple’s iPhone, has abandoned unlimited data plans and introduced a two tier pricing model as it attempts to shape the exponential growth in mobile data traffic which is threatening network quality and depressing returns. AT&T is not the first to introduce such a pricing model and indeed some markets have taken the next step, such as Singapore, Portugal and France where pricing is already based on the speed of connection. Re-establishing the link between revenues and bandwidth is essential if operators are going to make a return out of mobile data. Furthermore, if capacity is to data what coverage was to voice then in a capacity constrained world the operator with the greatest share of industry capacity may well capture the greatest market share. As spectrum is inextricably linked to capacity we can expect to see strong bidding for additional spectrum where the number of operators in a market exceeds the available spectrum on offer as is the case of the current BWA spectrum auction in India.

Coleago’s Mobile Broadband Pricing Report – An international review of mobile broadband pricing models and trends, June 2010 examined the pricing models for mobile data across a broad range of markets. The approach to dealing with bandwidth hogs varies across markets. The following approaches are typically used for out-of-bundle usage:

• A fixed price per out-of-bundle unit is charged, often at punitive rates (e.g. A1 Austria, up to 250x the in-bundle price per MB); in some cases, the total bill for extra usage is capped at a given maximum (e.g. StarHub Singapore, Orange UK).
• Access speed is reduced, but no extra charges are applied, thus respecting the principle of ‘unlimited’ usage and capped mobile broadband bills (e.g. France, Germany, Sweden, US).
• The user is automatically transferred to a higher bundle for the given period (e.g. PT/Sapo in Portugal).
• Add-on bundles are offered (e.g. Orange UK, Telia Sweden).

The study also revealed a proliferation of price plans within the sample countries reflecting increasing segmentation as the mobile data market moves out of the introductory phase and progresses through the growth phase towards maturity. In particular, Coleago’s observed the introduction of an increasing range of bundle sizes, and increasing prevalence of unlimited offerings, as well as the launch of micro-allowance prepay plans (e.g. 20 minute surf-time in France). Where mobile broadband is a relatively new offering unlimited offers are often used as a tool to achieve a “land grab” of mobile broadband users. However, in other markets more sophisticated traffic shaping pricing models are being developed. Coleago’s also observed:

• Weekend and evening plans (e.g. France).
• Home Zone offerings (e.g. Portugal and Germany).
• Converged offerings (e.g. Portugal, Singapore, Hong Kong, Sweden).
• Plans with multi-user shared allowances (e.g. Australia, Sweden).
• Differentiated plans based on headline speeds.

In some markets an even more direct link between revenues and network capacity and speed are being established. In markets where HSPA+ has been launched there has been a move to pricing packages based on access speeds, with considerable premiums being charged for the 21Mbps service. In Singapore the 21Mbps product is charged at a 130% premium to the 7.2Mbps product and 500% premium to 1Mbps. Further examples can be seen in Portugal (e,g, Vodafone’s ‘Top’ versus ‘Max’ unlimited plans) and in France (e.g. SFR’s ‘Unlimited Pro’ versus ‘Unlimited’ plan).

As there is a finite amount of available and appropriate spectrum for mobile operators and financial and practical limitations to number of mobile base stations that can be built capacity constraints will be encountered unless measures are taken to shape mobile traffic. Many markets have already begun to re-establish the link between revenues and capacity which de-coupled dramatically when mobile broadband went mass market.