ACG Research: With VoWiFi, it's all about the economics

by Ray Mota and Elias Aravantinos

Ray Mota, left, and Elias Aravantinos

When we look at the wireless residential and enterprise access industry today, we see that the industry has certain perceptions about Voice over LTE, which is that it has to be competitive with Wi-Fi. There is no reason for such a comparison, as carriers should view these technologies rather as complementary, enabling each other.

One of the misconceptions about VoWiFi is that with carrier VoWiFi there might be some loss of minutes. In reality there is no loss because it goes through the same natively integrated system, providing the advantage of a superb seamless user experience. When the user is outside of range, for example, overseas where the user requires a local carrier's SIM VoWiFi card, the user usually loses messaging capability and/or voicemail.

VoWiFi allows the user to keep the same phone number and service no matter where in the world the user is. For example, if local or in another region, VoWiFi enables and supports a seamless call transfer between Wi-Fi and LTE as long as the user is in a licensed zone. If the user is outside of the network range, a connection can be made to an unlicensed network via VoWiFi. The service is agnostic to the user's location.

Another key component of VoWiFi from an architectural perspective is the type of connection to the system. A smartphone or another device has the capability of connecting into either an unlicensed or license-type of connection. If a user connects through a licensed spectrum service, it is to a Service Gateway and a Packet Data Network Gateway and will go through an IP Multimedia Subsystem-based system or directly to the Internet. If the connection is a Wi-Fi-based connection, the traffic is transmitted through an IPsec tunnel or via a different type of trusted encryption or Wi-Fi-specific tunnel technology. Either a trusted gateway access or ePDG gateway is all that's needed. There are no minutes lost in the connection from the ePDG to the Evolved Packet Core. Note that it is the same underlying core architecture on which VoLTE or VoWiFi is deployed. In some cases where VoWiFi is deployed, it is useful to support handover between Wi-Fi and the LTE network to avoid dropped calls.

In relation to the VoWiFi market, ACG maintains that the market is ready and real. Why? Most users are in an area with Wi-Fi coverage between 80 to 90 percent of the time. In 10 to 20 percent of the time users are in a licensed indoor or outdoor area. Based on the rapid growth of smartphones there is an urgent requirement to solve the indoor coverage problem. Many carriers are in a cycle of spending to add more capacity. However, these capacity improvements do not target more revenues; they address churn reduction, maintaining at least the existing customer. 

If a carrier holds 80 to 90 percent VoWiFi traffic it behooves the carrier to develop a solution to take advantage of that number and deploy VoWiFi services, especially as more devices enter the market that use Android or iOS that support native Wi-Fi calling in the device, enabling the user to keep the same phone number. Currently, T-Mobile US and Sprint in the United States have already launched VoWiFi, and AT&T Mobility and Verizon Wireless have launched it for newer iPhones. Other carriers are developing offers for both VoLTE and VoWiFi. ACG predicts that 2015 is the year that VoWiFI moves from a "nice to have" feature or service to a requirement. We are seeing a tremendous number of VoWiFi deployments that will be commercially available in 2015 and 2016 globally.

One concern, however, is the "wait and see" position by many operators. ACG maintains this outlook is not acceptable. Why? A key concern for a mobile operator is customer acquisition, which is very expensive. If the operator spends significant amounts of money for customer acquisition, then normally the operator's top priority is to maintain that customer base. Ensuring a low level of churn is crucial. Competitors are introducing projects and fostering competition that is putting added pressure on carriers. Google, for example, has developed its own MVNO, Project Fi, which allows for seamless transition calls from Wi-Fi to a cellular network without dropping a conversation. Google, T-Mobile and Sprint have partnered and introduced a simple pricing package that offers unlimited voice and texting, unlimited low-cost international calls, and Wi-Fi tethering with a range of 120+ countries. The pricing is a flat rate of approximately $20 per month for any type of device that supports VoWiFi within Google. Each additional GB of data costs $10. The advantage of this model is that there is no annual contract and the user pays for what he or she uses. 

With Google or other companies getting very aggressive in their push to access or enter this market, an operator's "wait and see" scenario will result in medium-to-high customer churn. Port coverage is the leading cost related to subscriber churn. To address this issue, an operator typically creates a business timeline simulation model that identifies profitability, investing in additional capacity where revenue is maintained; there is no increase in new users. Instead, this capacity increases the support to the existing users' capacity needs, users that are now using more devices and data, resulting in tremendous mobile access traffic growth. For an operator, this means that it is in a continual cycle of both increasing LTE capacity just to meet customers' demands but also deferring capital expenditures.

One of the most important things an operator needs to consider in the business simulation model is to use Wi-Fi to offload the capacity addition to more quickly address capacity requirements and realize profits faster or at least maintain current profits. Basically, it is all about the economics, not the technology. The value potential of VoWiFi is that it simultaneously addresses the calling capacity addition and the revenue potential.

From an overall economic perspective, ACG examined an actual service provider's model, creating one that looked at a subscriber base that starts at 5 or 7 percent penetration and increases to a modest 25 or 27 percent penetration. When ACG looked at the income statement we identified a $2.2 billion TCO saving. How do you interpret this? It is the cost of doing nothing. Just by saving one cent per minute per subscriber using VoWiFI for this carrier resulted in $2.2 billion impact on the business.

Financial Impact of VoWiFi

More specifically, if we look at the current or historical prices that have been invested for spectrum in various markets, it is easy to understand the tremendous estimated impact of the VoWiFi service. The economic impact of VoWiFi is usually measured as the annual financial benefits or savings based on the increasing VoWiFi penetration as presented in the following figure. Based on our estimates for the U.S. market, where there is a tremendous demand for data, capacity and thus more spectrum, the amount of savings for 14 MHz of spectrum is $445 million. This is a great opportunity for capacity and technology managers, not only to the U.S. market, but also Germany, UK, India; they need to immediately rethink and carefully examine the impact of VoWiFi to the existing spectrum and its overall economic value, based on the assumptions of the model.

Potential Impact of VoWi-Fi on Spectrum Spending

This proven business case firmly establishes that VoWiFI will help solve a carrier's indoor coverage problem, protect churn, and develop SLAs that are collaborative and transparent, whether cellular or unlicensed connection. Additionally, time to market is quicker than the VoLTE scenario, as approximately three months for deployment is usually required. However, it is important to note again: Voice over LTE and VoWiFi are not competing technologies. In the near future, an operator's approach should be to look at both of them as complementary, especially from an economics perspective. And the time to do so is now.

Elias Aravantinos is a proven thought leader in cutting-edge technologies and strategic analysis. His market focus is mobility, covering a range of topics: LTE, LTE-A, 5G, SDN, NFV, WiFi, IoT, network APIs and identifying how under-the-radar technologies may disrupt or improve the mobile value chain. 

Dr. Ray Mota
brings a talent for complex technical and critical thinking and provides strategic direction, sharp analysis, and expert advice on networking issues, specializing in design, implementation, and troubleshooting. Prior to founding ACG Research Dr. Mota worked for Aberdeen Group, ManageAll, Micros-To-Mainframes, Advanced Technology Group, Eastman Kodak and the IRS. 

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