The great broadband disruption is about to hit cellular. That might threaten voice revenues, but is a high-speed boost to the data segment
These are precarious times for mobile operators. The old voice business is declining and the new 3G networks have not created the anticipated bonanza.
Too bad. Now cellular must face the biggest disruption of all: broadband. The coming of HSDPA is going to up-end the mobile business as we know it.
From one end, the arrival of mobile broadband spells danger. It means voice over IP over cellular, and all that follows for conventional voice and roaming revenues.
But it also means genuine high-speed Internet access speeds for music, video and other downloads.
Cellcos will be able to seize the broadband initiative from Wi-Fi hotspots by offering wide area coverage, and in some markets even challenge fixed-line players.
But broadband is about to descend on an industry facing increasingly tough conditions.
Cellular's woes were ably illustrated by the boardroom battles at Vodafone last month, culminating in founder Sir Christopher Gent resigning his honorary post in acrimonious circumstances. These battles were the result of weak operational performance, with the company forecasting zero or negative EBITDA growth this year.
After years of investment, 3G amounts to only 7% of revenues, while the biggest growth last year was in the emerging markets of Romania, Egypt and South Africa.
Meanwhile, UMTS vendors have been enthusiastically promoting 3.5G in the form of HSDPA.
The CDMA version of broadband, EV-DO, has been in play in Korea, Japan and the US for the past two years, enabling download speeds of 600-700 kbps and above (see story 'US carriers bet on convenience', p.22).
The W-CDMA answer to that, HSDPA, hits the market later this year in the form of a PC card, offering typically 1-1.2 Mbps bandwidth.
Some 70 operators have committed to HSDPA, says the Global mobile Suppliers' Association, though to date only eight are operating commercially. The first handsets will not arrive until later this year, which means volume shipments of attractive and affordable phones are at least 18 months away.
The first disruption from HSDPA is broadband data. It means different pricing plans, first for data, and then ultimately voice.
'Basically the Internet is the key driver for broadband, that is why most people get a broadband connection,' says Ericsson marketing director Andrei Dulski. HSDPA will end consumer indifference to the mobile Net, he predicts.
But the operators will have to take a fresh approach to pricing, says Devine Kofiloto, principal analyst at Informa Telecom. He points out that fixed-line broadband only took off after the introduction of flat-rate tariffs of around $25.
This flies in the face of cellular pricing orthodoxy, where operators have always tried to fix a premium for mobility.
Kofiloto said early HSDPA pricing plans in Europe show operators charging on average about 50-70 euros. He expects they will try to leverage a new mobility premium for broadband, but warns of continuing downward pressure 'to narrow the price differential in the voice domain between mobile and fixed.'
When consumers do start buying HSDPA handsets, the obvious disrupter is going to be VoIP. Although serious revenue leakage via VoIP is unlikely, the notion has carriers' attention.
'Can it be done‾ Once you have the appropriate client, absolutely,' says consultant Brendan Leitch, a former Cisco and Broadsoft engineer. 'To make it work reliably and consistently you will need to do some quality of service provisioning and bandwidth provisioning.'
He says mobile carriers take it as a given that they will see a VoIP threat. 'They recognize that it can cannibalize their voice revenues. They ask 'what do we do about partitioning off the data so it discourages people from doing that‾'
'The discussion is not about the technology, it's about how do I control and manage it from a tariff perspective. How do I get mobile data applications out there as well as the same time keep people from providing a VoIP application on top‾'
VoIP over HSDPA is much more an option for new 3G licensees, which are attacking the incumbents on price, notes Leitch. An obvious example is Hutchison 3, which has signed a deal with Skype worldwide. 3's Swedish operation is already offering a Skype client on its phones.
Defensive options
Yet operators have a couple of strategies at their disposal to prevent leakage of voice minutes.
First is the tariff defense. Yankee Group wireless analyst Farud Yunus points out that data costs more than voice.
'Assuming most operators move to a flat-rate model with 3G, you'll be paying $30-$50 for your unlimited data package - that's much more costly per kB - and $10-$20 for a gazillion free minutes,' he said.
Thanks to 3G, voice prices in developed markets are already low. Thus VoIP's best chance is where voice rates are still high, and that's in the developing markets where, as Yunus observes, customers aren't likely to be buying 3G and smartphones.
'Perhaps it'll gain better traction in a few years' time, when fixed VoIP is more pervasive and there's greater consumer awareness, and also when more supporting handsets become available in more attractive designs. Nokia isn't going to piss off their carrier customers with new VoIP handsets in the next 12 months, that's for sure.'
The technology defense is also pretty effective, where operators will deploy deep packet inspection software to police customers' use of the service.
Packet inspection provides precision monitoring of all data across an IP connection. As Leitch puts it: 'They can tell the difference between Skype, Vonage and Hong Kong Broadband.'
He expects operators will fence in customers by confining them to the services in their tariff bundle. 'There will be preferential tariffs for the applications they want to sell you. Here's your mobile email, voice, music downloads for $45. Use another application, and we will charge you x dollars per kilobyte.'
Ericsson marketing director Andrei Dulski says the VoIP fear is over-stated, especially in the face of bucket pricing for voice.
'It's happening in the US, it's happening in Europe, but to get lots of voice minutes, there's no reason why you should complicate your life when you already pay for 1,000 minutes.
In the Ericsson view, mobile broadband means entry into data. It also opens up new spaces in developing markets. In developing Asia, 2G cellular has been the single biggest contributor to narrowing the voice digital divide. HSDPA has the potential to do the same with data.
This is attracting a lot of interest from mobile operators in Southeast Asia, Dulski said.
'Here we see how 3G operators can enter into a new space. What we're looking at is small 3G packages and 3G modems similar to ADSL. You can get all the traditional fixed services delivered wirelessly to your home.'
While broadband opens up new possibilities, the impact of new technologies and pricing models is keeping plenty of telco execs awake at night, says consultant Leitch.
'The Telstras, the CSLs, the SingTels, they are shaking in their boots,' he believes, citing conversations with carrier execs around the region.
'This is the big irony of 3G. The very thing they built the networks for - the high-speed data - is going to kill their voice business.'
The lowdown
Broadband is coming to the mobile, with HSDPA delivering 1-1.2 Mbps downloads.
That spells opportunities to challenge
- Wi-Fi in the hotspot market
- DSL in emerging market residential
- For high-speed Net access for video, music and other downloads
But it also means threats
- To mobile incumbents from aggressive challengers
- To all operators as voice becomes an add-on app
- To roaming revenue traveling customers choose VoIP over cellular
US carriers bet on convenience
US carriers that are already running EV-DO networks are betting that the added convenience of mobile broadband will deliver far more value than will be lost through VoIP leakage.
'The customers want convenience and simplicity in their lives,' says John Polivka, a Sprint-Nextel spokesman. 'The [mobile] phone has become a primary access device that can be taken anywhere.'
Sprint began rolling out its Power Vision EV-DO network last June and reached 150 million POPs by the end of March.
Power Vision complements an existing Sprint national wireless PCS network, as well as a separate national Wi-Fi network. Users with EV-DO-capable devices can access wireless data at speeds roughly equivalent to DSL, with an average 400-700 kbps and a peak download rate of 2 Mbps.
Sprint contends the mobile phone has become the 'third screen' behind the television and computer. In this view, customers can use the EV-DO network to download music, information and more recently, video programming on their personal devices. Polivka says the EV-DO service has proven especially popular with mobile field workers and in vertical markets such as medial, insurance and sales.
Although it is possible to sign up for the EV-DO mobile broadband service and use it for VoIP telephone calls, Polivka says this isn't happening, at least not yet.
Another reason is simply economic. In the US market, Sprint mobile phone users pay a flat monthly fee for thousands of minutes of calling service, with no extra long-distance or roaming charges. So there's little financial incentive to pay for monthly VoIP service as well. What's more likely, Sprint suggests, is that customers will use their EV-DO devices to perform more and more tasks while they are on the move.
Sprint plans an upgrade to the EV-DO network in 2007 that will provide more capacity and higher data rates.
Verizon Wireless, which has a slightly larger EV-DO network in place in the US than Sprint, also recently started offering a mobile video programming service called V-Cast over its separate 3G network.
Verizon officials wouldn't discuss the details of the EV-DO service, which has speeds comparable to Sprint's, citing proprietary concerns. But Verizon Wireless recently started marketing a Palm Treo device that uses Windows Mobile on Verizon's wireless broadband network.
Neither Sprint nor Verizon Wireless officials would release actual subscriber numbers for the EV-DO service offerings.
Their main marketing efforts have involved enticing mobile users with video and music downloads. Cingular Wireless, the third American wireless service provider, also is focusing on its on-demand mobile service running on its new 3G wireless network. (Cingular does not currently provide mobile broadband).
However, mobile broadband could become a more competitive battleground in 2007 when the EV-DO networks are enhanced, especially if the current video service offerings flop.
Some studies suggest Americans have little interest in watching television on their mobile phones. One recent survey conducted by RBC Capital Markets found that 75% of the 1,000 respondents had little use for TV on their mobile phone.
- Al Senia