Mobile broadband: still growing but realism sinks in

Mobile broadband has been a telecom growth story for the past two years. Connections and traffic have continued to expand, as has associated revenues, although not at the same rate.

Just look at the growth in prepaid mobile broadband users in Asia Pacific. The segment - defined as PC-based internet connectivity using a USB modem supporting download speeds at least 384 KB - is expected to increase tenfold to 160 million over the next three years, with the APAC region leading the world by subscriber additions.

A report from Tariff Consultancy found that in many countries the majority of mobile broadband users are prepaid subscribers.

The results of a joint Telecom Asia-Ovum Asia-Pacific mobile broadband survey show that although respondents still believe mobile broadband is good news for the industry, they are now more realistic about its benefits compared to the wide-eyed enthusiasm of last year.

The survey found a more mature mobile broadband market, where expectations on margins are more realistic (although still overly optimistic), new charging methods are being explored (with unlimited flat-rates unsustainable) and the real threat to fixed broadband is better understood (as more of a direct competitor).

Better margins?

The majority of the telecom executives surveyed continue to see mobile broadband adoption as a significant boon to the industry, with 44% expecting mobile broadband to be a higher-margin business than mobile voice. That's down from 52% a year ago, but still widely optimistic based on the revenue generated compared with the required spending on capacity.

The number pf respondents thinking margins will be lower increased from 24% last year to 32%. (See chart 1)

Nathan Burley, an analyst in Ovum's Asia-Pacific research team, says more realism has set in, "yet this is still a very optimistic view of the industry's future." Another 13% said they don't know if they will increase or fall.

Responses to this question also varied more than any other between different markets. Industry participants doing business mostly in emerging markets were more likely to see mobile broadband as a higher margin service (52% vs only 36% in developed markets). Those in developed markets, further along in the adoption of mobile broadband, think that "the same" or "lower'" margins are more likely (42% of respondents answered lower vs only 22% in emerging markets).

Burley noted that: "When utilizing un-used capacity or signing on high-value early adopters, mobile broadband obviously will deliver good margins. However, as the service matures, limited ability to differentiate - hence strong, mostly price-based competition - and the ongoing capital investment required to support growth will put pressure on margins."

The vendor segment, unsurprisingly, was the most adamant that mobile broadband would be a higher-margin service (55%) while mobile operators were more negative on margins, with only 34% forecasting higher margins.

Over half of respondents think that unlimited/flat-rate-based charging models are the most effective way to charge for mobile broadband services. (See chart 2)

The question is what respondents mean by "most effective". Consumers undoubtedly prefer unlimited/flat-rate-based charging, however, it is unlikely the most effective method for operator margins. As a result, Burley noted that true unlimited/flat-rate-based charging is increasingly uncommon as fair-usage policies are implemented in Asia.

Not sustainable

In the US a strong backlash has flared up, with both AT&T and Verizon declaring flat-rate unsustainable and its days numbered as the operators move to LTE. AT&T said in December that it will have to get back to usage-based pricing. Verizon said in Janauary that LTE pricing will have to be different from 3G pricing, likely in the form of a basic monthly fee and usage-based pricing for bandwidth consumed. We're starting to hear similar concerns from cellco execs in Asia. (See "The flat-rate mobile broadband backlash".)

Many operators are seeing significant network congestion in urban centers, and one operator reported late last year that 40% of its traffic was being generated by 3% of its users.

"We are getting to a point where operators need to manage data usage or their business models will become unsustainable as the costs of managing exponential mobile data traffic escalate much faster than the revenues they can generate from all-you-can-eat plans," Bridgewater Systems SVP David Sharpley told Telecom Asia.

The competitive nature of the market, however, makes flat-rates a necessary evil, says Ranga Thittai, product manager at InfoVista, so they'll be around for a while. He says capex on network capacity can be kept in check through the use of systems that enable operators to optimally size their network.

"Operators need capabilities that allow them to continually baseline traffic trends, predict traffic growth and establish smart engineering limits (like 95th percentile load). The same offerings also monitor end-user quality to ensure that reduced network sizing does not compromise end-user QoS," he noted.

Some 19% of those surveyed think data volume-based pricing would be most effective while 9.5% are looking to a QoS/SLA-based model. Another 8% said speed-based charging would be best.

Burley says operators are beginning to explore many other charging methods to provide tiered services and differentiate in the market.

Celcom in Malaysia started off charging per kilobyte, but customer bills went through the roof, so it moved to unlimited plans. It has tiered plans for different speeds while Maxis offers tiered plans based on volume. "We're seeing if it's the right pricing model," said Harcharan Singh, GM of Celcom's broadband division.

No clear key differentiator emerged for marketing mobile broadband services. However, 31% of respondents see coverage as the leading differentiator, followed by quality of service (23%), price (21%) and speed (19%). (See chart 3)

There was a notable shift in the order of these criteria from the previous year's survey. Last year price topped the list with 29% seeing it as a key differentiator, coverage was second (28%) and speed third (26%).

We can only assume that that low-cost mobile broadband service alone will not secure customers' acquisition, loyalty or differentiation.

All-you-can-eat pricing strategies can lead to pricing wars that curb subscriber loyalty, says Amir Ofek from Amdocs. These strategies also miss the opportunity to collect revenue from high-bandwidth subscribers who are willing to pay a premium for better service.

He says that without distinguishing between mobile data traffic type or priority, network capacity is being deployed on the basis that every data bit costs (and is priced) at the same level. "There is no discrimination when rolling out new capacity as to its value."

Burley points out that coverage for a long time was important to differentiation in the mobile voice market. "It will also be, if not more so, for mobile data."

While "price" dropped to third from first last year (falling 8 percentage points), that was a just a dip compared to the freefall for value-added services, which plunged from 16.5% thinking it was a key differentiator a year ago to only 3.7% this year.

Obviously, users are not attaching much value to operator VAS services, especially for big-screen devices. The main selling point is connectivity.

Burley says niche services will be of value in certain segments and potentially reduce churn - yet they won't be key a differentiator. He suggests that operators choose VAS investments and focus on areas very strategically.

He says potential applications for both big- and small-screen mobile broadband VAS are integrated solutions across access networks and bundled offerings, security or device management with GPS location. In the enterprise space, the ability for IT departments to control mobile assets, VPNs, and roaming may add value.

Browsing remained the leading traffic generator, but its dominance dropped from 42% of respondents seeing it as the main traffic driver last year to 36% this year. The big winner was video, with expectations video will be the main driver of traffic growth increasing from 22% last year to 32%. (See chart 4)

Those in emerging markets were even more likely to see browsing as the key traffic driver while those in developed markets where more likely to see video as the main driver.

Both peer-to-peer and LBS were a distant third and fourth, little changed from a year ago when 16% saw P2P as a major growth catalyst and 12% expected LBS to drive growth.

Access is the killer app

Similar to last year, but only more emphatically in the clearest result of the survey, 83% of respondents believed non-operator content would drive more traffic than operator content. That's up from 76% in 2009.

Internet-based third-party content is both driving user demand for mobile data and traffic across devices.

Revenues will mostly be generated by data access with content and premium services remaining niche services. Most value and revenues generated by content and new services will not be captured by operators. Efficient data provisioning is, therefore, essential to operator strategies, Burley insists.

Almost a quarter of operator respondents stated operator content will drive more traffic. One reason for this may have been the traffic intensive nature of some operator services such as mobile video.

With little change from a year ago, laptops/netbooks and handsets were expected to fuel growth. Almost 90% of respondents said these two broad categories of devices would account for most traffic growth. Looking at specific segments, mobile operators and those in developed markets were more likely to select laptops/netbooks.

The PC category was the big looser from last year (slipping to just 4% from 10%), presumably as respondents see a shift to mobile PC form factors. (See chart 5)

Mobile broadband is clearly both a complement and competitor to fixed broadband, creating new broadband usage cases while also directly competing against fixed broadband in some segments.

Last year 63% of respondents saw mobile broadband as more a complement than competitor to fixed broadband. This year, with more a detailed look at the impact, we found 35% of those surveyed expecting a significant impact and substitution. Another 40% said was would have some or limited impact and substitution. Just 16% though it would have no impact and was only complementary. (See chart 6)

"We agree with the consensus, mobile broadband revenue streams will not entirely be generated by new product categories, but will steal revenue from the fixed broadband market as operators compete directly," Burley said. For many consumers, especially in emerging markets, fixed broadband will be irrelevant.

Investment required

Due to the business models adopted, especially the common unlimited/flat-rate plans offered by so many mobile operators, traffic has been growing exponentially. This growth has created a major strain on operators' backhaul and access networks.

Representing similar results to last year, 66% of respondents believe backhaul capacity is, or will be in the next 12 months, an issue in the provisioning of mobile services. The same number as last year (17% reckon backhaul won't be a restraint on mobile services. (See chart 7)

The responses to this question did differ by market. Interestingly, those in developed markets where more likely to see backhaul as a constraint compared to those in emerging markets, despite more options generally available in those markets.

In Malaysia, more than half of respondents stated backhaul as "currently a restraint on mobile services."

Over 59% of industry respondents believe wireless backhaul technologies will achieve greater growth than wired backhaul in 2010. This result is the same as last year.

Operators were more likely to suggest wired technologies would be deployed, with 41% selecting that option.

Capacity constraints in backhaul are a more pressing concern than in the access network. Burley says this differs by market. For example, in dense areas radio network capacity is more likely to be an issue while in rural areas backhaul may be the bottleneck.

Regardless, respondents still believe access capacity is still under pressure. A total of 65% believe radio access capacity is, or will be in the next 12 months, a constraint on mobile services. However, 21% do not forecast radio capacity being a constraint in the foreseeable future. (See chart 8)

Just under half of vendor respondents saw radio access as a constraint on network capacity in the next 12 months, significantly above the overall average. Malaysian respondents again were also above average in seeing radio access capacity as restraint mobile services.

Burley says significant investment is required to support traffic growth in capacity upgrades through technology upgrades, network expansion and infill, and use of additional spectrum via re-farming and auctions.

"There has been a lack of investment in capacity across some operators leading to network issues, although short-term capacity demands should be able to be met with sufficient investment."

Inevitably operators will also turn to other cost cutting initiatives such as site or network infrastructure sharing and even operator consolidation as they seek to support growth and be as efficient as possible.

Solving the capacity crunch

To keep up with traffic growth, excluding adding capacity, 41% of operators said they'd look at offloading traffic to ease constraints, especially through Wi-Fi. Another 13% would consider offloading to femto cells. (See chart 9)

Other traffic management techniques, such as throttling and use of policy control, as well as new charging schemes also received strong support from respondents as solutions to traffic growth.

Burley says there is no silver bullet to dealing with traffic growth and numerous solutions to manage capacity need to be used.

Bridgewater's Sharpley agrees. "It's not an either-or situation. Operators will need to deploy a toolkit of strategies to manage explosive mobile data traffic growth, including policy control, data traffic offload, and migration to 3G and 4G."

Research from Chetan Sharma Consulting (sponsored by Bridgewater Systems) shows that by deploying a combination of these strategies, operators can reduce costs by more than 60% over the next three years with savings of 20-25% from data offload to Wi-Fi or femtocells, and over 10% from policy control alone.

Sharpley also sees opportunities to combine data offload and policy control. For example, operators can use policy control to "surgically offload" certain applications to another access network or apply policies that offload traffic based on network conditions or a subscriber's location.


Respondent profile

The Telecom Asia-Ovum online survey was conduced in December and early January and had responses from more than 320 telecom executives in 19 countries across Asia Pacific. Almost a quarter of those surveyed were mobile operators, and another 18% were integrated players. Management accounted for 28% of respondents, sales/marketing 28% and engineering/operations 23%. This was the second year the survey was conducted.

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