Network sharing is pragmatic way forward
Previously, Ovum has argued that the challenges of slowing revenue growth and the investment required to roll out new networks means that the existing mobile industry structure may no longer be optimal. We raised the idea of a wholesale model, where a network is built primarily to offer wholesale capacity to existing market players. Last week, Yota, a Russian WiMAX-turned-LTE player, announced a wholesale network deal that will make it the key LTE network provider in Russia.
US carrier LightSquared also recently announced a wholesale model for a nationwide wireless broadband network in the country. While these are both extremely ambitious plans, if they succeed, the future of the mobile industry will be considerably different from what it is today.
Yota’s plan is breathtakingly ambitious
Yota is 25% owned by Russian Technologies, a Russian state entity, and it has struck a deal with the four main Russian mobile operators that will make it the key LTE network provider in the Russian telecoms market. By 2014, Yota will build an LTE network that extends to 180 cities and offers coverage to approximately 70 million people. Crucially, the four largest mobile operators in Russia – MTS, VimpelCom, Megafon, and Rostelecom – have agreed to use Yota’s future LTE network. These four operators will have the option to buy up to a 20% stake in Yota after 2014 and, together with Russian Technologies which will reduce its stake, all of these entities could own equal shares in the company after 2014.
At a time when the existing Russian operators are rolling out 3G services, the Yota deal will increase Russia’s mobile infrastructure development much faster than most countries can ever hope to achieve. Therefore, it is no surprise that Russian Technologies said it is backing the deal to “ensure an efficient and collaborative approach to rolling out 4G services in the country.” Given the Russian government’s indirect stake in Yota, this deal shifts the trajectory of the market, with Yota and the Russian government taking center stage.
The deal has both advantages and disadvantages for the four Russian operators. On the one hand, it will remove them from the LTE network investment cycle, which would have cost each operator an estimated $5 billion (€3.5 billion) to $7 billion. However, it could potentially undermine the role and influence that the operators have in the Russian market. The deal will also help to settle the debate over how LTE spectrum is awarded in Russia, where the future of the 2.3GHz band is still uncertain.
If successful, Yota’s plan will radically reshape the debate in the mobile telecoms industry
A wholesale network framework such as Yota’s separates network ownership from service provision, which will fuel the debate on whether the mobile telecoms industry should continue its current infrastructure competition model. Some wholesale networks, such as LightSquared’s in the US and Mobyland’s in Poland, are designed to be open networks, which any third party can use. However, in Yota’s case, it is unclear whether other operators that are not yet involved in the deal will be allowed to use the network. If not, then the Yota model is closed and we have reservations on its implications for competition in the Russian market.
Comparatively, Yota’s model is similar to Clearwire’s (and the model prevalent in the fixed telecoms industry), where the wholesale network owner retains a retail business that competes equally with other retail brands. If the main stakeholders take up the option to buy Yota after 2014, the model will become a type of network sharing agreement, with Yota remaining as the manager of the network.
There is a huge difference between the future outlook of Yota’s plan and that of other players that have embarked on a wholesale-related business. In other countries, wholesale players are building their networks with the expectation that the large operators will use them. However, in the US, there is no guarantee that AT&T, Verizon, or T-Mobile will use LightSquared’s network. The main lesson from existing network sharing deals is that a tenancy ratio of more than one is needed to make a deal economically viable.
In Russia, Yota has guaranteed that it will have at least four tenants on its network, and if the Yota retail brand remains, this will be increased to five. This is a prospect that will significantly reduce the cost of rolling out a nationwide LTE network in Russia. However, it also has implications for capacity constraints, particularly in dense, urban areas.
The industry must proceed with caution
While Yota has stated that its proposed model can “help all operators across the world to take advantage of the massive opportunity that 4G brings,” it is important to reiterate that there are no certainties over how the global industry should proceed. While the four largest operators in Russia may have agreed to subsume their LTE aspirations under Yota’s plan, it will not be easy to achieve this level of agreement everywhere, and the role that the Russian government has played in this deal should not be underestimated. However, what is certain is that it is time for operators, vendors, and regulators to begin to seriously revaluate their expectations for the future of the industry.
The major challenge for the future is an investment funding gap. Mobile telecoms revenues will not grow considerably in the future, and Ovum forecasts that European operators will experience limited growth up until 2015. If that is the future that operators are facing, expecting them to invest billions of dollars to buy spectrum and build new networks may not be the way forward.
Instead, the industry needs to be pragmatic about the future, and options such as active network sharing and combining the use of spectrum should not be dismissed. For example, rural areas are unlikely to support multiple network infrastructures, and it is encouraging to see the industry acknowledge this by embracing various options to share the burden. If the mobile industry is to remain viable in the long term, many more innovative business models such as Yota’s will need to emerge and thrive.