LTE operators have a major problem. ARPU is dropping, but data consumption continues to grow. The big LTE operators are forced to give bigger data bundles for lower prices. This will not end well.
Wi-Fi operators also have a major problem. They're spending more money on equipment than they collect in Wi-Fi service revenues. Frankly, that's unsustainable without some way to create revenue from the Wi-Fi network. The basic problem: Nobody pays for Wi-Fi anymore.
This is like one of those psychological experiments where you give peanut butter to one kid, and jam to another kid. Can they work together to make sandwiches, or will they stubbornly hang on to their prize?
Look at the wireless situation: LTE operators need a way to push more data to the consumer with a network architecture that is much cheaper. Wi-Fi operators need a way to bill customers that think Wi-Fi should be free. LTE operators are able to charge money for every GB, but Wi-Fi operators can't. Wi-Fi operators have huge capacity, and LTE operators need capacity. Roaming partnerships are the obvious answer.
To get down to the details, there are two technical directions to explore: LTE-LAA and LWA.
LTE-LAA drops the cost per bit of LTE services, up to 10X. An LAA small cell will actually carry more capacity than a macro LTE sector, at a fraction of the cost. Most LAA small cells will use multiple licensed bands for 3G/4G service, plus some fat unlicensed channels.
It's important to note that with LTE-LAA, end users that won't pay for Wi-Fi will be happy to pay for LAA. It's simple: The consumer will see the LTE icon lit up on their handset and they will think they're using LTE. The end user won't know that their Facebook video flew through the air on an unlicensed band. And they will happily pay, if the LTE anchor channel provides continuity and high quality.
Mobile Experts has run some ROI calculations to examine the investment in LTE-LAA. Our conclusion: LTE-LAA is a path to long-term profitability for big mobile operators, where they can maintain control of the customer…but this requires a big investment in small cells. Bet big and, possibly, win big.
LWA could save mobile operators that can't afford a big LTE network. Network operators that don't have strong LTE coverage would not benefit much from LTE-LAA, because they won't be able to maintain an LTE anchor channel most of the time. These operators are more likely to select LWA (LTE-Wi-Fi Aggregation), where LTE is used when it's available, but Wi-Fi is used at other times. This approach still uses an LTE control channel wherever possible, but allows for wider use of Wi-Fi networks owned by other players. The key benefit of LWA for the mobile operator: LWA avoids the multi-billion dollar expense of building out widespread LTE coverage. The cost-sensitive tier of the mobile market, including prepaid users and many urban users, will go in this direction.
LWA could save the Carrier Wi-Fi ecosystem. Cable operators and wireline Wi-Fi operators don't have a clear way to achieve an ROI on Carrier Wi-Fi investments today. All of these companies realize that public perception is against them: people believe Wi-Fi is "free." But mobile operators such as Sprint and T-Mobile USA have the ability to charge a decent price for wireless data. These mobile operators will choose to engage with the cable operators, and pay them a roaming fee for the use of the Wi-Fi network. This business model can also flip over: The cable operator can take the lead and pay Sprint or T-Mobile as an MVNO. The key is that LWA techniques will be used to improve handovers between multiple networks, to provide a more continuous connection. We believe that over the next 10 years, handover and core network management techniques will evolve to make LWA work pretty well for spotty LTE networks.
Mobile Experts has recently completed some ROI modeling for both LAA and LWA scenarios, so we have a clear view of how a mobile operator can improve their profitability through either approach, and what an appropriate Wi-Fi roaming fee should cost. In fact, we expect many LTE operators to use both approaches, with LTE-LAA where small cells are deployed and LWA in other locations.
At the end of the day, the technology choices of the carriers will depend on their willingness to engage in an LWA roaming partnership. If the big cable companies and wireline Wi-Fi providers are willing to open up a Hotspot 2.0 roaming deal with major mobile operators, then we see a path toward healthy profit for everyone. If cable companies and mobile operators stay in competitive stances, refusing to work with each other, then everyone will struggle to make money.
Joe Madden is Principal Analyst at Mobile Experts LLC. Mobile Experts is a network of market and technology experts that provide market analysis on the mobile infrastructure and mobile handset markets. He provides market forecasts for handset, DAS, small cell, and base station markets, with in-depth research down to the nitty gritty details of frequency bands and power levels. Mr. Madden graduated, cum laude, from UCLA in 1989 and is a Silicon Valley veteran. He has survived IPOs, LBOs, divestitures, acquistions, and mergers during his 24 years in mobile communications.