WiMAX turns the screw on 3G

Cheaper networks a real possibility

Backhaul and fiber costs

The third element is backhaul for the networks. One advantage for established telcos seeking to deliver broadband wireless is, of course, their ownership of fiber. In the US, Sprint-Nextel, even if it sells off its long lines business (and if it is not acquired by Verizon), is sure to retain access to its networks on a preferential basis. For Clearwire, the acquisition of AT&T by SBC is a setback – the start-up was almost certain to be the partner in AT&T’s planned national WiMAX roll-out, leasing its emerging network and spectrum in return for access to AT&T’s advanced fiber installations for backhaul.

Even for new operators, however, the backhaul costs are far less daunting than they were in the days of Teligent. Costs of fiber backhaul have collapsed since the telecoms boom and bust. This was because of tightened telco budgets for build-out, increasing competition from wireless backhaul alternatives and lower overall demand. The cost of owning one’s own fiber is now viable for larger companies – once unthinkable for anyone but a large telco – and this is putting further pressure on the prices for leasing operator fiber.

Contrasting, again, with the unsustainable business models of the earlier broadband wireless operators in the US, we saw Winstar involved in huge deals to acquire or lease dark (unlit) fiber to backhaul its network. Winstar spent $640m for 15,000 route miles of dark fiber in a seven-year leasing deal, one of the largest expenses of its roll-out.

The situation is very different now. Indeed, we see some metro area service providers and large enterprises choosing to buy their own dark fiber rather than lease it, as this becomes more cost effective. Steve Corbato, director of network initiatives at the US Internet2 project, commented: “The telecom boom of the late 1990s led to a glut in fiber assets, and the subsequent bust put undeveloped fiber on the market at bargain basement prices.” Gannett, a newspaper publisher that has built its own metro area fiber systems in three cities, said: “The fiber and the equipment are so cheap now, and anyone who is familiar with IP networking gear can handle a short distance optical network.”

Ford is one of the highest profile enterprises to acquire its own dark fiber to support an ambitious converged network strategy. The auto maker claims that owning fiber gives it the bandwidth it needs to support advanced all-IP applications and saves at least 30 per cent on leasing fiber. For a wireless operator, the potential savings could be even greater.

One telco had been leasing five DS3 (44.736Mbps) circuits for voice and data traffic at a cost of $12,500 per month, but has now signed a long term lease on dark fiber for $7,000 a month and built its own backhaul network, with one-off equipment costs of $50,000, that delivers 1Gbps.

Pressure on 3G economics

All this is shifting the economics of broadband wireless rapidly and putting even more pressure on the ROI potential of 3G. Although mobile WiMAX networks will incur additional costs – unlicensed spectrum will not be an option, and the increased volume of traffic will require more base stations and backhaul – the average revenue per user is expected to rise significantly with mobility because the high bandwidths will be able to deliver basic services at low cost to the operator, and to support innovative new applications that will command a price premium among enterprises and power consumers.

This contrasts with the likely pattern for 3G, whose bandwidth ceiling will exclude its operators from some of the most financially attractive services, forcing them to rely on core applications, including voice, that are steadily losing margin. Enhancements like the HSDPA upgrade for W-CDMA, and the EV-DO and EV-DV iterations of CDMA, will help but will require additional investment on a greater scale than building an entire broadband wireless infrastructure.

Like the first wave of national broadband wireless providers, the 3G operators, particularly in Europe, have put massive upfront investment into their systems and gambled on the principle that ‘if we build, they will come’. However, that will now be tested by the challenge from alternative networks that support not just phone-based media applications such as video chat, but the full mobile triple play – a far more powerful attraction than phoneonly services to consumers, in the three-year timeframe required to get the subscriber units right, and allowing the operator to deliver significantly more bandwidth for relatively low cost because of moderate set-up and running costs and the flexibility of bundling packages.

Researchers forecast that by 2006, there will be 20.6m active Wi- Fi users and 831,000 WiMAX subscribers in Europe versus 21.2m 3G subscribers.

Many of these, of course, will have at least two of these subscriptions but, though the average spend on wireless data services will rise steadily, a multi-network subscriber will spend less on 3G than a 3G-only user (in other words, WiMAX will not be purely an additional spend). Indeed, if the mobile operators persist in billing out 3G services by the megabyte instead of a flat fee model, more people will go for Wi-Fi – yet as they make the inevitable shift to all-you-can-eat, margins will suffer.

On data, broadband customers are traditionally used to spending $30 to $60 per month, more in rural areas or for premium services like video on demand. While this figure will erode, the mobility aspect of WiMAX should support a similar rate in 2007, plus high value revenues from enterprises. This could impact the expected data revenue from 3G, which is expected to be about €16 a month by the end of 2005 in western Europe.

Although there is currently strong association between adopters of broadband and of 3G, the ability of WiMAX to span both camps could make 3G data less attractive or drive its operators to low, flat pricing to compete. Yet Analysys estimates that the monthly ARPU required for a European 3G operator to gain ROI on its network investment will be, in 2005, about $25 from voice and $30 from data, with the voice figure declining to $20 by 2010 but data rising to $60. This will be extremely hard to achieve with the impact of flat rate pricing and VoIP, and a new estimate from Telecom View says that, by 2010, monthly ARPU for 3G in both voice and data will be around $50.

Copyright © 2004, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

Related stories

3G success hangs on handsets
WiMAX delay shakes investor confidence
Make-or-break year for WiMAX