The future of the mobile broadband market

Eden Zoller June 2008

THE FUTURE OF THE MOBILE BROADBAND MARKET

The future of the mobile broadband market

Mobile broadband is achieving strong take- up, providing additional incremental revenues to operators, encouraging use of advanced 3G networks data capabilities, and potentially generating heavy traffic growth for relatively empty networks. Solutions with attractive pricing are meeting user broadband and mobility demands and addressing new customers in often newly- defined segments.

Executive summary
Prepare for a mobile broadband access dividend The Internet is increasingly central to peoples lives and a mobile phone without an Internet connection is beginning to have limited value. This is driving the need for broadband anywhere connectivity, and combined with increasing laptop penetration and the uptake of plug-and-play USB modems (dongles) is driving huge adoption of mobile broadband. We see significant upside for mobile operators, with new multiple connections and improved traffic revenues. This has already proved the case for 3 in the UK. This will produce what we call a mobile broadband access dividend not unlike the fixed broadband dividend. But access will become commoditised think of smart value-added services (VASs) and other ways to differentiate The mobile broadband access dividend is good news for mobile operators but they need to start thinking ahead now about how to drive revenues when access becomes a commodity. This has already happened with fixed broadband and it will be a similar story for mobile. The problem is that consumers are increasingly unwilling to pay for existing mobile VASs while the Internet has a profound impact in shaping consumer expectations that mobile Internet content services should be free. This means that operators will have to consider advertising-supported services, which is the dominant approach online. They will also need to think of introducing services that do not carry a premium but nonetheless have value, for example security services that make consumers feel confident and hopefully more loyal to a provider. They will also need to think of other ways to differentiate, for example quality of service. Vodafone in Spain is doing just this by offering different speed propositions depending on the customer segment. Another means going is for operators to differentiate thro ugh customer management as users increasingly have multiple mobile Internet devices and connections.

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Operators still need to raise awareness of mobile broadband Mobile broadband is still a relatively new service, so consumer awareness remains relatively low compared to other mobile, even data, services. Therefore, much work remains for operators to educate consumers of the advantages offered by mobile broadband. Advertising and instore/online presence will be vital to ensure that the correct offerings are communicated. It is also important not to damage the markets potential by a focus on unrealistic mobile broadband speeds that will inevitably cause disappointment among consumers . Finding a profitable price point is challenging Mobile operators need to think very carefully about pricing for mobile broadband services. Consumers understandably like unlimited data offerings and it does encourage adoption and worry-free usage. But it can be dangerous for mobile broadband operators. Data usage is generally growing quickly and flat rate plans will fuel this trend, which can introduce capacity issues for networks and affect the quality of user experience for some applications such as video. This will be exacerbated by the onset of heavy fixed-type broadband usage of many data hungry segments. This results in increasing costs and capex for operators needing to improve capacity, and therefore thinner margins. The flat rate model is starting to break down even in the fixed environment where more data caps are being introduced, at least in the fine print. We recommend that mobile operators focus on usage limits as a guard and balance against capacity issues. The devices landscape for mobile broadband is looking healthy The GSA recently announced (April) that 637 HSDPA devices have been launched by 110 suppliers, and operators like 3 believe that the availability of handsets has reached a tipping point. However, it is USB modems or dongles as they are called, that has captured consumer interest and is helping to drive growth. Dongles appeal because they are easy to install and are not too expensive, which is exactly what consumers want. Going forward we expect to see the emergence of a market for embedded cellular chipsets in a wider range of devices such as portable media players and games consoles. Femtocells can help improve the quality of experience Mobile broadband can receive a reduced signal when indoors, which will impact on any broadband service or application down to that device. TV and video services will be particularly sensitive to any degradation in bandwidth due to a reduced signal. Fixed broadband therefore has a distinct advantage of mobile broadband in this area. This is where femtocells can help. Femtocells improve indoor mobile coverage by placing a mini-mobile base station actually within the home. This not only increases coverage, but also performance, with femtocells being able to provide in excess of 5Mbps around the home. In theory this would help a mobile broadband operator provide its mobile broadband portfolio down to the same device whether the person was outdoors or indoors, although as a femtocell relies

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on a fixed broadband solution, this would not allow that user to cut the fixed line altogether. Fixed-to-mobile broadband substitution (FMS) will not be mass-market Even taking into account the fixed ISP users that could be churned to mobile, it would be unlikely that mobile will account for the majority of broadband connections in Western Europe. This is especially true when fibre deployments are gathering momentum across the region and offer far higher access speeds. We think that for the majority of customers, mobile broadband is a complement to rather than a substitute for fixed broadband, which will be disappointing for mobile-only operators looking at FMS as a core plank of their mobile broadband strategy. The exception to this is the mobile-only customer segments that do present some good opportunities, for example, renters and sharers. The group includes those who move too frequently to sign up for a fixed broadband contract and can therefore take their mobile subscriptions with them when they next move. Hybrid carriers are in a strong position When it comes to basic broadband, there will be a segment of the market that will drop their fixed broadband for a mobile broadband subscription students are a good example. However, especially as broadband services become more sophisticated, the majority will stick with a fixed solution for the greater bandwidth and quality of experience. When it comes to the concept of broadband everywhere therefore, converged carriers with fixed and mobile broadband capability will carry the upper hand. This will not mean they will not have issues to solve. Successfully integrating their mobile and fixed divisions together, and solving strategic issues around cost and revenue sharing are just some of the major problems that such operators will have to work through. Get this right however, and they should be better placed to push ubiquitous broadband than those w ith a pure -play mobile strategy, and not in immediate danger of revenue cannibalisation. A danger for hybrid operators is fixed-to-mobile broadband substitution and therefore cannibalisation of fixed broadband revenues. We think the risk of revenue cannibalisation from fixed to mobile broadband is currently small. However, there is a very real risk of revenue cannibalisation where dense, high speed mobile network coverage does enable mobile broadband to be a substitute for fixed, such as in Austria. It can become a greater risk if price wars eliminate a mobile broadband premium. A combination of improving speed and falling prices could then shift low volume and value users on to mobile broadband.

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Trends and opportunities for mobile broadband

HSPA drives mobile broadband and delivers on the 3G promise
In Western Europe, HSPA (High Speed Packet Access) has proven critical in finally providing the user experience promised by 3G. As a cellular technology it also offers true mobility for broadband, as opposed to the patchy, nomadic coverage offered by WiFi. The Global Mobile Suppliers Association (GSA) states that by April 2008 there were 103 HSDPA deployments in Western Europe see the GSA Fast Fact box below for more details. The number of deployments is significant as it provides the economies of scale in both network infrastructure equipment and devices that make an upgrade even more affordable to an ever greater number of operators. Furthermore, as HSPA implementations have evolved so the downlink speeds offered have improved, reaching the sweet spot of a theoretical maximum downlink of 3.6Mbps. This speed is seen as the minimum for offering mobile broadband. The GSA reports that over 62% of HSPA deployments worldwide support peak data downlink rates of 3.6Mbps or higher. GSA fast facts 185 3G/HSDPA operators launched in 80 countries 103 HSDPA networks launched in Europe 637 HSDPA devices launched by 110 suppliers (GSA survey, 3 April 2008) representing annual growth of 150% 116 HSDPA networks have launch ed 3.6 Mbps (peak) downlink service or higher in 58 countries = 62.7% of commercial HSDPA operators, thus establishing the baseline for mobile broadband services. 190 devices support 3.6 Mbps peak 38 HSDPA networks, i.e. over 20%, launched in 25 countries supporting 7.2 Mbps (peak); 128 devices support 7.2Mbps 34 HSUPA networks launched in 26 countries, plus another 24 network commitments/deployments; 66 HSUPA devices launched Almost 100 HSPA devices incorporate WLAN functionality 70 HSPA devices incorporate GPS/positioning functionality compared to 20 in October 2007 Most WCDMA/HSDPA networks combine with EDGE for service continuity and the best user experience. Over 70% of HSDPA devices also support GSM/EDGE.

The main reason for HSPAs popularity for opera tors is that it offers a cost efficient upgrade of existing UMTS infrastructure , as it is predominantly a software upgrade.

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It is also an excellent way to maximise the 3G spectrum that was purchased at such great cost at the turn of the century. As a result, HSPA connections in Western Europe are forecast to rise from just 1% of total cellular connections in 2007 to become the dominant technology with 77% in 2012. However, if WiMAX (both fixed and mobile) is added to the equation then the dominance of HSPA as the key wireless technology in Western Europe for at least the next five years is clear (see Figure 1). There are also spectrum issues to consider. For example, the most widely allocated 3.5GHz band is often limited to the provision of fixed wireless access services. This may change in Europe as the EC has published a resolution that recommends the 3.43.8GHz band to support fixed, portable and mobile services.

Figure 1 Western European connections by technology, 20072011

600,000

500,000

Connections (000s)

400,000

300,000

200,000

100,000

0 2007

2008 2G GSM WCDMA

2009 HSPA

2010 WiMAX (fixed & mobile)

2011

Source: Ovum

HSPA evolution As the 3GPP has evolved the specifications for HSPA (see Figure 2), improvements in the uplink (HSUPA) and downlink (HSPA+) will eventually see theoretical HSPA downlink speeds reach 28Mbps and uplink reach 11.4Mbps. This could even make it viable for a larger role in the mobile operators progression to LTE than was originally envisaged for the specification. Before the end of 2008 several operators

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are expected to trial both configurations of HSPA+, with commercial launches expected in 2009.

Figure 2 3GPP HSPA evolutionary path

Source: Ovum

Mobile broadband device types are proliferating

A major trend over the past two years has been the proliferation of device types capable of supporting mobile broadband and data services. Mobile phones better able to support mobile broadband access and data services have grown dramatically over the last two years. 3G phones with large colour screens, browsers and powerful operating systems are becoming mainstream in developed markets and among certain segments in emerging markets. This has largely been driven by the availability of more mid-range 3G phones. We expect this to continue at a faster pace during 2008 as operators grow in confidence with 3G, and as economies of scale in handsets mean that 3G phones can be produced at a lower cost. 2007 also saw the arrival of attractive HSDPA-enabled devices from all the major manufacturers. Datacards have been available since GSMs infancy and have been traditionally focused on the enterprise sector. However, the biggest development in device categories over the last 18 months has been the huge growth of USB modems (dongles) for use with laptops. However, we expect to see much greater usage

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across a range of devices, leading to the emergence of a serious market for embedded cellular chipsets in a range of consumer electronics. The sort of devices we have in mind are portable media players and games consoles. USB modems offer two very clear advantages over datacards: they are extremely simple to install acting as part-memory stick USB modems contain the required installation software, so are literally plug-andplay although Mac users often require a CD install. This is in stark contrast to the PCMCIA experience, which can prove frustrating for enterprise users even with the backup of in-house IT support teams. As a consumer proposition this is far easier to market, sell and support they are cheap although the radio technology is little different, one of the key drivers for USB modem uptake has been heavy support from the Chinese vendors. Their cheap manufacturing and huge volumes have made the devices so affordable that they are more often than not provided free of charge with mobile broadband contracts. Again, an excellent facet of a consumer offering.

Demand for data services is growing

This section contains forecasts for operator content services (end-user) and it would therefore be misleading to call them Internet services. Ovum does not have forecasts for non-operator content related and data revenues, which is where a lot of the Internet service revenues are coming from (D2C). Anywhere Internet access is clearly core to the mobile broadband proposition, but other applications and content services will play an increasingly important role, particularly as access becomes commoditised as the market matures. We will discuss this in detail in the section on VASs. What is encouraging here is that consumer demand and revenues for data services are improving, as shown in Figures 3 and 4.

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Figure 3 Consumer content and associated data revenues (operators only) Western Europe 2007 ($ 000s)
4,145 2,568 444 1,961 710 386 25,690 Messaging Music Games Personalisation TV and video Other Data

Note: The data category is based on users browsing and downloading content

Source: Ovum

Figure 4 Consumer content and associated data revenues (operators only) Western Europe 2012 ($ 000s)

7,685 3,889 2,615 1,585 1,811 2,378 36,363

Messaging Music Games Personalisation TV and video Other Data

Note: The data category is based on users browsing and downloading content
Source: Ovum

Mobile broadband is personal

Broadband, like the fixed phone before it, has historically been a family or household purchase. Different terminals, personal and laptop computers, networking, routers and WiFi have made it more personal but at a minimum the bill is still communal. Although, the broadband situation does not provide exactly the same comparison with voice, there are similarities and mobile broadband does have potential to change the dynamic as the mobile phone did for voice. This personal aspect of mobile broadband makes mobile broadband appealing to numerous segments such as those in a share houses who want an individual broadband connection or bill.

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The personal nature and mobility also gives rise to different usage patterns for broadband users a bit more like mobile phone usage for voice. Additionally, the individual nature also makes the potential market significantly larger for mobile broadband than household fixed broadband.

Femtocells can improve indoor coverage and service quality

The emergence of femtocells is potentially important in the future development of mobile broadband. Several trials are underway in Europe in 2008 and the first commercial services could appear before the end of 2009. They are relevant from a data perspective, as any improvement in coverage will also have a positive impact. The key benefit of femtocells from a consumer perspective is the improved inbuilding coverage they provide. For data services, being able to improve network coverage to enable data speeds as close to the theoretical technical maximum is a compelling concept. As several operator and vendor studies show, the majority of mobile usage in mature markets, both voice and data, is generated in the home. The most significant challenge for femtocell adoption is that a user needs a fixed broadband line to enable the femtocell backhaul. This is no problem for integrated operators, which can offer the fixed and mobile offerings in a converged bundle, and they will leverage the femtocell opportunity. However, mobile -only operators could find themselves in a situation where they are effectively handing over their traffic to a competitor. This suggests a potentially dangerous quality of service management issue. Who is to guarantee that a broadband ISP will deliver voice and data at the same quality as the macro network? There is certainly potential here for regulatory intervention to ensure quality, but it would be foolhardy for a mobile operator to handover its traffic without some service level agreement. Therefore, in the meantime we expect mobile-only o perators to only implement femtocells over broadband networks with which they have an agreement.

Challenges for mobile broadband

Network speed
A mobile network will invariably compare unfavourably with a fixed broadband line, as radio spectrum must be shared by all users in a cell, so the more active users, the less the available bandwidth. According to our forecasts, in 2011 43.7 million (45%) of Western European DSL connections will be 10Mbps or more. In addition, a further 4.9 million connections will be fibre-to-the-premises (FTTP). Therefore, mobile broadband will not be able to compete on IPTV (although mobile TV is an option) and certainly not high-definition (HD) IPTV. Furthermore, uplink speeds are slower, an issue as user-generated content (UGC) becomes a staple Web

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application. Femtocells could make a difference, but are still unlikely to keep up with other connected home technologies. Therefore, as the main pipe into a bandwidth hungry home it is unlikely that mobile offers a viable alternative to fixed broadband although it could of course act as a complement. Additionally, the reality today is far from the maximum theoretical rates offered by HSPA. For example, 3 UK states that in real-world applications the speed achieved is more likely to be 12Mbps on 3.6Mbps HSPA networks, which is likely to double on the upgrade to 7.2Mbps HSPA. From our experience the reality can be even lower. As a result we would advise mobile operators not to focus on speed as a core message of their mobile broadband offerings, for two reasons: the greater bandwidth available on fixed broadband means that mobile broadband will invariably lose any speed comparison. fixed broadband ISPs are coming under increasing pressure from consumer groups for misleading advertising, which claims the maximum theoretical speed, but delivers far less. The situation could easily be replicated in mobile broadband and generate a negative perception of the service.

The issue of misleading speed advertising has already arisen in the UK. Fifth placed mobile operator, 3 UK, has reported Vodafone to the Advertising Standards Authority for emphasising its warp speed mobile broadband at 7.2Mbps, when in reality the speed was available only in central London and its airports. However, in May 2008 Vodafone announced a major expansion of its service and an overhaul of its messaging. In the future it will downgrade its marketing messaging emphasis on speed and focus more on usability. Interestingly, Vodafone in the UK was, until this point, the o nly company in the groups portfolio to place such an emphasis on speed.

Coverage
Another network issue faced by mobile broadband today is that HSPA is an immature technology and, as such, its availability is limited geographically. Vodafone in the UK is embarking on a major expansion of its 7.2Mbps HSPA network to increase the potential market for its mobile broadband offerings by 3 million more people. Until now it has been limited on priority areas, although even with the network expansion the highest speeds are not available nationwide. Therefore, the scale of the mobile broadband opportunity is limited by where the appropriate network technology is available. In this case network sharing could bring major benefits. Aside from the capex and opex reductio ns of a single network, it also boosts both geographic coverage and coverage density. For example the T-Mobile and 3 network sharing deal in the UK will ultimately cover 98% of the population. Crucially for mobile broadband, this will be HSPA too, maximising both operators market potential and giving them a competitive advantage in relation to quality of service.

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Network capacity
There is no doubt that mobile data traffic is increasing. 3 UK saw throughput on the network increase seven-fold between October 2007 and February 2008, coinciding with the sharp uptake of mobile broadband. In Austria, 3 is averaging 1GB of data per mobile broadband user per month. The result is that within one year network traffic increased by 3000% and only 10% of its network traffic is now voice. 3 Austria offers mobile TV too, so this was not totally mobile broadband related, but it highlights the huge volumes of traffic now hitting mobile networks. Ovums discussions with operators make it clear that many networks will not be able to handle the onset of heavy fixed-type broadband usage of many data hungry segments. Unfortunately, this means that as capacity and speed requirements increase even with mid-term technology developments (such as HSPA+ and even LTE) that mobile networks will struggle to provide profitable price points for the mass market. 3 Austria, along with its Swedish counterpart, has already experienced network capacity issues, although the operators feel that all have now been addressed. In the radio access netw ork (RAN) 3 has had to deploy a second frequency at some cell sites (it has three). In contrast, most other European mobile network operators have not yet seen capacity issues in the RAN and in general feel they have significant capacity available at this point.

Price can mobile compete with fixed broadband?

As Table 1 highlights, the offerings at the lowest end of the market can be relatively competitive with fixed broadband in terms of monthly cost, but not in terms of performance. If costs are comparable then the network speed of fixed broadband is stronger. If network speeds are comparable (in the case of Vodafone only and then solely in London and major airports to date) then mobile broadband usage limits are far more restrictive than those in fixed. However, Table 1 does show that there are opportunities at the low end of usage for mobile broadband to pick up subscribers in some segments. The phenomenon is not limited to the UK market. In Italy, Telecom Italias fixed broadband packages cost around 15 per month for unlimited usage, compared to Telecom Italia Mobiles 20 for 100 hours of mobile broadband access. However, the mobile price premium is most apparent at the high end of the market where the mobile networks simply can not compete with the high speeds and high data usage allowances offered by fixed broadband ISPs.

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Table 1 UK fixed and mobile broadband cheapest price comparison

Cheapest monthly consumer tariff (excluding offers & modem costs) 16.00 15.50 16.39 14.99 12.00 20.00 15.00 15.00 10.00 15.00 Maximum theoretical speed (Mbps) 8 2 8 8 2 3.6 3.6 3.6 3.6 7.2

Network type Fixed

Operator BT Virgin Media Carphone Warehouse Tiscali Orange

Usage limit (GB) 5 n/a 40 unlimited 6 3 3 3 1 3

Mobile

O2 Orange T-Mobile Three Vodafone

Source: Companies

Roaming
Roaming is another area where high mobile pricing premium is apparent. However, it should be remembered that at least mobile broadband can offer roaming, which is some thing that isnt possible for fixed ISPs. Nonetheless, roaming prices are high, and with mobile broadband becoming an increasingly consumer-oriented proposition there is an opportunity for one of Europes major mobile operators to target data roaming, for both consumers and enterprises. This should occur before regulatory intervention as there are already stories of massive data bills being run up unwittingly and mobile broadband, by its very nature transportable across borders, could well be on the EUs future agenda. Even for enterprises, data roaming tariffs are expensive. For example, Vodafone charges either 10 (12.50) per day or 95 (120) per month, with a usage cap of 5GB and excess data charged at 4.25 (5.35) per MB. However, this excess usage fee is the equivalent to 4,325 (5,454) per GB, compared to the UK excess charge of 15 (19) per GB.

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Strategic issues for operators

Critical success factors
The following critical success factors can be identified that apply to both integrated and mobile operators: best-in-class network capabilities: coverage, speed, capacity, scalability and efficiency timely device evolution: devices that optimise recent network upgrades need to hit the market as soon as possible to keep operators ahead of their peers functionality. Operators must also maximise the potential of new form factors to steal first mover advantage from their rivals, such as the handset as modem simple, competitive offerings in each segment: a portfolio of offerings is needed that targets the different elements of the customer mix value-added services: the most common examples appear to be security, roaming and backup services, but both corporate and consumer services are under development technical support: this is not just having helpdesk staff trained and available to help customers, but also support for different PC operating systems, such as Microsoft, Apple Mac OSX and Linux.

Market segmentation
Enterprise This is the historical foundation of mobile broadband services and it would be remiss to forget about them. They are also likely to invest more in services to guarantee high quality of service and higher usage limits. Roaming is a key VAS. However, with the development of USB modems and lower cost tariffs the divide between business and consumer users is becoming blurred, particularly at the smallest organisations. Internet anywhere This group has evolved from the previously labelled prosumers to embrace a wider group of intensive Internet users who want to keep up to date with their social networks and Web content. Unable to be parted from the Web, they are the largest consumer generators of mobile broadband traffic on a per-user basis. Therefore, spending on data services will be high. They will view mobile broadband as more complementary than a substitute to fixed (unless they also fall into one of the other segments). This also means that they are an excellent target for integrated operators bundling fixed and mobile broadband offers, potentially through a femtocell. They are also most likely to be

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attracted by messages highlighting the personal nature and mobility. However, as power users of the Internet they would also be very aware of network quality, most specifically in relation to network availability and speed they will ignore maximum theoretical speeds and make great demands on the network. Renters and sharers This is the largest consumer segment by number and the first of the potential targets for fixed-to-mobile broadband substitution (FMS). The group includes those who move too frequently to sign up for a fixed broadband contract and can therefore take their mobile subscriptions with them when they next move. They are likely to be young professionals, so of high value. To date this group has comprised predominantly males, although several operators see 2008 as the year in which females will be increasingly targeted. Value-added services will be of most interest here. However, it may not be exclusively an FMS target segment. It could be that the accommodation is served by DSL, but the prospect of a personal connection is compelling. Price sensitive This group has low data usage requirements and will identify the opportunity to save money by switching from the low end fixed broadband offering to a mobile broadband equivalent. Being extremely cost conscious they will want the lowest price, but also speeds and usage limits similar to those available through fixed. Mobility is less of an issue as it is a true FMS target group. The segment is of a reasonable size, but is also low value and highly likely to churn when a better offer appears. Casual users This segment appreciates the mobility and simplicity messages, but their levels of usage cannot justify committing to a two-year contract. Therefore, they will appreciate the freedom of a prepaid tariff. Although the value to the operator will be reduced, the incremental revenues generated would otherwise be lost if such casual users were to be ignored. This also has the potential to be a major segment in terms of numbers of users. Second homes This group is relatively small, but likely to pay a premium for network availability if it covers their second residence (often located in more remote areas). However, providing the main broadband service to a second home is actually a complementary service as the user will feel that the primary residence is the main broadband service and will most likely have higher bandwidth demands for that connection than a second home. In the second home the best connectivity will be key. However, it is likely that once purchased, the mobile broadband service will be

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used not only at the second home, but also on the way there and even when mobile near the primary residence. As it also a temporary residence prepaid could be a viable offer to provide incremental revenues to the operator if such segments feel that a full time contract cannot be justified. No broadband alternatives The level of broadband penetration in Western Europe means that this is a very small group, but distance from the exchange and issues in the network does result in a segment that cannot physically receive fixed broadband services. Therefore, these consumers are perfect for mobile offerings. They are also likely to spend to achieve as close to a fixed broadband experience as they can get, as it will be their only broadband connection. They will opt for the highest speeds and largest data allowances. However, network availability will be key. After their experience (or lack of) with fixed broadband they will only chose the mobile broadband provider with the strongest signal. They are also likely to be interested in VASs as they will have no fixed alternatives. Students and itinerant workers Both groups have two key attributes that make them similar mobile broadband targets. Firstly they are in temporary accommodation and likely to move frequently. Therefore, a broadband contract is irrele vant. Furthermore, differentiating them from renters and sharers, they have relatively low disposable income. Lower usage tariffs will be most appropriate to this group with an emphasis on mobility. However, there are also likely to be users in the student group that aspire to the Internet everywhere segment. Providing maximum usage at the highest speed, but for the lowest cost, will be key to targeting this subsegment. Low end connectivity Any broadband users requiring (or currently on) a plan under 2Mb ps with usage of less than 5GB/month can be targeted. This will be applicable to many users in emerging markets but also sectors of more mature markets where certain segments have low disposable incomes. It could also apply, for example, to people with credit history issues, who to date have been unable to subscribe to a fixed broadband contract. Therefore, prepaid offerings will be of interest. Speed, usage limits and VASs will be of little interest, as connectivity at a low, manageable cost will be key.

Evolution of the service proposition

Mobile operators typically offer mobile broadband services based around the following propositions:

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get connected with your PC anywhere, based on a laptop/dongle or datacard combination. This is primarily focused on being an access provider the Internet on your mobile phone. This is focused on being a service provider for personalised mobile Internet. This has been difficult to get right but is improving. This is because of better device interfaces and capabilities, operators moving to a more open environment through developments around un-metered tariff and partnerships with content providers and Internet players that extend outside of the operator-controlled portal. And of course mobile broadband infrastructure is helping with improvements in quality and performance.

At the moment operators are selling the two propositions as separate services. This is understandable as it enables them to grow the number of connections via additional SIM cards and revenues. Most opera tors will pursue this path, or at least as long as possible, but we think others will look at a single mobile broadband access package for both types of proposition. The consumer could leverage a single data tariff across laptop or mobile phone, increasing data traffic as mobile data use becomes easier. Ultimately, device choice would simply come down to a choice of the form factor most relevant to the users needs at the time. In this context there is the potential for the handset to act as the modem for connectivity, an idea currently being investigated across Western Europe. With the high penetration of Bluetooth in both laptops and handsets, connectivity between devices is already possible. The service logic is simple too, as it provides an extremely streamlined solution for the user. Just one device, the device most likely to be carried everywhere, is needed to gain access through either the mobile device screen or the laptop. This might prove particularly appealing to mobile-only operators as the marke t matures. This strategy could provide differentiation, provide convenience and value to the consumer, and by doing so foster loyal and hopefully attract new users. We believe 3 is interested in this approach. However, this is a disruptive model and despite these positives there are two major obstacles that could prevent it becoming a mainstream proposition: it eradicates the need for a separate connection and therefore subscription to mobile data services. This undermines the entire revenue and connection growth opportunities from mobile broadband the innumerable connectivity options between network operator, handset hardware, handset OS, laptop hardware and laptop OS make this a technical minefield today, and far less simple than it could be. If promoted today it would result in unnecessary support costs. Before it is viable a technical solution will be needed to make it far less complex and far more reliable.

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Pricing strategies
Mobile broadband tariffs today typically apply a capped usage limit. This is because a true flat rate model could drive usage to the point that it might affect network capacity and the quality of service for some applications. By far the most common limit is 3GB per month, which accounts for 38% of the tariffs in the UK, Italy, Austria and Germany. However, 1GB is proving a useful low-level entry point for a low monthly contract value. Similarly, 5GB and 7GB offerings are becoming increasingly common as more mature mobile broadband markets such as Austria and Norway evolve and opera tors are able to target higher-spending power users or differentiate their offerings. Both instances highlight the need for operators to offer a portfolio of mobile broadband offerings to serve their target segments. In all instances, when the usage limit is exceeded an additional charge is incurred, ranging from 0.10 to 0.25 per MB, depending on the operator and plan. However, another tactic is to throttle back performance once the limit is reached. This is used by Vodafone in Spain and Telenor in Norway, but although protecting the quality of the service for other users, this does create a danger that the largest users will resent the change in performance. We would suggest that it is far more commercially viable to charge users for extra usage as that is ultimately the objective of offering such services. However, such a tactic could be useful to impose on repeat offenders to protect the network. It would also act as a good deterrent, with the ultimate sanction of disconnecting users continually abusing their contract terms. Its not just about gigabytes Although the vast majority of mobile broadband offerings are focused on capped usage there is a danger that the limit is meaningless for a user. How much data is used by accessing a Web page? Or checking email? Or watching a video? In response, some operators have taken an alternative approach, most notably through imposing time -limited access. An excellent example is Telecom Italia Mobiles recent mobile broadband tariff, which charges 20 per month for 100 hours of mobile broadband access. T-Mobile in Germany also offers time -based tariffs for 100 and 40 hours. There is an issue that such metered usage harks back to the early days of dial-up Internet access where consciousness of the time spent creates a desire to get offline as quickly as possible. DSL has been hugely successful in marketing the idea of always on connectivity, and has helped place Internet connectivity more centrally in peoples lives. There is a risk that a step backward in mobile broadband offerings will mean that they do not compare at all favourably with unmetered fixed broadband. However, it is important to understand the positioning of mobile broadband in these circumstances. Neither Telecom Italia Mobile or T-Mobile use time as the sole

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basis of their offerings. It is simply another way for users to select their services. Furthermore, mobile broadband is predominantly seen as complementary to its fixed counterpart in Western Europe. Finally, the allowances of 100 hours are quite reasonable and equate to 3 hours 20 minutes per day. Combining the factors of choice of offerings, a complementary to fixed perspective and high allowances makes time -based tariffs a useful addition to an operators mobile broadband tariff portfolio. Nonetheless, we do not expect time to become a core basis for mobile broadband offerings. The prepaid mobile broadband opportunity At present there is a great deal of emphasis on contract plans that tie in customers for a set period of time, usually two years. This is completely understandable as a stable revenue stream can be achieved over the length of the contract. As operators build their mobile broadband portfolios we would expect to see fixed term contracts continue as the dominant format. However, we believe that there is a major opportunity for prepaid mobile broadband offerings as part of this service portfolio. This is especially true where mobile broadband is marketed as complementary to fixed services Prepaid is also a viable option in markets where prepaid makes up a significant share of voice connections, for example Italy where 87% of connections are prepaid. In these cases prepaid mobile broadband offerings are attractive simply because that is how the majority of users are accustomed to paying for mobile services. Prepaid tariffs do exist today and the main barrier to uptake is the cost of an unsubsidised modem or datacard. However, several offerings in the more mature market of Austria show how prepaid mobile broadband offerings can evolve to look very similar to their prepaid voice cousins, with the device and some data bundled into an initial starter pack. Furthermore, as device volumes, USB modems in particular, increase dramatically over the next two years we expect to see the prices fall. Given that this will coincide with a more intensified competitive landscape in Western Europe, prepaid could well be the mobile broadband battlefield.

Exploring value-added service revenues

At the start of this report we predicted that mobile broadband access will see a similar growth curve experienced by fixed broadband access what we term the mobile broadband dividend, as shown in Figure 5. This is great news for mobile operators desperate to make money from their 3G investments, particularly data services. But they need to start thinking ahead now about how to drive revenues from mobile broadband when access becomes a commodity and competition intensifies. This has already happened with fixed broadband and it will be a similar story for mobile.

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Figure 5 The mobile broadband dividend

3.0% 2.5% % of GDP 2.0% 1.5% 1.0% 0.5% 1996 1999 1987 1990 1993 2002 2005 0.0% 1981 1984 Total Total Fixed Mobile

Mobile broadband dividend Fixed network broadband dividend Fixed network voice revenues

Note: this data only refers to access revenues

Source: Source ITU

When considering VASs we need to keep in mind the key usage scenarios for mobile broadband will vary according to whether consumption is based on a laptop, mobile phone or other handheld device. The form factors and capabilities of each are very different and this will clearly have an impact on the services each is best positioned to support. Another important factor to be aware of is that not all VASs will command a premium, but can nonetheless add value in other ways, for example by providing consumers with useful tools and an improved user experience. Communications services Email and instant messaging (IM) are two of the most important applications in driving PC Internet usage and it is assumed these cant live without services will be core to a mobile broadband proposition. We think that, broadly speaking, this is true particularly for a laptop/dongle scenario. But we need to be careful not to oversta te the assumption regarding email and IM access via a mobile phone over broadband, as people's need to communicate while on the move is already satisfied to a large degree by voice and SMS. Content services The increased capacity and speed offered by mobile broadband generally improve the quality and user experience of mobile multimedia services such as games, music, TV and video. For example, less latency for games, faster downloads for music and videos, better image quality for TV. Mobile broadband will also play well to services that need frequent updating or to be accessed on a regular basis. Examples here include social networks and information services such as news,

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weather and travel. However, many of these services are already low cost or free and we do not think mobile broadband will change this, which is where mobile advertising revenues come into play. We will discuss this in more detail below. However, there is a scenario where mobile broadband could have a negative impact on the quality of experience for some services and that is when inside buildings. Mobile broadband can receive a reduced signal when indoors, which will impact on any broadband service or application down to that device. TV and video services will be particularly sensitive to any degradation in bandwidth due to a reduced signal. Here, femtocells could play a role improving this scenario. Security In particular virus protection is already being promoted by several operators. For example, Vodafone has launched it in some of its markets already. In such cases, the emphasis will need to be more on mobile protection to prevent offering nothing in addition to existing security offerings. The alternative would be that security becomes an incentive to attract customers rather than a revenue generating service. Laptop client software There is interesting potential for operators to optimise the laptops control panel software. Today most simply install a brand version of the client software provided by the modem vendor. Vodafone is currently developing its Dashboard, which it has designed to deliver service updates and software patches. It is also going to use it to go beyond adding value to its offering, by delivering additional, revenue generating services, such as VPN access for enterprises, and music and content for consumers.

Other means of differentiation

Quality of service It is also possible to use quality of service to differentiate between an operators own offerings as well as competitors. For example, Vodafone in Spain offers different speed propositions depending on the segment. The highest speed (7.2Mbps) is aimed at enterprises, while the lower cost offering provides a slower (3.6Mbps) speed. Furthermore, if the lower speed users data allowance is exceeded then the users traffic speed is downgraded. Vodafone are keen to stress that the offering isnt driven by network management concerns, but it is a means to enable differentiated offerings. Customer management Moving further forward there is also potential for operators to differentiate through the customer management offered to consumers. Today mobile broadband adds an extra SIM to a users account, but what happens if the user of the future has a

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mobile handset, USB modem and multiple mobile Internet devices (MIDs)? How does the operator manage the true value of that account rather than the SIM? Today consumer customer management is handled at a SIM model, but as SIM ownership multiplies in the future there are two models today that may provide an insight. Firstly, family tariffs are already forcing operators to manage multiple SIM accounts, albeit from a predominantly voice perspective. However, these will also need to evolve as data becomes more important to the offering, but they could form the nucleus of interesting household offerings based around femtocells. The second is to view the individual consumer with multiple connections or households as an SME. For example, an SME today with a voice account can consist of ten connections. A household with handsets, mobile broadband and MIDs could easily approach that number of connections. Therefore, the customer management principles applied to maintaining SMEs today could be applied to such households. Of course, as consumers and not business customers, the value of the tota l account will most likely be smaller, making it a challenge to provide such a service cost effectively.

Operator positioning
Hybrid operators: a converged balancing act to avoid cannibalisation
Mobile broadband offers an excellent opportunity to integrated or hybrid operators (those with both fixed and mobile offerings), as long as they can avoid falling into the trap of cannibalising fixed broadband revenues. The central platform of an integrated offering is, as Telenor describes it, to provide the best possible broadband experience wherever you are. By combining fixed and mobile broadband with WiFi hotspots, users with integrated operators effectively achieve best available access to the Internet via a PC. In this scenario mobile broadband is complementary to fixed broadband, rather than a substitute. This converged approach is most evident in Telenors enterprise mobile broadband offering. The services software enables users to switch seamlessly between fixed, WiFi and cellular access. Access to WiFi is also included in all its mobile broadband offerings, as is the case for T-Mobile in the UK. In the UK, Orange now offers a fixed and mobile broadband package for 22 (28) per month and O2s mobile broadband is available only to existing fixed broadband or mobile customers. Telekom Austria has also launched a combined fixed and mobile broadband offer, through which fixed broadband customers can add mobile services for 14.90 per month. Telecom Italia Mobile has also stated to Ovum its intention to launch an integrated offering in the near future.

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Of course, there is an issue with such a converged solution as to how the package is priced. A per usage model on the mobile broadband element would undermine the premise in the home if WiFi is available. A flat rate bundle comprising all of the connectivity elements is far simpler to understand and prevents revenue leakage. Revenue cannibalisation: generally not a threat, yet The danger for integrated operators is fixed-to-mobile broadband substitution and therefore cannibalisation of fixed broadband revenues. We think the risk of revenue cannibalisation from fixed to mobile broadband is currently small. Network speeds mean that mobile broadband is being marketed as a complementary service rather than as a substitute to fixed. Therefore, marketing should highlight mobility and convenience. However, there is a very real risk of revenue cannibalisation where dense, high speed mobile network coverage does enable mobile broadband to be a substitute for fixed, such as in Austria. Telekom Austria is already reporting some cannibalisation, but it feels that currently the growth opportunity is outweighing the threat. Nonetheless, integrated players such as Telekom Austria will be focusing on more converged offerings to avoid the trend becoming too damaging. Furthermore, as mobile broadband network coverage develops across the rest of Europe, fixed broadband revenue cannibalisation could become a greater threat to incumbent operators. It can also become a greater risk if price wars eliminate a mobile premium. A combination of improving speed and falling prices could then shift low volume and value users onto mobile broadband, eradicating the additional value created by mobile broadband offerings. Mobile-only segments are also open to integrated operators Despite the focus on the fixedmobile converged offering, integrated operators can also target the mobile-only customer segments, described above, for which fixed broadband is not desirable or not an option, for example customers too far from the exchange for fixed broadband or those in temporary accommodation (such as students, house sharers or migrant workers). However, the mobile -only operators will be focusing their attention on these segments, so competition will be fierce. These segments are therefore the most likely to see the greatest pricing pressure. Femtocells add to the offering As discussed above, integrated operators are best positioned to benefit from femtocell technology to serve the home. An integrated opera tor controls the traffic over both mobile and fixed networks, thereby avoiding any quality of service issues that could arise from handing backhaul over to a third party. To the user it becomes practically irrelevant as to which network is used at home. Femtocells also provide an opportunity to provide users with a single home gateway device, which integrates the fixed broadband modem, WiFi router and femtocell. That way the user can access the Internet at home regardless of device

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laptop or mobile handset. There is also the opportunity for voice revenues through the femtocell, which should not be ignored, although of course the risk of cannibalisation from the fixed network is heightened.

Mobile-only operators: fixed-to-mobile broadband substitution?

For operators with just mobile networks (and not even a fixed DSL offering) the mobile broadband proposition is both simplified and complicated. The simplification arises from the fact that there is no conflict of interest within the organisation. The mobile broadband strategy is the broadband strategy. Mobile operators have carte blanche to highlight mobile broadband as the best choice for broadband access. Messages should focus on the simplicity, flexibility and personal nature of mobile broadband. Furthermore, the messaging can be clear and uncompromising to other services. All segments can be safely targeted and, in the consumer space, much emphasis can be placed on the fact that HSPA offers sufficient speeds for average Internet usage. In this scenario fixed ISP customers can be targeted head-on. Fixed-to-mobile broadband substitution: the exception rather than the rule For the majority of customers, mobile broadband is a complement to rather than a substitute for fixed broadband. The exception to this is the mobile-only customer segments. Even taking into account the fixed ISP users that could be churned to mobile, it is unlikely that mobile will account for the majority of broadband connections in Western Europe. This is especially true when fibre deployments are gathering momentum across the region and offer far higher access speeds. In addition, fixed services can offer sufficient bandwidth for IPTV to consumers and corporate networking, which is out of touch for mobile. Of course there are always exceptions, and Austria has proven that mobile broadband can substitute for fixed. Indeed, 3 Austria claims that mobile will be the access technology of choice in the future. However, as the case study below highlights, there were particular factors shaping the markets evolution that dont appear across the rest of Western Europe. The mobile broadband providers are also facing renewed pressure from the fixed ISPs, so it is not certain that the current scenario will continue in the long term. Mobile broadband wholesale ISPs? Although not actively pursued as a strategy to date, there is an opportunity for mobile operators to enhance revenues by offering wholesale data access to thirdparty ISPs wishing to offer mobile broadband services. As in the fixed broadband space, this could be a way of generating new revenues through the optimisation of another brands strength.

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In particular, existing fixed ISPs taking advantage of local loop unbundling (LLU) may see this as an excellent way to complement their existing offerings. For mobile operators it would be a cheap way of selling into a niche customer base that may otherwise be difficult to target, as the current MVNO model allows. However, as with wholesale voice services today, operators must also be wary of cannibalising their own revenues. Again, the key would be for the network to make this option cost effective, but 3 Austria claims that a wholesale mobile broadband offering could be more cost effective than unbundling a fixed line, which currently costs a minimum of 10 per line.

Case studies
Telekom Austria
Austria is one of the most advanced mobile markets in Western Europe, with mobile penetration in 2007 of 119%. Furthermore, FMS in the voice space is well established, with Telekom Austria (operating as A1) reporting that 70% of its voice minutes are carried over the mobile network. Almost half of new households wont take a fixed line. In the mobile broadband space, there were 500,000 net adds in 2007, half of all broadband connections. Telekom Austria had 290,000 mobile broadband subscribers in 4Q07. However, Telekom Austria launched its mobile Internet services to business customers in 2004. So why has the Austrian market taken to mobile broadband so enthusiastically over the past 18 months? First and foremost, Austrias mobile networks are of a high quality. The Austrian operators believe the density of basestations per kilometre is higher than elsewhere in Western Europe. This provides good geographical coverage across the country and ensures capacity at the basestation is maximised. In addition, the networks are advanced in terms of network technology. Telekom Austria now offers a maximum speed of 7.2Mbps in the downlink and, importantly in comparison to other Western European markets, 1.4Mbps in the uplink. Combining the speed with the network coverage gives a compelling offering. However, Austria also displays a significant push factor away from fixed broadband. In 2007 we estimate that broadband penetration was 24%, the tenth highest in Western Europe out of 20 markets. The reason for this was that broadband was relatively expensive compared to other markets. Therefore, as Table 2 shows, mobile broadband pricing was extremely competitive.

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Table 2 Austrian mobile broadband pricing

Consumer pricing Fixed Telekom Austria UPC Tele2 iNode (UPC) Mobile 3 A1 (Telekom Austria) T-Mobile One Highest monthly fee $62.67 $111.78 $50.11 $111.78 $91.37 $46.46 $38.72 $77.44 Lowest monthly fee $24.99 $23.74 $21.98 $22.48 $10.84 $23.23 $23.23 $15.49 Usage/time limits/unlimited Usage; Unlimited Unlimited Usage; Unlimited Unlimited Usage Usage Usage Usage

Source: Ovum, companies

In addition to price, the tariff plans were simple and capped. Our discussions with the Austrian operators highlighted the danger of offering unlimited packages. All operators offer a range of tariffs tiered around monthly usage limits ranging from 300MB to 30GB at 3. Prices start at 7 for the former plan and go up to 59 for the latter. The standard contract length is 24 months for all operators, although 3s 300MB offer is just 13 months. Furthermore, prepaid offerings from Telekom Austria and T-Mobile completed the tariff portfolio in the market. The final factor in 2007 was the introduction of USB modems. Once the convenience of mobility and ease of install were combined with the simple and cost effective pricing, the drivers for uptake were complete. Customer segmentation is less of an issue for Austrian operators as mobile broadband is marketed as the broadband of choice However, Telekom Austria reports that despite the convenience of mobile, only a small proportion of users are utilising the mobility of the service. They have found that two-thirds of a subscribers mobile broadband use occurs through the same base station, effectively making it a fixed offering. This also effectively makes it a FMS offering and Telekom Austria is already seeing a cannibalisation effect on its revenues, as it is also the largest fixed broadband ISP. As a result, Telekom Austria is focusing on products combining fixed and mobile broadband access, which are to launch in mid-2008. The company predicts that the convenience and pricing of the converged offering will be key to its successful market acceptance. Moving forward, the mobile operators in Austria see a reinvigorated fixed broadband sector reducing prices as becoming more competitive. However, as a

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case study in the potential for mobile broadband, given the right market conditions, Austria is unique in Western Europe.

3 UK
The company says that customers are finally entering 3 retail stores to ask specifically for data products, and part of the reason is mobile broadband. 3 says there is clear evidence that mobile broadband drives data traffic, which has grown seven-fold since the introduction of mobile broadband in October 2007. Between October 2007 and February 2008, data throughput grew from 200Mbps to 1400Mbps, as shown in Figure 6. CEO Kevin Russell believes that with mobile broadband 3s market opportunity has come of age. Figure 6 Data throughput on 3 UK network October 2007 March 2008
16.00

14.00

12.00

Relative Traffic Growth

10.00

8.00

6.00

4.00

2.00

12/10/2007 19/10/2007 26/10/2007 02/11/2007 09/11/2007 16/11/2007 23/11/2007 30/11/2007 07/12/2007 14/12/2007 21/12/2007 28/12/2007 04/01/2008 11/01/2008 18/01/2008 25/01/2008 01/02/2008 08/02/2008 15/02/2008 22/02/2008 29/02/2008 07/03/2008 14/03/2008 21/03/2008 28/03/2008 04/04/2008

Downlink

Uplink

Total Growth

Source: 3 UK

Russell stresses the importance of network coverage and depth in driving mobile broadband. 3 has a 3G network sharing deal with T-Mobile to address this, and by early 2009 the two operators will have 13,000 cell sites between them. This compares to 7000 sites for 3 alone today. Currently 3 can offer top theoretical speeds of 3.6Mbps, which will increase in the second half of 2008 to 7.2Mbps. The issue of network capacity remains a nagging doubt if data traffic were to explode, and Russell concedes that 3 is still feeling its way around the impact on the network. He also conceded that 3 Austria and 3 Sweden had experienced some network congestion as a result of data uptake. However, he was confident that there was 'significant capacity' in the UK radio network and that the core network could be easily upgraded to cope with demand. 3 believes the availability of

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handsets is approaching the tipping point where vendors include HSPA functionality by default. The GSMA recently announced that 467 HSPA handsets are now available. However, 3 says it is HSPA dongles that are attracting user interest, with the UK market reporting a total of 55,000 sold in January 2008. Russell is keen to stress that s implified pricing has been crucial to consumer uptake. The company recently cut the price of a 2.8Mbps connection to 5 per month for existing customers. The 3 networks 5 Broadband Lite service includes 1GB of downloads, an 18-month contract length, and the latest Huawei E169G dongle. Excess downloads cost 0.10 per MB over the 1GB allowance. Alternatively, a 3GB and 7GB download limit will set existing users back 7.50 and 12.50 per month, respectively. Rivals Vodafone and Orange charge 15 a month for a service based on 3GB of downloads per month, while O2 charges 20 per month for roughly the same . Russell says 3 is not yet ready to offer an unlimited data package, as the potential impact on capacity of high traffic applications, such as file-sharing, was still unknown. 3 UK has embraced an open access model and has pretty much opened up its network to any application. This will continue and Russell says the company will put less emphasis on developing content services such as mobile TV. He thinks that VoIP, email and instant messaging (IM) are the key services for mobile broadband and 3 wants to get ahead of its rivals with these, rather than be distracted by content. It is allowing partners like Skype, Yahoo, Microsoft and Google to offer some of these key communications services. This kind of strategy calls to mind a fixed broadband ISP, rather than a traditional mobile operator.

Vodafone Group
Vodafone has become increasingly active in setting the technology agenda. Recent examples include Vodafones involvement in setting up the OMTP in 2004, and its unilateral initiative of 2006 to reduce fragmentation in the handset environment, known as the Terminal Platform Programme. In the development of standards for 4G mobile networks, Vodafone turned heads in 2007 by joining the WiMAX Forum, and by suggesting that WiMAX and LTE could end up converging into a single set of 4G standards. At the 2008 Mobile World Congress, CEO Arun Sarins keynote address focused on urging the mobile industry to make faster pro gress with 4G. Vodafone is one of the few operators to combine the scale and the geographic scope required to drive the development of mobile technology. For this reason, we belie ve that Vodafones technology agenda is worthy of close attention. In a recent technology roundtable for analysts, Vodafone highlighted the following points: in the next generation of mobile networks, LTE and WiMAX may both play a role. It may be that each predominates in different parts of the world. So there

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is a need to couple LTE and WiMAX developments more closely together, so that 4G can deliver one global standard one phone that works everywhere access bandwidth is increasing rapidly: 3G only turned on in 2004, now HSPA is already delivering up to 7.2Mbps, with plans to upgrade to 14.4Mbps in some hotspots by the end of 2008, and to trial 28.8Mbps commercially soon afterwards. At 28.8Mbps, HSPA users can get real, consistent data speeds around the 3Mbps mark. Thus, HSPA now enables a mobile broadband service that can fulfill the same needs as home DSL and indeed, it is already being marketed in that way with some success in some of Vodafones markets, such as Portugal and Ireland.

Vodafones mobile roadmap to what it calls 4G is based on an evolutionary approach, as s hown in Figure 7. Vodafone is active in trialling both LTE and WiMAX, and is influencing the development o f both technologies via membership of 3GPP, NGMN and the WiMAX Forum. Vodafone notes that both LTE and WiMAX are founded on a set of common technologies (such as OFDM and MIMO), so the operators approach (broadly speaking) is to push for a global 4G standard of which LTE and WiMAX could ultimately become variants. A key distinction between the two is that LTE predominantly uses FDD (frequency division duplex or paired) spectrum, while WiMAX predominantly uses TDD (time division duplex or unpaired) spectrum. One plausible scenario, therefore, is a global 4G standard with an FDD flavour and a TDD flavour, with regional deployment determined by whether FDD or TDD spectrum is available for use, and with devices that can support either one and are thus able to work anywhere in the world.

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Figure 7 Vodafones network technology roadmap

Source: Vodafone

Vodafone is comfortable that its current spectrum holding in Europe is adequate to support its medium-term network development plans. Moreover, there are likely to be further attractive acquisition opportunities during the next few years, especially in the 700MHz range as analogue TV switch-off proceeds. Voice service pricing will continue to experience downward pressure, and the mix of voice and data traffic in the network is shifting towards data at an accelerating rate. At current rates of growth, the number of terabytes in Vodafones network generated by voice is likely to overtaken by the number generated by data sometime in 2008. For both of these reasons, network development strategy needs to focus on optimising capacity, both in access and in backhaul. Although this gives rise to some long-term requirements in terms of spectrum and site density, progress in expanding capacity can also be addressed to a large extent by more immediate projects. Through a combination of power boosting in selected sites, implementing new releases of HSPA, using remote radio heads and treating interference with DSP-based methods, capacity improvements in the order of 20x can be achieved.

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Another potentially important network technology that Vodafone is currently trialling is femtocells. The aim is to assess the potential of femtocells to improve indoor 3G coverage, and to reduce the cost and capacity requirement of future network rollout. Vodafone has no current plans to use femtocells for FMC or other home location-based services, although such services could clearly become a feature of its femtocell trials later on.

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