The road to LTE was written in association with the Economist Intelligence Unit

LTE opens up a plethora of possible business models, all of which are untested. Mobile operators will have to tread carefully.

Mobile operators appear to be embracing next-generation networks (NGNs), which promise much faster downlink and uplink speeds, extra capacity and greater cost-efficiencies than their current crop of technologies. By far the most popular choice of network upgrade is long-term evolution (LTE) – now considered the main 4G mobile technology. According to the Global Mobile Suppliers Association (GMSA), 180 operators in 70 countries had invested in LTE by the end of 2010, with 17 LTE networks already offering commercial service.

For all the momentum, however, it is too early to say that LTE is a runaway success. The overwhelming majority of operator LTE commitments are trials and pilots, reflecting the relative immaturity of the technology. ‘Operators are still learning about the mobile capability of LTE, as well as how handover [for voice calls and data traffic] works between next-generation and existing networks,’ says Markus Haas, managing director of corporate affairs and strategy at Telefónica O 2 Germany, a mobile operator still in the LTE trial phase. Mr Haas does expect, however, that the first commercial LTE networks in Germany will be launched in 2011.

44% of respondents identify the cost of NGN deployments as a critical challenge over the next three years 

What’s your business model?

LTE business models, too, have still to be worked out and refined. It is unlikely that many mobile operators with wellestablished retail operations would opt for the role of wholesale service provider to other carriers as favoured, for example, by 

LightSquared, which plans to roll out a nationwide LTE network in the US. But faster and higher-capacity networks capable of streaming high-definition content to customers should open up new wholesale and retail opportunities. Mr Haas, for example, believes LTE will allow O 2 Germany to compete directly against cable TV operators. LTE also opens the door to more compelling real-time and interactive mobile applications. Compared with existing 3G mobile broadband technologies, LTE has a quarter of the latency time, which eliminates annoying data transfer delays.

Online mobile interactive gaming, a nascent industry today, may very well boom on the back of next-generation mobile networks. Operators need to decide, then, how best they can take advantage of the new business opportunities afforded by LTE once the technology matures. Beyond deciding on a wholesale or retail model, different LTE strategies may be needed in different geographical locations, since the level of fixed-line and mobile broadband penetration and competition will differ from country to country, and from region to region within those countries. In some places it may be enough to acquire and retain customers by offering faster access; in others it may be necessary to offer different services.

How much radio spectrum there is available for LTE, and in which frequency band, will also largely determine the amount of extra network capacity that a mobile operator has at its disposal, as well as the data speeds it can offer. Whereas TeliaSonera in Sweden says it can deliver average LTE downlink speeds of between 20Mbps and 80Mbps, Verizon in the US – which has less spectrum – offers average LTE downlink speeds of between 5Mbps and 12Mbps. Some operators with limited spectrum assets may well decide to postpone costly LTE deployment for as long as possible and try to squeeze the most out of existing 3G technologies to achieve faster mobile data speeds, particularly if mobile broadband competition is limited in their market.

The cost-cutting promise

Even if the revenue part of the LTE proposition looks hazy, there is some conviction within the mobile industry about the potential to cut operational costs. In a global survey of 391 mobile industry executives conducted by the Economist Intelligence Unit in June 2010, nearly one-fifth of respondents said that the single most effective measure mobile operators should consider to improve cost efficiency is to accelerate the deployment of next-generation networks. Only network sharing was a more popular route for cost effciency among the survey respondents overall (31 per cent). For those based in North America, where the scope for network sharing is limited by ill-matching network footprints and the use of different technology standards, the acceleration of NGN deployment is the most favoured cost-efficiency option – nearly 30 per cent ticked this box, compared with the 17 per cent choosing the network-sharing option.

Due to the growing popularity of internet-friendly smartphones, and the subsequent rapid increase of traffic on their networks – combined with falling per-bit retail prices – mobile operators desperately need to cut their costs. LTE, with its so-called ‘flat architecture’ (ie with fewer elements to maintain and monitor than existing networks) and more efficient use of spectrum, would appear to fit the bill. According to some suppliers, the cost per bit using LTE can be up to 10 times lower than that for the current generation of mobile networks.

Not all the survey respondents share this cost-cutting optimism, however. When asked to select the three most critical challenges facing mobile operators over the next three years, 44 per cent of respondents identified cost containment of NGN deployments, while 37 per cent flagged up the issue of ensuring adequate backbone capacity for future traffic loads.

Although there is undoubted mobile operator enthusiasm for LTE, neither the revenue nor the cost-cutting sides of the business case – while holding out much potential – are yet clear-cut.

Working with the regulator

One way mobile operators may be able to swing the LTE business case more in their favour is to work closely with the regulator on designing spectrum auction rules. Mr Haas describes a long working process with the national regulator, involving ‘several iterations’ of the rules, before the auction of spectrum (which could be used for LTE) began in Germany in April 2010. 

One of the frequency bands up for auction was 800MHz, the so called digital dividend when television broadcasters switch from analogue to digital programming (see Mobile Matters: Europe’s digital dividend, September 2010). Because wireless signals travel further at lower frequencies, 800MHz is a more cost efficient candidate for delivering broadband to rural areas than the higher 3G frequencies, which typically occupy 2.1GHz. As a way to further encourage mobile operators to extend broadband coverage to rural areas, which are not as profitable as the more densely populated urban areas, the German regulator imposed an unusual condition on the successful bidders for 800MHz – they must cover 90 per cent of the country’s white spots (places where there is no broadband service) before they can use their 800MHz assets elsewhere.

According to Mr Haas, however, the rural coverage condition is not as onerous as it might have been, thanks partly to the input operators were able to provide into the spectrum rule making. As a result of that consultation, says Mr Haas, ‘the 90 per cent rollout obligation is a collective target of the 800MHz holders, which means we can avoid duplicating our roll-out efforts and make a white spot business case.’

But many mobile operators, including Telefónica, are preparing to ask for more from their national regulatory authorities than favourable spectrum rules. The arrival of LTE will make services from the likes of Google, Yahoo! and other ‘over-the-top’ (OTT) providers even more accessible and attractive. Mobile operators are likely to feel aggrieved, believing that they do not share sufficiently in the OTT provider revenue given the level of their network investment. Indeed, Mr Haas argues that unless there is a redrawing of the relationship between operators and OTT providers, future investment in next-generation networks will be under threat. ‘If we want to keep Europe competitive and remain the world’s leading continent when it comes to mobile infrastructure’, he says, ‘we need to act now.’

Contact the authors

Thomas Tschentscher thomas.tschentscher@freshfields.com

Natasha Good natasha.good@freshfields.com

Connie Carnabuci connie.carnabuci@freshfields.com