Mobile networks built for voice traffic will in future carry vast amounts of data. E&T looks at the implications.
The world's mobile operators have got themselves in a jam and they'll have to work like stink to get out of it. While they're doing that, it looks likely that others will make off with the lion's share of the profits that their networks are enabling. It is, to quote a phrase, a fine to-do.
What's gone wrong? Firstly, let's look at what went right for the industry during last month's Mobile World Congress. The most important thing was the anointing of LTE as the next-generation mobile technology of choice for most of the world's operators. When KDDI, China Telecom and Verizon Wireless announced that they were joining the GSM Association and throwing their weight behind LTE, it was clear that the battle to be the 4G standard was over although it may take another six years to develop LTE chipsets that can handle both the Chinese and rest-of-the-world versions of the technology and hence make the globally roaming cellphone a reality.
LTE trials are going well, the operators say, with network performance as expected or better. Verizon will launch LTE services in 25 to 30 markets this year, and device makers are promising to have eight or 10 different dongles ready. Issues to do with guaranteeing voice quality over the packet-based LTE network are being resolved thanks to the GSMA settling on an approach. And there is much excitement, or at least hype, about the prospects for LTE as the long-term basis for machine-machine communications Ericsson continues to predict that there will be 50 billion cellular connections by 2015.
And then there's the point of LTE, its support for data rates are roughly pegged as ten times greater than you can get on a 3G network today. It's here that things begin to look sticky for the operators, because that may not be enough to meet the rapidly growing demand for mobile data. Everything that the operators thought they knew about how people would use mobile data connections has been turned upside down by the emergence of the iPhone, apps and dongle-toting laptop users.
AT&T, which took the most criticism last year for its network's inability to service iPhone users properly, has seen traffic skyrocket. John Donovan, CTO of AT&T, told an MWC session that the extra traffic that ran across his wireless network in the fourth quarter of last year compared to the third quarter was greater than all of 2007's traffic. Cisco forecasts that mobile data usage will rise forty-fold between now and 2014, to an incomprehensible 3.6 exabytes per month, or 3.6 million terabytes, if you'd prefer to try and visualise an impossibly tall stack of hard disk drives.
AT&T will spend between $18bn and $19bn on capital equipment this year, up 5 per cent on last, and dedicate an extra $2bn of that spend to increasing its wireless network capacity. But even that may not be enough. Part of the problem is that the industry has trained users not to value the mobile data service that it is finding so expensive to provide. Flat-rate packages for 3G mobile data helped build a customer base (and set expectations), which was fine when users didn't do more than email and a little light browsing. Now that downloadable apps can completely transform the utility of a mobile phone, it is impossible to predict how traffic will change.
Operators are working feverishly on making their wireless networks more efficient and on offloading traffic on to Wi-Fi and femtocell connections as soon as possible. Donovan pushed the growth of AT&T's Wi-Fi network even as he was building its cellular infrastructure, so that he can now 'get the bits in the ground as soon as possible'. Vodafone's Sure Signal femtocell launch in the UK is similarly helpful in offloading the cellular network's macrocells. But even with more efficient networks, the prices charged for service aren't matching the cost of providing it.
'We have to charge for the network,' said Donovan. 'Pricing models will shift rather fundamentally and radically over the next 24 months.'
Hardware and software vendors are lining up to help operators enforce more subtle policies than caps on downloads in a bid to regain the pricing initiative from customers, for example, a supplement for guaranteed quality of service for VoIP connections or a flat fee to watch a film. The only problem with this approach is that some of the schemes may breach net neutrality guidelines under development in the US, which say that operators must handle all traffic equally.
Even as the operators try to square the circle of investment and return, a larger problem looms. Eric Schmidt, CEO of Google, came to MWC to announce that his company was moving to a 'mobile first' strategy, focusing the development of its services on handsets, tablets and whatever comes next and pocketing the ad revenue in the process. Operators face the bleak prospect of working flat out to build highly efficient, capital-intensive and technologically advanced networks only for others to cream off most of the profit opportunities.