“The success of mobile broadband is transforming the mobile operator business model. But it will lead to significantly lower margins and reduce cash flows unless operators take a completely different approach to networks.”

Mobile broadband has driven operators to adopt a model similar to fixed-line internet access: flat-fee subscriptions with ‘all you can eat’ usage. This is quite different to the traditional voice and SMS model, where revenues and costs maintain a relation with traffic.  The mobile broadband business model offers less scalability and sees cost per customer increase with usage, while revenue per customer remains constant or even declines. 

Mobile internet users are expanding their usage at a high rate – between 3x and 5x per year.  As a result, access subscription revenue per user (ARPU) is dropping as mobile broadband spreads into the mass market from its original customer base of early adopters and business users.

Mobile broadband customers are using more while mobile broadband access ARPUs are falling.  Network costs are increasing, both in response to this demand and to the changing mix of traffic on their networks:

As mobile broadband volumes grow – and also become the main driver of capital investment and operating costs – the profitability of mobile networks will shrink. Mobile broadband traffic eats into margins because of the capex, depreciation and operating costs associated growing data traffic.

Capital investment in mobile broadband is much less scalable than in the voice model. Some studies suggest that the network cost of 1Mb of data may be 7x the cost of 1 minute of voice.  Because of increasing traffic levels per user, each unit of mobile broadband network investment supports a proportionally smaller set of the customer base every 12 months.

Analysis suggests that capex increases 2.6x and opex increases 2.0x with a 3x increase in traffic (based on an assumption of HSPA R7 radio performance). Whilst wireless technology developments in HSPA and LTE provide increased capacity, the rate of data growth outpaces any gains. And in any case, these developments are not without cost.  Growth in demand for capacity also generates further costs in the backhaul network which carries traffic back to the operator core.

If nothing changes, margins decline:

Together, new users and increasing data usage are growing mobile broadband throughput by up to 10x per annum.  This means operators must make major investments just to satisfy existing customer demand, with more investment needed to accommodate new users. 

The financial consequences are serious. Mobile broadband operators will see capex lifetime reduced alongside increased capital investment, with depreciation costs increasing as a consequence.  The outcome is reduced EBITDA margins, and significantly greater declines in EBIT margin and free cash flow.

The business model doesn’t need to change. But the network model does:

The fixed-fee, ‘all you can eat’ business model of mobile broadband access is locked in, with traffic- based charging unmarketable.  While operators can and do apply usage ceilings, this is a retreating position.  Incremental revenues may come from content and applications, but the evidence is that these will not offset network costs and will merely go to covering the cost of content. Access must therefore pay for the network.

While there are clear benefits to network co-operation between operators, continued traffic growth means that at best, the problem is postponed. In the areas of highest customer concentration and hence highest revenue potential, demand is already overstretching the available capacity for all operators.  The demand for network investment is immediate. 

So what gives?  The solution lies in network strategy and architecture. Operators must take mobile broadband traffic off the mobile network and onto cheaper wireless broadband access wherever possible, reducing network costs whilst maintaining customer revenues.

In the mobile broadband world, the optimal model is to have as many customers as possible whilst carrying the lowest possible proportion of their usage:

This approach requires a re-think of the ‘vertical integration’ of customer experience and network infrastructure that prevails in mobile operator models. A ‘roaming user experience’ is the new paradigm.

Three factors make this new model possible:

•The inherent capability of laptops, smart phone and entertainment devices to access multiple network types (WiFi, 3G, HSPA).

•The concentration of mobile broadband demand in high-density environments, including urban centres, transport hubs and public locations.

•The millions of WiFi-based wireless broadband access networks in enterprise and home locations.

As a short-range, low-cost radio technology, WiFi can provide much greater capacity in high-demand locations, where the main network issue is the megabyte demand per square meter rather than the overall area that needs coverage. HSPA and LTE technologies are designed to spread capacity over a relatively large area, while WiFi technology is designed to provide 10x the capacity over a much smaller area. WiFi takes advantage of low-cost backhaul technologies such as DSL and residential fibre, with associated economies in provisioning and operation. 

The millions of home or office WiFi networks provide mobile operators with wireless access networks funded by the location host. So traffic taken off the mobile network is inherently cost-free to the mobile operator.  In urban centres and indoor public locations, mobile operators can use WiFi to provide low-cost, high-speed access at up to one-tenth of the cost of mobile broadband technology.

In order to prosper in the mobile broadband world, mobile operators need to:

•Drive as much economy as possible out of their network infrastructures by consolidating fixed and mobile infrastructure and sharing investment.

•Complement traditional mobile data coverage with WiFi in high demand, high-density areas and locations – enabling more Mbps of access capacity per square meter and reducing capital and operating costs.

•Encourage customers to use available private WiFi networks in homes and offices – automating the connection to these networks when customers are in-coverage and potentially intervening with the residential broadband network to ensure it is available to ‘roaming’ customers.

•Ensure the user experience is seamless and automated – directing customers onto the appropriate network according to where they are and what they are using.

Act now, don’t pay later:

Up to 50% of mobile broadband access demand takes place in home and office environments, and the bulk of truly mobile broadband access takes place in urban centres, transport hubs and other public locations.  Laptops generate 5 to 10x the capacity demand of smart phones.  All these devices are WiFi capable. The economies of a hybrid network strategy transform the negative implications of mobile broadband for traditional operator models. The solution is within the immediate grasp of those operators who can adapt to the mobile internet world.

(c) The Cloud Networks Limited, 2009