Quick report: Is leapfrogging to LTE realistic?

Emerging market MNOs could skip 3G/HSPA and save big on CAPEX

It sounds like a no-brainer: Why spend tens of millions of dollars on a 3G/HSPA network when you can skip it and go directly to LTE? Many emerging markets - particularly in Africa - are still served by GSM/EDGE networks only, while the tsunami of demand for Internet access continues its romp. In such markets leapfrogging to LTE is likely a real and attractive option, but operators will need to take a concerted look at the details. Here is an overview of some of the key issues.

Learning from past mistakes

Any operator behind on technology may indeed be ahead on wisdom if only one is ready to learn from the past mistakes of others. The truth is that 3G without HSPA offers little real benefit on top of GSM/EDGE, and it can even be argued that 3G is more expensive and clumsier than GSM for voice services. With HSPA and real mobile broadband MNOs finally found the reason why they bought expensive licenses and built 3G networks in the first place. But with LTE maturing that reason is steadily eroding away.

A serious drawback to 3G/HSPA is that it needs circuit-switched (CS) architecture to work. If you want 3G/HSPA there is really no way around fat switches, SS7 signalling, and all the other bits of CS machinery that today look positively Stone Age. For a GSM operator the costs and complexities of upgrading to 3G/HSPA are not trivial, as nearly every part of the network is seriously affected from core to transmission to radio access.

With LTE operators can finally lay CS to rest, and the architecture is greatly simplified. That alone should be of benefit to many emerging markets operators, and this may assist in reducing operational costs in the long run. That does not mean that operators can do away with GSM, as for handset and coverage reasons LTE and GSM will need to coexist for a long time still. Fortunately, LTE is designed for multi-mode operation.

Lower cost of delivery

When comparing the CAPEX cost per unit of data delivered, LTE is the runaway winner compared to HSPA+ - this should come as no surprise as LTE was designed specifically to this end. According to recent business case modelling results from HETTING and Ventura Team consulting (read more about our new LTE-ready business case tool here) the CAPEX cost of delivery in the LTE 800 MHz land at around 1 EUR per user per gigabyte per month, while HSPA+ is nearly double the amount (these values presuppose various assumptions and should be taken as approximate only – for more details contact me).

Throughput rates for LTE cells under live network conditions are typically twice those of HSPA+, so if you’re looking for enough mobile broadband capacity to serve the mass market, LTE is for you. Conversely, if you believe LTE is overkill for your market – where perhaps mobile broadband is only just starting to gain ground - then note that it is possible to operate LTE in smaller bands such as 5 MHz or less in the event that the full 10 or 20 MHz is too much. It will still perform much better than anything HSPA and HSPA+ can muster.

Access to the right bands

Another circumstance favouring the leapfrog approach is the growth of LTE in the 700 and 800 MHz bands. At the time of writing the US market is probably the most important early driver of LTE, as Verizon Wireless and others are rolling out LTE networks for mass US consumption at full throttle. The Verizon LTE network will be built for coverage and from scratch, scheduled to cover more than 100 million people by the end of 2010. This network is also clearly not a sideshow for Internet-hungry inner city folks, but will be at the core of Verizon Wireless’ nationwide mobile services business for many years to come. And of course 700 MHz is a vast improvement on 2.6 GHz and other higher bands when it comes to building cost-effective coverage (although at 10 MHz the average end user data rate will likely be relatively modest at 8-15 mbps).

Meanwhile, Europe has freed chunks of spectrum in the 800 MHz band for LTE, and in Germany such bands have already been auctioned off at extravagant prices. Most network vendors are waiting in the wings with 700 and 800 MHz equipment, and terminals are not too far behind. LTE in the right coverage-friendly bands for Africa and other emerging markets may not yet be fully mature, but the technology is certainly growing up at a respectable pace.

For emerging market operators this means to things: Firstly, that the fortunes of MNOs with aspirations of offering LTE at 700 or 800 MHz will be linked closely to an ecosystem supported by some of the largest mobile operators in the US and Europe. Secondly, that LTE in the 700 and 800 MHz bands is not a sideshow for the few, but a mass-market technology on schedule to cover huge swaths of population in mature markets. It seems that hooking onto this train of industry development is likely a good idea.

The voice problem

But alas the world of executive decision making is never that simple. LTE still suffers from one overshadowing problem, and that is the lack of a common standard for voice. In mature markets it may be feasible to launch a broadband service without voice (as has TeliaSonera in Sweden) but for emerging markets this is - in my view - unthinkable. A voice solution is conspicuously lacking and desperately needed.

At the time of writing the VoLTE initiative as coordinated by the GSMA seems to be the accepted industry-wide solution for voice, and nearly every company of importance in the industry is backing it up. That is good news, although VoLTE is not intended to be a standard as such and has been pitched as an interim solution on the way to full IMS (so if IMS does not happen then it clearly will be a permanent solution!).

But there are unfortunately a few more uncertainties. Although VoLTE very likely will happen, it may not happen in time for mass market LTE deployments, and thus CS fallback (falling back to GSM or 3G networks for voice calls) may be the only viable option for operators in the interim. Not that CS fallback is necessarily a bad idea in itself. But it does leave us with all of three schemes for LTE voice on the roadmap – CS fallback, VoLTE, IMS - and a big risk of fragmentation. It is not a pretty picture, and it needs to be carefully studied for GSM operators thinking of leapfrogging to LTE.

Affordability is key

Last but not least we are left with the thorny issue of terminals, and clearly LTE terminals will at first be more expensive than their 3G/HSPA counterparts. We have also yet to see how LTE will be incorporated into multimode devices, and how CS fallback will work in practice. Both affordability and usability of terminals will be of great importance, so these issues must not be taken lightly. Reputable sources indicate that multi-mode terminals capable of LTE, 3G/HSPA, and GSM will be released end of this year – and perhaps one would be wise to look to the big Chinese vendors for affordable devices.

Recommendations:

• Develop a detailed techno-economic business model comparing 3G/HSPA/HSPA+ to LTE over e.g. 10-year time frame. The model must include assessments of usage, markets, networks, terminal development, timing, etc., and it must deliver key financial indicators. Scenarios could include other evolutionary options.
• The 700 and 800 MHz bands are  key - without at least one of them there is little chance of succeeding with the leapfrogging approach (2.6 MHz will be too costly to deploy for coverage)
  
• Terminal availability, roadmaps, and costs must be studied, scrutinized and included in the model using accurate forecasting & sensitivity analysis. Cost & availability of LTE terminals may to some extent offset the benefits and tip the scales more towards choosing 3G/HSPA, but on this point only careful analysis will offer clarification
  
• Last but not least: The LTE voice services issue must be understood and fully accounted for technically and commercially
  

Further comments:

Since writing & posting this report I have been told by a well-informed colleague that the 700 and 800 MHz bands (UHF) will not be released for mobile use before 2015 in most African countries, and that even 2015 may be quite optimistic. That would appear to render the leapfrogging case impossible for operators in these countries. On the other hand I have also been told that at least two major international operators in Africa & Asia are considering the leapfrogging approach in earnest. In my view further research on the availability of bands is required to clarify this issue, and as soon as I have more information, I shall post it to this site. 

Date: 04-05-2010

Author: Claus Hetting

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