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Only Structural Change Can Save the Mobile Industry

I regularly bring this issue forward, similar to the discussion in relation to the structural separation of the fixed networks, which I began just over a decade ago.

What we are seeing in the mobile industry is an infrastructure and a spectrum crunch.

The amount of spectrum needed to satisfy people’s demand from mobile phones, tablets and soon a range of other smart devices is limitless. Mobile carriers are scrambling for spectrum, but it is already known that the spectrum that will become available from the digital dividend (reuse of broadcast spectrum) will not be enough.

Another strategy to obtain access to spectrum is to consolidate. In the USA AT&T tried to merge with T-Mobile in order to lay their hands on their spectrum, but for anti-competitive reasons that was blocked by the FCC.

In Australia Optus is buying the minnow vividwireless. Because of its small size there won’t be a major regulatory problem here, but it highlights the quest for spectrum. And it must be said that had Optus wanted to buy Vodafone Australia, for example, it would no doubt have created regulatory issues.

So with limited availability of spectrum and significant regulatory problems the industry is facing some serious challenges.

The spectrum problem is also evident in the marketplace. Many people will have noticed that their mobile call quality has deteriorated over the last year or so and the network problems with Vodafone Australia are also well-known. All this relates to network capacity problems. Operators have to manage their networks so as to cope with all of the new mobile data traffic and some of that traffic management involves prioritising traffic, which can lead to deterioration elsewhere.

On the physical infrastructure side there is another crunch. In order to cope with the traffic and the spectrum limitations operators can build smaller cells and then reuse the spectrum. However an infrastructure configuration of this kind is far more expensive to roll out.

To give an idea of the scale of the challenges mobile operators are facing—in order to provide proper LTE services in London more than 70,000 base stations are needed. How many operators are in a position to do this? Interestingly, all of these sites will need to be linked to a fibre network. The question becomes—are we still talking about mobile networks, or are we talking about mobile feeders into the fibre network?

While Telstra is winding down its WiFi network the reality is that more and more mobile traffic needs to be offloaded from the mobile network through WiFi hotspots onto the fixed network. Many households are now experiencing congestion problems when 4 or 5 devices are trying to connect to the WiFi modem in the home. All smartphones and tablets automatically switch over to the WiFi modem if that is available. This, of course, is much cheaper for the user but it also works to avoid a collapse of the mobile network. In Australia it is estimated that 80% of smartphone and tablet usage is within the home, office or internet cafe. As a side issue, this also clearly shows the need for fibre-to-the-home networks.

Mobile operators would not voluntarily offload mobile broadband usage through WiFi connections to the fixed network if it was not strictly necessary, as they do not get any money from people using the WiFi network. So that really is a clear indication of the seriousness of the problem.

I have been predicting that these developments will lead to an urgent need for a more efficient use of infrastructure and of spectrum. If further network problems arise—and there is no doubt that this will happen—there will be an increased request for better quality services, similar to the warning by the Australian bank regulators to the banks regarding their network outages. These infrastructures are no longer a luxury; they are essential for the functioning of the society and the economy.

In the case of mobile networks, consolidation will eventually need to take place. With 800 global mobile operators, the cost structure associated with so much duplication will not support future infrastructure and spectrum investments. However, because of competition issues consolidation will need to be based on structural separation. This would also fit in very well with the digital economic developments, which require far more open access in order to provide the applications and services that are increasing by the day.

Since the arrival of the iPhone in 2007 the platform has ceased being the network—it has become the smartphone. This is the most fundamental change in the history of the mobile market.

The winners will be the first mobile operators who have the vision and understand that the mobile network has fundamentally changed to become basically a fibre network with mobile feed-ins—with smartphones, tablets and other smart devices as the platforms on which to build new business models. Competing on mobile/fibre infrastructure through duplication will not be the smartest way forward.

Operators and service providers will have to abandon the old mobile infrastructure and business models and align themselves with open digital economy models. Already many mobile services are moving into the cloud and are purely data-based (not voice). Soon there will be no need for the current complex mobile (voice-based) infrastructure structures. Such operations could be run at a fraction of the current cost. If the operators use this opportunity they could remain a competitive voice in the broader mobile ecosystem; if not, they will become road-kill on the (fibre) superhighway. There is no way that the outdated IMS technology, for example, can turn the clock back—the future lies in web-based OTT applications. We questioned this technology as far back as 2005.

The current developments in LTE, linked to the growing number of smart devices, are only speeding up these transformation processes. This is led by the operators. However these operators continue to cling to outdated business models, as if nothing is changing. Such an attitude will only lead to situations similar to what happened when Apple introduced the iPhone, an event that took the mobile operators completely by surprise and changed the mobile industry forever.

Also the lock-in options for SIM cards are under threat, as BuddeComm reported last year, and several jurisdictions are now looking at this issue. Roaming—a goldmine for the operators—is under threat, with new International Mobile Subscriber Identity (IMSI) cards.

With all these rigid systems linked to their mobile networks service innovation and market leadership has slipped away from the operators. Rather than looking at innovations for their customers carriers are looking at optimising their networks (e.g., LTE). Seventy-five per cent of the current Apple products didn’t exist five years ago. Compare this with the product offerings from the telcos. Apple put innovation and customer experience ahead of profits—the telcos do the reverse. And which group of shareholders are smiling now?

Structural changes can of course be undertaken on a voluntary basis. This does not necessarily require regulation; however, history tells us that it is very hard for telco companies to make such decisions without being forced to do so. By that time many of the other business opportunities will again have slipped through their fingers.

Expect more of this kind of commentary over the next few years. I expect the crunch to happen between 2013 and 2015.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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