sgreaves@cambridgesys.

com

Wireless Doomsday Clock at 15 to Midnight

Author:Stuart Carlaw | Vice President and Chief Research Officer

2010-10-04

I was recently at a manufacturer analyst event listening to the CEO put forward the interesting thesis that the US phone market is in something of an
arms race. No doubt, as in every product market, there is an emphasis on innovation and one-up-manship of the competition that inevitably leads to
product and feature set innovation. The startling thing about the smartphone market is that the pace of innovation is rapidly increasing. Moreover, this
rapid change in the market is doing incredible long-term damage to the carrier community. A prominent feature in the media during the cold war arms
race was the doomsday clock. If we apply a similar timeline of mutually assured destruction to the wireless market, then we could argue that we are
now nearing midnight. What are the factors causing this situation and will it be defused?

The Device Perspective: Splitting the Atom

Probably the largest catalyst affecting the smartphone market is the handset OEM base. Two major companies have parachuted into the device market
through both hardware and software plays: Google and Apple. They have brought fresh innovation and have moved the focus of innovation away
from traditional handset OEMs.

The compound result is that the old elongated device innovation cycles have condensed down to 9-month periods. Innovation in this area has focussed
on more bytes, more pixels, more apps – more everything. To lag behind this curve leaves a company open to significant pounding on the stock
market, never mind what the bottom line looks like.

Unfortunately this influx from new vendors and new providers has a detrimental impact on the carrier community. Carriers are being asked to
subsidize increasingly expensive devices that generate more traffic, burden their networks extensively, and involve leakage of revenue out of carrier
created environments into vendor owned apps stores. Plus, vendors market them aggressively to the carriers’ customer base. Are these new entrants
truly aligned with the carriers best interests?

The Network Perspective: Introducing the Atomic Bomb

We already touched upon the fact that new smartphone vendors have brought significant change to the device market. Probably the most profound of
those effects is the radical change in traffic:

• The average smartphone generates 50 times the traffic of a feature phone.

• The average iPhone generates between 8 and 12 times the traffic of the average smartphone.
• Every time a PC dongle is used it generates 24 times the traffic of a smartphone user.
• Android phones generate similar traffic levels to the iPhone
• Application signalling traffic is growing 50 times the rate of data traffic.

Alone, these facts wouldn’t be cause for alarm. In fact, carriers have been crying out for more data usage to counteract the negative trend in voice
usage. Unfortunately, this rapid growth in traffic is a disastrous factor when coupled with the carriers creaking infrastructure.

Historical Context
Before contemplating the sheer lunacy of this situation, it is worth adding some historical context. Networks are built by second class citizens. Carrier
operation groups often play second fiddle to the subscriber acquisition arm; network engineers have very little in the way of a direct line to the top. It
is very hard for a CEO to approve a major capacity upgrade to the company’s network before there is a clear and pressing problem.

This means that networks will almost always be a step behind demand except on those rare occasions when there is a greenfield deployment or
technology upgrade. Remember: many carriers networks are cobbled-together efforts that are the product of historical deployments, acquisitions, and
the selling agenda of large infrastructure vendors that are as far removed from reality as possible.

On an aside; I heard a presentation by the CTO of a major network vendor this past March, who insisted that the average user will never use more than
500 MB per month in developed markets!

When we put this into context, it is clear that, although the air interface is going through rapid enhancements that could support some portion of this
on-going traffic growth, there are certain other pain points. The backhaul network is woefully under-provisioned. To put this into context, the average
BTS in most locations has less bandwidth than we are currently using on our desk-tops. The billing systems are outmoded and the core network is so
convoluted we need a London tube map just to understand its rapidly diversifying layout.

Mutually Assured Destruction Here We Come!

Changing the inherent problems in the carrier network is like uninventing the Atomic bomb. It’s done and we can’t change that fact. Arguably, this
“arms build-up” has reached a point of mutually assured destruction. We now have only three possible routes forward. We totally disarm and solve
these issues once and for all. We stave off the inevitable by slow disarmament to minimal levels. Or we stick with the status quo until Armageddon.

Current Activity Charts a Path to Armageddon

Right, so we can’t uninvent the bomb so how do we stop proliferation? During his presentation the handset vendor CEO mentioned previously pointed
out that Tablets and Wi-Fi offload will break this demand for subsidisation as well as traffic growth on carrier owned networks. I would argue that this
is somewhat short sighted.
sgreaves@cambridgesys.com
Carrier traffic needs to go through the carrier core. IMS would help here, and if we offload more traffic we leak more value from the carrier
proposition into the ether. Tablets do not solve this either. All tablets will do is shift the focus of the arms race sideways a little – and only for a short
time. Think Cuban missile crisis.

Wi-Fi is not the panacea either. It is not everywhere; there is no QoS and how long before we start clogging Wi-Fi networks in public places. Readers
who followed the metro Wi-Fi market know that the economics of original roll out costs were woefully underestimated. During recent private
corporate roll outs of overlay Wi-Fi networks, the AP density required to support mobile usage was 5 times standard. This gives an interesting insight
into what would happen if we relied upon Wi-Fi alone as our saviour.

Can Carriers Postpone Armageddon?

So what are carriers doing to postpone Armageddon? Probably the most significant aspects revolve around pricing and a low key dabbling with
Femtocells…both of which are flawed.

When looking at pricing, the carrier community is beginning a move to a usage-based pricing model after years of marketing all-you-can-eat bundles.
This is a move to limit exposure to those high usage subscribers that eat margin. It’s important to remember that carriers make money on all-you-can-
eat bundles through the traffic users DON’T use. The move to usage-based pricing alienates users who don’t know where they stand from month to
month and has no net effect on the vast majority of traffic and revenue generating subscribers.

On the plus side of this approach, companies have offloaded that 2% of subscribers that kill their networks. On the negative side they are also opening
the flood gates to new device types that are more data hungry than anything we have seen before.

PC dongles are the tip of the iceberg.

To put this into context, between now and 2015, the carrier community will see 1.8 billion smartphones, tablets, netbooks, mobile CE, etc. on their
networks, 700% higher than today. Interestingly the rise of these products will be heavily driven by the side of the carrier community focused on
subscription acquisition. (Remember, network engineers are second class citizens. How does tiered pricing solve the traffic avalanche this influx of
new devices will provide?)

Femtocells fall into the same bucket as Wi-Fi. The roll out is too slow and too conservative. Legislation on lawful intercept is still-birthing some of
the offload opportunities and unfortunately Femto’s are being championed by the network guys within carriers. Carrier marketers have neither the
gumption to effectively market Femto’s nor the requisite skill set. The network engineers do not have the influence to push the Femto agenda through.

The Clock Is Ticking Down

We could argue that the current status quo results in a slow tick-down to the end of days. However, this is an optimistic scenario. Several things over
the horizon will quicken the pace of devolution.

LTE and Video

LTE and Video are the chief culprits. Carriers see video as the killer app for 4G. Killer is the right term. The air interface might be able to support the
service but the billing system and the transport network will not.

LTE in itself is a burden. Companies must deploy a network to keep up with the Joneses and the temptation is to roll out a superficial introduction as a
tick box rather than deal with the full issues and revamp, core, transport, and air interface networks. Companies introduce terms to the consumer like
“mobile broadband” and will be measured on the same criteria. Cost, usage, speed, and capacity: they’re a dangerous game to play.

The way networks have been architected around high capacity areas in cities and poor rural coverage is now defunct. New services and new device
types mean that people are consuming media and high bandwidth content when they switch off from their work day – invariably during transportation
or at home. This traffic spike happens later in the day (9 p.m. rather than 5 p.m.) and in suburban area, not urban. This, if anything, should shock us;
it’s a radical departure from the standard network deployment logic.

Are we going to plug this gap with big iron telecoms engineering? No.

Lastly and most frighteningly – much like oil, we will reach the limit of our spectrum resources. What happens then?

How Do We Manage Disarmament?

In reality, this problem will never go away. Usage, carrier profitability, and the networks economics will always be in flux. The trick is keeping all
vested parties in the game.

At present, I argue that the carrier community is seriously on the decline. In order to bring them back into the game, they and the community need to
do several things to provide a sound market for everyone. (Think about what happened to the global financial markets when everyone stepped aside
and let Lehman go under.)

What can be done?

1) Carriers need to balance their organisations. A more integrated structure between business groups (fixed, mobile) and functions (engineering,
marketing) is a must.

2) As much investment as there is in air interface technologies currently, going forward there must be two fold in core networks and transport
layers.

3) Network design philosophy must change. Carriers need to move the base station closer to the subscriber.

4) The heterogeneous, distributed, flat network that is self-organising must be the solution of choice.

5) Multiple off-load solutions must be used at once. Wi-Fi, Femto, and policy management should all be used.
sgreaves@cambridgesys.com

6) Carriers must evolve billing systems to a point where they can price on QoS rather than usage. Give precedent to premium traffic and best effort
traffic for PtoP applications.

7) Carriers need their own OS. Maybe a resurrection for Nokia and the prospect of MeeGo will be good in stopping the pre-eminence of leaching
suppliers which take revenue out of the mobile value chain.

8) Carriers must control content much better. It must be cached, routed, and treated like the valuable commodity it is. Content centric networks are
not only fixed.

9) Carriers need hero products from more carrier attuned partners. The brand dominance of Apple and Google must be broken. It will take a
concerted and co-ordinated carrier push to raise the profile of a viable competitor.

10) Be more proactive. The innovation cycle is not just a physical product concern. It should be applied to all parts of a business. Carriers
have been too slow historically and that is the major reason we are here at 15 minutes to midnight.

Whatever way we cut this, it’s a tough ask. These are but 10 strategies the community can employ to dig itself out of this hole. Will they be
adopted? In part, yes. Will they be followed through with gusto and enthusiasm? Absolutely not.

We look set to be in a period of perpetual limbo where we are forever in the twilight.

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