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In our previous report, we established that policymakers must choose among competing outcomes when the agency makes spectrum allocation decisions, including the number of licenses the agency wants to award, the cost to build out the licenses, and network speeds based on channelization. In light of the FCC’s recent decisions in the AWS-3 and incentive auction proceedings, the agency appears to have decided that more narrow spectrum channels, allocated across smaller geographic areas, is the preferred outcome. Europe, on the other hand, has opted to allocate spectrum in wider channels. This note attempts to analyze whether the FCC’s spectrum allocation choices will put US wireless carriers at a disadvantage when it comes to the speed of their networks, as compared to providers in other countries using wider channelizations.

In 2013, US wireless capital expenditure spending hit an all-time high. AT&T’s attempt to overtake Verizon in network quality had the company spending roughly $11.5 billion on network improvements, while Verizon Wireless spent another $9.75 billion improving its network. Let me put this into context: AT&T and Verizon together spent more money improving their networks in 2013 than all 20 operators serving the five largest EU countries (EU5) combined. Once we add the capital expenditure of Sprint and T-Mobile, which both spent more on network improvements last year than they had in previous years, US operators spent more than twice as much as the EU5 operators did to improve their infrastructure covering roughly the same number of subscribers. Even when adding all 98 operators active in the EU together, their combined capital expenditures are only 80% of what the US operators are investing.

Indeed, US wireless carriers spent roughly $109.58 per US citizen to upgrade wireless infrastructure in 2013 whereas the EU5 carriers that serve the more affluent European countries spent significantly less, at roughly $52.64 per citizen. Whether you look at the investment numbers on their own or in comparison with what non-US wireless companies are spending, America’s wireless companies appear to be at the upper bounds of investing in infrastructure. Why is this an important point? Current reports and research indicate that the cost to build out wide area mobile networks using more narrow channelizations is a more expensive proposition than building out wider channels as illustrated in Peter Rysavy’s Mobile Broadband Explosion white paper.

So, with US wireless carriers at the upper bounds of investing in infrastructure, is it reasonable to assume that they will spend even more money to deploy small channel networks that are slower and less efficient? Most investors will tell you that that is not a tenable outcome.

So what does this mean? In the US, the carriers that have the largest swaths of contiguous spectrum will be able to provide fast download speeds. Only Sprint is continuously in this fortuitous situation and in some markets T-Mobile, due to pure happenstances, also has 20×20 MHz contiguous spectrum. The other carriers will have to rely on costly and still unproven “carrier aggregation technology” to achieve results similar to what is possible with wider, contiguous spectrum blocks. The big question, then, is what the additional overhead will be to make it a reality and deploy it extensively. None of the vendors working on carrier aggregation technology are willing to publically state how much the overhead will be. That’s not a good omen. Compounding the issue is the fact that the appetite for carrier aggregation technologies has waned because European carriers have moved to wider channelizations, receiving 20×20 MHz licenses in their last spectrum auctions. Thus, the European operators do not need carrier aggregation technology for the foreseeable future, alleviating the pressure on vendors to quickly develop the standards and related equipment. That might explain why the vendors have quietly extended the timeline for when US carriers will be able to use two and three channel carrier aggregation.

Although it is doubtful the FCC intended to retard the proliferation of high speed wireless broadband networks when it made some of its more recent spectrum allocation decisions, the agency may have inadvertently created an environment where this very result will occur. The simple laws of physics (smaller spectrum channels + (higher traffic volumes * more users) = slower network speeds) combined with economic realities (US companies are already at the upper bounds of capital expenditures to build out wireless networks) portend a slower future for America’s wireless subscribers.

The US mobile broadband experience is the stuff of lore around the world, in part due to the smartphone revolution that first happened here, enabled by large, reliable wireless networks and innovative pricing strategies that made smartphones and Internet access a reality for hundreds of millions of Americans. But all is not well as they say. There are signals emanating from Washington DC these days that indicate the country may be going down a road of short-term compromises that will impact America’s wireless consumers for decades.

Recently the FCC announced the channel configuration for the AWS-3 band. The FCC divvied up 40 MHz of the 67 MHz of spectrum originally allocated for AWS-3 and made it available for auction to wireless carriers as a single 10×10 MHz license, three 5×5 MHz licenses, including one 5×5 MHz license allocated across each Cellular Market Areas (CMA), and the other licenses allocated across Economic Areas (EA). The FCC appears ready to continue the narrow channelization idea for the upcoming incentive auctions intended to reallocate up to 120 MHz of broadcast spectrum to wireless broadband. By embracing more narrow spectrum channels as a preferred policy, the FCC has set itself on a path that forces wireless operators to either accept slower network speeds or significantly higher capital expenditures in the US, an outcome that is out of sync with both technology innovation. This decision comes just as global trends in competing markets and America’s insatiable demand for video delivered to their mobile devices come to head.

Europe, Asia and Latin America have been embracing wider channel sizes for a while. For example, for its most recent spectrum auction, Switzerland decided to use spectrum allocations of 20×20 MHz while refraining from dictating what technology the winner bidders could deploy. Below are additional examples of the global move towards wider channels, consistent with the evolution and deployment of LTE network technology.

Why the global trend to embrace wider channels? It’s all about providing higher speeds at lower cost for the data hungry masses of smartphone users. The faster the network speed, the better the quality of video and data bits traversing the network. The lower the cost, the more people can actually enjoy wireless data services. And the impact that channel size has on network speed is quite direct. Because wireless bandwidth is a shared resource, the speed with which packets traverse a mobile network is the fraction of the total bandwidth available, divided by the number of concurrent users. Consider the following chart that explains the relationship between network speed and the size of the spectrum channel.

Wider spectrum channels make it easier to deliver faster speeds for accessing and downloading content as the wireless carriers have to manage just one contiguous channel. This is caused by what engineers called trunking efficiency, which means that resources from a single larger channel can be more efficiently allocated than from separate independent channels. In effect, channel sizes impact the design and cost of the network. The faster the speed, the more satisfying the experience which prompts more usage and so the cycle goes. The most obvious advantage for consumers is that videos, which represent more than half of all bandwidth consumed on mobile networks, can be viewed without interruptions and at a higher quality than video delivered over narrow spectrum channels. Small businesses can more easily use video conference services, healthcare providers can more effectively use video for instruction or treatment, schools and libraries can more cheaply use video-based instructional tools and companies relying on mobile ad revenue for their next billion in revenue will be well served.

While Europe, Asia and Latin America are embracing the technical benefits of innovation by licensing wide channel sizes, the US remains solidly grounded in the thinking of the 1990s – when small channel sizes were technically sufficient and politically appealing as a way to entice small companies into the wireless industry. Today the FCC is making a trade-off between allocating smaller bands of spectrum to more people, rather than allocating wider spectrum bands that will allow network operators to provide faster and/or cheaper data on average.

The fact that not only Europe, but also Asia and Latin America are making spectrum available with much wider channelization than their US counterparts is significant. It should come as no surprise then that wider spectrum channels are creating superior outcomes for the wireless broadband networks in these countries. Operators around the world will be able to provide their customers faster and/or cheaper wireless services while boosting the economic and productivity improvements that the proliferation of more and faster wireless service has been shown to produce. Putting the U.S. on a path away from this global trend makes it much harder to maintain the wireless data leadership that this country has enjoyed.

The best path to maintaining America’s global leadership in deploying LTE networks that offer the fastest speeds accessible by the greatest number of consumers at the lowest possible cost is to license spectrum consistent with how technology has progressed and in sync with global spectrum allocations. Today, the best quality of service for delivering mobile data is achieved with channels that are 20 MHz and larger. Ultimately, there we can have two out of three: higher number of licenses, faster speed, lower cost. If US policymakers only offer spectrum licenses with small channel sizes, like they have decided to do with AWS-3 and is rumored to be considering for the incentive auction, it should come as no surprise if other countries will enjoy faster data speeds and the United States increasingly falls behind in global wireless rankings.

The following is the second of a two-part series examining some of last year’s key developments in the mobile space and also projecting their impact into 2014. In this note, we focus on handsets, operating systems and the networks that support them.

As we consider handsets, OS and networks, a few bottom line conclusions spring to the fore:

• Both the handset market and OS competition are characterized by a sharp divide between two winners and a batch of competitive also-rans. That is unlikely to change significantly this year for either handsets or OS.
• In 2014, Apple and Samsung will continue to account for almost all profit in handsets; Android and iOS will remain the dominant operating systems. Wearables may be the best new growth area (a subject, along with tablets, we will address further in the near future).
• Consumers, however, will continue to benefit from handset innovation, new pricing models for handsets and wireless service, and the opportunities that come with the continued expansion of U.S. carriers’ LTE networks.
• Fierce competition for network supremacy will mean a continued American edge over Europe in mobile carriers’ capital expenditures and drive further innovation in applications and handsets.

Handset market share in holding pattern

By limiting the opportunity to sell to first-time purchasers who might consider a wide variety of brands, the high ownership levels of smartphones makes it difficult to significantly shift handset market share.

Smartphones now account for more than three-quarter of all U.S. device sales and roughly 90% of the handsets sold by the nationwide carriers. This shift reflects the devices’ astonishing utility combined with declining upfront costs to take a phone out of the store. While Americans upgrade to new devices at a rapid pace (about every 22.4 months in 2013), the data suggests they tend to stick with their current brand rather than switch.

Thus, the introduction of new models such as Samsung’s Galaxy S4, Apple iPhone 5S, HTC’s One and Google’s Moto X in 2013 provided consumers with outstanding new devices, but barely budged market share. The Galaxy S4 and iPhone 5S boosted sales over their predecessors, but because of natural limitations imposed by the law of big numbers the growth rates did not much impact share or impress Wall Street.

Samsung and Apple account for virtually all of the industry’s profits and will continue to slug it out for the championship belt. Everybody else is struggling to stay out of the red. This hierarchy is unlikely to change in 2014 – except for the possibility that some lesser players will exit the marketplace. Indeed, Google has already run up a white flag in handsets with the sale to Lenovo of Motorola Mobility’s handset division (although retaining most of Motorola’s patent trove). Overnight, the transaction makes Lenovo No. 3 in the battle for handset supremacy and endows it with an outstanding piece of hardware, the Moto X phone. A strong marketing effort and long-term commitment to the brand may give Lenovo a chance to make inroads – but it won’t happen suddenly this year.

Microsoft’s 2013 acquisition of Nokia represented a bid to replicate Apple’s integrated approach of keeping both its software and hardware in house. So far, the effort is lagging in the marketplace despite good quality. Things remain dire for BlackBerry, where device sales have imploded and the company is hemorrhaging cash in an unsustainable way. HTC, one of the other premier device brands, is continuing to lose money in its core device business in what looks increasingly like a race against time.

Feature phones headed for oblivion?

Nor is there much opportunity in feature phones. With fewer and fewer people shopping for these phones, the variety and innovation in this segment is on the decline – and so is its price advantage over more advanced phones. Slowly, but surely, feature phones are headed for near extinction in the United States. Even in emerging markets, feature phones are likely to yield the field as manufacturers produce a more diverse inventory of smartphones to fit a variety of individual budgets.

The demise of the feature phone is being accelerated by the emergence of handset financing and enticing trade-in options for smartphones. More and more consumers are taking advantage of phone financing offers or opting to trade up sooner in exchange for cash and/or credit toward new devices. While these programs actually include restrictions similar in kind to the subsidy model they are replacing, consumers are attracted to lower out-of-pocket costs. With a financing plan, consumers can walk out of the store with a high-end smartphone for zero down and between $24 and $27 per month – so they see little reason to settle for less than the best. Although they may pay more for their device in the long run under the new plans, consumers like the idea of paying in smaller increments compared to plunking down $200 up front for a subsidized device under the traditional service contract.

Minting a winner is increasingly a matter of marketing

Increasingly, the dividing line between the winners and losers in the handset business in the United States comes down to marketing. Apple and Samsung have been willing to make the necessary $150 million plus annual spend to create and sustain a consumer brand. The market laggards’ promotional efforts, on the other hand, have been episodic and underfunded. Instead of continuous year-round advertising to implant their brands in consumers’ psyches, competitors have largely run ads in short spurts or around specific events. As quickly as the ads appeared they disappeared, and so did public interest in their new offerings.

Microsoft, for one, certainly has the wherewithal to sustain prolonged campaigns, but has chosen not to do so for its mobile offers. Given the limited effect of its underfunded marketing efforts, it might have been better off skipping it altogether. Accelerating the device upgrade cycle might crack the door a bit for possible inroads because the more times a consumer goes to the store, the greater the chance he or she will decide to switch. But so far that has not happened even though Americans change their phones more often than consumers elsewhere around the world.

Still, this comparatively rapid handset upgrade cycle has propelled the United States to the leadership position in the global smartphone economy. New devices with new capabilities drive the demand for faster and better networks, which, in turn, make new applications feasible. That’s what keeps the mobile space in the United States so exciting. In contrast, consumers in continental Europe replace their devices every four to six years, which traps them in the digital past. Just imagine still using the first generation iPhone: magical, revolutionary, but oh so six years ago.

Aside from potentially opening the door to movement in market share among device makers, a shorter upgrade cycle matters because new, high quality devices boost customer satisfaction. That satisfaction spills over to network providers whose high-speed data networks open up new possibilities for mobile devices. Satisfaction reduces churn among carriers and supports a comparatively high average revenues per user as customers receive good value for their money. The result is a virtuous “win-win-win” circle that should hold even with changes in the way customers buy services and devices.

OS market looks steady

Stability is also likely for OS market share in 2014. The two OS leaders, Android and iOS, hold about 90% of the market between them and, will continue to jockey for position. Windows Mobile, a good if unloved system, has likely hit bottom and should gain slightly in 2014, especially in the prepaid market where it has done relatively better. BlackBerry is still trending down. Absent a game-changing device (which we do not expect), BlackBerry could slide further this year. Other systems are little more than background noise.

Google’s decision to sell its handset business may boost Android by removing handset makers’ concerns about competing with a Google phone even as they embrace Google’s flagship OS. In that sense, its deal with Lenovo may be seen as a renewed commitment to a multi-vendor Android ecosystem. By contrast and absent a change in direction under its new leadership, Microsoft appears committed to both its Nokia handsets and its Windows Mobile OS.

The usefulness of these devices and operating systems are contingent on strong networks with the capacity to handle rising demand. As noted in part one, U.S. carriers are locked in a feverish race to expand their LTE footprints and also increase speeds. Among the key questions is whether Sprint, which is spending lavishly with new money from Softbank, can make it a four-way competition. In our view, 2015 is the year that Sprint’s networks will match or exceed its rivals by taking advantage of its huge spectrum holdings.

Devices and the networks that make them work

The United States is home to more than half of all LTE subscribers in the world and carriers continue to pour money into their networks. In 2013, AT&T and Verizon Wireless combined easily outspent all 58 European wireless carriers combined. The U.S.-Europe gap is even greater when increased investment by T-Mobile US and Sprint is toted up.

Verizon Wireless has the largest LTE network, covering more than 90% of the U.S. population. But the company’s competitors are challenging its supremacy and increasingly claim to exceed Verizon Wireless in speed, reliability or both. Those claims have gained credibility because of several nationwide LTE outages that have hurt Verizon Wireless’ reputation. But the carrier is bringing additional spectrum online, which should boost performance and help it hang on to its reputation as number one.

AT&T is catching up through its multi-year Velocity IP initiative. AT&T is spending more than $10 billion a year on its wireless network and now reaches about 280 million consumers with LTE. By mid to late 2014, AT&T Mobility should match Verizon Wireless’ network in coverage. AT&T Mobility will get a capacity boost in 2015 as it deploys additional 2.3 GHz (WCS) spectrum.

T-Mobile US has put the pedal to the metal and now covers 200 million consumers with LTE. It’s also claiming the fastest speeds in half of the top 20 markets and points to a Speedtest.net study to claim the overall crown for fastest downloading. Backhaul upgrades in 2012 and 2013 and new spectrum acquired from MetroPCS have positioned T-Mobile US with 40 megahertz of spectrum to support LTE. The company cleverly minimized zoning hurdles by reusing existing antennas and focusing only on existing sites to optimize the beefed up network. The company faces a bit of a catch-22 going forward, however. Its comparatively lower number of customers per-megahertz of spectrum provides higher speeds, but download speeds will drop as its customer base expands and puts greater demand on share resources. One way to mitigate that trend is a quicker shift of former MetroPCS customers from that company’s legacy CDMA network to T-Mobile US’ GSM/HSPA/LTE network, so we expect speedy migration will be an operational priority in 2014.

Sprint’s network upgrade is not going as well. Sprint now covers about 200 million consumers with LTE, but quality has declined because of disruptions created by the longer-term network upgrade. The company is replacing all of its base stations and antennas, creating a massive local zoning and permitting nightmare and knocking the effort off schedule. Once past these obstacles, however, Sprint should be better positioned. Sprint Spark will aggregate several 20-megahertz contiguous channels to achieve initially industry leading speeds. The company has launched a few markets and expects 100 million pops covered for Spark by 2015. Given the potential competitive benefits from Spark’s speeds, we’re disappointed that it’s projected to cover only 100 million consumers in 2015. Finding some way to accelerate deployment would provide a major boost for the company’s competitive position.

Even regional carriers are investing in LTE to remain competitive. U.S. Cellular is currently covering 80 million pops with LTE, which is 87% of its footprint. C Spire also has aggressively expanded its LTE footprint.

The future of the various networks is, of course, tied to spectrum and how efficiently carriers put it to work. Given the continued growth in data demand, which is now climbing about 50% annually, putting more spectrum in the hands of wireless carriers is now a Federal Communications Commission priority. Curiously, the big winner from Auction 96, which began in January, is almost certain to be Dish Network rather than one of the national wireless carriers – none of which is bidding for the 10 megahertz of 1.9 GHz (PCS) spectrum now available. As of right now the bids for Auction 96 are coming in at $1 billion, still well shy of the $1.56 billion Dish Network has promised to pay for the nationwide license.

The big action in spectrum is the voluntary auction of TV broadcast spectrum that the FCC will shift to wireless broadband providers in 2015. The outcome of that auction may depend on the commission’s bidding rules, which is now the focus of a fierce debate among the national carriers. A successful auction also would provide critical funding for the planned public safety network, FirstNet. The usability of the 700 MHz A-Block also is at stake as the incentive auction will remove the Channel 51 interference.

According to Report Change in Administrator Would Jeopardize Launch of Next Gen Wireless Services

Recon Analytics, an independent data analytics and consulting firm, today released a report finding that a change in the nation’s local number portability administrator (LNPA) could severely impact efforts by wireless providers to introduce innovative new services, such as voice over LTE (VoLTE), Web Real-Time Communication, Wideband Audio and Machine-to-Machine.  The report, titled “LNPA Transfer Would Cause Significant Industry Conflicts,” comes as the industry is considering the future of local number portability, currently administered by Neustar.

The LNPA manages more than 650 million telephone numbers, updates information in its registry over 1.5 million times per day and broadcasts that change to hundreds to network elements across the country in real time.

Report author Roger Entner, founder and lead analyst of Recon Analytics, said, “As a part of the underlying fabric of the US wireless market, LNP is vital to the evolution and protection of wireless networks.”  He explained, “a decommissioning and replacement of this infrastructure presents challenges and pitfalls for any service provider looking to maintain a superior customer experience while simultaneously undertaking disruptive innovations, such as VoLTE, within their own networks.”

The report explains that the work being done to expand and enhance wireless networks will keep engineering and IT organizations at full capacity, but a shift to a new LNPA provider will take resources aware from these projects – potentially delaying or derailing the projects outright.

The report’s key conclusions include the following:

• LNPA transition could jeopardize the wireless industry’s move to VoLTE and next generation services.  These innovative new services require equally revolutionary changes in back office systems.
• LNPA transition will probably not be smooth.  As we saw with healthcare.gov and Ericsson’s migration of O₂’s central user database where seven million customers experienced a 20-hour outage, large database migrations are difficult and fraught with problems.
• LNPA transition will likely be a costly mess.  According to research by Hal Singer, principal at Economists Incorporated , the transition cost will come to $719 million, which comes as a time when most carriers are tightening their belts.
• LNPA transition could devalue carrier brands.  The negative impact the transition would have on wireless consumers would damage and devalue all brands.
• LNPA transition could impede and increase the costs of M&A activity.  LNP infrastructure is critical to ensure that telecom mergers and acquisitions are seamless in the eyes of consumers.  Problems with a transition would slow mergers and acquisitions to a crawl or stop them entirely.

The full report, “LNPA Transfer Would Cause Significant Industry Conflicts,” which was funded by Neustar, is available on Recon Analytics’ site.

About Recon Analytics

The mission of Recon Analytics is to clear the clutter, help focus executives and policymakers on what is actually happening in the marketplace and what really matters, and make a positive impact on business and policy decisions. Founded and led by leading telecom analyst Roger Entner, Recon Analytics’ approach is bolstered by its industry-first executive advisory board, which helps us hone our strategy, improve our research, and provide unparalleled insights into the matters most relevant to the business and the public policies impacting it. With this foundation, Recon Analytics focuses on three core areas: Syndicated research, custom consulting, policy related data analysis, as well as white papers.

CONTACT:
Roger Entner
February 11, 2014
617.823.3363
[email protected]