With 4G LTE Performing Well, Monetization and Business Models Are LTE Priorities
Snapshot
With 57 live LTE commercial networks and counting in 32 countries around the globe by mid-March 20121, LTE has proven that it is ready for business and is rapidly becoming the platform for growth for mobile broadband. Despite a few minor glitches-for example the LTE network outages at Verizon Wireless caused by software issues in the IMS core and some signaling capacity issues-the technology has performed remarkably well and become a key part of the competitive mobile landscape in markets like the US, South Korea and Japan. The main challenges for LTE in 2012 now shift from technical issues to how to further monetize the network investments by creating service plans and business models and partnerships to drive data revenues through smartphones, tablets, modems and other LTE devices.
Analysis
LTE deployments have become a global story by the end of Q1 2012 with subscriptions across multiple data-hungry devices on a strong growth trajectory.
- North America is leading in terms of the number of 4G LTE subscriptions and available devices; the addition of the LTE iPad in March 2012 adds an exceptionally strong brand to LTE tablet portfolios. Verizon Wireless, with the largest LTE network in the US (and the world) covering over 200 million PoPs to date, reached 4.4 million LTE subscriptions in 2011-5% of total subs-just over a year after initial commercial launch. AT&T is on a similar run rate to Verizon Wireless, adding a total of 700 thousand LTE subscriptions in Q4 2011 after launching LTE service in mid-September 2011. MetroPCS, the first to launch LTE in the US in September 2010, has also reached 5% of its subscriptions on LTE-offering only LTE handsets, not modems. US Cellular and other Tier 2 and 3 regional operators have also launched LTE services, and Sprint will launch LTE mid-year. Canada had limited LTE coverage and device availability as of the end of 2011, but now commercial LTE services are available from the top three operators and the market will see significant activity in 2012 with multi-device shared data plans and family shared data plans for LTE already available.
- Asia Pacific is quickly ramping thanks to LTE smartphones and competitive coverage builds – South Korea now has 100% PoPs covered (by LG Uplus; SK Telecom in response has accelerated its nationwide coverage target to April 2012) and competitive offerings for handsets and tablets, along with modems. LTE is having a measurable impact on ARPUs and data usage levels. SKT reports that 80% of its LTE subscribers have signed up to the KRW62,000 3GB/month or higher plans – this compares to 75% of users on the 3G All-in-one plans being on the KRW54,000 or higher plans with unlimited data. There is obviously a significant gap in the data allocation on the KRW52,000 at 1.2GB LTE plan and the KRW62,000 LTE plan at 3GB. Users prefer the better cushion of the larger plans. SKT reports that average use on the 3G All-in-one plans is 1.1GB/month while average use on the LTE plans is 1.6GB/month. Likewise, LG Uplus is generating ARPUs of approximately KRW18,000 on feature phones, KRW41,000 on smartphones and KRW55,000 on LTE smartphones – so LTE is providing some good early momentum in driving users onto higher value plans. In Japan, NTT DoCoMo reached only 1 million LTE subscriptions by December 2011, one year after launch on Dec 24, 2010, but with smartphones accelerating adoption, added its second million subscribers in only three months to mid-March 2012.
- While quite a few countries in Europe now have commercial LTE, in the Nordics and other European markets operators have been slower to add LTE subscribers than in US or Asia Pacific, in part due to limited coverage and lack of smartphones. In addition, good performance of HSPA+ and lack of competitors moving quickly into LTE from CDMA have meant operators have not felt the need push LTE uptake as quickly. Recent introductions of LTE smartphones and planned coverage expansion should increase the rate of uptake in markets with commercial LTE, and additional spectrum auctions and refarming of 2G/3G spectrum for LTE will lead to more new LTE launches that will tap into the growing range of LTE devices. TeliaSonera, which launched LTE in Stockholm and Oslo in December 2009, had only around 100,000 LTE subscriptions in the Nordics in early March 2012 when it introduced its first LTE handset.
With LTE performing well, business models and issues are as key or even more challenge than the technical issues of LTE today.
- What is the right device mix? Smartphones are driving the subscription volumes for operators, but in many markets subsidies on smartphones eat into profit margins. For operators that launched LTE with modem/PC data plans, the device mix has been shifting to focus on smartphones and tablets to drive uptake-particularly for operators that are anxious to migrate spectrum from 2G/3G to 4G. For example, Verizon Wireless moved quickly in 2011 to introduce a range of data centric devices including USB modems and standalone portable hotspots (MiFi-type devices), focusing on moving all new devices in this category to LTE to support more efficient data delivery and free up capacity on its 3G EVDO network for the iPhone and other smartphones. Verizon Wireless has now said all its new smartphones will also include LTE.
- With expanding device availability, we are seeing more operators focus at launch on smartphones and tablets. This is particularly true of smaller operators with less spectrum, since the mobile data traffic impact has been lower for tablets and smartphones has been lower than PCs/modems, and smartphones have generated higher revenue per MB of data traffic. For example, in March 2012 US Cellular’s initial device for its LTE service launch is the Samsung Galaxy Tab 10.1, to be followed in April 2012 by a Samsung smartphone. MetroPCS in the US has so far only offered handsets on LTE.
- Should 4G LTE be priced at a premium over 3G? TeliaSonera’s pricing model shifted from charging a price premium for 4G to a model based on selling mobile broadband based on level of speed/volume/coverage, with 3G for entry tiers and 4G for mid and premium tiers. In this case the operator shifted its marketing from selling premium-priced 4G plans to selling “a very good mobile broadband experience” that uses LTE’s capabilities to provide premium service with higher data buckets and speeds. Operators need to tap into the opportunities LTE provides to create more additional value for premium users and create upside revenues rather than simply positioning LTE as a more expensive service. In the US, LTE is becoming mainstream mobile broadband and LTE is becoming “table stakes” for new smartphones and data centric devices for the top two operators.
Does LTE make sense for smaller operators and emerging markets? LTE is not just for big operators in highly evolved mobile markets. Smaller operators-even those with less spectrum-can build a solid business case for LTE on small `slivers’ of spectrum, although they face additional challenges. Both smaller operators and operators in emerging markets are discovering the efficiencies of LTE, but access to low cost LTE smartphones remains a challenge at present; for global scale the key challenge is lack of spectrum harmonization.
Operator actions that accelerate LTE growth and improve ARPU
The two major factors accelerating LTE subscriber growth in 2012 are the expanded line up of new devices and growth in geographic coverage. But LTE’s contribution to operator revenue growth and profitability will be determined equally by operators who act to:
- Create multi-device plans to encourage activation of mobile service for more devices per person or family-especially tablets
- Address streaming media and mobile video. Video and other streaming services are data intensive, placing heavy traffic demands on networks during peak load and quickly using up consumers’ data allocation. Operators need to create specific approaches to video access beyond simple tiered plans with varying data caps. Strategy Analytics expects to see experimentation with a range of approaches, including ad hoc session-based pricing for streaming media on top of data plans-so that users could:
- Add video access to their accounts for a particular video or for an increment of time (for example, Leap Wireless in the US has indicated it will introduce session based pricing), or
- Bundle video access and even video content libraries into premium plans (for example – MetroPCS premium plans), and
- Have options to allocate minutes of use to video services such as premium video or YouTube or even
- Select video optimization levels to stretch the amount of video minutes in an account balance – a range of approaches were demonstrated by vendors at Mobile World Congress, including Alcatel Lucent, Amdocs, Ericsson, Flash Networks, Mobixell, OnMobile and Openwave.
- Target LTE service plans and marketing for premium segments – Operators should leverage the capabilities of LTE to create premium plans that deliver Quality of Experience (QoE) and priority during periods of congestion, bundle in streaming content and provide speed promises.
- Position LTE for more mainstream uptake, particularly with lower cost LTE smartphones and use it as a way to move entry-level users to mid-level use and more active data usage; plans with small data allocation for browsing or social network updates and ad hoc add-ons for streaming media to help make base level plans more affordable
- Forge new partnerships across a broad ecosystem to deliver on LTE’s promise of high throughput and low latency as well as ease of connectivity with new services and devices
- Develop flexible and innovative business models to bring new products to market
- Exploit intelligence in LTE networks for Policy Rules driven traffic management, real time data plan modification, rapid service creation, personalization and scalability
Implications
LTE coverage and smartphones will drive connections and market volumes in 2012, while LTE traffic will be driven by computing devices. Significant revenue opportunities exist across a wide range of devices and services requiring new business models that optimize the combinations for premium, mid-range and price sensitive subscribers.
Contact Information
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The author of this Insight, Susan Welsh de Grimaldo, can be reached at swelshdegrimaldo@strategyanalytics.com
Other Contacts
Phil Kendall, pkendall@strategyanalytics.com |
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