Thursday, February 24, 2011

Mobile Network Operators ponder WiFi

The recent explosion in smartphone usage has created a major dilemma for mobile network operators (MNOs). Not only do smartphones drive huge increments of broadband demand, they also come with built-in WiFi creating an expectation that the network operator should provide ubiquitous WiFi hotspot coverage wherever the customer feels the need for it.

In response, O2 recently announced it was setting up a nationwide free WiFi broadband network to compete with BT and The Cloud. This is clearly intended to address the increasing demand for mobile broadband access to services such as Facebook, YouTube and video calling, some of which in any case only work over WiFi in the current generation of handset.

O2’s new network will not be ubiquitous, far from it. The plan is to work with partner restaurants, shops and high street retailers across the UK. Nor are O2 planning a massive capital investment: their strategy appears more focused on a tactical choice of locations and ensuring good-quality service where their revenues opportunities are maximised. The issues however are complex.

1. The Business Model. It has proved difficult signing customers up to a public WiFi hotspot service which is subscription based. Part of the problem is a disinclination to pay for episodic use in advance; a deeper problem is that business demand is more robust and there is a greater willingness to pay; a lower consumer tariff would undermine business revenues and an effective market segmentation strategy has proved hard to find. On the other hand, advertisement-funded, "free at the point of use" models have foundered on low rates. At the moment, a bundled strategy seems most appropriate, which really means some form of cross-subsidy.

2. Network Deployment. Where should WiFi Access Points be placed? Public locations such as lamp posts require complex liaison with Councils and incur extra obligations and costs. Interior locations such as restaurants and coffee shops are an order of magnitude cheaper but cannot meet all the coverage requirements. Residential solutions such as BT FON tend to be in the wrong place.

3. WiFi vs. 3G/4G. The costs associated with WiFi do not scale well with increasing coverage. This is due primarily to the low power constraint on transceivers, the high frequency and the limited number of channels. The selective deployment of 3G picocells/femtocells has always seemed an attractive alternative to mobile operators, although WiFi will always be part of the mix. Future strategies are made more complex by the superior performance of LTE, to be deployed in a few years time in the UK.

Most mobile operators believe that WiFi is fundamentally a distraction - the 3G/4G technology roadmap is already sufficiently complex! However, given the lack of an affordable, small-scale, high-bandwidth solution within the cellular stable, WiFi it has to be. In any case, the handset suppliers, Apple in particular, have forced their hand. So expect the MNOs to cherry-pick the highest-value locations with their own WiFi hotspots (as O2 is doing) and/or to make the necessary deals with existing public hotspot providers. Their true strategy still lies with 3G to 4G evolution (using LTE) together with tactical picocells and femtocells. However, with WiFi hegemonic in offices and in the home, the uneasy coexistence of cellular with WiFi looks set to be with us for the duration.

Note: the battle between LTE and WiMAX seems to have been well and truly won by LTE, WiMAX having been consigned to developing country ghettos. This says more about the market dominance of the MNOs and the cosy relationships with their suppliers than about cost or technology, in both of which (mobile) WiMAX seems to have had the edge.