Should Emerging Markets Leapfrog Technology in favour of LTE?

LTE_logoThere are 124 countries where 3G (Third Generation mobile services, WCDMA and EVDO) has been launched but very few countries outside Europe and US have decent 3G coverage. Many emerging markets are yet to roll-out services and even the big emerging economies like India and China are largely out of 3G ambit. In India, the 3G services have been launched only by state owned operators who have just 13,000 subscribers between them whereas China has just started the journey and are still in dilemma about their home grown technology (TD-SCDMA) and WCDMA. When I started to write this post, I had planned to argue that it would be beneficial for the emerging markets to leapfrog technology and skip 3G roll-outs in favor of LTE (Long Term Evolution) which is a 4G technology (well.. almost!!! It is actually 3.9G as it just falls short of the speed requirements for 4G). However, during the course of research for this post, I realized that it actually makes more sense to launch 3G rather than talking about LTE. I am comparing 3G with LTE and not with other 4G technology like WiMax as I do not believe that WiMax will ever be a viable 4G technology. The figure below details the technology evolution path.

Technology Roadmap

LTE provides operators with several significant benefits like increased peak data rates, increased cell performance, reduced latency, ability to be deployed in scalable bandwidths, coexistence with GSM/EDGE/UMTS-HSPA systems and reduced CAPEX/OPEX. The capex and opex are lower on account of lower number of cell sites required for LTE. The cost of IP backhaul in LTE does not increase in proportion to amount of bandwidth it offers and hence the unit cost of bandwidth is lower in case of LTE (Refer my earlier post on Open Mobile Ecosystem). Despite the above benefits, I feel that it is beneficial not to leapfrog technology and it makes sense to roll-out 3G before LTE. The key reasons for my position are:

Maturity of Technology: 3G has been around for almost 8-9 years now and is a proven technology. The standards are well developed and each of the equipment vendors has decent experience in the 3G roll-out. On the other hand, LTE is still a nascent technology and is expected to mature only by 2013/14. The first BTS was recently rolled-out and the trials are still on and hence I do not think that the emerging markets should take the lead in experimenting with a new technology.

Voice Standard: LTE is an all IP network and it is surprising that VOIP is not a part of LTE as standardized in 3GPP Release 8. Though LTE is backward compatible with WCDMA and CDMA, I am not sure if the technology is ready for voice. I hope that VOIP finds its way in Release 9 scheduled for December 2009.

Revenue Enhancement: Rolling out LTE could be a costly mistake for the operators with low ARPUs and low data usage. Post LTE, if operators in emerging markets are not able to increase the ARPU, we might see some of the operators winding up. The key question in front of the operators would also be how to protect their current voice revenues which is a significant portion of their revenues. As LTE network would be an IP based network and if a subscriber uses voice over IP in LTE, then how the treatment should be different from VOIP on PC or mobile internet.

Capex per Subscriber: The capex per subscriber for LTE is much higher than 3G at $275 per subscriber. The capex per subscriber for 3G is already sub $100 which means there is a huge gap between the two. In 3G rollout, the basic infrastructure is the same and it is just a software update for the core and addition of electronics on the BTS. However, n case of LTE, it is a complete new infrastructure rollout due to the difference in the technology resulting in a higher capex. Most of the emerging markets have vast rural hinterlands and 3G being an evolved technology is seeing a lot of initiatives to cut costs for rural roll-outs. Therefore from the cost perspective, 3G markets more sense. In one of my earlier posts, I had written about the limited viability of 3G in emerging markets and the case for LTE is even weaker.

Devices Availability: Access terminal availability across different price points is another issue which is critical especially in low handset ASP (Average Selling Price) markets. There are almost no handsets available for LTE. It is still not clear if the LTE handsets would work on 2G and 3G networks which means in absence of seamless coverage, the users would need to keep two handsets. I am sure soon there would be multimode LTE/2G/3G handsets but I am concerned about the price of such handsets. In absence of the volumes, it is unlikely that the prices of LTE handsets would come down anytime soon. In some of the markets where operators provide handset subsidy, the operators would need to swap the current handsets with LTE handsets that can result in high initial cash outflow.

Spectrum Issues: Many Governments across the world are yet to spell out their spectrum policy towards LTE. The standard spectrum band for LTE is converging at 2.6 GHz which means that the indoor coverage for LTE would be poor unless augmented by using Femtocells.

Also Read: The WiMAX vs. Cellular Debate … or Is It?

Does 3G have a Viable Business case for Emerging Markets?

Will WiMax Ever Become Mainstream?

Related Posts: