Significance: Although a few advanced operators like NTT Docomo were quick to turn off 2G services once they had 3G in place, generally carriers have kept both generations running in parallel, and in separate bands. That will be different in 4G, partly because of the inefficiencies of running three or more technologies ‘ with the 2G ones ageing quickly ‘ but also because many cellcos want to harness as much of their spectrum as possible for high performance LTE. Some players are already starting to run LTE in 2G or even 3G bands, though usually in unused frequencies, but between 2012 and 2017 there will be a major surge of complete refarming projects, migrating legacy networks and customers entirely to 4G. The quicker than expected decline of older systems like iDEN and CDMA is squeezing some vendors, as are the relatively low margins of network modernization schemes. However, they will hope to offset those losses by taking an integrator role in what promises to be a trend beset with technical and commercial challenges.
One of the factors hitting some infrastructure vendors in recent quarters has been the decline in sales of older network technologies. The most obvious example is iDEN, which was only used by a handful of cellcos anyway, but more serious is the reduction in spend on CDMA. Although long anticipated, this has happened more abruptly than was forecast just a few years ago, and now the downturn is not just about carriers halting network expansions, but switching off old services altogether, as Telecom New Zealand did this week. These switch-offs will accelerate as operators look to refarm that spectrum for LTE capacity and save on the cost of maintaining legacy systems and devices.
The effect of CDMA decline was seen in the quarterly results of Alcatel-Lucent, where its was the main culprit in a 26% year-on-year fall in wireless infrastructure revenues. Of course, vendors aim to leverage their incumbency with CDMA cellcos to win LTE business, but this will take a couple of more years to offset the legacy decline ‘ ALU’s LTE revenues were up 254% year-on-year, but the sector is currently too small to save its overall performance. Ericsson, with its purchase of many Nortel’s assets, and to a lesser extent Nokia Siemens, with its acquisition of Motorola’s networking business, both took a gamble on legacy technologies which they had scarcely offered before ‘ CDMA and, in NSN’s case, WiMAX ‘ because they knew these would be the first carrier bases to migrate to LTE, driven by the lack of a long term roadmap equivalent to HSPA(+) for the GSM camp.
By contrast, investment in GSM continues to hold up, as operators in large countries like India battle to add basic capacity to meet rising demand, and as some carriers upgrade their networks to make them more efficient, actually aiming to preserve their useful life (as seen in Huawei’s contract with Everything Everywhere in the UK). Such updates to 2G networks can improve their spectral efficiency and free up more space for refarming.
But in CDMA, although there are enhancements to the standard, a long term future track was cut off when Qualcomm and co dropped the UMB (UltraMobile Broadband) effort and threw their lot fully behind LTE as a unified 4G standard. So vendors like Ericsson calculated on being able to hang on to those fleeing CDMA operators, with mixed results so far. Ericsson certainly got a major share of the upgrade contracts at CDMA majors Verizon and Sprint, but the benefits of Motorola have been less clear for NSN, and it has actually offloaded the WiMAX business altogether, to NewNet.
The difficult balancing act which the pressurized suppliers have to pull off is to embed themselves deeply into the carriers’ network migrations so that the disadvantages of the older products are outweighed by being in pole position for LTE business. This is worsened by the relatively low margins of network modernization schemes, which are popular with upgrading operators and involve running several systems in tandem and focusing on flexible RANs ‘ rather than delivering a quick burst of revenue and profit from a brand new roll-out. For every ‘good’ migration, in the vendors’ view ‘ when a carrier like Korea’s KT switches off a 2G network almost overnight and invests in an advanced new LTE system in the same band ‘ there are many more messy, step-by-step efforts to refarm spectrum and introduce new standards. Ericsson was particularly vocal in its last quarter about the negative impact which modernizations are having on its profitability.
One compensation may come from stepping into an integration role, as carriers look for support in planning and executing highly complex migration plans. These involve moving customers and frequencies from one technology to another, usually step-by-step ‘ and trying to match the balance of subscribers with the amount of spectrum used for the old and new RANs. In some cases, like T-Mobile USA, the migrations may be taking place across different bands too. Even when a customer base is fully converted, decommissioning of the old network is still a complicated endeavor. So vendors can see a role in managing these projects, which may not have the quick returns of old-style equipment sales, but at least deliver a stream of fees and make the supplier indispensable to the customer.
Asia-Pacific has been a hotbed of network switch-offs this year, most recently in New Zealand where TNZ has shut down CDMA. It will transfer its customers to its HSPA+ XT service, having not sold a new CDMA handset since 2009, and eventually aims to refarm the spectrum. KT was finally given permission, after a legal struggle, to turn off its 2G services at the turn of the year, when it had 159,000 remaining customers to move to 3G. Japanese 2G services have been progressively shutting down since Softbank in 2010 and no GSM phone has been sold since 2008.
Even in mobile-hungry and affluent countries like these, there is still a considerable process to be undergone before the regulator and the consumers will tolerate total shutdown, so 2012 to 2015 will, in many parts of the world, be a time of multimode networks and gradual shifts of capacity towards newer services. These challenges will, in particular, face the rising number of operators looking to refarm GSM spectrum in 1.8GHz for LTE, such as E-Plus and Everything Everywhere in Europe or Telstra in Australia. They will also be a hallmark of the US market, where all the main operators will soon start to move LTE into 2G or 3G bands.
According to a new study by management consultancy PwC, 60% of wireless operators plan to decommission a 2G or 3G network over the next five years, often to make way for more capacity for newer services. As PwC’s report says: It is increasingly common practice for
equipment vendors to take on both deployment and decommissioning activities. In line with this, more than two-thirds of network operators indicated that they have already been approached by their primary equipment vendors about participating in this activity. Wireless vendors have the opportunity to align decommissioning activities with the sale and deployment of more advanced mobile broadband networks’and manage the amount of inventory available in the market.
The explosion of network switch-offs and migrations which will take place over the next few years will be driven by many factors, not least the need for additional mobile broadband spectrum even in areas where auctions are delayed or have not delivered enough for the cellcos’ needs. Moving to the newer technologies achieves several interrelated goals ‘ to improve customer experience and data rates; to carry 5-10 times more traffic on the same amount of spectrum and therefore make significant savings and support new services; to achieve reductions in opex and power consumption.
According to PwC’s carrier survey, among those looking to decommission a network by 2017, two-thirds were focused on 2G, and just 9% on 3G, but interestingly, 27% planned to switch off both during the period. This is particularly prevalent in the CDMA world, where some operators, like TNZ, actually turn off EV-DO first, but more generally, it shows how the pace of LTE deployment is proving more rapid than expected, leading to different patterns to those seen in the shift from 2G to 3G. Of course, many cellcos, particularly in Europe, will continue to enhance HSPA+ for several generations, running it in parallel with LTE hotzones. And some will turn off 3G networks only to shift subscribers to other 3G offerings, not just to LTE ‘ especially in the case of change of ownership or RAN sharing deals. Telstra, for instance, is this month switching off the 3GIS system it built with Hutchison and will only offer its more advanced Next G HSPA+ services, as well as its nascent LTE.
However, there is also a rising school of thought which favors deploying a single technology, LTE, in every available band, to achieve device and management efficiencies and support all-IP. Such a strategy would take the full five years to complete, or even longer, depending on factors such as the age of the existing kit; the previous investment in technologies like flexible RAN (which ease the process); regulatory requirements; and the willingness of customers to abandon older services (which almost certainly involves some compromises on the prices charged for LTE).
The process will not be a rapid one, but 46% of wireless carriers have already begun some decommissioning, pointing to an average time of 2.3 years to turn off a 2G system, and more than five years for a 3G one. In the 1.8GHz band in particular, cellcos are just starting to take the brave step of actually turning off some 2G to make way for LTE, either because they do not have new 4G spectrum or they want additional capacity.
Singapore’s StarHub is one example, shutting down a portion of its GSM network and launching LTE1800 by the end of this year. It will use Nokia Siemens equipment. Its rivals SingTel and M1 have also launched LTE in 1.8GHz, but they have so far just relied on unused frequencies, rather than refarming occupied spectrum, a far more complex process and one which involves delicate handling of customer expectations.
Other 1.8GHz refarming activities are seen at various Deutsche Telekom units, TeliaSonera, Everything Everywhere, 3 Italy, Telstra and Hong Kong’s CSL ‘ among others. But as StarHub points out, most of these still have enough unused airwaves to cope for now, but will soon need to start full refarming and migration.
Their challenges may be simple, though, compared to those of Sprint and T-Mobile in the US. Verizon and AT&T plan to refarm PCS spectrum to add to their 700MHz LTE capacity (and Verizon also aims to acquire AWS frequencies from four cablecos), but their two smaller rivals both have particularly offbeam strategies.
T-Mobile is attempting a complex set of refarming and migration moves, shifting its extensive HSPA+ activities from a non-standard 3G band, AWS, to its 1.9GHz PCS spectrum, and freeing up AWS for LTE. This will allow it to tap into mass market devices, and support roaming more easily, because its 3G and 4G services will be in frequencies commonly used by other operators (Verizon hopes to run LTE in AWS too, provided its purchase of these licences from four cable operators is approved). To free up capacity for its new 3G/4G strategy, TMo is shutting down 75% of its GSM capacity to clear PCS airwaves.
TMo is currently expanding its HSPA+ network, with equipment from Ericsson and NSN, while also trialling LTE in readiness for a 2013 roll-out. The cellco’s SVP of technology, Dave Mayo, wrote in a recent blog post that TMo will have installed new equipment at its first 2,500 modernized GSM/HSPA+ sites as of the end of July. It has also secured zoning approval for 19,500 sites and has completed all the necessary entitlement work, such as securing building permits, for its first 4,000 locations, according to the blog. “As new equipment is in place, we’re turning up some small scale tests of 4G HSPA+ service in our 1900MHz spectrum,” Mayo wrote (that will allow TMo to support the iPhone, and it has already tested its new base stations with some unlocked iPhone users, claiming faster data speeds than they usually gain on their 3G networks).
TMo is embarking on LTE later than its main rivals, a timing largely imposed on it by the long hiatus period while its failed acquisition by AT&T was being debated last year. However, it is making a virtue out of necessity, claiming the delay will enable it to move straight to the next release of LTE, 3GPP release 10 or LTE-Advanced, and so leapfrog competitors in terms of efficiency and performance. “The ability to launch with this next version of LTE technology is one advantage of launching next year,” Mayo wrote.
TMo’s plans also rely on expanding its AWS reserves via a spectrum swap deal with Verizon Wireless, conceived as a way to make regulators look more kindly on Verizon’s proposed purchase of AWS licences from four cablecos plus Leap Wireless. TMo is lobbying the FCC to approve that $3.9bn Verizon/cable pact, since it will trigger its own AWS transaction, which it argues will enable it to build a far better and more robust LTE network. TMo rejected arguments from the Rural Telecommunications Group, which claimed the swap would not deliver the benefits the fourth US cellco hopes for. The swap covers spectrum in 218 markets across the country and will expand TMo’s 4G offerings to an additional 60m POPs.
Interim CEO Jim Alling said in meetings with the FCC that the offloaded Verizon frequencies “will enable T-Mobile to deploy LTE services in a number of markets where such deployment would otherwise have been impossible, and to enhance its LTE service in a number of additional markets where T-Mobile would have otherwise been limited to a 5x5MHz LTE deployment.” Responding to the RTG, another TMo filing said the deal would allow both it and Verizon “to create more contiguous blocks of spectrum and realign spectrum in adjacent markets,” to improve efficiency and network performance, as well ensuring Verizon does not get too much AWS spectrum in any one market.
Sprint also has a winding road ahead. It is refarming both PCS and iDEN frequencies as part of its Network Vision plan, which introduces LTE but also runs CDMA and, for a limited period, iDEN in parallel. It has the added complication of its on-off relationship with Clearwire, the WiMAX operator in which Sprint is the largest shareholder and customer, and which is going through its own transition to TD-LTE in its 2.5GHz spectrum.
The negative impact of a decommissioning programme was clear in Sprint’s second quarter. The operator’s losses increased as it started to switch off the legacy Nextel iDEN services. Its second quarter revenue was up 6% year-on-year, to $8.85bn, but losses increased by 62% to $1.37bn.
The deficit included a writedown of $872m primarily related to the huge Network Vision project, which includes the iDEN shutdown ‘ charges included $184m for the recognition of lease exit costs for certain Nextel sites which have been shut down. There was also an impairment charge of $204mm related to Sprint’s investment in Clearwire.
The company has accelerated the shutdown of the Nextel systems, which have bled customers for years and now mainly support the Boost prepaid offering. It has shut down 9,600 Nextel sites so far, ahead of its original roadmap, and has completed leasing agreements for more than 12,700 Network Vision sites, with zoning requirements completed for nearly 13,900 sites, according to filings. In addition, GigaOM says nearly 6,300 sites are ready for construction or being established, while more than 2,000 are live. Sprint expects to bring 12,000 sites on air by the end of 2012 and to complete the majority of Network Vision by the end of 2013.
In Q2, the cellco ended the period with more than 56m customers, including 32.6m postpaid subscribers (29.4m on the Sprint CDMA services and 3.1m on iDEN) plus 15.4m prepaid and 8.4m wholesale and affiliate users. Sprint added 442,000 net postpaid customers during the quarter but this was offset by the loss of 688,000 net postpaid Nextel users.
Sprint is also sacrificing some Clearwire sites in its decommissioning process, where its WiMAX equipment is collocated with iDEN. The smaller firm said in an SEC filing that it would be unlikely to keep operating WiMAX at those sites once Sprint shuts them off. “We determined the useful lives of the network and base station equipment at these sites should be accelerated beginning in the first quarter of 2012 from a weighted-average remaining useful life of approximately five years to approximately 1-2 years based on the expected date of decommissioning,” the filing reads. “We will continue to monitor the estimated useful lives of our network assets as our plans continue to evolve.”
This suggests that, like iDEN users, WiMAX subscribers will also see their services turning off more quickly than they had once anticipated, pushing them to move to other services and devices ‘ or carriers. Clearwire currently offers WiMAX in 71 markets, reaching 134m people and with about 11m subscribers, the largest number via Sprint ‘ which adds to its problems, since Sprint is no longer offering new WiMAX Sprint 4G products, but will focus on its own LTE. Although it plans to supplement this by wholesaling Clearwire’s upcoming TD-LTE systems, that still leaves the smaller firm with a difficult transition period and an urgent need for more customers, especially having lost three cablecos to the Verizon deal. Clearwire lost subscribers for the first time in the second quarter as a result of Sprint discontinuing new contract WiMAX device sales.
This highlights how decommissioning, refarming and migration not only create transition headaches and costs for the primary operators, but also their partners, wholesale customers and roaming allies. The shift to LTE may be happening more quickly, at least in some important markets, than the move to 3G, but it will raise a host of unprecedented challenges.
Clearwire looks for asset sales and new partners:
Clearwire has gone from being the first 4G operator in the US to struggling with a complex migration from WiMAX to LTE, but it managed to reduce its second quarter losses anyway. It is also looking for new partners in addition to major shareholder Sprint, and is revisiting the idea of selling certain portions of its huge spectrum holding.
Clearwire has signed several MVNOs for its WiMAX and its future TD-LTE network, but it has lost its deal with three cablecos (Comcast, Time Warner and BrightHouse), which have defected to a new alliance with Verizon Wireless. Pay-TV provider DirecTV recently told the FCC that those cable operators should also dump their financial stakes in Clearwire, perhaps signalling interest in a holding of its own, which would bring it into the mobile broadband space.
Although CEO Erik Prusch was open about looking for new partners or asset sales, he said Clearwire had $1.2bn in cash as of the end of Q2, enough to last for at least the next 12 months. “The question is whether or not we can be well served from a strategy standpoint in selling a piece of spectrum in conjunction with possibly something else,” he said. The company could sell regional chunks of spectrum or even a nationwide slice. Prusch said that the main cellcos do not currently have ‘a comprehensive solution to their spectrum needs” and that Clearwire was “ideally suited to help operators capitalize on this growing demand’.
However, Clearwire is under pressure. Sprint is building its own LTE network and Verizon and AT&T are leaping ahead in 4G, while Dish Network may enter the fray if it gets FCC approval to run LTE in its mobile satellite spectrum. Clearwire shares are down almost 48% so far this year, leading Sprint to take an impairment charge in its own Q2. Last month, Sprint said it was no longer the majority owner of Clearwire after the latter issued stock to raise money, which diluted Sprint’s holding.
In Q2, Clearwire reported a loss of $145.8m, or 33 cents a share, from a year-earlier loss of $168.7m. The latest period included a net $14.4m in writedowns, while the year-earlier quarter included $590.9m in writedowns. The loss from continuing operations was 32 cents from a year earlier loss of 98 cents. Revenue decreased 1.8% year-on-year to $316.9m as wholesale revenue declined 11% particularly because of adjustments to the Sprint deal plus the cable issue.
The company ended the quarter with 11m subscribers, up 43% from 7.6m a year earlier, the huge majority via Sprint.
The wholesale operator said capex in the second half of 2012 than in the first, when it totalled $47m, though it hopes to spread the cost of migration to LTE via vendor financing.
For the full year, the company now expects a smaller adjusted EBITDA loss of $175m to $225m on revenue of $1.2bn to $1.3bn, from its prior estimate of $250m to $350m and revenue of $1.15bn to $1.25bn.
Verizon pushes ahead with cableco deals:
Verizon Wireless is being slightly premature in extending its quad play coverage in partnership with Comcast and Time Warner Cable before gaining the regulatory approval that will make them fully legitimate. Under the deals the respective MSOs and Verizon Wireless are selling each other’s services, which are then packaged into quad play bundles that rivals say undermines competition. The arrangements sprung from the $3.6bn proposed deal for Verizon to purchase more than 122 spectrum licences from SpectrumCo, a joint venture between the three MSOs Comcast, Time Warner Cable, and Bright House Networks (and additional ones from Cox and Leap).
This was a significant move, because it concerned the last remaining unused, nationally available swathe of spectrum in the US, amounting to an average of 20MHz reaching most of the population. It more or less doubled what Verizon previously had for its national LTE roll-out. Verizon therefore wanted it badly, as the spectrum would provide adequate capacity for future bandwidth intensive LTE services including video, but the MSOs, especially Comcast, would have preferred to sell to a smaller player. They claimed that being a fifth US mobile operator with just that amount of spectrum would be unviable and so had to sell, and only Verizon came up with the money. As part of that deal, the MSOs made the best of the job by reaching an arrangement to resell services with Verizon, so that they could still at least offer quad play bundles.
Bright House has yet to announce any bundles, but deals between Verizon Wireless and Time Warner now cover cities in Nebraska, as well as urban areas in Alabama, Kansas, North Carolina, Ohio, South Carolina, and Wisconsin. Meanwhile people in Florida, Tucson, Arizona, as well in Albuquerque, Santa Fe, and Las Cruces in New Mexico, can purchase Comcast and Verizon Wireless services from either provider. Joint Verizon Wireless and Comcast services are also available in cities in Alabama, Arkansas, California, Colorado, Georgia, Illinois, Indiana, Kentucky, Louisiana, Missouri, Michigan, Minnesota, Mississippi, Oregon, South Carolina, Tennessee, Utah, and Washington.
The quad play deals involving Comcast go the deepest, including a variety of options, such as Visa prepaid cards worth up to $300, a Comcast HD DVR at no additional cost for six months, and a complementary 12-month upgrade to Blast!, the version of Comcast’s Xfinity Internet service with download speeds of up to 30Mbps. There is also the option to stream live TV over Wi-Fi, so overall it is a fairly comprehensive offering. That is why competitors are concerned and regulators are still agonizing over whether to approve the spectrum sale even while Verizon and the three MSOs are behaving as if it were a done deal.
Verizon’s rival strongly oppose the deal, arguing that it dangerously consolidates power for mobile services with Verizon and AT&T, by far the biggest two carriers in the US ‘ though TMo is lobbying on its behalf, since it agreed its own AWS spectrum swap plan with Verizon, which would be triggered by the cable transaction going through. There is also concern on the pay-TV front in that some of the regions concerned will have Verizon’s Fios services available as well as either Comcast’s or Time Warner’s. In those areas, deals in which the rivals are selling each other’s services does dent the desire of either party to compete strongly on price with the other. Such considerations are currently weighing with both the Federal Communications Commission and the Justice Department.
About 7.1m of Comcast’s customers, 31.5% of its total subscriber base, have this quad play bundle available, and in the case of Time Warner 1.6m customers, or 13.3% of the base.