Thursday, December 17, 2009

U.K. Regulator Seeks to Mitigate 2.6 GHz Band Interference «

Yet another reason to delay release of the 2.6GHz TDD band that WiMAX would use?

U.K. Regulator Seeks to Mitigate 2.6 GHz Band Interference «

If WiMAX fails to gain traction it will have been entirely caused by regulators like OFCOM.

Thursday, October 15, 2009

LTE will probably be late in mature markets

Despite all of the LTE hype and pilot announcements there are plenty of good commercial reasons for mobile operators to delay rollout of LTE networks for some considerable time, and only one good reason for rolling out as soon as possible. A delay would put a serious dent in the UK government’s commitment to provide broadband to everyone.
The main reasons for delaying are:
1. The UK operators stumped up an estimated £50Bn to build their 3G networks, including £22Bn for 3G licences. Most mobile operators have therefore yet to recoup their investments in 3G, so replacing it would mean writing down that investment – which would severely damage their share price. There is still considerable room for low-cost in-life upgrades to higher bandwidths using technologies like HSDPA – unless the platform technology is too old to be upgraded, in which case the network cannot be upgraded and must be replaced.
For example, in February 2008 Vodafone UK announced HSPA+ trials “to ascertain whether HSPA+ voice and data capacity enhancements will be able to leverage existing UMTS assets, including radio spectrum, to prolong the lifespan of current UMTS networks still further", according to the Global CTO. These trials have been successful and prove that HSPA+ is a sensible route to increasing data capacity in the network.
2. Unless the mobile operator’s current network technology is the very latest there is no upgrade path for the operator to support LTE. LTE and 3G are not compatible, and there are currently no handsets that support LTE, let alone 2G, 3G and LTE. 2G, 3G and LTE use different frequencies – this means that the current base-stations, spaced for 2G and 3G networks, will not be close enough for the higher LTE frequency and so more base-stations will be required.
3. The cost of supporting broadband scales with traffic, which is growing exponentially, but the revenues scale linearly with the number of users, so a completely new commercial approach is required. There is no evidence that the mobile operators have solved that problem yet.
4. As LTE is a faster and more complex system it will require much more complex processors in handsets, which will significantly reduce battery life. 3G handsets didn’t come down in price significantly until both 2G and 3G could be supported on a single chip. It will be several years before handsets become available that can support both 3G and LTE on a single chip. So until these handsets become available the LTE network will be used primarily for laptops in a similar way to the 3G datacards available today. This will merely cannibalise the 3G datacard business. 3G networks must be run in parallel with LTE until the great majority of the user-base have dual-mode handsets, just as the 2G and 3G networks are running in parallel today.
5. There is little advantage in LTE for the operators at present, but significant downsides. The existing 3G network is perfectly good enough to support the main revenue-generating services that the operators offer, voice and messaging. Although the operators hope for significant revenues from mobile broadband there is no evidence that they will come quickly. Mobile video has been slow to take off.
6. Most importantly, operators cannot ignore the threat of Skype and other VoIP services. LTE should be good enough to allow VoIP to work well enough for most users. This could crash voice revenues where LTE is available, particularly for off-net and international calls where the mobile operator makes excess profits from roaming and interconnection, well before broadband services revenues start to replace them.
For all of these reasons I do not expect to see any LTE services available in the UK for at least three years, and probably five.
And the one good reason for rolling out a network as soon as the technology and spectrum becomes available? It’s to protect themselves against a WiMAX market entrant. However, if they can accomplish that by making enough noise about their intentions to scare off potential investors in WiMAX, why would they bother with a rollout any time soon?

Wednesday, October 7, 2009

Summary: Why Mobile WiMAX can succeed in mature mobile markets

Here's a summary for those that don't want to plough through the rather long post below.
A mobile WiMAX operator can be successful in a mature mobile market if it:
  1. doesn't offer services that 3G networks are good enough at. In particular, voice, because a new WiMAX network will definitely NOT be good enough on coverage and will not get mobile interconnection. Allow free access for VoIP services
  2. concentrates on what it can do better than 3G, not try to fix it's shortcomings or copy 3G services.
  3. concentrates on differentiation. Investors demand above-average returns on their investments. Above-average returns come from competitive advantages. Competitive advantages come from either lower costs or differentiation (or network effects) - and a new mobile WiMAX network certainly won't benefit from economies of scale. WiMAX's primary competitive advantage, until LTE arrives, is better performance.
  4. develops premium services for customers for whom the performance of 3G networks are not good enough and where WiMAX is better. This primarily means businesses and a few very demanding consumers
  5. ignores 'average' consumers for a while. Most of these are not willing to pay more for better services even if they whinge about performance
  6. moves quickly to build its network - it has three to five years before LTE rolls out - but builds selectively, targeting demand rather than coverage - so, large cities first (which is also where 3G broadband is under the most pressure)
  7. focuses on making above-average margins and profitability rather than a land-grab for customers - although energetic solution sales skills are a must for its sales teams
  8. ignores rural markets (unless it's demanding customers value it sufficiently to make it economically attractive, unlikely as that sounds)
This is, of course, as long as the 3G operators don't manage to bamboozle the regulator into withholding WiMAX spectrum any longer.
A mobile WiMAX operator can damage the investment case for LTE by taking the most demanding customers now - because LTE and mobile WiMAX are so similar that there is no way to build differentiated products on the basis of the technology, so once a mobile WiMAX network has these customers then a 3G/LTE operator is not good enough to win them back UNLESS it makes a disruptive, low-price play. However, a disruptive play is highly unattractive when the majority of the costs are sunk in infrastructure because, when push comes to shove, the incumbent can write down its investment and match pricing to keep the competitor out, as happened with fibre networks - which is why WiMAX doesn't work as a disruptive play either.
Over a relatively short time increasing demand for bandwidth will mean that more and more consumers will fit into the 'more demanding' category and will look for services that can only be delivered over the WiMAX network.
So many different services will work over a broadband infrastructure and require better quality bandwidth that there is plenty to go for. More on this later.

Monday, October 5, 2009

Why mobile WiMAX can succeed in mature mobile markets

Mobile WiMAX has been somewhat dismissed as a third-world or rural broadband technology, but there is every reason why it would be a success as a major urban network in established mobile markets as well. It could also severely crimp the ambitions of the 3G operators to deploy LTE. To demonstrate why this is so, I will use the theory of disruptive innovation.

Disruption is a very over-used word, applied by marketing departments to just about every new technology and product, but the word has a concise meaning in the theory. Professor Clayton Christensen’s theory of disruptive innovation is one of the very few scientifically-based management theories. The theory defines two types of disruptive innovation – a low-end disruption is aimed at other firms’ existing customers that would be satisfied with a lower-performing product at a lower price, whereas a new-market disruption targets those who do not use the incumbent products at all. Incumbents, on the other hand, develop sustaining innovations to meet the needs of their more demanding customers and will not target innovation at those who are satisfied with the existing product, nor will they tend to create innovations to meet the needs of non-users at low cost and low margin. Disruptors’ business models make high margins targeting customers that are low-margin for incumbents.

There are two consequences of disruptive innovation that are important for this analysis. An innovation that is not good enough compared to an incumbent product in some attribute that is valued by the incumbent’s customers can only be successfully introduced as a disruptive innovation at a lower cost to the incumbent’s product. If the price of the innovation is close to that of the incumbents product then the incumbent’s product would be favoured by potential purchasers. Alternatively, if a startup introduced an innovation that would be sustaining for incumbents and would thereby increase profits then the incumbent will quickly adopt the innovation and use its superior resources to take the market, unless there is something – perhaps a patent – to stop it.

The value of a good science-based theory is that it allows us to make and test predictions about the outcome of a situation that has not been used to derive the theory. The theory has been extensively tested against various historical scenarios and consistently been found to be a good fit to the circumstances. Intel itself launched it’s Celeron processor as a direct consequence of the predictions of the theory, to defend against a low-end disruption of it’s processor range. I’m going to use it to make predictions about WiMAX versus LTE.

WiMAX itself is not a disruptive innovation, it is merely a technology. Only business models are disruptive, whether they use fundamentally the same technology as the incumbent (like low-cost airlines) or not. So the WiMAX network operator has to differentiate itself from the incumbent mobile operators through its business model. In particular the services that the WiMAX operator offers will be its main source of differentiation. That differentiation can be on price, or some other factor.

An infrastructure technology like WiMAX or LTE can be both used in both a disruptive and a non-disruptive way because it can support a variety of services and business models. For instance, low-cost voice may be disruptive if the WiMAX operator has a significant cost advantage, which would mean that the WiMAX operator would earn significant profits at prices which the 3G operators could not profitably match. A non-disruptive use of WiMAX would be to in-fill broadband coverage in rural areas where the mobile operators did not want to go – however, this is a most unattractive business model for any investor.

The LTE and mobile WiMAX technologies are very similar technically and economically. In fact it’s impossible to create differentiated products on the basis of the technologies alone. Products offered on mobile WiMAX can be duplicated using LTE, and vice-versa. The only significant difference between mobile WiMAX and LTE is that mobile WiMAX is available now and has been deployed across the world, whereas the LTE specification has only recently been finalised and a few field tests carried out. LTE is at least two if not three years behind mobile WiMAX.

A mobile broadband network can support a wide range of services, from voice through email and music / video streaming to any number of internet services such as Ebay, Google, Facebook, various e-commerce services, etc. Each service is treated by the user on its own merits – just because a user prefers Vodafone for calls does not make them a user of Vodafone Live!. All that matters is that a product or service is relevant to the user and good enough to help them do what they are trying to do. Any service may be relevant to the user, and therefore worth paying extra for, or may not. Whether a particular service is good enough depends on the user’s decision criteria, so for instance for a particular user a handset may be good enough for voice calls but not good enough for watching video.
  • Most costs are sunk in the build-out of a mobile network which makes it hard for the late-arrival disruptor to undercut the incumbents due to the cost of financing, particularly if at least one of the incumbents has already recouped much of the cost of their investment
  • Coverage is important for the current primary revenue-generating mobile services, voice and SMS, and it would be some time before a mobile WiMAX network could achieve the coverage necessary to attract a significant number of voice users
  • There is almost no non-use, only some less-demanding customers who might put up with poorer coverage for a cheaper service
  • The rate of uptake of services based on a lower price alone is low when the cost of the incumbent’s service is reasonably affordable by the majority of customers, unless the disruptive service is considerably cheaper to use (like Skype)
  • Mobile operators are highly unlikely to offer interconnection as a mobile network unless forced to by the regulator. This would mean higher WiMAX-to-3G than 3G-to-3G call costs, although WiMAX-to-fixed phone costs would be lower.
  • Most importantly, the high costs of rolling out a network cannot be recouped in any reasonable timeframe if prices and margins are low
The lack of coverage as well lack of handset availability makes mobile WiMAX ‘not good enough’ for the majority customers currently using mobile telephony, and therefore a voice service on a WiMAX network could only be introduced as a low-cost or free service. However, this is not true of other services. Broadband services could perform significantly better than on 3G, even with HSPA+. This is partly because of the enhanced capabilities of the WiMAX technology, which includes facilities for quality-of-service management, but also because the network could be designed to be better, particularly in the backhaul network which carries the traffic from the base-stations to the internet. Now under normal circumstances the mobile operators would adopt the innovation because it met the needs of their more demanding customers, but these are not normal circumstances. In particular
  • The mobile operators have delayed the 2.5G spectrum auction
  • LTE has been designed to fit the 3G architecture better than mobile WiMAX
  • LTE itself is going to be two to three years late to market, and good-quality handsets much later
  • There are many reasons why the mobile operators want to delay the rollout of LTE (more on this in the next blog)
  • The mobile operators have declared in favour of LTE. Well, they could perhaps change their minds, but…
  • the amount of spectrum available for WiMAX at 2.5GHz is limited, with only enough for one or perhaps two national networks being made available
Whoever acquires the UK WiMAX spectrum, as long as it is not delayed any further, has a two to three year window of advantage. During this time the operator can build a network targeting opportunities that are looking for better-performing mobile broadband and make above-average profits on the services provided. I’ll post more on demand for mobile broadband services later.

Once LTE becomes available a well-funded WiMAX operator could have mopped up a lot of the attractive early-adopter markets – mainly business requirements - that LTE operators would be relying on in their business plans. The only way that LTE operators could win them back is by becoming disruptive – which, as we have seen, is not an attractive option for investors.

How will this play out? I believe that a mobile WiMAX operator could establish itself as the dominant provider of high-quality mobile broadband services to businesses, while the 3G operators will come to market with LTE much later to meet demand from consumers for lower-quality, cheaper high-volume services. It all depends on whether investors can see past the noise being created in the market by the LTE vendors and 3G operators – and whether the WiMAX community can find the courage to really push for the high ground, rather than accept second place.

Saturday, March 14, 2009

Disruptive Innovation

I've found that few business managers understand disruptive innovation. It's too complex for most of them and can't be encapsulated in a sound-bite. They merely see it as a tag they can associate with their products to make them sound attractive to investors, who also rarely understand disruption.

Good. That means they won't see me coming. :-)

Thursday, March 12, 2009

Microsoft tries to avoid disruption

Microsoft is to launch a crippled 'starter edition' of it's new Windows 7 operating system for Notebooks. The starter edition will only run 3 applications at a time. As several people have pointed out, Windows 7 runs fine on Notebooks, so why do it?  

It's probably about avoiding disruption. Notebooks make computers affordable to people to whom they would have been a luxury item previously. I think this version is not targeted at current Windows customers, but at the people who would love a computer but can't quite afford one. MS will make it easy for people to upgrade to Windows 7 in a few minutes, so it has nothing to do with the capability of the notebooks.

The cheaper the hardware relative to cost of the operating system, the more the choice of operating system becomes an issue. Desktop and laptop PC's cost several thousands and the operating system a hundred at best, so the difference between comfy old Windows and unknown Linux was a small part of the purchase price and the operating system could be bundled as part of the purchase. The difference here is a almost a factor of two with the full Windows OS on. So if Microsoft OEM's bundled a full version of Windows 7 there would be a sizeable market of people who can't quite afford the Windows version but can afford the Linux version. These are the people I believe MS is targeting with the crippled version - MS wants to make choosing the Windows-based system easy again.

If MS did not do this, Linux would be adopted by a user base of, for instance, kids for homework, particularly in emerging markets. For those old enough to remember the early days of Unix, this is exactly why Unix caught on - it was affordable to those at the entry end of the market who were fed up waiting for their turn on the mainframe, and ran on low-cost systems. Because of this it became popular in university departments. Eventually these people grew up, graduated and got purchasing budgets of their own - and they bought what they were comfortable with. The danger for Microsoft is that the same will happen with its OS's.

What I believe Microsoft is doing is trying to prevent itself being disrupted by offering a lower-price-point OS that can again be bundled by OEM's for a small cost. This is exactly the same strategy as Intel offering the Celeron as an entry-point processor to prevent itself being disrupted by a cheap startup. MS doesn't want to lose the new market of have-nots, a proportion of which represent its future customers for its more valuable products. 

However, whether crippling the OS is the right approach is highly dubious - the Celeron was slower and lacked some functionality, but once in a PC these shortcomings could be overcome by code, albeit running a bit more slowly. Kids want to experiment and download a whole slew of dubious but entertaining and free little programs, so they might switch to Linux (at the cost of a little experimentation) to get more freedom. 

I think it would be better to restrict the ability to run the more expensive programs. This would mean those who can afford, for instance, full MS Office (as opposed to the student edition) would be forced to upgrade to the full Windows 7. The kids can continue to download and play with free software while the rest of us get the performance we are used to with the full OS.

Thursday, March 5, 2009

Low-wage Britain?

I saw an article in the Financial Times the other day that said that "Britain's manufacturing industry has fared less badly than that in comparable countries during the downturn". This is of course what would be expected when the pound has fallen so far against the dollar and euro. Our export goods are cheaper for other countries to buy, relative to goods paid for in dollars or euros. This is good for the economy and will help us turn around more quickly.

The flip side of this is that goods ultimately paid for in dollars and euro's - even if we pay for them in pounds, like package holidays overseas - will be more expensive. This applies to Taiwanese TV's, German cars, Asian rice, French cheese, and many of the goods and raw materials our industries need in order to expand or manufacture. So our manufactured goods will also cost more because of that, and that will fuel price inflation. What is really happening is that our cost of labour, as a proportion of the cost of the item, is cheaper in pounds than euros or dollars.  If we insist on our wages matching inflation then the benefits of the lower pound are partially nullified and it will take longer to recover from the recession - so the pound will stay low and goods from elsewhere will remain expensive. Better to take the hit now.

The other side of this is that the benefit will be short term - our goods will become more expensive again and manufacturing will suffer - as the pound rises. That is, unless our manufacturing also takes the opportunity to do what the Germans and Japanese did, and become lean, efficient, higher quality and customer value-oriented. 

Which brings me to a letter sent by the CEO of a US engineering company, Gregory Knox, to a President of General Motors who requested support for a bailout. It makes wonderful reading, and explains exactly why inefficient industries saddled with bad working practices, intransigent unions, managers concerned only with earning the most for least effort and lack of customer care should be left to go to the wall. Bailouts, paid for the us the taxpayers, keep these leeches in a job they don't deserve.