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.