Fixed wireless access growth: To 20% homes by 2025

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Fixed wireless access growth forecast

Fixed Wireless Access (FWA) networks use a wireless “last mile” link for the final connection of a broadband service to homes and businesses, rather than a copper, fibre or coaxial cable into the building. Provided mostly by WISPs (Wireless Internet Service Providers) or mobile network operators (MNOs), these services come in a wide range of speeds, prices and technology architectures.

Some FWA services are just a short “drop” from a nearby pole or fibre-fed hub, while others can work over distances of several kilometres or more in rural and remote areas, sometimes with base station sites backhauled by additional wireless links. WISPs can either be independent specialists, or traditional fixed/cable operators extending reach into areas they cannot economically cover with wired broadband.

There is a fair amount of definitional vagueness about FWA. The most expansive definitions include cheap mobile hotspots (“Mi-Fi” devices) used in homes, or various types of enterprise IoT gateway, both of which could easily be classified in other market segments. Most service providers don’t give separate breakouts of deployments, while regulators and other industry bodies report patchy and largely inconsistent data.

Our view is that FWA is firstly about providing permanent broadband access to a specific location or premises. Primarily, this is for residential wireless access to the Internet and sometimes typical telco-provided services such as IPTV and voice telephony. In a business context, there may be a mix of wireless Internet access and connectivity to corporate networks such as VPNs, again provided to a specific location or building.

A subset of FWA relates to M2M usage, for instance private networks run by utility companies for controlling grid assets in the field. These are typically not Internet-connected at all, and so don’t fit most observers’ general definition of “broadband access”.

Usually, FWA will be marketed as a specific service and package by some sort of network provider, usually including the terminal equipment (“CPE” – customer premise equipment), rather than allowing the user to “bring their own” device. That said, lower-end (especially 4G) offers may be SIM-only deals intended to be used with generic (and unmanaged) portable hotspots.
There are some examples of private network FWA, such as a large caravan or trailer park with wireless access provided from a central point, and perhaps in future municipal or enterprise cellular networks giving fixed access to particular tenant structures on-site – for instance to hangars at an airport.

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FWA today

Today, fixed-wireless access (FWA) is used for perhaps 8-9% of broadband connections globally, although this varies significantly by definition, country and region. There are various use cases (see below), but generally FWA is deployed in areas without good fixed broadband options, or by mobile-only operators trying to add an additional fixed revenue stream, where they have spare capacity.

Fixed wireless internet access fits specific sectors and uses, rather than the overall market

Source: STL Partners

FWA has traditionally been used in sparsely populated rural areas, where the economics of fixed broadband are untenable, especially in developing markets without existing fibre transport to towns and villages, or even copper in residential areas. Such networks have typically used unlicensed frequency bands, as there is limited interference – and little financial justification for expensive spectrum purchases. In most cases, such deployments use proprietary variants of Wi-Fi, or its ill-fated 2010-era sibling WiMAX.

Increasingly however, FWA is being used in more urban settings, and in more developed market scenarios – for example during the phase-out of older xDSL broadband, or in places with limited or no competition between fixed-network providers. Some cellular networks primarily intended for mobile broadband (MBB) have been used for fixed usage as well, especially if spare capacity has been available. 4G has already catalysed rapid growth of FWA in numerous markets, such as South Africa, Japan, Sri Lanka, Italy and the Philippines – and 5G is likely to make a further big difference in coming years. These mostly rely on licensed spectrum, typically the national bands owned by major MNOs. In some cases, specific bands are used for FWA use, rather than sharing with normal mobile broadband. This allows appropriate “dimensioning” of network elements, and clearer cost-accounting for management.

Historically, most FWA has required an external antenna and professional installation on each individual house, although it also gets deployed for multi-dwelling units (MDUs, i.e. apartment blocks) as well as some non-residential premises like shops and schools. More recently, self-installed indoor CPE with varying levels of price and sophistication has helped broaden the market, enabling customers to get terminals at retail stores or delivered direct to their home for immediate use.

Looking forward, the arrival of 5G mass-market equipment and larger swathes of mmWave and new mid-band spectrum – both licensed and unlicensed – is changing the landscape again, with the potential for fibre-rivalling speeds, sometimes at gigabit-grade.

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Executive Summary
Introduction
- FWA today
- Universal broadband as a goal
- What’s changed in recent years?
- What’s changed because of the pandemic?
The FWA market and use cases
- Niche or mainstream? National or local?
- Targeting key applications / user groups
FWA technology evolution
- A broad array of options
- Wi-Fi, WiMAX and close relatives
- Using a mobile-primary network for FWA
- 4G and 5G for WISPs
- Other FWA options
- Customer premise equipment: indoor or outdoor?
- Spectrum implications and options
The new FWA value chain
- Can MNOs use FWA to enter the fixed broadband market?
- Reinventing the WISPs
- Other value chain participants
- Is satellite a rival waiting in the wings?
Commercial models and packages
- Typical pricing and packages
- Example FWA operators and plans
STL’s FWA market forecasts
- Quantitative market sizing and forecast
- High level market forecast
Conclusions
- What will 5G deliver – and when and where?
Index

LPWA: Which way to go for IoT?

Introduction: Why is LPWA important?

The Internet of Things (IoT) space is huge and incredibly diverse. It spans everything from remote-control of commercial drones, to consumer wearables, in-building sensors and smart electricity metering. It has the potential to improve cities’ safety, industrial productivity and enhance human health and welfare. Each area has its own characteristics in terms of connectivity, management, platform and security requirements.

This briefing report focuses on “narrowband”, long-distance IoT connectivity – typically applications which operate at speeds of 1Mbit/s or less, and perhaps only transmit a few kilobytes per day. That contrasts with the high-speed, low-latency connections IoT connections that people reference for wearables like AR headsets, or those streaming real-time telemetry and cloud-access, from complex devices like robots or huge arrays of sensors.

It is frequently said that connectivity represents only a small percentage of the overall revenue and value opportunity around IoT. Yet while that is, objectively, true, it ignores the anchoring and potential “pull-through” on other layers, especially for LPWA and narrowband access, where optimisation for power consumption and coverage is critical for many use-cases. Provision of connectivity to a device or application gives the provider (or owner) a head-start on exploiting the entire solution stack, for example in terms of collection of operational data for machine-learning and analytics.

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Against that backdrop, it is understandable why telcos and their vendors and industry bodies are putting so much attention on IoT-centric networking. That encompasses everything from 5G headline use-cases about ultra-low latency connections, through to the desire to manage smart homes and cities’ infrastructure, or very simple sensors.

It is already clear that no one single technology – or even two or three – can cover everything to do with IoT. There are too many dimensions – between 5 and 10 important ones can be identified (see page 19 of the report) – which leads to a vast set of combinations. No vendor, and no operator, will be able to optimally cover everything, while for any given problem there is likely to be an overlap of “reasonable” solutions.

An important part of the mix, which STL Partners has considered before in 2016 is for low-power, wide-area LPWA connectivity. This is envisaged to connect many of the “billions” of endpoints which are widely anticipated – inexpensive sensors, actuators, personal devices, tags and other gadgets – and especially those spread over large distances (think 100s of metres, up to 10s of kilometres or more).

Typical LPWA / narrowband applications

In particular, LPWA focuses on low-bandwidth products, rather than those needing enough speed for video or rich telemetry to/from the cloud. Most, but not all, LPWA applications are fairly tolerant of delay/latency – temperature sensors or street-lights don’t need millisecond response times – but security may still be very important.

They need to be simple to deploy, inexpensive, energy-efficient, low-maintenance and use radio technology suitable for hard-to-reach locations. Most of the new LPWA networks can connect many end devices via a single base station, usually over a long (1-10km) distance. This brings trade-offs, however: slower data transmission rates and less-frequent updates/messages.

New cycle-sharing services, where the bikes don’t need special racks, but have remote-controlled padlocks and can be left/picked-up (and tracked) anywhere in an urban area.
Smart electricity/gas meters for homes – which may be in basements, or wherever the pipes/wires enter the building.
Asset-tracking, such as attaching beacons to expensive tools on large sites.
Smart lighting systems for cities, where lamp-posts can be switched on remotely – but also house sensors (e.g. for weather or traffic) which report back data to a central system.
Supply-chain management, such as monitoring of shipments of pharmaceuticals from manufacture to dispensary.

Shared bicycles’ locks have requirements for mobility & long battery life

Key LPWA technologies & deployments

There are currently four main LPWA technologies that dominate IoT deployments and discussion: SigFox, LoRaWAN, NB-IoT and LTE-M (sometimes called LTE Cat-M1). There are also a number of other less-prominent solutions, which can be important for certain niches. Various hybrids and combinations are possible as well – plus many short-range solutions like Wi-Fi, ZigBee and Bluetooth, which are outside the main scope of discussion here.

The main four include two that are endorsed by the mobile industry “establishment”, as they are 3GPP standards that fit into the broader 4G family. In most cases, they are intended to work in dedicated (licensed) spectrum bands, typical for most mobile networks. The cellular LPWA variants include:

LTE-M: This is essentially a de-tuned, cheaper, lower-power version of “normal” LTE. It can also support VoLTE voice communications. It is focused on mid-range speeds of up to 1Mbit/s. An earlier version of LTE designed for M2M was called LTE-Cat1, although it is not in widespread use.

NB-IoT: This is 3GPP’s first attempt at an ultra-low power, long battery-life standard. The NB stands for Narrowband, meaning below 100kbit/s data speeds, and often considerably less than that. This means can fit into quite small slices of spectrum.

EC-GSM: As well LTE-M and NB-IoT, 3GPP is also working on a more-modern version of 2G connectivity, especially suitable for countries or rural regions which do not yet have 4G coverage, yet need an improved version of GPRS M2M, for low-power applications like agriculture. It has had little traction so far.

5G “Massive” MTC: One of the main promised use-cases of 5G networks is for ultra-dense, low- power IoT networks – potentially tens of thousands of nodes per cell, or even more. This is commonly referred to as “massive IoT” or MTC (machine-type communications). While there may be evolution of NB-IoT towards that (e.g. NB-IoT2), the full 5G version is only likely to emerge in 2020 or beyond.

Outside of the “mainstream” cellular-industry IoT connectivity technologies created by 3GPP, there is a wide variety of other options. Some of these have been created by individual vendors which retain core rights to the IPR, while others have been standardised by other IT/networking bodies such as IEEE. Mostly, they work in unlicensed spectrum – which makes them cheaper to deploy (especially in limited areas), but risks interference.

Executive Summary
Introduction: Why is LPWA important?
Typical LPWA / narrowband applications
Key LPWA technologies & deployment
Status and deployments
LoRa / LoRaWAN
SigFox
Strategic considerations
Multiple dimensions determine the “best” LPWA for each use
LPWA delivery models: Service, private, solution or other?
Spectrum considerations
IoT developers and ecosystem
Hybrid and multiple networks
Conclusions and recommendations
Vertical solutions?
Conclusions

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Autonomous cars: Where’s the money for telcos?

Introduction

Connected cars have been around for about two decades. GM first launched its OnStar in-vehicle communications service in 1996. Although the vast majority of the 1.4 billion cars on the world’s roads still lack embedded cellular connectivity, there is growing demand from drivers for wireless safety and security features, and streamed entertainment and information services. Today, many people simply use their smartphones inside their cars to help them navigate, find local amenities and listen to music.

The falling cost of cellular connectivity and equipment is now making it increasingly cost-effective to equip vehicles with their own cellular modules and antenna to support emergency calls, navigation, vehicle diagnostics and pay-as-you-drive insurance. OnStar, which offers emergency, security, navigation, connections and vehicle manager services across GM’s various vehicle brands, says it now has more than 11 million customers in North America, Europe, China and South America. Moreover, as semi-autonomous cars begin to emerge from the labs, there is growing demand from vehicle manufacturers and technology companies for data on how people drive and the roads they are using. The recent STL Partners report, AI: How telcos can profit from deep learning, describes how companies can use real-world data to teach computers to perform everyday tasks, such as driving a car down a highway.

This report will explore the connected and autonomous vehicle market from telcos’ perspective, focusing on the role they can play in this sector and the business models they should adopt to make the most of the opportunity.

As STL Partners described in the report, The IoT ecosystem and four leading operators’ strategies, telcos are looking to provide more than just connectivity as they strive to monetise the Internet of Things. They are increasingly bundling connectivity with value-added services, such as security, authentication, billing, systems integration and data analytics. However, in the connected vehicle market, specialist technology companies, systems integrators and Internet players are also looking to provide many of the services being targeted by telcos.

Moreover, it is not yet clear to what extent the vehicles of the future will rely on cellular connectivity, rather than short-range wireless systems. Therefore, this report spends some time discussing different connectivity technologies that will enable connected and autonomous vehicles, before estimating the incremental revenues telcos may be able to earn and making some high-level recommendations on how to maximise this opportunity.

Executive Summary
The role of cellular connectivity
High level recommendations
Contents
Introduction
The evolution of connected cars
How to connect cars to cellular networks
What are the opportunities for telcos?
How much cellular connectivity do vehicles need?
Takeaways
The size of the opportunity
How much can telcos charge for in-vehicle connectivity?
How will vehicles use cellular connectivity?
Telco connected car case studies
Vodafone – far-sighted strategy
AT&T – building an enabling ecosystem
Orange – exploring new possibilities with network slicing
SoftBank – developing self-driving buses
Conclusions and Recommendations
High level recommendations
STL Partners and Telco 2.0: Change the Game

Figure 1: Incremental annual revenue estimates by service
Figure 2: Autonomous vehicles will change how we use cars
Figure 3: Vehicles can harness connectivity in many different ways
Figure 4: V2X may require large numbers of simultaneous connections
Figure 5: Annual sales of connected vehicles are rising rapidly
Figure 6: Mobile connectivity in cars will grow quickly
Figure 7: Estimates of what telcos can charge for connected car services
Figure 8: Potential use cases for in-vehicle cellular connectivity
Figure 9: Connectivity complexity profile criteria
Figure 10: Infotainment connectivity complexity profile
Figure 11: In-vehicle infotainment services estimates
Figure 12: Real-time information connectivity complexity profile
Figure 13: Real-time information services estimates
Figure 14: The connectivity complexity profile for deep learning data
Figure 15: Collecting deep learning data services estimates
Figure 16: Insurance and rental services’ connectivity complexity profile
Figure 17: Pay-as-you-drive insurance and rental services estimates
Figure 18: Automated emergency calls’ connectivity complexity profile
Figure 19: Automated emergency calls estimates
Figure 20: Remote monitoring and control connectivity complexity profile
Figure 21: Remote monitoring and control of vehicle services estimates
Figure 22: Fleet management connectivity complexity profile
Figure 23: Fleet management services estimates
Figure 24: Vehicle diagnostics connectivity complexity profile
Figure 25: Vehicle diagnostics and maintenance services estimates
Figure 26: Inter-vehicle coordination connectivity complexity profile
Figure 27: Inter-vehicle coordination revenue estimates
Figure 28: Traffic management connectivity complexity profile
Figure 29: Traffic management revenue estimates
Figure 30: Vodafone Automotive is aiming to be global
Figure 31: Forecasts for incremental annual revenue increase by service

5G: The spectrum game is changing – but how to play?

Introduction

Why does spectrum matter?

Radio spectrum is a key “raw material” for mobile networks, together with evolution of the transmission technology itself, and the availability of suitable cell-site locations. The more spectrum is made available for telcos, the more capacity there is overall for current and future mobile networks. The ability to provide good coverage is also determined largely by spectrum allocations.

Within the industry, we are accustomed to costly auction processes, as telcos battle for tranches of frequencies to add capacity, or support new generations of technology. In contrast, despite the huge costs to telcos for different spectrum allocation, most people have very little awareness of what bands their phones support, other than perhaps that it can use ‘mobile/cellular’ and WiFi.

Most people, even in the telecoms industry, don’t grasp the significance of particular numbers of MHz or GHz involved (Hz = number of cycles per second, measured in millions or billions). And that is just the tip of the jargon and acronym iceberg – a full discussion of mobile RAN (radio access network) technology involves different sorts of modulation, multiple antennas, propagation metrics, path loss (in decibels, dB) and so forth.

Yet as 5G pulls into view, it is critical to understand the process by which new frequencies will be released by governments, or old ones re-used by the mobile industry. To deliver the much-promised peak speeds and enhanced coverage of 5G, big chunks of frequencies are needed. Yet spectrum has many other uses besides public mobile networks, and battles will be fierce about any reallocations of incumbent users’ rights. The broadcast industry (especially TV), satellite operators, government departments (notably defence), scientific research communities and many other constituencies are involved here. In addition, there are growing demands for more bandwidth for unlicensed usage (as used for WiFi, Bluetooth and other low-power IoT networks such as SigFox).

Multiple big industries – usually referred to by the mobile community as “verticals” – are flexing their own muscles as well. Energy, transport, Internet, manufacturing, public safety and other sectors all see the benefits of wireless connectivity – but don’t necessarily want to involve mobile operators, nor subscribe to their preferred specifications and standards. Many have huge budgets, a deep legacy of systems-building and are hiring mobile specialists.

Lastly, parts of the technology industry are advocates of more nuanced approaches to spectrum management. Rather than dedicate bands to single companies, across whole countries or regions, they would rather develop mechanisms for sharing spectrum – either on a geographic basis, or by allowing some form of “peaceful coexistence” where different users’ radios behave nicely together, instead of creating interference. In theory, this could improve the efficient use of spectrum – but adds complexity, and perhaps introduces so much extra competition than willingness to invest suffers.

Which bands are made available for 5G, on what timescales, in what type of “chunks”, and the authorisation / licensing schemes involved, all define the potential opportunity for operators in 5G – as well as the risks of disruption, and (for some) how large the window is to fully-monetise 4G investments.

The whole area is a minefield to understand – it brings together the hardest parts of wireless technology to grasp, along with impenetrable legal processes, and labyrinthine politics at national and international levels. And ideally, it is possible to somehow to layer on consideration of end-user needs, and economic/social outputs as well.

Who are the stakeholders for spectrum?

At first sight, it might seem that spectrum allocations for mobile networks ought to be a comparatively simple affair, with governments deciding on tranches of frequencies and an appropriate auction process. MNOs can bid for their desired bands, and then deploy networks (and, perhaps, gripe about the costs afterwards).

The reality is much more complex. A later section describes some of the international bureaucracy involved in defining appropriate bands, which can then be doled out by governments (assuming they don’t decide to act unilaterally). But even before that, it is important to consider which organisations want to get involved in the decision process – and their motivations, whether for 5G or other issues that are closer to their own priorities, which intersect with it.

Governments have a broad set of drivers and priorities to reconcile – technological evolution of the economy as a whole, the desire for a competitive telecoms industry, exports, auction receipts – and the protection of other spectrum user groups such as defence, transport and public safety. Different branches of government and the public administration have differing views, and there may sometimes be tussles between the executive branch and various regulators.

Much the same is true at regional levels, especially in Europe, where there are often disagreements between European Commission, European Parliament, the regulators’ groups and 28 different EU nations’ parliaments (plus another 23 non-EU nations).

Even within the telecoms industry there are differences of opinion – some operators see 5G as an urgent strategic priority, that can help differentiation and reduce costs of existing infrastructure deployments. Others are still in the process of rolling out 4G networks and want to ensure that those investments continue to have relevance. There are variations in how much credence is assigned to the projections of IoT growth – and even there, whether there needs to be breathing room for 4G cellular types such as NB-IoT, which is yet to be deployed despite its putative replacement being discussed already.

The net result is many rounds of research, debate, consultation, disagreement and (eventually) compromise. Yet in many ways, 5G is different from 3G and 4G, especially because many new sectors are directly involved in helping define the use-cases and requirements. In many ways, telecoms is now “too important to be left to the telcos”, and many other voices will therefore need to be heard.

Executive Summary
Introduction
Why does spectrum matter?
Who are the stakeholders for spectrum?
Spectrum vs. business models
Does 5G need spectrum harmonisation as much as 4G?
Spectrum authorisation types & processes
Licensed, unlicensed and shared spectrum
Why is ITU involved, and what is IMT spectrum?
Key bands for 5G
Overview
5G Phase 1: just more of the same?
mmWave beckons – the high bands >6GHz
Conclusions

Figure 1 – 5G spectrum has multiple stakeholders with differing priorities
Figure 2 – Multi-band support has improved hugely since early 4G phones
Figure 3 – A potential 5G deployment & standardisation timeline
Figure 4 – ITU timeline for 5G spectrum harmonisation, 2014-2020
Figure 5 – High mmWave frequencies (e.g. 28GHz) don’t go through solid walls
Figure 6 – mmWave brings new technology and design challenges

eSIM: How Much Should Operators Worry?

What is eSIM? Or RSP?

There is a lot of confusion around what eSIM actually means. While the “e” is often just assumed to stand for “embedded”, this is only half the story – and one which various people in the industry are trying to change.

In theory the term “eSIM” refers only to the functionality of “remote provisioning”; that is, the ability to download an operator profile to an in-market SIM (and also potentially switch between profiles or delete them). This contrasts with the traditional methods of pre-provisioning specific, fixed profiles into SIMs during manufacture. Most SIMs today have a particular operator’s identity and encryption credentials set at the factory. This is true of both the familiar removable SIM cards used in mobile phones, and the “soldered-in” form used in some M2M devices.

In other words, the original “e” was a poor choice – it was intended to stand for “enhanced”, “electronic” or just imply “new and online” like eCommerce or eGovernment. In fact, the first use in 2011 was for eUICC – the snappier term eSIM only emerged a couple of years later. UICCs (Universal Integrated Circuit Cards) are the smart-card chips themselves, that are used both in SIMs and other applications, for example, bank, transport and access-security cards. Embedded, solderable SIMs have existed for certain M2M uses since 2010.

In an attempt to separate out the “form factor” (removable vs. embedded) aspect from the capability (remote vs. factory provisioned), the term RSP sometimes gets used, standing for Remote SIM Provisioning. This is the title of GSMA’s current standard. But unsurprisingly, the nicer term eSIM is hard to dislodge in observers’ consciousness, so it is likely to stick around. Most now think of eSIMs as having both the remote-provisioning function and an embedded non-removable form-factor. In theory, we might even get remote-provisioning for removable SIMs (the 2014 Apple SIM was a non-standard version of this).

Figure 1: What does eSIM actually mean?

Source: Disruptive Analysis

This picture is further muddied by different sets of GSMA standards for M2M and consumer use-cases at present, where the latter involves some way for the end-user to choose which profiles to download and when to activate them – for example, linking a new cellular tablet to an existing data-plan. This is different to a connected car or an industrial M2M use-case, where the manufacturer designs in the connectivity, and perhaps needs to manage whole “fleets” of eSIMs together. The GSMA M2M version of the standards were first released in 2013, and the first consumer specifications were only released in 2016. Both are being enhanced over time, and there are intentions to develop a converged M2M/consumer specification, probably in H2 2017.

eSims vs Soft-SIM / vSims

This is another area of confusion – some people confuse eSIMs with the concept of a “soft-SIM” (also called virtual SIMs/vSIMs). These have been discussed for years as a possible option for replacing physical SIM chips entirely, whether remotely provisioned, removable/soldered or not. They use purely software-based security credentials and certificates, which could be based in the “secure zone” of some mobile processors.

However, the mobile industry has strongly pushed-back on the Soft-SIM concept and standardisation, for both security reasons and also (implicit) commercial concerns. Despite this we are aware of at least two Asian handset vendors that have recently started using virtual SIMs for roaming applications.

For now, soft-SIMs appear to be far from the standards agenda, although there is definitely renewed interest. They also require a secondary market in “profiles”, which is at a very early stage and not receiving much industry attention at the moment. STL thinks that there is a possibility that we could see a future standardised version of soft-SIMs and the associated value-chain and controls, but it will take a lot of convincing for the telco industry (and especially GSMA) to push for it. It might get another nudge from Apple (which indirectly catalysed the whole eSIM movement with a 2010 patent), but as discussed later that seems improbable in the short term.

Multi-IMSI: How does multi-IMSI work?

It should also be noted that multi-IMSI (International Mobile Subscriber Identity) SIMs are yet another category here. Already used in various niches, these allow a single operator profile to be associated with multiple phone numbers – for example in different geographies. Combined with licences in different countries or multiple MVNO arrangements, this allows various clever business models, but anchored in one central operator’s system. Multi-local operators such as Truphone exploit this, as does Google in its Fi service which blends T-Mobile US and Sprint networks together. It is theoretically possible to blend multi-IMSI functionality with eSIM remote-provisioning.

eSIMs use cases and what do stakeholders hope to gain

There are two sets of use-cases and related stakeholder groups for eSIMs:
Devices that already use cellular radios & SIMs today; This group can be sub-divided into:
- Mobile phones
- M2M uses (e.g. connected cars and industrial modules)
- Connected devices such as tablets, PC dongles and portable WiFi hotspots.
Devices that do not have cellular connectivity currently; this covers a huge potential range of IoT
devices.
Broadly speaking, it is hoped that eSIM will improve the return on investment and/or efficiency of existing cellular devices and services, or help justify and enable the inclusion of cellular connections in new ones. Replacing existing SIMs is (theoretically) made easier by scrutinising existing channels and business processes and improving them – while new markets (again theoretically) offer win-win scenarios where there is no threat of disruption to existing business models.

The two different stakeholders want to receive different benefits from eSIMs. Mobile operators want:

Lower costs for procuring and distributing SIMs.
Increased revenue from adding more cellular devices and related services, which can be done incrementally with an eSIM, e.g. IoT connectivity and management.
Better functionality and security compared to competing non-cellular technologies.
Limited risk of disintermediation, increased churn or OEMs acting as gatekeepers.

And device manufacturers want:

To reduce their “bill of material” (BoM) costs and number of design compromises compared to existing removable SIMs
To sell more phones and other connected devices
To provide better user experience, especially compared to competing OEMs / ecosystems
To create additional revenue streams related to service connectivityTo upgrade existing embedded (but non-programmable) soldered SIMs for M2M

The truth, however, is more complex than that – there needs to be clear proof that eSIM improves existing devices’ costs or associated revenues, without introducing extra complexity or risk. And new device categories need to justify the addition of the (expensive, power-consuming) radio itself, as well as choosing SIM vs. eSIM for authentication. In both cases, the needs and benefits for cellular operators and device OEMs (plus their users and channels) must coincide.

There are also many other constituencies involved here: niche service providers of many types, network equipment and software suppliers, IoT specialists, chipset companies, enterprises and their technology suppliers, industry associations, SIM suppliers and so forth. In each case there are both incumbents, and smaller innovators/disruptors trying to find a viable commercial position.

This brings in many “ifs” and “buts” that need to be addressed.

Contents

Executive Summary
Introduction: What is eSIM? Or RSP?
Not a Soft-SIM, or multi-IMSI
What do stakeholders hope to gain?
A million practical problems So where does eSIM make sense?
Phones or just IoT?
Forecasts for eSIM
Conclusion

Figure 1: What does eSIM actually mean?
Figure 2: eSIM standardisation & industry initiatives timeline
Figure 3: eSIM shipment forecasts, by device category, 2016-2021

The IoT ecosystem and four leading operators’ strategies

The IoT ecosystem

The term IoT is used to describe a broad and diverse ecosystem that includes a wide range of different connectivity types and use-cases. Therefore, it is not helpful to discuss the IoT ecosystem as a whole, and to understand IoT better it is necessary to break it down into horizontal layers and vertical segments.

Figure 1: A simplified map of the IoT ecosystem

Source: STL Partners

The five horizontal layers in the figure above are essential elements common to all IoT use-cases, regardless of vertical segment, and comprise:

Sensors or controllers (embedded in connected devices, the “things” in the Internet of Things)
A gateway device to aggregate and transmit data back and forth via the data network.
A communications network to send data.
Software for analysing and translating data.
The end application service.

Perhaps surprisingly we have not included ‘IoT platforms’ as a horizontal layer in its own right. IoT platforms are designed to organise, analyse, and (in some cases) act upon the data from connected devices. Because there can be differences in platform capabilities from vendor to vendor, a platform horizontal layer has not been included in this analysis. Depending on the platform, it will be designed to deliver any combination of horizontal layers 3, 4, and 5.

Level 5 – the end application service – is where material differences exist between vertical segments. Because IoT is a young market new use-cases are still emerging and existing use-cases are still evolving. The IoT ecosystem is not static and will continue to change, grow, and develop, and could look quite different in the next ten years. However, several distinct IoT vertical markets – sometimes described as ecosystems in their own right – are already emerging. These include:

Smart and connected cities.
Connected vehicles.
Industrial IoT (including smart manufacturing).
Smart home.
Smart healthcare.
Smart agriculture.

Within each of these six verticals there are several use-cases, and each vertical is developing and evolving new ones all the time. Figure 2 shows examples of use-cases either currently in use or under development in each vertical.

Figure 2: IoT vertical markets and use cases

Source: STL Partners

The complexity and technical requirements of each use-case varies widely. For example, the requirements of a smart thermostat compared to those of an autonomous vehicle are distinctly different. The next section of this report will provide an overview of the different technologies enabling IoT, followed by a section providing analysis of the technological requirements of several use-cases to illustrate how the IoT ecosystem will be enabled by not just one, but several different connectivity technologies.

Executive Summary
Introduction
Methodology
The IoT ecosystem
Six key technologies enabling IoT
1. Cloud computing
2. Low-power wide-area technologies
3. Big data analytics
4. Network function virtualisation (NFV) and software-defined networking (SDN)
5. 5G
6. Edge computing
Will one connectivity technology be dominant?
Use-case one: Smart metering
Use-case two: Autonomous driving
Use-case three: Smart thermostat
Use-case four: Smart home security system
How will IoT use-cases evolve?
Telcos’ role in the IoT ecosystem
The IoT value chain
AT&T: the ambitious ecosystem orchestrator
Vodafone: a ‘connectivity plus’ approach
SK Telecom: connectivity via multiple technologies
Deutsche Telekom AG: the open platform integrator
Adapting for evolution

Figure 1: A simplified map of the IoT ecosystem
Figure 2: IoT vertical markets and use-cases
Figure 3: The role of ‘network slicing’ in IoT
Figure 4: The role of Edge Computing in IoT
Figure 5: Complexity profile criteria ratings
Figure 6: Smart metering complexity profile
Figure 7: Autonomous driving complexity profile
Figure 8: Smart thermostat complexity profile
Figure 9: Smart home security system complexity profile
Figure 10: IoT use-case evolution
Figure 11: Telco’s original role in the IoT ecosystem
Figure 11: Telco’s current role in the IoT ecosystem

5G: How Will It Play Out?

Introduction: Different visions of 5G

The ‘idealists’ and the ‘pragmatists’

In the last 18 months, several different visions of 5G have emerged.

One is the vision espoused by the major R&D collaborations, academics, standardisation groups, the European Union, and some operators. This is the one with the flying robots, self-driving cars, and fully automated factories whose internal networks are provided entirely by ultra-low latency critical communications profiles within the cellular network. The simplest way to describe its aims would be to say that they intend to create a genuinely universal mobile telecommunications system serving everything from 8K streaming video for football crowds, through basic (defined as 50Mbps) fixed-wireless coverage for low-ARPU developing markets, to low-rate and ultra-low power but massive-scale M2M, with the same radio waveform, backed by a single universal virtualised core network “sliced” between use-cases. This slide, from Samsung’s Raj Gawera, sums it up – 5G is meant to maximise all eight factors labelled on the vertices of the chart.

Figure 1: 5G, the vision: one radio for everything

Source: Samsung, 3G & 4G Wireless Blog

Most of its backers – the idealist group – are in no hurry, targeting 2020 at the earliest for the standard to be complete, and deployment to begin sometime after that. There are some recent signs of increasing urgency – and certainly various early demonstrations – although that is perhaps a response to the sense of movement elsewhere in the industry.

The other vision is the one backed in 3GPP (the main standards body for 5G) by an alliance of semiconductor companies – including Intel, Samsung, ARM, Qualcomm, and Mediatek – but also Nokia Networks and some carriers, notably Verizon Wireless. This vision is much more radio-centric, being focused on the so-called 5G New Radio (NR) element of the project, and centred on delivering ultra-high capacity mobile broadband. It differs significantly from the idealists’ on timing – the pragmatist group wants to have real deployments by 2018 or even earlier, and is willing (even keen) to take an IETF-like approach where the standards process ratifies the results of “rough consensus and running code”.

Carriers’ interests fall between the two poles. In general, operators’ contributions to the process focus on the three Cs – capacity, cost, and carbon dioxide – but they also usually have a special interest of their own. This might be network virtualisation and slicing for converged operators with significant cloud and enterprise interests, low-latency or massive-scale M2M for operators with major industrial customers, or low-cost mobile broadband for operators with emerging market opcos.

The summer and especially September 2016’s CTIA Mobility conference also pointed towards some players in the middle – AT&T is juggling its focus on its ECOMP NFV mega-project, with worries that Verizon will force its hand on 5G the same way it did with 4G. It would be in the idealist group if it could align 5G radio deployment and NFV perfectly, but it is probably aware of the gulf widening rather than narrowing between the two. Ericsson is pushing for 5G incrementalism (and minimising the risk of carriers switching vendors at a later date) with its “Plug-In” strategy for specific bits of functionality.

Dino Flores of Qualcomm, the chairman of 3GPP RAN (RAN = radio access network) has chosen to compromise by taking forward the core enhanced mobile broadband (eMBB) elements for what is now being called “Phase 1”, but also cherry-picking two of the future use cases – “massive” M2M, and “critical” communications. These last two differ in that the first is optimised for scalability and power saving, and the second is optimised for quality-of-service control (or PPP for Priority, Precedence, and Pre-emption in 3GPP terminology), reliable delivery, and very low latency. As the low-cost use case is essentially eMBB in low-band spectrum, with a less dense network and a high degree of automation, this choice covers carriers’ expressed needs rather well, at least in principle. In practice, the three have very different levels of commercial urgency.

Implicitly, of course, the other, more futuristic use cases (such as self-driving cars) have been relegated to “Phase 2”. As Phase 2 is expected to be delivered after 2020, or in other words, on the original timetable, this means that Phase 1 has indeed accelerated significantly. Delays in some of the more futuristic applications may not be a major worry to many people – self-driving cars probably have more regulatory obstacles than technical ones, while Vehicle to Vehicle (V2V) communications seems to be less of a priority for the automotive industry than many assert. A recent survey by Ericsson[1] suggested that better mapping and navigation is more important than “platooning” vehicles (grouping them together on the highway in platoons, which increases the capacity of the highway) as a driver of next-gen mobile capabilities.

3GPP’s current timeline foresees issuing the Technical Report (TR) detailing the requirements for the New Radio standard at the RAN (Radio Access Network) 73 meeting next month, and finalising a Non-Standalone version of the New Radio standard at either RAN 78 in December 2017, with the complete NR specification being frozen by the TSG (Technical Specifications Group) 80 meeting in June 2018, in time to be included in 3GPP Release 14. (In itself this is a significant hurry-up – the original plan was for 5G to wait for R15.) This spec would include all three major use cases, support for both <6GHz and millimetre wave spectrum, and both Non-Standalone and Standalone.

Importantly, if both Non-Standalone and the features common to it and Standalone standards are ready by the end of 2017, we will be very close to a product that could be deployed in a ‘pragmatist’ scenario even ahead of the standards process. This seems to be what VZW, Nokia, Ericsson, and others are hoping for – especially for fixed-5G. The December 2017 meeting is an especially important juncture as it will be a joint meeting of both TSG and RAN. AT&T has also called for a speeding-up of standardisation[2].

The problem, however, is that it may be difficult to reconcile the technical requirements of all three in one new radio, especially as the new radio must also be extensible to deal with the many different use cases of Phase 2, and must work both with the 4G core network as “anchor” in Non-Standalone and with the new 5G core when that arrives, in Standalone.

Also, radio development is forging ahead of both core development and spectrum policy. Phase 1 5G is focused on the bands below 6GHz, but radio vendors have been demonstrating systems working in the 15, 28, 60, and 73GHz bands – for instance Samsung and T-Mobile working on 28GHz[3]. The US FCC especially has moved very rapidly to make this spectrum available, while the 3GPP work item for millimetre wave isn’t meant to report before 2017 – and with harmonisation and allocation only scheduled for discussion at ITU’s 2019 World Radio Congress.

The upshot is that the March 2017 TSG 75 meeting is a critical decision point. Among much else it will have to confirm the future timeline and make a decision on whether or not the Non-Standalone (sometimes abbreviated to NSA) version of the New Radio will be ready by TSG/RAN 78 in December. The following 3GPP graphic summarises the timeline.

[1] https://www.ericsson.com/se/news/2039614

[2] http://www.fiercewireless.com/tech/at-t-s-keathley-5g-standards-should-be-released-2017-not-2018

[3] http://www.fiercewireless.com/tech/t-mobile-samsung-plan-5g-trials-using-pre-commercial-systems-at-28-ghz

Executive Summary
Introduction: Different visions of 5G
One Network to Rule Them All: Can it Happen?
Network slicing: a nice theory, but work needed…
Difficulty versus Urgency: understanding opportunities and blockers for 5G
Business drivers of the timeline: both artificial and real
Internet-Agility Driving Progress
How big is the mission critical IoT opportunity?
Conclusions

Figure 1: 5G, the vision: one radio for everything
Figure 2: The New Radio standardisation timeline, as of June 2016
Figure 3: An example frame structure, showing the cost of critical comms
Figure 4: LTE RAN protocols desperately need simplicity
Figure 5: Moving the Internet/RAN boundary may be problematic, but the ultra-low latency targets demand it
Figure 6: Easy versus urgent
Figure 7: A summary of key opportunities and barriers in 5G

MWC 2016 Overview: 5G, the Cloud, and the Internet of Things

This 8 page Telco 2.0 report gives an overview of MWC 2016 and what we took away from it, including…

Executive Summary
5G: The Pace Picks Up
Networks are Software
The Internet of Many Fewer Things Than Expected is Here
Conclusion

Members of the Executive Briefing Service can also access the following additional MWC 2016 reports:

MWC 2016: 5G and Wireless Networks (also in the Future of the Networks Stream)
MWC 2016: The Cloud/NFV Transformation Needle Moves (also in the Telco 2.0 Transformation Stream)
MWC 2016: IoT & Enterprise (also in the Enterprise Cloud and ICT Stream)

Digital Partnering: Success Factors and AT&T Drive Case Study

Introduction

As communications services providers continue their push to develop and monetise digital services, partnering is proving a critical element of strategy, and a key enabler for telco agility. While some telco-digital player partnerships have been successful in achieving their objectives, many have languished, and failed to deliver value to one or both parties within the partnership.

In this report, we examine the different types of digital services partnerships that operators are engaged in; discuss the key success factors for the various partnering approaches and strategies; and look more deeply at a successful partnership strategy: AT&T’s Drive connected car initiative, which is an example of a broad vertical-focused partnership ecosystem. Our follow-on report will provide a case study of TeliaSonera’s successful digital music partnership with Spotify, an example of a single-focus collaboration for digital services.

Telcos are increasingly recognising the importance of partnerships for achieving their potential as true digital services companies. Partnering between telcos and third parties to deliver new services or target new markets is, of course, not a new phenomenon. Two things are new, however: the focus on partnering as a core competency of the telco organisation, and the increasing complexity of telco partnership ecosystems, as digital services, enabling technologies and service delivery value chains continue to evolve. An agile approach to building and managing complex partnerships is one of the key elements of becoming a Telco 2.0 organisation.

Figure 1: The Telco 2.0 Agility Framework

Source: STL Partners

Partnering is being defined as a telco ‘core competence’

A number of operators have now enshrined the objective of successful partnering in their corporate strategy. Deutsche Telekom, for example, has made partnering one of its ‘four pillars’. The clearly-stated objective in DTAG’s case is to attract (and learn from) companies that have adopted the agile, rapid-response, high-energy approach found in Silicon Valley and other global tech hubs such as Israel. DTAG hopes to offer these partners, access to its customers and channels across the twelve DTAG European markets, as well as the ability to leverage DTAG’s network and corporate resources:

“The list of companies we have been working with for many years is long. But how we cooperate, that has changed. We are more open and faster. We focus on our core competence – our best net – and add specific offers of the partners. Take for example the eReader tolino: We not only provide the eReader, but also the technical platform on which Bertelsmann, Hugendubel, Thalia and Libri are able to distribute their eBooks. Together with the German book trade, we established the tolino as a model of success in the eReader market.

In the area Smart Home, we work together with Miele, Samsung, EON and EnBw, amongst others. We have started the system platform QIVICON, which our product DT Smart Home is based on. Together with our partners, we develop the vision of a connected house.”

Thomas Kiesling, Former Chief Product and Innovation Officer, Deutsche Telekom AG1

Partnering and partnerships are becoming more complex

The DTAG example highlights our second point about new aspects of partnering. The increasing complexity of digital services partnerships, and the growing trend for larger partnership ecosystems with many partners participating from different levels of the value chain, requires telcos to take a different and more flexible approach.

A potential digital services partner will usually want to build global scale and so is likely to have several telco partners. Digital services partners will in many cases move at very different speeds from telcos in terms of decision-making and processes, and are likely to use a variety of distribution channels, some of which will bypass, or compete with, the telco partner (particularly for OTT B2C content services such as Spotify). For both B2B and B2C partnerships, business models and revenue sharing arrangements are likely to be fluid and to involve multiple parties.

B2B (and B2B2C) services are increasingly being supported by more extensive and complex partnership ecosystems, rather than single partnerships. Telcos may lead the development of such ecosystems – as AT&T does in the case of Drive – or simply participate. The growth of wider ecosystem partnering relationships has been especially prevalent in the development of M2M/IoT propositions. These may require a variety of platforms, applications, devices and integration elements, as well as a high level of openness in terms of open-source and accessible platforms, APIs, analytics etc.

These trends present challenges for traditional telco approaches to partnering, which have favoured exclusive relationships and ‘what’s-in-it-for-me’ approaches to building joint revenue streams. Many telcos have set up digital or innovation arms with the goal of developing new digital propositions together with third parties in a more flexible manner. However, for such propositions to succeed, they need clear buy-in from one or more of the main divisions of the telco. In the case of AT&T, the successful partnering effort we profile here was ultimately rolled back into a main division of the operator, rather than continuing to sit within an innovation division.

Based on our observations from AT&T’s success and the partnership case study we cover in our follow-up report (TeliaSonera’s long-term relationship with Spotify), we have identified a set of key success factors, and major barriers, for effective digital services partnerships between operators and third parties (see Figure 2).

Figure 2: Key success factors and barriers for successful digital services partnering

Source: STL Partners

While it isn’t the case that all of the key success factors above must be present in successful operator partnering initiatives, our analysis suggests that several external and internal ones should be present in any digital services partnership.

In the next section, we discuss drivers for digital services partnering, approaches operators have used in partnering, key success factors and barriers; and evaluate the approach that AT&T has taken to partnering with the connected car.

Motivations for partnering in digital services

There are several compelling reasons for telcos to partner when exploring and growing digital services opportunities. The most important of these drivers are shown below in Figure 3. Each driver supports a set of higher-level objectives for telcos, comprising revenue growth, revenue retention, branding and positioning, and organisation transformation and/or agility.

Figure 3: Major drivers for telco digital services partnering initiatives

Source: STL Partners

Drivers linked to the objectives of revenue growth and retention may appear to be most compelling to telcos, given their obvious short-term impact; but those linked to transformation/agility and branding/positioning have been at the forefront of the AT&T partnership initiative we profile here as well as the TeliaSonera-Spotify partnership we profile in our follow-on report. The most successful partnerships support several telco objectives: part of their success is thus attributable to the support they engender from across the telco organisation.

As discussed in the following sections, beyond clearly defining the objectives of the partnership, and the assets that both parties bring to the table, there are a number of other soft elements that contribute to (or hinder) the success of telco digital services partnerships. The existence of clear market demand for the partnership’s products and services is also a key, though sometimes overlooked, element of success.

Executive Summary
Introduction
Partnering is being defined as a telco ‘core competence’
Partnering and partnerships are becoming more complex
Motivations for partnering in digital services
4 digital services partnership approaches
Single-focus collaboration is easiest to manage and has best track record but impact is likely to be limited
Broader vertical focus requires greater commitment and has a greater market and implementation risk but can yield big benefits
General strategic partnerships appear to have had limited success
Key success factors for digital services partnerships
External/Market-Driven (demand-side) factors
Internal / organisation (supply-side) factors
Challenges to successful digital services partnering
External (demand side) challenges
Internal (supply-side) challenges
AT&T’s Drive Connected Car Ecosystem – A B2B2C Vertical Area Partnership
Background and context for the partnership
AT&T’s Drive Ecosystem
Key objectives and fit with the operator’s digital services strategy
Partnership approach and evolution
Organisation structure and framework for the partnership
Evidence of success
Key success factors and challenges
Barriers to successful partnering: challenges for Sprint and Verizon’s connected car initiatives

Figure 1: The Telco 2.0 Agility Framework
Figure 2: Key success factors and barriers for successful digital services partnering
Figure 3: Major drivers for telco digital services partnering initiatives
Figure 4: Telco Digital Services Partnership Models
Figure 5: US Connected Car Shipments, 2014-2020
Figure 6: AT&T Drive: Key End User Applications
Figure 7: AT&T Drive Studio, 2015
Figure 8: Drivers and objectives for AT&T’s connected car partnerships
Figure 9: AT&T Drive Platform Core Functionality and Applications
Figure 10: Opel OnStar Service Features, 2016
Figure 11: AT&T Drive Partnerships, Dec. 2015
Figure 12: AT&T connected car net adds are accelerating
Figure 13: Key Success Factors for AT&T Drive Partnerships (GM)

Huawei’s choice: 5G visionary, price warrior or customer champion?

Introduction: Huawei H1s

Huawei’s H1 2015 results caused something of a stir, as they seemed to promise a new cycle of rapid growth at the No.2 infrastructure vendor. The headline figure was that revenue for H1 was up 30% year-on-year, somewhat surprising as LTE infrastructure spending was thought to have passed the peak in much of the world. In context, Huawei’s revenue has grown at a 16% CAGR since 2010, while its operating profits have grown at 2%, implying very significant erosion of margins as the infrastructure business commoditises. Operating margins were in the region of 17-18% in 2010, before falling to 10-12% in 2012-2014.

Figure 1 – If Huawei’s H2 delivers as promised, it may have broken out of the commoditisation trap… for now

Source: STL Partners, Huawei press releases

Our estimate, in Figure 1, uses the averages for the last 4 years to show two estimates for the full-year numbers. If the first, ‘2015E’, is delivered, this would take Huawei’s profitability back to the levels of 2010 and nearly double its operating profit. The second estimate ‘Alternate 2015E’, assumes a similar performance to last year’s, in which the second half of the year disappoints in terms of profitability. In this case, full-year margin would be closer to 12% rather than 18% and all the growth would be coming from volume. The H1 announcement promises margins for 2015 of 18%, which would therefore mean a very successful year indeed if they were delivered in H2. For the last few years, Huawei’s H2 revenue has been rather higher than H1, on average by about 10% for 2011-2014. You might expect this in a growing business, but profitability is much more erratic.

For reference, Figure 2 shows that the relationship between H1 and H2 profitability has varied significantly from year to year. While in 2012 and 2013 Huawei’s operating profits in H2 were higher than in H1, in 2011 and 2014, its H2 operating profits were much less than in H1. 2015E shows the scenario needed to deliver the 18% annual margin target; Alternate 2015E shows a scenario where H2 is relatively weak, in line with last year.

Figure 2 – Huawei’s H1 and H2 Profits have varied significantly year on year

Source: STL Partners, Huawei press releases

Huawei’s annual report hints at some reasons for the weak H2 2014, notably poor sales in North America, stockbuilding ahead of major Chinese investment (inventory rose sharply through 2014), and the launch of the Honor low-cost device brand. However, although North American wireless investment was in fact low at the time, it’s never been a core market for Huawei, and Chinese carriers were spending heavily. It is plausible that adding a lot of very cheap devices would weigh on the company’s profitability. As we will see, though, there are reasons to think Huawei might not have got full value from strong carrier spending in this timeframe.

In any event, to hit Huawei’s ambitious 2015 target, it will need a great H2 2015 to follow from its strong H1. It hasn’t performed this particular ‘double’ for the last four years, so it will certainly be an achievement to do it in 2015. And if it does, how is the market looking for 2016 and beyond?

Where are we in the infrastructure cycle?

As Huawei is still primarily an infrastructure vendor, its business is closely coupled to operators’ CAPEX plans. In theory, these plans are meant to be cyclical, driven by the ever present urge to upgrade technology and build out networks. The theory goes that on one hand, technology drivers (new standards, higher-quality displays and camera sensors) and user behaviour (the secular growth in data traffic) drive operators to invest. On the other, financial imperatives (to derive as much margin from depreciating assets as possible) encourage operators to resist spending and sweat the assets.

Sometimes, the technology drivers get the upper hand; sometimes, the financial constraints. Therefore, the operator tends to “flip” between a high-investment and a low-investment state. Because operators compete, this behaviour may become synchronised within markets, causing large geographies to exhibit an infrastructure spending cycle.

In practice, there are other drivers that mitigate against the cyclical forces. There are ‘bottlenecks’ in integration and in scaling resources up and down, and generally, businesses prefer to keep expenditures as flat as possible to reduce variations and resulting ‘surprises’ for their shareholders. In general though, there is some ongoing variation in levels of capex investment in every market, as we examine in the following sections.

North America: operators take a breather before 5G

In North America, the tipping-point from sweating the assets to investment seems to have been reached roughly in 2011-2012, when the major carriers began a cycle of heavy investment in LTE infrastructure. This investment peaked in 2014. Recently, AT&T informed its shareholders to expect significantly lower CAPEX over the next few years, and in fact the actual numbers so far this year are substantially lower than the guidance of around 14-15% of revenue. Excluding the Mexican acquisitions, CAPEX/Revenue has been running around 13% since Q3 2014. From Q2 2013 to the end of Q2 2014, AT&T spent on average $5.7bn a quarter with the vendors. Since then, the average is $4.4bn, so AT&T has reduced its quarterly CAPEX by 21%.

Figure 3 – AT&T’s LTE investment cycle looks over.

Source: STL Partners, Huawei press releases

During 2013, AT&T, Sprint, and VZW were all in a higher spending phase, as Figure 3 shows. Since then, AT&T and Sprint have backed off considerably. However, despite its problems, Sprint does seem to be starting another round of investment, and VZW has started to invest again, while T-Mobile is rising gradually. We can therefore say that the investment pause in North America is overhyped, but does exist – compare the first half of 2013, when AT&T, Sprint, and T-Mobile were all near the top of the cycle while VZW was dead on the average.

Figure 4 – The investment cycle in North America.

Source: STL Partners

The pattern is somewhat clearer in terms of CAPEX as a percentage of revenue, shown in Figure 5. In late 2012 and most of 2013, AT&T, Sprint, and T-Mobile were all near the top of their historic ranges for CAPEX as a percentage of their revenue. Now, only Sprint is really pushing hard.

Figure 5 – Spot the outlier. Sprint is the only US MNO still investing heavily

Source: STL Partners, company filings

If there is cyclicality it is most visible here in Sprint’s numbers, and the cycle is actually pretty short – the peak-to-trough time seems to be about a year, so the whole cycle takes about two years to run. That suggests that if there is a more general cyclical uptick, it should be around H1 2016, and the one after that nicely on time for early 5G implementations in 2018.

Executive Summary
Introduction: Huawei H1s
Where are we in the infrastructure cycle?
North America: operators take a breather before 5G
Europe: are we seeing a return to growth?
China: full steam ahead under “special action mobilisation”
The infrastructure market is changing
Commoditisation on a historic scale
And Huawei is no longer the price leader
The China Mobile supercontract: a highly political event
Conclusion: don’t expect a surge in infrastructure profitability
Huawei’s 5G Strategy and the Standards Process
Huawei’s approach to 5G
What do operators want from 5G?
In search of consensus: 3GPP leans towards an simpler “early 5G” solution
Conclusions
STL Partners and Telco 2.0: Change the Game

Figure 1: In Q2, the Euro-5 out-invested Chinese operators for the first time
Figure 2: If Huawei’s H2 delivers as promised, it may have broken out of the commoditisation trap for now
Figure 3: Huawei’s H1 and H2 Profits have varied significantly year on year
Figure 4: AT&T’s LTE investment cycle looks over.
Figure 5: The investment cycle in North America.
Figure 6: Spot the outlier. Sprint is the only US MNO still investing heavily
Figure 7: 3 of the Euro-5 carriers are beginning to invest again
Figure 8: European investment levels are not as far behind as you might think
Figure 9: Chinese CAPEX/Revenue levels have been 10 percent higher than US or European ones – but this may be changing
Figure 10: Chinese infrastructure spending was taking a breather too, until Xi’s intervention
Figure 11: Chinese MNOs are investing heavily
Figure 12: LTE deployments have grown 100x while prices have fallen even more
Figure 13: As usual, Huawei is very much committed to a single radio solution
Figure 14: Huawei wants most 5G features in R15 by H2 2018
Figure 15: Huawei only supports priority for MBB very weakly and emphasises R16 and beyond
Figure 16: Chinese operators, Alcatel-Lucent, ZTE, and academic researchers disagree with Huawei
Figure 17: Orange’s view of 5G: distinctly practical
Figure 18: Telefonica is really quite sceptical about much of the 5G technology base
Figure 19: Qualcomm sees R15 as a bolt-on new radio in an LTE het-net
Figure 20: 3GPP RAN chairman Dino Flores says “yes” to prioritisation
Figure 21: Working as a group, the operators were slightly more ambitious
Figure 22: The vendors are very broadband-focused
Figure 23: Vodafone and Huawei

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.

Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.

Telstra: doing pretty well

Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.

Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s