Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband

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1 Perspective Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband By Richard Thurston (Analyst) July 2009 After several years of hype about the potential of public Wi-Fi hotspots, usage of them has abated, raising questions about their future. However, new opportunities have opened up for hotspots, as service differentiators and means of providing backhaul for operators rolling out successful mobile broadband services. This article considers this new lease of life for Wi-Fi hotspots, and how operators can capitalise upon their ownership of hotspot networks. Wi-Fi hotspots were launched in a period of post-dotcom enthusiasm In 2003, telecoms operators and start-up Wi-Fi operators rushed to build out public Wi-Fi hotspots. The commotion caused by the dotcom crash had subsided and many observers felt that the overinvestment that had led to the crash had worked its way through. There was renewed enthusiasm to identify the next means of connectivity and to be the first to provide it. Intel, looking to secure the future success of its Centrino chipsets, poured millions of dollars of funding into Wi-Fi development, backing the hotspot provider The Cloud to roll out public Wi-Fi at thousands of sites. The Cloud became one of the main instigators of the new public Wi-Fi phenomenon. Many integrated operators, such as BT, Deutsche Telekom (through its mobile network operator T-Mobile), Swisscom and TeliaSonera, also rolled out Wi-Fi hotspots. The number of hotspots in North America and Europe grew dramatically, to thousands, within a matter of months. Every operator was concerned about the size of its hotspot footprint, and hotspots expanded into hotzones, when whole areas of some cities were Wi-Fi enabled. The initial success of Wi-Fi hotspots was obvious from the usage and revenue statistics. The Cloud had expanded into a multi-million dollar business by User interest in the technology had grown, too. As Wi-Fi PCMCIA cards started to appear and, later, as Wi-Fi radios became a standard feature of PCs, enterprise usage of Wi-Fi rose rapidly. Consumer usage also increased, as home routers enabled for Wi-Fi began to be offered cheaply, or free of charge, by ISPs.

2 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 2 Usage of hotspots did not continue on this growth trajectory for long, however. It was constrained by the cost of subscriptions, which in the UK was typically around GBP85 (EUR99.98) per month for unlimited usage in a price far greater than most subscribers were used to paying for connectivity. Mobile broadband changed the profile of wide-area usage In the same timeframe, 3G cellular connectivity was launched. Take-up of 3G voice services was modest at first, but grew over time, giving mobile operators a stronger business case for improving their network coverage. The eventual ubiquity of 3G coverage allowed the launch from 2006 onwards of high-speed mobile broadband services. These launches turned the world of Wi-Fi hotspots on its head. Mobile broadband quickly became affordable and convenient. This appealed to consumers, and the number of mobile broadband connections in Europe rose sharply to 19.5 million by the end of Mobile broadband gave subscribers a choice of ways to achieve connectivity when on the move. Use of mobile broadband began to be more popular than use of Wi-Fi hotspots in many situations (see Table 1), although this varied from country to country. For example, mobile broadband adoption rates are still very low in France and the Netherlands. Table 1: Suitability of Wi-Fi hotspots and mobile broadband in various usage scenarios [Source: Analysys Mason, 2009] Usage scenario Suitability of Wi-Fi hotspot usage Suitability of mobile broadband usage Remarks In a coffee shop ***** ** Indoor mobile broadband coverage may be poor On a train * **** Unless the train operator offers Wi-Fi access, the only option will be mobile broadband Outdoors Not applicable ***** Wi-Fi hotspot access is unlikely. This is the best usage case scenario for mobile broadband At a conference or exhibition ***** *** Indoor mobile broadband coverage may be poor unless picocells have been installed At an airport ***** *** Indoor mobile broadband coverage may be poor unless picocells have been installed In a moving car or stationary at a petrol station * ***** Provision of Wi-Fi connectivity is not appropriate for most petrol stations At home ***** *** Wi-Fi is already available for fixed broadband users through enabled routers, meaning that the use of Wi-Fi in the home is compelling. Mobile broadband connectivity may be poor in some parts of the home. However, some homes have replaced fixed broadband with mobile broadband, so no longer have a Wi-Fi connection At a hotel **** *** Wi-Fi coverage is likely to be provided, but may be very expensive. Mobile broadband coverage could be patchy In premises where Wi-Fi is not enabled Key: ***** = highly suitable; * = poorly suited. Not applicable *** No Wi-Fi connectivity, but mobile broadband coverage could be patchy

3 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 3 A number of factors other than location have affected the relative usage of Wi-Fi and mobile broadband, including technical considerations, ease of use and pricing characteristics (see Table 2). Table 2: The relative merits to subscribers of Wi-Fi hotspots and mobile broadband [Source: Analysys Mason, 2009] Factor Wi-Fi hotspot Mobile broadband Ubiquity Small cells in a limited number of locations Near national coverage Speed Fast Not as fast Pricing model Subscriptions and pay-as-you-go tariffs are available. Free Wi-Fi usage is often bundled with mobile and fixed broadband tariffs Reliability of High Variable connection Mobility Low High Latency Low Medium Most users, whether prepaid or postpaid, have purchased a data bundle, which stimulates usage As demand for mobile broadband rose during 2007 and 2008, mobile operators upgraded their networks to HSPA, which offers a faster mobile broadband experience. Given the convenience and ease of use of mobile broadband, much traffic that could have been carried by the Wi-Fi hotspot operators was instead sent over the cellular networks. The growth in Wi-Fi usage stalled and, in many countries, went into reverse. In an off-therecord comment to Analysys Mason, a European incumbent operator reported that its revenue from public Wi-Fi hotspots at January 2009 was down 10% year-on-year. The rate at which data traffic has moved from Wi-Fi networks onto mobile broadband networks has been influenced by a range of factors, including the following. Density of mobile broadband coverage. Mobile broadband now covers more than 90% of the population in many developed markets, so it is easy for subscribers to connect. In contrast, it can be difficult to find a Wi-Fi hotspot. Speed of mobile broadband connections. HSDPA upgrades have transformed the headline speeds of mobile broadband connections from 384Mbit/s when it was first launched to as fast as 7.2Mbit/s currently. Radio frequency at which mobile broadband has been deployed. 3G has been deployed at 850MHz in some markets, such as the USA, which enables the coverage of large areas with relative ease. Other countries are refarming the 900MHz range and are preparing to offer for sale digital dividend spectrum, which will also help the cost-effective deployment of widespread mobile broadband networks. Quantity of Wi-Fi hotspots. In the first three years after launch, the number of public Wi-Fi hotspots increased meteorically, leading to increased usage. Since mobile broadband has started to take off, growth in the number of hotspots has slowed. Ease of use of Wi-Fi hotspots. It has become easier for subscribers to use hotspots. Initially, use of the services required a subscription, or purchase of difficult-to-use scratchcards, or payment over the Web for prepaid services. Authentication by the SIM in a mobile broadband modem has made hotspots much easier to use.

4 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 4 The onset of the economic recession accelerated the fall-off in the attraction of Wi-Fi hotspots as a standalone proposition and critically altered the dynamic between Wi-Fi hotspot usage and mobile broadband usage. The recession has caused Wi-Fi usage to fall considerably: severe restrictions imposed by businesses on international travel by their employees has led to marked falls in the use of airports and hotels, two of the main locations for hotspot usage, with a knock-on effect on PC usage in those locations. Mobile broadband has continued its rapid growth trajectory, driven by massive consumer demand. Analysys Mason forecasts that mobile broadband will continue to grow rapidly despite the recession, with connections in Europe increasing nearly fourfold from the end of 2008 to the end of 2010, to reach 59.5million connections. The shift in usage has caused many operators to evaluate their hotspot investments carefully, while at the same time making extensive upgrades in their cellular networks. This investment in cellular networks has further exacerbated the gap in usage between cellular and Wi-Fi hotspots. Wi-Fi hotspots should be harnessed as part of the cellular infrastructure The rapidly increasing usage of mobile broadband has provoked a crisis for mobile network operators (MNOs), which are facing capacity constraints on their networks. Even with current planned upgrades of both the radio and backhaul networks, some operators may not have the capacity in the future to carry all the mobile broadband traffic they would like to. Therein lies a previously unlikely, but now significant, advantage of Wi-Fi hotspots. If MNOs could backhaul some of their cellular traffic over the Internet connections of their Wi-Fi hotspots, then the bandwidth constraints they face would be eased. The backhaul connections of hotspots tend to be DSL lines, and so can offer considerable capacity. Furthermore, much of this capacity is not fully utilised, so operators could use this spare capacity rather than upgrading costly cellular backhaul links. It is paramount, of course, that subscribers are able to roam easily and without interruptions from the cellular network to the Wi-Fi network. If roaming relies on the subscribers actively transferring onto the Wi-Fi network, such as by inserting a datacard or verifying their identity, they are likely to stay on the cellular network despite the lower access speeds. However, mobile broadband devices are capable of detecting the best available network and could choose to connect to a Wi-Fi network when the signal is strong enough without the user s intervention or knowledge. The strategy of using backhaul from public Wi-Fi hotspots to support the cellular network has two parallels for operators. Femtocells offer the same advantage of taking traffic off the cellular network, in this case to carry it over the subscriber s home DSL connection. Although femtocells have the advantage of using the same bearer as the macrocellular network, they have the disadvantage that there is a large upfront cost to be borne either by the operator or the customer, a cost which is already borne for public Wi-Fi hotspots. Alternatively, backhaul can be provided by using the Wi-Fi component of DSL subscribers home connections. Integrated operators can bring this about by creating separate private and public segments in each DSL subscriber s home gateway, and allowing anyone to access the public segment.

5 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 5 The second strategy is particularly useful for fixed and integrated operators for the following reasons: it recovers traffic that would otherwise traverse the mobile network either that of the operator concerned, or that of a rival MNO and transfers it onto the fixed/integrated operator s fixed network it provides an additional value-added service for consumers, and gives the fixed/incumbent operator the chance of creating compelling bundles it reduces the dependence on public Wi-Fi operators of fixed operators that are working in partnership with them, because the home Wi-Fi connections are managed by the fixed operator it is a relatively quick way of expanding Wi-Fi coverage the cost of backhaul is not incurred by the operator, and is instead borne by the broadband subscriber, although few broadband subscribers would realise this little additional expenditure is required. BT is one operator that has exploited this opportunity, through its partnership with FON, a company that was created to enable public sharing of Wi-Fi connections. Through this partnership, BT is effectively offering its subscribers three services: fixed broadband, mobile broadband and public Wi-Fi, which it has packaged together to provide a clear differentiator against its fixed broadband competition. Wi-Fi hotspots should be used as a key differentiator As well as their backhaul benefits, public Wi-Fi hotspots have another advantage: MNOs that own hotspots, and those that have partnerships with hotspot owners, can exploit their Wi-Fi portfolios as key competitive differentiators. In many developed markets, there is little to choose between one MNO and another, from the subscriber s point of view, especially where pricing is similar. Wi-Fi offers a way for MNOs to stand out from their rivals. A good example of this is in the UK, where two of the five MNOs (O2 and T-Mobile) offer Wi-Fi, while three (3, Orange and Vodafone) do not. The incumbent fixed telco, BT, owns a Wi-Fi network and, in addition to its larger fixed broadband business, offers mobile broadband through an MVNO, making it also a contender. O2 and T-Mobile (in the mobile broadband space) and BT (in the fixed broadband space) have created the opportunity to differentiate their offerings by providing Wi-Fi as a free, add-on service T-Mobile and BT through their own networks, and O2 through a partnership with The Cloud and BT. Wi-Fi provides a reason for subscribers to choose these operators services instead of their competitors. Orange and Vodafone have not made competitive responses to these Wi-Fi offerings. They each have a mobile broadband offering that is not clearly differentiated. Using an aggressive customer acquisition strategy, 3 has differentiated its product by offering cheaper data. It is difficult to quantify the benefits that Wi-Fi brings to the three operators that offer it. Although T-Mobile is performing reasonably well in the mobile broadband market, O2 is not a strong player in this area: its 3G network has the poorest coverage in the UK, by population. O2 s strategy of offering Wi-Fi, plus a mobile broadband/dsl bundle, is an appropriate strategy to adopt in order to make up for the weaknesses of its network coverage. BT is the number-one fixed broadband player, and the addition of Wi-Fi could further cement its leadership. T-Mobile and BT both sell standalone subscriptions for public Wi-Fi, but have been unable to increase the price of their mobile broadband services as a result of including Wi-Fi access. The operators that do not offer Wi-Fi have had widely varying success. Orange is suffering the most: without Wi-Fi, it has no clear competitive differentiator, and it is failing to achieve its potential in mobile broadband,

6 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 6 having only an 8% market share. Because Orange does not have a clear differentiator with which to attract new customers, it may find that its ability to attract mobile broadband sales is limited to its existing voice customer base. Vodafone and 3, even without Wi-Fi, have been very successful in mobile broadband. 3 s aggressive strategy has won it a large customer base, while much of Vodafone s success has been due to its early launch of mobile broadband services and the considerable marketing budget it has put into them. Clearly, the offer of free public Wi-Fi access can be an important differentiator of services, and therefore attract new subscribers, but on its own it is no guarantee of mobile broadband success. Actions MNOs that have no public Wi-Fi footprint MNOs that have no Wi-Fi footprint have three choices, all of which may be valid responses: form a partnership with a Wi-Fi provider acquire a Wi-Fi footprint continue without a Wi-Fi footprint. The first option is the one chosen by, for example, O2 UK, which has partnerships with The Cloud and BT. It quickly establishes a Wi-Fi footprint and is the cheapest means of providing Wi-Fi, allowing the operator to offload mobile broadband traffic and to offer a range of bundled cellular and Wi-Fi products. The second option is more expensive and will take longer to implement. At a time when operators are investing significant amounts in network upgrades both mobile and fixed NGA they may have little financial appetite for acquiring hotspot operators. However, AT&T adopted this strategy and is now one of the largest Wi-Fi hotspot operators in the world with ( of which are in the USA), although it completed all its deals before the current restrictions on credit came into existence. It established its footprint through the acquisition of a range of companies, including Wayport (3000 hotspots), and the Starbucks hotspots, formerly owned by T-Mobile (7000 hotspots). MNOs may continue without a Wi-Fi footprint, concentrating their investment on mobile broadband. The consequence of doing this may be that extra investment is needed in the RAN and backhaul capacity, and MNOs with this strategy may lack the differentiation that Wi-Fi access could bring. The backhaul issue could be addressed in another way by offering femtocells to subscribers, which also represents a differentiating factor. Operators like Vodafone in the UK are pursuing this strategy. MNOs that have a public Wi-Fi footprint MNOs that already have their own footprint should continue to invest in it and to maximise the opportunity to provide a differentiated mobile broadband service. They should ensure that subscribers can roam easily between cellular and Wi-Fi coverage and that they use hotspot backhaul where possible. However, these MNOs should be aware of changing patterns of demand, and should be prepared to alter, add to or even sell or discontinue parts of their hotspot portfolio as usage changes. They should consider hotspot acquisition where it suits usage patterns and network capacity.

7 Operators can harness Wi-Fi hotspots to bolster the success of mobile broadband 7 Operators that are partnering with a hotspot provider should endeavour to continue the partnership and to develop it over time in order to ensure that the key locations are covered. MNOs with a substantial fixed broadband subscriber base should consider harnessing the Wi-Fi connections of their DSL users to expand network coverage and provide increased backhaul potential. Wi-Fi hotspot operators As the market for it shrinks, public Wi-Fi will struggle as a standalone business model. However, as long as they have a footprint in the top business locations, hotspot operators have the opportunity to form partnerships with MNOs. They may also look to be acquired by an operator. As well as gaining revenue from partner MNOs, Hotspot operators should, depending on the nature of that contract, also harness direct sales. Hotspot operators should regularly review their footprints to ensure that they provide hotspots where end users want to use Wi-Fi, and where operators wish to supplement their network coverage with additional backhaul capacity.