LTE Flat Rate Pricing for Competitive Advantage

White paper: Lte Flat rate pricing for Competitive advantage

executive Summary

Mobile telephone service has achieved worldwide mass market penetration as has wireline broadband service in many developed markets. The next step in the evolution of the telecommunication industry is the convergence of wireless telephony and broad-band access. This convergence will reach the early adopters with 3.5G technology (HSPA, EV-DO) and achieve mass market penetration with 4G LTE and WiMAX technology.

Today’s consumer experience with wireline broad-band will set expectations for tomorrow’s wireless broadband. This market evolution will inevitably move from the early adopter segment to penetrate the mass markets. This movement will be enabled by the convergence of :

• Widespread use of flat rate and block tariffs for voice and data

• Feature rich and smart phones entering the main stream

• 3.5G data networks nearing build out

The effect of these innovations will invariably result in more subscribers with wireless broadband doing more things requiring more data traffic. The 3.5G technologies of today will struggle with the simul-taneous increase in subscribers and data traffic. The added pricing pressures due to flat and block tariffs will hasten the need for 4G WiMAX and LTE.

introduction

Market penetration of broadband telecommunica-tion service has been faster than most other in-formation and communication services. In North America, consumer embrace of broadband Inter-net access at home achieved 50% penetration in 10 years.1 Consumers in Europe likewise fuel the telecom explosion as internet usage penetration is greater than 50%,2 and mobile phone use at 95%. The convergence of these two mass markets into mobile wireless broadband will likely result in the demand for faster adoption times.

more Subscribers

Reliable sources forecast wireless broadband pen-etration in Europe to reach 20% of cellular subscrib-ers by 2010, and exceed 50% by 2012.3 Soon, more people will access information services wirelessly rather than by wireline.

1. Pew Internet & American Life Project, Why We Don’t Know Enough About Broadband… (2007)

2. CIA,The World Factbook (2008)

3. Informa, Future Mobile Broadband, 2nd Edition (2007)

2 White paper : Lte FLat rate priCing For Competitive advantage

adoption time to 50% (Yrs)

Broadband at home 10

Compact disc player 10.5

Video cassette recorder 14

Cell phones 15

Color television 18

Personal Computer 18

Source: Pew Internet & American Life, 2007

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3.5G & 4G3G2.5G2G

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Figure 1. european Wireless Subscriber mix (millions),Summarized from informa, Future mobile Broadband, 2007

Today, access to information sources and the Internet is by wireline, primarily with personal computers. As the mobile consumer increasingly adopts high speed wireless delivered by 3.5G technology, access to in-formation sources will increasingly be via wireless technologies. The cross over to majority wireless ac-cess will be largely complete by 2010 (See Figure 2).

Figure 2. Wireless access to the internet passes wireline accessSummarized from informa, Future mobile Broadband, 2007

The 3.5G technologies (EV-DO and HSPA) will lead the way for the early adopter market segment, and blaze the trail for the inevitable mass market assimilation. The advent of high capacity broadband wireless, flat rate tariff plans, and mass market penetration by me-dia-rich and smart phones are the keys to mass mar-ket penetration. The huge traffic demand of the mass market can only be served by 4G LTE and WiMAX.

Wireless Broadband expectations

Consumer expectations for mobile broadband reflect a continuation of the wireline broadband experience, with suitable accommodation for the mobile experi-ence. The early adopters of 3.5G are nomadic laptop users, but mass market penetration will shift the focus to mobile handset subscribers. Leading Internet con-tent providers and web sites are now adapting their service for the mobile consumer.4 Mobile Internet ac-cess that is comparable to the home experience will be critical in order to reach the mass market.

Given the human aspect of handset usage, the traffic profiles are likely to be substantially different from a laptop PC. The effective average data rate for watch-ing video and listening to audio may be quite different from a laptop user uploading and downloading spread-sheets, updating databases, emailing with multi-mega-byte attachments, etc.

Applications suitable for a handset can be delivered with 3.5G technology for early adopters, but radio capacity and spectrum may be exhausted before the mass market uptake is fully realized. The high efficien-cy of 4G LTE and WiMAX means fewer base stations and radios are needed while deferring additional spec-trum needs. The ability to effectively deliver data to the mass market consumer (handset based) is a key as-pect of 4G LTE and WiMAX that is often overlooked.

Flat rate data tariffs – a Key driver to mass market adoption

The wireline internet experience of today will set ex-pectations for tomorrow’s mobile broadband. As dem-onstrated with xDSL/Cable tariffs, consumers univer-sally prefer transparency, and have been shown to pay more for flat rate tariffs than measured usage data services.

Flat rate tariffs are preferred because of:

1. Risk avoidance - no unpleasant surprise at the end of the month.

2. Systemic over estimating - no clue about how much downloading, so better guess high

3. Mental hassle factor - is this web page worth a part of my 200 MB plan?

Feeling the competitive pressure to meet consumer needs, and to gain a competitive advantage, operators are starting to introduce simplified flat rate pricing for mobile data that reflect the typical wireline broadband tariffs.

As with wireline broadband, flat rate pricing leads to significant uptake in usage, and increases stickiness as the service becomes more “valuable and necessary” in everyday lives. Mobile operators that have adopted flat rate data tariff have proven that it has a similar ef-fect on mobile broadband usage and data uptake.

more data

The recent introduction of ultra-premium phones with Half VGA resolution and flat rate data plans are rap-idly altering subscriber usage profiles. These devices and plans are positioned for the mobile web, infor-mation access, and entertainment. However, there is little doubt that competing devices will enter the marketplace, bringing many of these features to the mainstream mass market subscribers. As shown in Figure 3, today’s feature rich and smart phones will soon become mass market handsets.

3 White paper : Lte FLat rate priCing For Competitive advantage

4. www.google.com www.youtube.com www.wamu.npr.org, www.facebook.com www.flickr.com mobile.msn.com mobile.nytimes.com www.yahoo.com

Figure 3. Feature rich and smart phones cross the mass market threshold informa, Future mobile handsets, 2007

The introduction of Internet friendly mobiles with large display shows a significant shift in usage pat-terns (Figure 4). In every case, usage increases dra-matically. As the ultra-premium and smart phone fea-tures move to the mass market, similar traffic shifts are expected, the net being many more wireless sub-scribers and using much more data.

0%

25%

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All Phones

Smartphone

Media-Web Phone

Figure �. Usage profiles from January 2008, Summarized from m:metrics, 2008

Wireless Broadband Case

Cellular operators must soon choose their evolution path to address the coming boom in wireless broad-band – more subscribers are demanding intensive data capabilities to get the most of the sophisticated pool of mobile devices available. The current 3.5G technologies will deliver services to the early adopters, and to a con-siderable portion of the mass market evolution.

We compare a theoretical market deployment for a large urban and suburban market with approximately two mil-lion subscribers. The goal is to find an NPV optimizing solution. The approach is to hold all things equal (price sensitivity, traffic profile, average data rates, 10 MHz of spectrum, etc) and only vary the particular 3.5G or 4G radio technology.

The consumer’s price sensitivity (Figure 5), will vary by market and demography. The curve simply illustrates that as the tariff is reduced, more subscribers sign up. Figure 6 is the evolution of an average user traffic pro-file, in GByte/month. A real world data plan today is $60 and 5 GBytes / month, which on this analysis is achieved in 2011 by the average user. Both of these curves are based on market research. Of course there can be con-siderable variation.

� White paper : Lte FLat rate priCing For Competitive advantage

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Figure 5. Subscriber penetration vs tariff,

motorola, 2007: Based on parks

associates, 2007.

Figure 6. average user data demand,

gBytes / month, motorola, 2007

Analysis of the model reveals considerable insight. The fundamental driver for the NPV is the average cell capacity, as this directly affects the number of cell sites needed to meet the total traffic demand.

The lower cell throughput capacity of 3.5G technol-ogy means that more base stations radios and cell sites are needed to support the rising traffic demand. Additionally, with the 10 MHz of spectrum, the LTE solution requires only 1 base station radio, while the 3.5G technologies need 2 or 7 radios in the same 10 MHz spectrum. A single radio solution almost always has a competitive advantage compared to a multi-radio solution in the same bandwidth.

The model indicates that decreasing the tariff results in more subscribers, and they in turn are using more data. The discount cash flow shows that decreas-ing the tariff increases NPV until the cell throughput capacity is encountered. Further reductions in tariff cause the NPV to fall due to acquisition and develop-ment costs of additional cell sites.

This indicates that an LTE operator will gain a sus-tainable competitive advantage compared to an op-erator with 3.5G technology. While conditions vary from market to market, this analysis suggests an LTE operator also has significant incentive to drive tariffs to mass market levels, gain market share and maximize Net Present Value. An ominous implica-tion is that 3.5G operators increasingly become non-competitive as they try even harder to compete with mass market 4G LTE and WiMAX wireless broad-band.

Summary

The advent of wireless broadband, smart phones for the mainstream, and widespread competitive price tariffs will cause consumer demand and us-age to rise such that operators will need the 4G LTE and WiMAX technology to manage the data traffic. Operators with 4G LTE and WiMAX networks will achieve a significant sustainable competitive advan-tage over competitors with 3G or 3.5G networks.

Motorola’s LTE solution leverages our extensive expertise in OFDM technology, having first dem-onstrated OFDM at speeds of up to 300 Mbps in 2004, and further by our leadership in IEEE 802.16e WiMAX, expertise in collapsed IP architecture, and leadership in LTE RAN standards. In addition, Mo-torola’s leadership in home and video solutions, chip-sets, handsets, CPE, leading backhaul solutions and experience in deploying OFDM mobile broadband networks assures operators that Motorola delivers a compelling LTE ecosystem. Motorola’s diverse ex-perience insures a smooth migration path for 3GPP and 3GPP2 service providers, traditional wire-line service providers, and new entrants to the exciting world of mobile broadband.

For more information on Motorola LTE and Flat rate mobile data tariffs, please talk to your Motorola representative.

5 White paper : Lte FLat rate priCing For Competitive advantage

Figure 7. npv comparison for 3.5g and �g, motorola, 2007

Motorola, Inc. www.motorola.com

The information presented herein is to the best of our knowledge true and accurate. No warranty or guarantee expressed or implied is made regarding the capacity, performance or suitability of any product. MOTOROLA and the Stylized M Logo are registered in the U.S. Patent and Trademark Office. All other product or service names are the property of their respective owners. © Motorola, Inc. 2008