Why Wireless Operators are Shifting Focus from Capex to Opex
In the book, Tipping Point, author Malcolm Gladwell describes a tipping point as “the moment of critical mass, the threshold, the boiling point.” The point where the sociological scale tips and “ideas and products and messages and behaviors spread like viruses do.” Gladwell gives interesting observations of how once unknown products and behaviors reach the “tipping point” and become wildly popular and eventually commonplace. I argue that such a phenomenon will occur in the near future in the wireless industry. No, I am not making some bold prediction but rather simply pointing out an obvious fact – with nearly everyone in possession of a cell phone, the cellular industry is nearing market saturation and is transitioning into the mature phase of the business life cycle.
In the cellular industry, operators rapidly blew through the introduction phase and are deep into the growth phase where it has been for the last ten to fifteen years. With the onset of the maturity phase, however, comes the cellular tipping point.
Here’s Business 101. When companies reach the maturity phase of the business life cycle they attempt to prolong a product’s life span by stretching this phase for generations. It is a business school fundamental that the best way to prolong this phase is to reinvent yourself as many times as possible and simultaneously optimize margins. While struggling as of late, the auto industry is a classic example of success in this endeavor. Each year they introduce new models of old cars aimed at getting consumers to trade-in for a new/improved version. But auto makers only paid attention to one side of the equation. It has been the mismanagement of opex over the last several decades that has caused American auto manufacturers to falter – they simply can’t compete with foreign manufactures that can produce an equal or better car with substantially lower labor costs per vehicle.
Back to the cellular industry. Operators are making the same competitive adjustments to their products. Each carrier is upgrading their networks to the next “G” in an effort to reinvent themselves faster than Madonna. They are introducing new über-cool handsets so quickly you’re in constant phone-envy and the end of your two-year contract comes slower than a child’s Christmas morning.
But unlike the auto industry, don’t think operators are ignoring opex. FierceWireless recently published an article entitled, “Operators now playing the opex game”, which points out that mobile operators can no longer focus on subscriber acquisition to grow and that they are now focusing on opex in an attempt to manage margins. While I have been forecasting this phenomenon as “the perfect storm” ever since AGL published my first article, I want to declare again that the tipping point is very close. Over the next twelve to twenty-four months I argue that key industry executives and Wall Street analysts will make the reduction of wireless opex such common speak that the masses will shift from focusing on capex and speed-to-market to scrutinizing operating margins. Are you prepared for this tipping?
The most common thing I heard at the CTIA 2010 trade show this week at the Las Vegas Convention Center was that wireless operators will need more spectrum as they deploy WiMAX and LTE networks – generally marketed as 4G. This need was discussed twice within the opening hours of the show. First at the opening morning Raymond James Breakfast Roundtable which was part of the Tower Technology Summit co-located at CTIA and more notably in the opening key note address by Ralph de la Vega, President and CEO of AT&T Mobility and Consumer Markets. While earlier this month the FCC announced its plan to free up 500 MHz of spectrum in the next ten years, 300 MHz of which is expected within five years, the mobile operators can’t wait that long. New smartphones are fueling an insatiable consumer demand for applications that hog bandwidth, which in turn will require mobile operators to manage the spectrum they have more efficiently.
For me, this was the tone of this year’s trade show and thus raised the obvious question – what are carriers to do until they get the additional spectrum they need? Answer: Perform cell splits— decrease the cell radii and insert more cell sites to try to eek out more capacity with the limited spectrum they have. The simplified math works like this – you can have several users all downloading large amounts of data through one 4G cell site or you can break that site into multiple smaller cell sites to spread the consumer demand. By subdividing cell sites carriers can try to get more capacity out of their limited spectrum, at the risk of decreased efficiency and increased interference in the network.
These smaller cell sites are known as microcells, picocells and femtocells. Microcells usually have a cell radius of one mile or less. Picocells have a cell radius of a city block or less. The equipment for a picocell can be quite small, even deployed on light poles or street corners in dense, urban areas and are common in large public facilities like football stadiums, shopping centers, office buildings, airports, etc. And femtocells are typically private cell sites in a home or small office with four or less private users. Click here for a prior opinionpole.net blog on femtocells.
One thing is for sure, none of these three types of small cell sites are found on top of the typical cell tower. While there will always be a need for traditional cell towers, particularly for rural coverage, and high rooftop cell sites in urban areas, they are going to become less critical as network traffic begins to get off-loaded to these sites.
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When the A/B Block PCS Auction ended in 1995 an unusual real estate phenomenon occurred. Cellular operators paid way too much to lease it. No, this wasn’t driven by low interest rates, the refi boom, Option ARMs or teaser rate mortgages. It was driven by a race for market share.
And, boy, was it a doozy. An analog-based industry had just gone digital. Wall Street was throwing money at this new enterprise as they were starting to inflate the dot-com bubble, and the FCC found a new revenue source for something they had previously given away for free.
Before there was an auction for spectrum, the government had employed an inefficient lottery system to allocate spectrum. When the government realized that they could be the ones making money out of thin air (as economist Peter Cramton quipped after the first auction 15 years ago), the wheels were set in motion for a new industry dynamic that would profoundly affect future operating costs and the way carriers do business.
I know because I was there. I watched as players like WirelessCo, AT&T, PCS PrimeCo, Pacific Telesis, GTE, American Portable Telecommunications, Ameritech Wireless, Western PCS, Powertel PCS Partners and others together paid in excess of $7 billion for spectrum and then turned around and spent billions more to build their network — all before even selling their first PCS phone. They needed the frequency to build the network. They needed the network to sell the phones. They needed to sell the phones to appease the investors. The race was on.