Insight Wimax Outlook in the US Market: Implications for Service Providers

insight WiMAX Outlook in the US Market: Implications for Service Providers

By Hamilton Sekino, John Kwon and David Gates

WiMAX has recently gained a lot of traction and attention in the market and media. We believe the technology has a large addressable market in the US but realistically may capture only a small share of that, competing against incumbent fixed and wireless technologies that are also evolving in terms of bandwidth and costs.

The market penetration and success of WiMAX will be determined by how quickly its ecosystem organizes and collaborates to prioritize target segments, develop and market simple-to-use and affordable end-user applications and devices. Potential WiMAX players need to accelerate the adoption of the service and attract a critical mass of users before competing technologies can catch up.

There is a diverse range of potential owned or leased-facility WiMAX players—pure wireless carriers, integrated carriers, cable and satellite operators, fixed incumbent and competitive operators, MVNOs, and content owners and aggregators. Each player should ask the right strategic questions to objectively assess the economics of WiMAX, only as one of the potential enabling technologies to support incremental growth, drive customer retention, or reduce its operating or capital cost structure. Introduction WiMAX, the trade name given to strategies as they face many unanswered technologies based on the IEEE 802.16 questions on both the demand and standards for broadband wireless supply sides of a WiMAX business case. communications, is finally emerging as In this paper Diamond addresses the a credible alternative for US telecom demand question by segmenting the market service providers looking to deploy next- for both fixed and mobile WiMAX and generation broadband wireless networks. by estimating the addressable market for WiMAX is gaining momentum among each of these segments. In addition, we both vendors and service providers in part use market benchmarks of new technology due to its promise to be a viable technology introductions in the telecom industry to to provide wireless broadband and to further estimate the potential market that reduce the mobility premium of 3G networks. WiMAX can capture. We also determine table of contents WiMAX-focused startup Clearwire, which the breakeven capital investment of fixed already operates fixed WiMAX networks and mobile WiMAX based on demand Introduction 2 in more than 30 cities, received more than and WiMAX’s expected market share Context and Background 3 $1 billion from investors led by Intel and estimates. Finally, we address the supply Positive Momentum for WiMAX 5 Motorola. Meanwhile, Sprint has announced question by identifying nine categories WiMAX Market Forecast it will build a mobile WiMAX network, of potential WiMAX providers, including and Economics 7 for which it may spend $3 billion to reach RBOCs, cable operators, local exchange 100 million people in major metropolitan carriers, Web portals and media companies, Implications for Service Providers 12 areas across the US. reviewing the potential fixed and mobile Conclusion 17 WiMAX plays available to each set of players, Despite the growing attractiveness of About the Firm 18 and highlighting key strategic questions WiMAX, service providers are only these players will need to address before About the Authors ...... 18 beginning to grapple with potential offer they decide on any WiMAX initiatives.

For more information contact: Hamilton Sekino, Partner Telecom & High Tech Practice [email protected]

2 Context and WiMAX Time-to-Market Advantage to RevA, which has theoretical speeds Background WiMAX will offer service providers an of up to 3.1 Mbps (downlink) and 1.8 Mbps attractive alternative to current and future (uplink). AT&T/Cingular will also continue to generations of CDMA 1xEV-DO and WCDMA bolster its HSDPA network. Future versions HSDPA technologies. In the United States, of HSDPA could achieve peak rates of today’s EV-DO networks (Verizon Wireless 14.4 Mbps (downlink) and 2 Mbps (uplink) and Sprint) are theoretically capable of although actual speeds will probably reaching peak speeds of 2.4 Mbps (downlink) be much lower. Despite these speed and 150 Kbps (uplink). Theoretical peak increases, the EV-DO and HSDPA networks rates are higher for Cingular’s HSDPA will be challenged to match the data network, approaching 3.6 Mbps (downlink) transfer rates of mobile WiMAX, which and 384 Kbps (uplink). are projected to reach 14 Mbps (downlink) and 5.3 Mbps (uplink). EV-DO and HSDPA will be challenged to compete against mobile WiMAX once the The performance gap between WiMAX and latter technology becomes commercially the 3G mobile technologies may widen available in the US (Sprint aims to launch a when service providers deploy new versions mobile WiMAX network covering about of each of the technologies, starting in 100 million people by mid-2008, and other 2008. Integration of MIMO and beamforming players could light up metropolitan networks technologies to mobile WiMAX will even sooner). EV-DO and HSDPA will dramatically increase its potential data offer higher speeds by this date. Verizon and transfer rates to 32 Mbps (downlink) and Sprint are upgrading their EV-DO networks 8 Mbps (uplink). By comparison, theoretical

WiMAX Time-to-Market Advantage

Evolution of 3G and WiMAX

2005 2006 2007 2008 2009 2010+

3G EV-DO Rev0 EV-DO RevA EV-DO RevB EV-DO RevC • 2 x 1.25 MHz FDD • 2 x 1.25 MHz FDD • Multi-carrier (1.25 - 20 •“Ultra Mobile Broadband” • Enhanced DL • Enhanced DL/UL MHz) & Enhanced DL •Multi-carrier, Flexible •Peak = 2.4/0.15 Mbps (DL/UL) •Peak = 3.1/1.8 Mbps •Peak = 4.9/1.8 Mbps spectrum allocation • 850/1900 MHz bands in the US • 850/1900 MHz bands (2 x 1.25 MHz FDD) option & Enhanced DL/UL • 850/1900 MHz bands •Peak = 70+/30+ Mbps

WCDMA HSDPA HSUPA HSPA+ LTE • 2 x 5 MHz FDD • 2 x 5 MHz FDD • 2 x 5 MHz FDD • 2 x 5 MHz FDD •Multi-carrier •Peak = 384/384 Kbps • Enhanced DL • Enhanced UL • Enhanced DL/UL (1.25 - 20 MHz) (DL/UL) •Peak = 14.4/2.0 Mbps •Peak = 14.4/5.8 Mbps •Peak = 40/10 Mbps •Peak = 100/50 • 850/1900 MHz bands • 850/1900 MHz bands • 850/1900 MHz bands • 850/1900 MHz Mbps in the US bands

WiMAX Fixed WiMAX Mobile WiMAX Mobile WiMAX • Scalable bandwidth • Scalable bandwidth • Scalable bandwidth (5, 7, 8.75, 10 MHz) (5, 7, 8.75, 10 MHz) •MIMO, OFDMA & • OFDM & LOS •SISO, OFDMA & NLOS Beamforming •Peak = 14/5.3 Mbps •Peak = 14/5.3 Mbps •Peak = 32/7 Mbps (1 x 10 MHz TDD) (1 x 10 MHz TDD) (1 x 10 MHz TDD) • 2.5/5.8 GHz bands • 2.5 GHz band

Note: Timeline depicts initial commercial availability. Those introduced beyond 2008 are under standardization and are subject to variability.

Sources: WiMAX Forum, CDG, 3GPP. Figure 1 WiMAX is expected to have a time-to-market advantage of approximately 12 months and offer higher data rates suitable for broadband wireless access.

3 peak rates for EV-DO RevB will be 4.9 Mbps WiMAX Wireless Enablement technology creates enough economies (downlink) and 1.8 Mbps (uplink) while and Premium Reduction of scale to drive down costs. HSUPA will reach 14.4 Mbps and 5.8 Mbps, WiMAX has the potential to boost demand Additionally, WiMAX could dramatically lower respectively. If enhanced mobile WiMAX for wireless data by reducing the cost of the “wireless premium” for data services indeed realizes superior data transfer rates integration of wireless interfaces into (in other words, the difference between the without requiring significantly greater consumer devices such as laptops, MP3 price of accessing an application using capital expenditures, the technology will players, digital cameras and portable a fixed broadband connection as opposed to weigh heavily on US service providers’ video games, and by minimizing the “wireless a wide-area wireless network) by leveraging data network deployment strategies after premium” to accessing the same application potentially superior network performance 2008. Although subsequent generations with a fixed broadband connection. WiMAX (which implies lower price-per-MB to of 3G technologies (e.g. EV-DO RevC and could broaden the portfolio of wireless- consumers). To date, the much higher cost of HSPA+) will provide substantially improved enabled consumer electronics devices by 3G compared to fixed broadband (a 127 percent speeds, they will still trail behind WiMAX lowering the wireless interface chipset wireless premium for downloading an MP3 in commercial availability, coming to the costs in these devices. EV-DO chipsets song, or a 91 percent premium for high-speed market only in 2009. Their later arrival will currently cost $30 or more, while WiMAX Internet access) has inhibited demand for give mobile WiMAX a critical time-to-market chipsets are projected to be as inexpensive wireless connectivity. advantage of approximately 12 months. as $3 once demand for the emerging

WiMAX Wireless Enablement and Premium Reduction

Wireless Enablement of Consumer Devices

US Households Owning a 2006 Fixed Substitute Wireless Application Pricing 3G Pricing Premium Data-Centric Device (Millions) 2011

Wireless Broadband $32 per month1 $60 per month 2 91% Laptops 40.1 64.1 Access

MP3 Phones 24.4 81.0 Wireless Music $0.99 per song 3 $2.25 per song 4 127% Download MP3 Players 31.8 47.2

Digital Cameras 65.3 93.7 Wireless Free Photo (advertising- $0.89 6 N/A 5 Camera Phones 45 91.9 Upload based model)

Source: Forrester Research, Company Websites, Diamond analysis.

1. Average of BellSouth DSL ($32.95) and AT&T DSL ($29.95), excluding promotions. 2. EVDO and HSDPA unlimited plans from Verizon Wireless, Sprint and Cingular. 3. Apple iTunes. 4. Average of Verizon VCAST ($1.99 via mobile) and Sprint Vision Music ($2.50 via mobile). 5. Photo upload and storage services by Yahoo! Photos, HP Snapfish, Sony ImageStation and Kodak EasyShare Gallery. 6. Based on cost per photo upload for 1.3 MP cameras on most US mobile phones.

Figure 2 WiMAX can reduce the wireless premium and drive penetration of device-specific applications across a wide range of portable consumer electronics such as digital cameras, laptops and MP3 players.

4 Positive Momentum WiMAX is gaining traction in the marketplace established standards for fixed WiMAX for WiMAX as the establishment of industry-wide standards (802.16-2004) in October 2004 and for mobile enables both service providers and technology WiMAX (802.16e) in December 2005. Fixed vendors to make commercial commitments to WiMAX equipment was first certified by the the technology, thereby forming the foundation WiMAX Forum’s certification laboratory in for a WiMAX ecosystem. Spain in January 2006. Since then, a number of vendors such as Airspan, Alvarion, Motorola, Navini Networks, and Nortel have developed The WiMAX Forum fixed WiMAX-certified equipment. The rollout The WiMAX Forum has been the key of certified mobile WiMAX equipment is organization promoting WiMAX among expected in early 2007, although several technology vendors and service providers. vendors are already promoting “pre-WiMAX” The WiMAX Forum was created in 2001 equipment, and the WiBRO mobile broadband by a handful of equipment vendors and two network in Korea, which is a variant of major semiconductor companies—Intel and mobile WiMAX, is already operating. Fujitsu—for the purpose of establishing universal standards for the IEEE 802.16 family of wireless metropolitan area network Technology Vendors standards. Since 2001, the WiMAX Forum has Component vendors, infrastructure vendors, grown to encompass more than 300 companies, and device manufacturers are each playing including technology vendors such as Alcatel, a role to advance the development and Lucent, Motorola, Nortel, and Samsung, and commercialization of WiMAX. Intel has been service providers such as British Telecom, WiMAX’s greatest champion since it KDDI, and Sprint Nextel. The WiMAX Forum helped launch the WiMAX Forum five years

Positive Momentum for WiMAX: Technology Providers

Component Vendors Infrastructure Vendors

• WiMAX’s largest promoter, Intel stands to gain from WiMAX •Motorola dominates the US market after capturing equipment chipset sales to device OEMs1 contracts with Clearwire and Sprint • Texas Instruments, Motorola and Samsung are also active in •Israel’s Alvarion claims 80% of the WiMAX market, with WiMAX chipset and component development installations in 30 countries • Beceem Communications released the first commercially •Nortel announced the first MIMO-powered mobile WiMAX available terminal chipsets for mobile WiMAX in January 2006 solution to deliver 4G mobile broadband content 2

Device Manufacturers WiMAX Forum

• Infrastructure vendors such as Motorola and Alvarion provide • The WiMAX Forum promotes WiMAX by establishing fixed WiMAX CPEs standards, certifying equipment and devices and ensuring the • Samsung and LG have been introducing a handful of WiBro 3 global compatibility and inter-operability of WiMAX products devices (PDA types and laptops) in Korea • Currently, it has over 350 members, including leading • Samsung has unveiled a prototype dual-mode phone that equipment manufacturers, service providers and system supports WiBro and 3G CDMA in June 2006 integrators • Nokia plans to release dual-mode phones in 2008

1. Intel announced its first dual-mode (fixed and mobile) baseband WiMAX chipset for device manufacturers in October 2006. 2. Nortel reported that its MIMO-based (Multiple Input Multiple Output antenna technology) mobile WiMAX would deliver three times the speed and twice the subscriber capacity with greater range and building penetration in urban areas compared to non-MIMO WiMAX. 3. WiBro is a Korean-developed variant of the 802.16e-2005 mobile WiMAX standard and was commercially launched in Korea in June 2006.

Figure 3 Growing participations and activities by various stakeholders have considerably accelerated the maturation of the WiMAX ecosystem over the past few years. 5 ago. The microprocessor manufacturer opportunities. Device manufactures are country and eventually offer mobile WiMAX. stands to benefit from the popularization intensifying their WiMAX initiatives as Sprint has announced plans to build a of WiMAX, especially because WiMAX’s well. While fixed WiMAX CPEs are largely nationwide mobile WiMAX network covering source technology is not dominated developed by infrastructure vendors as a part 100 million people (mostly in large cities) by by other companies such as Qualcomm. of their turn-key solutions, both Samsung 2008. Sprint’s cable partners (Comcast, Time Other component vendors, including and LG have unveiled CDMA-compatible Warner, Cox and Advance/Newhouse) may Texas Instruments, Motorola, and Samsung, smartphones for the Korean WiBRO network. participate in this venture. They recently are following Intel’s lead and developing acquired nationwide AWS spectrum licenses their own chipsets for fixed and mobile that could be used for deploying mobile Service Providers WiMAX. In addition, several infrastructure WiMAX, although they are in preliminary Service providers in several countries, vendors are placing large bets on WiMAX. stages of reviewing how to best use these including the US, are driving demand Motorola was among the first to commit assets. Other players are taking a more for both fixed and mobile WiMAX. In the US, to WiMAX, and it now stands to dominate tactical approach to WiMAX. The Regional Clearwire and Sprint have committed the US market for years to come after Bell Operating Companies (RBOCs) are viewing to building nationwide networks for fixed and locking in exclusive contracts with Clearwire WiMAX as a potential broadband technology mobile WiMAX. Clearwire, which currently and Sprint. Smaller vendors, such as of choice for towns or regions that lie outside offers fixed WiMAX services in more than Airspan, Alvarion, and Navini Networks, are of DSL coverage. AT&T, Qwest and Verizon 30 mid-size cities, aims to expand to many also focusing much of their businesses are each trialing fixed WiMAX networks among more rural and suburban markets around the on WiMAX, eyeing additional global market several technology options.

Positive Momentum for WiMAX: Service Providers

Wireless Operator Cable Operators

•Plans to invest up to $3B in 2007 and 2008 to deploy a •Formed a consortium and acquired 137 licenses in “B” block mobile WiMAX network initially covering 100M POPs (20 MHz) of AWS spectrum (covering 267M POPs and most • Owns 90 MHz of 2.5 GHz spectrum covering 85 markets major markets) for $2.4B in September 2006 •Partly motivated FCC deadline for Sprint to utilize its 2.5 GHz • Planning to “evaluate all options” including possible WiMAX spectrum assets to cover 30M POPs by 2011 testing in limited markets •Partnering with Intel, Motorola and Samsung to develop •May consider incorporating the new spectrum assets into chipsets, network equipment and WiMAX handsets the existing joint venture with Sprint

RBOCs Clearwire

• Conducting trials of fixed WiMAX services in small • Deploying nationwide WiMAX network on 2.5 GHz band (162K communities throughout the US customers in 31 markets with 5.6M POPs by Sept. 2006; • BellSouth having the most assets with 50+ licenses in 90M POPs covered by current licenses) 2.5-2.6GHz bands and 22 licenses in 2.3 GHz band • Owns 2.5 GHz licenses for 100 small-city markets and • Other RBOCs relying more on unlicensed bands another 60 markets from a trade with Sprint Nextel •Exploring to roll out WiMAX selectively in areas where they • Received $1B in new financing from Intel and Motorola currently do not offer DSL services • Bell Canada to be an exclusive VoIP supplier for Clearwire around the globe (in addition to making $100M investment) • Expected to provide US roaming to Inukshuk, a wireless broadband JV between Bell Canada and Rogers

Figure 4 Recent announcements of WiMAX investments and commercial interests by high-profile telecom companies, more specifically the service providers, have created positive boost for the WiMAX ecosystem.

6 WiMAX Market WiMAX will enable two types of broadband to rural geographies. Figure 5 illustrates a Forecast and offers—a fixed broadband offer as a substitute framework that represents the range of fixed to DSL and Cable and a mobile broadband and mobile WiMAX offers to customers in Economics offer as an upgrade or complement to existing rural, suburban, and urban areas. We use this 3G technologies such as EV-DO and HSDPA. geographical division as a basis for developing addressable market sizes for both fixed and Fixed WiMAX enables users to communicate mobile WiMAX in the US. wirelessly within the range of a specific antenna attached to their home or office, while mobile WiMAX frees users to migrate Market Segmentation by from one antenna to another. The customer PRIZM Clusters experience of fixed WiMAX echoes that of a We leveraged Claritas’ PRIZM Cluster local-area WiFi network, while the experience segmentation methodology to estimate of mobile WiMAX resembles that of a wide- addressable market sizes for fixed and mobile area 3G network. Fixed WiMAX will be most WiMAX in the US. Each PRIZM cluster attractive to those households in primarily describes a household-based market segment rural geographies that are not covered by whose categorization is based on family cable or DSL networks, while mobile WiMAX structure, income and lifestyle factors (see will be more attractive to those end-users Figure 6). For example, “Hometown Retired” who desire wireless broadband access or who represents pension-dependent seniors who are frequent users of data-intensive mobile live in aging suburban homes while “Bohemian applications (e.g. audio, video, bulk data). A Mix” refers to progressive young singles and large majority of these customers will likely couples—both students and professionals— be found in urban and suburban as opposed living in urban areas. For our study, we grouped

Potential WiMAX Offers

MOBILITY Fixed Mobile • High data intensity • Moderate data intensity • Indoor residential & business with • Outdoor, on-the-go with portable stationary equipment equipment • Speed critical • Roaming & coverage critical

DSL and Cable Substitute 3G Upgrade (Fixed Broadband) (Mobile Broadband) Rural • Voice • Voice •Low population density –VoIP with WiFi phones –VoIP with WiMax phones & other • Residential & small business (WiMax as backhaul) portable devices • Little or no broadband access technologies – Soft hand-offs between WiFi and – Soft hand-offs between WiMax and available Cellular with dual mode phones Cellular with dual mode phones Suburban Y • Data • Data •Moderate population density – Broadband access via PCs & –Broadband access via laptops & • Single family residences, business parks & laptops (range of speed that may other portable devices (range of ALIT strip malls be even better than current speed that is better than near • Some technologies not universally available DSL/Cable offers) future 3G offers) LOC Urban • Audio/Video • Audio/Video • Highest population density –Media content download & –Media content download & •Many multiple tenant office & residential streaming via PCs & laptops streaming via laptops, other buildings portable devices, car units •Multiple technologies available –Audio/video broadcasting to laptops, other portable devices, car units

Figure 5 WiMAX will enable two types of broadband offers—a fixed broadband offer as a substitute to DSL and Cable and a mobile broadband offer as an upgrade to 3G.

7 these 66 PRIZM Clusters into nine categories Urban segments include those living near mid-size cities such as Birmingham, Alabama based on income and geography. Low income the urban cores of large metropolitan areas or Missoula, Montana, who may live near segments have household incomes ranging such as New York or Portland, Oregon. Rural city centers, and residents of “exurbs,” typically from $15,000 to $25,000 (33 and 55 percent of segments encompass those living in small tract housing developments rising at the the national average of about $45,000) while towns, farms or ranches. Suburban segments margins of metropolitan areas. Figure 7 shows wealthy segments have incomes exceeding cover everyone in between, including not only the market sizes of each of these nine super- $65,000 (44 percent of the national average). stereotypical suburbanites but also residents of segments derived from the PRIZM Clusters.

Potential WiMAX Market Clusters: Demotraphic Descriptions

Low Income Medium Income High Income

Rural Poor (RP) Rural Middle (RM) Rural Rich (RR) • “Bedrock America”–Young, • “Big Sky Families”– Young •“Big Fish, Small Pond”–Olde r, economically challenged rural families with high school upper-class leaders of their families in isolated towns educations and blue-collar jobs small-town communities Rural • “Crossroads Villagers”– • “Shotguns & Pickups”– Middle-aged, blue collar Working-class couples with families who hunt and fish large families and small homes

Suburban Poor (SP) Suburban Middle (SM) Suburban Rich (SR) • “City Startups”–Yo ung, • “Greenbelt Sports”–Middle- • “Second City Elite”–Wealthy multi-ethnic singles living in class exurban couples with a highly educated elites of apartments in satellite cities taste for outdoor activities America’s satellite cities Suburban • “Hometown Retired”–P ension- • “Red, White & Blues”–Blue - • “Country Squires”–Wealthy dependent seniors living in collar residents of exurban families living in newly-built aging suburban homes towns rapidly suburbanizing exurban “McMansions”

Urban Poor (UP) Urban Middle (UM) Urban Rich (UR) • “Urban Elders”–Ethnically - • “Bohemian Mix”–Progressive , • “Money and Brains”–Married mixed, low-income apartment young singles and couples, couples with high incomes renters in large inner cities students and professionals and sophisticated tastes Urban • “Low-Rise Living”–V er y poor, • “The Cosmopolitans”– • “Young Digerati”–Tech-savvy young, ethnically diverse Affluent, hard-working, singles and couples living in singles and single parents typically immigrant families fashionable neighborhoods

Figure 6 Profiles of the 9 potential WiMAX market clusters can be described in terms of the granular segments allocated to each cluster. The use of these clusters enables a bottom-up calculation of WiMAX addressable market size through proxy variables such as Internet and mobile data penetration.

Sizing of WiMAX Market Clusters

% of Total Households Income Level in the Locality High Medium Low 100% RR (2.5M HHs, 5.6M POPs, $68K) UR (3.7M HHs, SR (15.6M HHs, 50.0M POPs, $77K) 10.0M POPs, $68K) 80%

RM (18.7M HHs, 60% 50.5M POPs, $43K) UM (11.0M HHs, 28.0M POPs, $40K) 40% SM (31.5M HHs, 85.0M POPs, $46K)

20% RP (13.8M HHs, 3 1.9M POPs, $24K) UP (5.6M HHs, SP (10.0M HHs, 23.6M POPs, $22K) 13.1M POPs, $21K) 0% Rural Suburban Urban 35M HHs = 88M POPs 57M HHs = 159M POPs 20M HHs = 51M POPs Note: Figures in parentheses represent total households, total population and median household income for each segment.

Sources: Claritas, US Census, Diamond analysis.

Figure 7 Rural and Suburban together account for 82% of the total US households, and Suburban Middle is the single biggest segment with over 31M households. 8 Total Addressable Market of their suburban counterparts. This and 161 million people for mobile WiMAX. We used broadband and mobile data may be explained by urbanites’ greater Of course, these total addressable markets penetrations of each PRIZM Cluster to access to free Internet services, whether comprise a range of customer segments estimate the potential addressable market by benefit of free public WiFi networks, much broader than the core groups that for fixed and mobile WiMAX respectively. neighbors’ unsecured networks, or by WiMAX operators will likely target. Figure 8 shows the weighted average inclusion of broadband in apartment rental Fixed WiMAX will have a difficult time broadband and mobile data penetrations or condominium maintenance fees. competing against cable and DSL in urban for the nine groups we have defined based Figure 8 also shows the growth forecasts and suburban geographies, and mobile on income and urbanicity. These numbers for each of the groups, derived from market WiMAX will not be attractive to ”light- represent the share of households that research projections for household-level data” users. In fact, the value proposition of subscribe to broadband Internet services, broadband and mobile data penetrations. fixed and mobile WiMAX services will rise or, in the case of mobile data, individuals We used these growth forecasts to calculate significantly for those customer segments that frequently browse the wireless Web the total addressable market for WiMAX that can derive more utility from WiMAX or download content. All nine groups (see Figure 9), assuming that the potential than from existing competitive alternatives. show generally increasing penetration in universe of fixed and mobile WiMAX users Such customers could include dial-up Internet correlation with their income level and will be a sub-set of the total number of users in far-flung geographies not touched degree of urbanicity. One exception to note broadband and mobile data users. This high- by broadband networks or EV-DO/HSDPA is that broadband subscription rates level calculation yields addressable markets aircard subscribers who desire a faster among middle and upper income urban of 87 million households for fixed WiMAX service at lower cost. households are lower than those

Potential WiMAX Market Clusters Penetration Rates and Forecast

Low Income Medium Income High Income

Rural Poor (RP) Rural Middle (RM) Rural Rich (RR) 100% 100% 100% 73% 75% 75% 60% 75% 54% 50% Rural 50% 50% 41% 50% 37% 31% 38% 32% 25% 13% 25% 16% 25% 13% 0% 0% 0% Broadband Mobile Data Broadband Mobile Data Broadband Mobile Data

Suburban Poor (SP) Suburban Middle (SM) Suburban Rich (SR) 100% 100% 100% 92% 80% 75% 68% 75% 75% 64% 56% 63% 48% 54% Suburban 50% 46% 50% 50% 20% 23% 27% 25% 25% 25% 0% 0% 0% Broadband Mobile Data Broadband Mobile Data Broadband Mobile Data

Urban Poor (UP) Urban Middle (UM) Urban Rich (UR) 100% 100% 100% 90% 78% 78% 75% 64% 62% 75% 65% 75% 53% 61% Urban 44% 50% 50% 50% 33% 26% 27% 25% 25% 25% 2006 0% 0% 0% Broadband Mobile Data Broadband Mobile Data Broadband Mobile Data 2011

Sources: Indexing of clusters from Claritas; Baseline figures from Forrester and Technology Futures (Internet and BB), Telephia and Diamond (mobile data). Figure 8 At an aggregate level, broadband penetration will increase from 50% of US households in 2006 to 73% in 2011 while mobile data penetration will grow from 21% to 52% of the population.

9 Total Addressable Market for WiMAX

Fixed Mobile

•Total Households (2011): 36.9M •Total Population (2011): 92.1M • Broadband HH Penetration (2011): 59% •Mobile Data Pop. Penetration (2011): 34% Rural

21.8M Households 31.3M People

•Total Households (2011): 60.2M •Total Population (2011): 166.0M • Broadband HH Penetration (2011): 81% •Mobile Data Pop. Penetration (2011): 57% Suburban

48.8M Households 94.6M People

•Total Households (2011): 21.4M •Total Population (2011): 53.5M • Broadband HH Penetration (2011): 76% •Mobile Data Pop. Penetration (2011): 66% Urban

16.3M Households 35.3M People

87M Households 161M People Total (73% of US Households) (52% of US Population)

Figure 9 WiMAX will compete with other technologies for shares of the US broadband households and mobile data users—estimated at 87M households and 161M people.

WiMAX Share of for mobile WiMAX. Hutchison is projected its per-subscriber cost of deploying WiMAX Addressable Market and is close to capturing 8 percent of the should not exceed one-tenth of the average The current absence of clearly defined competitive UK mobile market in the five lifetime value of its subscriber. Each business models or service provision years since its launch in March 2003. While penetration rate will determine a breakeven strategies clouds any effort to dictate how these examples are only indicative of point to deploy WiMAX on a household fixed and mobile WiMAX will be received what fixed and mobile WiMAX may achieve, or POP basis, as illustrated in Figure 10. Using in the US market. However, there are some they demonstrate how new technologies DSL and EV-DO, respectively, as benchmarks guiding benchmarks within the telecom can produce a competitive and differentiated to support CPGA, ARPU, CCPU, and churn industry that may facilitate an understanding offering and rapidly grab an important assumptions for fixed and mobile WiMAX, of the potential market shares fixed and slice of the market in industries previously we estimate lifetime values of $411 mobile WiMAX may achieve. dominated by other technologies and players. for a fixed WiMAX household and $625 for a mobile WiMAX subscriber. The introduction of digital satellite television service in the 1990s serves as a proxy for Breakeven Costs for Assuming the satellite TV and Hutchison 3 fixed WiMAX. Competing against cable Network Operators benchmarks provide reasonable market companies, satellite operators, led by DirecTV We can project breakeven costs for potential penetration forecasts for WiMAX, we can and EchoStar, captured 12.5 percent of the WiMAX operators, since breakeven capital project breakeven costs for potential WiMAX US pay-TV market five years after launching investment can be determined as a function network operators. For fixed WiMAX, we commercial services. Similarly, the launch of of addressable market penetration. For use the 12.5 percent combined market share Hutchison 3, the first greenfield 3G operator example, if a provider captures 10 percent of of DirecTV and EchoStar to estimate that in the United Kingdom, serves as a proxy its addressable market, then to break even, a single fixed WiMAX operator may capture

10 6.25 percent of its addressable market. share, a mobile WiMAX operator may invest mobile WiMAX correspond to 73 percent of For mobile WiMAX, we assume the 8 percent up to $50 per addressable POP before households and 52 percent of the population, share of Hutchison 3. At 6.25 percent becoming unprofitable. Next, we must modify respectively (as noted in Figure 9). As a market share, a fixed WiMAX operator may these values to accommodate the fact that result, the adjusted per-subscriber breakeven maintain a positive business case if it can operators must deploy networks to cover costs are $19 for fixed WiMAX and $26 limit capital investments to $26 per addressable entire populations, not just addressable for mobile WiMAX. household. Similarly, at 8 percent market markets. Addressable markets for fixed and

Breakeven WiMAX Costs for Network Operators

Fixed WiMAX Mobile WiMAX

WiMAX Share of the WiMAX Share of the Addressable Market Addressable Market 40% 40%

30% 30%

20% 20%

10% 10% ($26, 6.3%) ($50, 8.0%) 0% 0% 25 50 75 100 125 150 175 200 25 50 75 100 125 150 175 200 Breakeven Cost per Addressable HH Breakeven Cost per Addressable POP

Profitable at 6.3% market share Profitable at 8.0% market share Unprofitable at 6.3% market share Unprofitable at 8.0% market share

Note: Since fixed WiMAX would primarily compete with DSL, an average Note: Since mobile WiMAX would largely compete with 3G, an average DSL household’s metrics were used as a baseline to estimate a lifetime DSL household’EV-DO subscriber’s metrics were used as a baseline to value of a fixed WiMAX household ($411). Calculation is based on $250 estimate a lifetime value of a mobile WiMAX subscriber ($625). Calculation CPGA, $25 ARPU, 65% gross margin and 2.0% churn. CPGA includes is based on $400 CPGA, $50 ARPU, 60% gross margin and 2.5% churn. $100 marketing, $50 subsidy and $100 distribution. CPGA includes $50 marketing, $200 subsidy and $150 distribution.

Sources: Bear Stearns, JP Morgan, Diamond analysis.

Figure 10 Assuming benchmarks to guide reasonable market share for WiMAX, WiMAX providers may have a positive business case if they can limit CAPEX to $26 per addressable household for fixed WiMAX and to $50 per addressable POP for mobile WiMAX.

11 Implications for Fixed and mobile WiMAX present a wide of these players must answer critical questions Service Providers range of potential business opportunities about the specific value of WiMAX to their for different types of communications and core business and long-term offer strategies. content providers. Fixed-line incumbents, In this section, we describe the key WiMAX wireless-focused players, cable operators, opportunities facing different types of satellite television service providers, local communications and media players. For exchange carriers, mobile virtual network each set of players, we list the key strategic operators, VoIP providers, Web portals, and questions they need to address before media companies each have an opportunity pursuing a WiMAX play. Finally, we specify to exploit fixed or mobile WiMAX to create the prioritized types of WiMAX service incremental revenues, either through direct (fixed or mobile) and geographies (urban, investments or through partnerships with suburban or rural) for each category of service WiMAX network operators. However, before providers (see Figure 11). committing to WiMAX investments, each

Priority WiMAX Offers and Markets

RBOCs Satellite Operators VoIP Providers F M F M F M R R R S S S U U U

F: 71M HH F: 87M HH F: 65M HH M: 130M POP

Wireless Players RLECs Web Portals

F M F M F M R R R S S S U U U

F: 65M HH F: 71M HH F: 65M HH M: 130M POP M: 130M POP

Cable Operators MVNOs Media Companies

F M F M F M R R R S S S U U U

M: 130M POP M: 130M POP M: 130M POP

Priority Level High Medium Low

Source: Diamond analysis. Figure 11

12 Fixed/Wireless Incumbents Strategic Questions for Fixed/Wireless Incumbents The RBOCs could deploy fixed WiMAX as • What is the return on investment of fixed WiMAX as a replacement for DSL in a DSL substitute in areas of limited DSL rural areas? coverage. For example, BellSouth, prior to the merger with AT&T, was planning to use • Will the market demand for mobile data be large enough to support mobile WiMAX as one way to reach the 16 percent WiMAX as well as 3G networks? of the households in its service area that • What is the effect of WiMAX cannibalization on existing 3G networks? currently do not have DSL access. RBOCs with integrated wireless operations (e.g. AT&T, • Can integrated RBOC/wireless carriers wait for substitute technologies such as BellSouth, and Verizon) could also provide RevC and LTE, or does mobile WiMAX carry a substantial time-to-market advantage? mobile WiMAX as an extension of their current • Will integrated RBOC/wireless carriers have enough spectrum to deploy WiMAX? fixed broadband and mobile data service Can they leverage AWS spectrum as an option? offerings. In addition, they could leverage mobile WiMAX to offload data traffic from 3G networks in congested metropolitan areas.

Wireless-focused Players Strategic Questions for Wireless-focused Players Wireless-focused players could provide • Can fixed WiMAX compete against DSL and Cable broadband price points? bundles of fixed WiMAX and mobile voice and data from their 3G networks. • Will the market demand for mobile data be large enough to support mobile They could also deploy mobile WiMAX WiMAX as well as 3G networks? as an extension of their current 3G services • What is the effect of WiMAX cannibalization on existing 3G networks? and leverage it to offload traffic from 3G networks in metropolitan areas. Sprint • Can wireless operators wait for substitute technologies such as RevC and LTE, would be the leading case study for or does mobile WiMAX carry a substantial time-to-market advantage? these players. • What are the spectrum options to deploy WiMAX? In addition to 2.5GHz, is AWS spectrum an option?

Cable Operators Strategic Questions for Cable Operators Cable operators could provide fixed • What is the ROI of fixed WiMAX as a replacement for cable broadband in rural WiMAX as a cable broadband replacement and suburban areas? in areas of limited coverage. Cable operators could also deploy mobile WiMAX as an • Will the market demand for mobile data be large enough to support mobile extension of the fixed voice-video-broadband WiMAX as well as 3G networks? and/or mobile voice and data service • Can cable operators reduce their dependency on Sprint with mobile WiMAX? offering they are launching through their Can it replace 3G mobile services? joint venture with Sprint. In addition, they could leverage mobile WiMAX to offload • Can cable operators lease WiMAX from Sprint and Clearwire, or should they their data traffic from Sprint and potentially build their own network? voice traffic as well in the long term. • Can cable operators leverage their AWS spectrum?

• What are the alternative wireless technologies for the AWS spectrum, and what is the best option?

13 Satellite Service Providers Strategic Questions for Satellite Service Providers The broadband and mobile service ambitions • Can satellite operators compete against the cable operators without a triple-play/ of satellite providers DirecTV and EchoStar VOD offer? were significantly undermined after their failure to place a winning bid at the • Can fixed WiMAX compete against DSL and Cable broadband price points? AWS spectrum auction. However, the • Can fixed WiMAX provide the bandwidth necessary to deliver video-on-demand satellite providers could still enter the economically? WiMAX picture through partnerships with other spectrum holders. They could add • Can satellite operators lease WiMAX from Sprint or Clearwire? fixed WiMAX to the core satellite TV offer, • Is it too late for satellite operators to acquire spectrum to deploy WiMAX? thereby enabling a triple-play based What are their options? on TV, broadband and VoIP. They could also leverage fixed WiMAX to offer Video-on- • What are the alternative wireless technologies, and what is the best option? Demand to their customers, thereby reducing a competitive gap with the cable operators. Alternatively, satellite providers could compete against the cable-Sprint JV by leveraging mobile WiMAX to bundle wireless broadband services with their core TV offers.

Local Exchange Carriers Strategic Questions for Local Exchange Carriers Reseller Local Exchange Carriers could • What is the ROI of fixed WiMAX as a replacement for DSL in rural or suburban areas? emulate the RBOCs by providing fixed WiMAX as a DSL replacement in areas • Can RLEC MVNOs such as Embarq leverage mobile WiMAX to reduce dependency of limited DSL coverage. They could on their network hosts which lease them 3G network access? Can mobile WiMAX also leverage fixed WiMAX to step up substitute 3G voice and/or data services? competition against the RBOCs to include • Can RLECs lease WiMAX from Sprint and Clearwire? neighborhoods outside of their current wireline footprint. In addition, they could • Do RLECs have enough scale to acquire spectrum and deploy a WiMAX network? look to mobile WiMAX to provide a wireless What spectrum options are available to them? extension to their current wireline voice • What are the alternative wireless technologies? and data services. If local exchange carriers such as Embarq deploy their own mobile WiMAX networks, they could also leverage mobile WiMAX to offload their data traffic from mobile network operators and potentially voice traffic as well in the long run.

14 MVNOs Strategic Questions for MVNOs MVNOs could provide mobile WiMAX as • Do the MVNO’s target segments value broadband-wireless bundles? Are they an extension of the 3G mobile network- already served by other providers? based voice and data services they already offer. For example, Helio could consider • Can fixed WiMAX compete against DSL and Cable broadband price points? expanding its current agreement with Sprint • Will the market demand for mobile data be large enough to support mobile WiMAX to take advantage of its upcoming mobile as well as 3G networks? WiMAX network. MVNOs could also look to reduce their wholesale costs by offloading • Can MVNOs reduce their dependency on network hosts with mobile WiMAX? their data traffic from host 3G network Can it replace 3G voice and/or data services? operators to mobile WiMAX networks. • Can they lease WiMAX from Sprint or Clearwire?

VoIP Providers Strategic Questions for VoIP Providers VoIP service providers such as Vonage • Can VoIP providers compete against RBOCs and Cable without a bundled could leverage fixed WiMAX to increase broadband offer? their addressable market of broadband households to include those not covered • Can VoIP providers compete against RBOCs and Cable without a mobile offer? by existing cable or DSL networks. They • Can fixed WiMAX compete against DSL and Cable broadband price points? could also use mobile WiMAX to expand their service offering to bundled mobile VoIP • Is mobile WiMAX a viable alternative to an MVNO agreement with a 3G network and broadband. provider?

• Can VoIP providers lease WiMAX from WiMAX network operators such as Sprint or Clearwire?

Web Portals Strategic Questions for Web Portals Large Web portals could leverage WiMAX • How can Web portals such as Google and Yahoo! generate more traffic in their to provide bundled fixed VoIP and broadband core search advertising business? service, expanding the type of co-marketing agreement currently held between AT&T and • Are fixed WiMAX network providers willing to enter into distribution/marketing Yahoo. Web portals could also explore new agreements with portals? business models for mobile WiMAX whereby • Is branded mobile WiMAX service a viable alternative to an MVNO agreement they subsidize service in exchange for with a 3G network provider? ownership of advertising space in the user’s mobile device. • Can Web portals create incremental revenues from mobile advertising and mobile applications such as location-based mapping and push email?

15 Media Companies Strategic Questions for Media Companies Media content developers (e.g. Time • Will WiMAX-enabled consumer electronics devices be widely available? Warner, Sony, Disney, News Corp, etc.) could leverage mobile WiMAX to enable wireless • Can WiMAX deliver a cost structure low enough to be competitive with fixed delivery of proprietary content such as music broadband access? and video clips, while content aggregators • Are fixed and mobile WiMAX network providers willing to enter into distribution/ (e.g. Apple iTunes and Xbox Live) could use it marketing agreements with content developers and aggregators? to make their libraries available anytime, anywhere to a much broader audience. While • Can video content developers leverage WiMAX to dis-intermediate cable operators content owners could encourage adoption for video entertainment distribution? of services through various agreements • Can media companies compete against wireless carriers for a larger share of with traditional WiMAX network operators, wireless media and entertainment revenues, leveraging their own distribution content aggregators could enter into platform based on WiMAX? network-leasing agreements to directly offer mobile service, thereby integrating wireless access subscriptions with their existing content libraries and proprietary mobile devices.

16 Conclusion WiMAX is a disruptive technology that, in the network operators such as cable, mobile, next few years, will compete against existing and satellite companies will need to broadband as well as wireless technologies carefully evaluate how to best position for a share of US consumers’ communications themselves relative to the inevitable budgets. Two operators—Clearwire and WiMAX disruption. Meanwhile, WiMAX Sprint—have already committed to bringing may create opportunities for other service fixed and mobile WiMAX coverage to much providers, such as VoIP providers, MVNOs, of the country by 2008. These players are Web portals, and media content owners betting that WiMAX will propel them to the or aggregators. These players will need to vanguard of broadband wireless services, assess whether WiMAX enables mobile not only by providing broadband services to data service models that expand beyond underserved customer segments (fixed their options with 3G networks. Whether WiMAX) but also by reducing the current threat or opportunity, all classes of telecom wireless premium in delivering high- and content providers will need to adapt bandwidth applications such as mobile media their business strategies to reflect the new and entertainment and Web browsing competitive and technological realities brought (mobile WiMAX). Consequently, incumbent about by the introduction of WiMAX.

17 About the Firm Diamond (NASDAQ: DTPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit www.diamondconsultants.com.

About the Authors Hamilton Sekino is a Partner in Diamond’s Telecom and High Tech practice. Hamilton has experience across North America, Latin America, Europe, and Asia in launching mobile operators and helping them grow through new technologies, new products, channels, and MVNO programs. He also has experience in generating growth for wireless handset OEMs, infrastructure vendors, and media & entertainment companies through the introduction of new technologies, services, business models, and strategic partnerships with mobile operators.

John Kwon is a Manager in Diamond’s Telecom and High Tech practice with experience across North America, Europe, and Asia in developing wireless operators’ market entry strategies and launching new products and services. His experience also comprises 3G network strategy, operations improvement, customer value management, and MVNO strategy for leading wireless operators as well as market opportunity analysis for a major wireless handset and infrastructure vendor.

David Gates is an Associate in Diamond’s Telecom and High Tech practice. David has experience in customer segmentation, marketing, and pricing strategy for leading wireless operators and alternative wireless providers. David also has expertise in fixed-mobile and telecom-media convergence, and he recently advised a telecom operator on acquisitions in the US media industry.

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