Telecom, Media & Entertainment the way we see it

Telecom & Media Insights Journal 2005 Broadband Takes Flight Table of Contents

Preface 2

1 The Changing Face of DSL Provision in Western Europe 3

2 Gateways: A Business Imperative in a Box 7

3 Mobile VoIP: Knocking at the Gates? 13

4 Charge of the Mesh Brigade: Hype or Disruption in Progress? 20

5 The Future of 3G: Assessing the Threat of Alternative Technologies 26

6 Growing Mobile Data Revenues: Opportunities in Infotainment 31

Telecom & Media Insights Journal 2005 Foreword

In an industry characterized by turbulence Our commitment to research and analysis and uncertainty, with a constant flow of plays a fundamental role in our ability to technological innovation, consumer deliver real value to our clients. Now in its demand and financial outcomes are more 12th year of operations, the TME Strategy and more difficult to predict. This has Lab is a global network of strategy certainly been true in 2005. The rapid consultants dedicated to generating growth in broadband; the stuttered content-rich insights into the telecom and adoption of 3G; the challenge of VoIP; the media industries based on in-depth increasing competition and corresponding analytical research and our willingness to decline in prices; the search for new services take a position on some of the most that will drive ARPU growth—the industry complex issues facing our industries. We is evolving rapidly. Managing this level of would like to thank the numerous clients, uncertainty, the corresponding risk profile colleagues, research organisations and and the number of investment decisions is academics who have worked with us this becoming more and more complex. year and have helped us advance the thinking on key industry topics. To navigate these turbulent skies requires the foresight to know not only what This Journal brings together an edited challenges and opportunities are collection of the “Insight” papers emerging, but also what action to take. published by the TME Lab over the past For over 30 years, Telecom, Media & year. I hope you find these perspectives Entertainment (TME), a global sector insightful and thought provoking. organization of Capgemini, has been helping the and Didier Bonnet media & entertainment industries turn their goals and aspirations into reality. Our clients include over 80% of the top telecom, media & entertainment leaders worldwide and we have successfully delivered over 1,000 engagements in some 50 countries around the world. Managing Director Telecom, Media & Entertainment Preface

More than any other year, 2005 bears OFDM are emerging, promising a better testimony to the fact that the telecom and experience to mobile users. In chapter 5, media sector is a rapidly evolving industry we assess whether 3G is under threat from and a turbulent world. these alternative wireless technologies and discuss strategic options for mobile operators. We start this Journal with looking at the broadband market, which grew 3G operators are keen to launch new tremendously this year with more than 24 services that will drive ARPU up and deliver million new subscribers worldwide in the the return on operators’ massive investments. first 6 months alone. As we highlight in In the final issue of this year, we discuss the first chapter, local loop unbundlers which mobile data services have the best have been instrumental in driving chance of succeeding and what operators broadband penetration through aggressive need to do to realise the prospects. We price cuts. As the broadband access argue that mobile TV could emerge as the market matures and prices decline rapidly, star performer in the data market. operators are looking for new sources of revenue. In chapter 2, we highlight that 2006 will be another year of major home gateways, launched by an increasing changes in the telecom and media sector number of DSL players in Western as fixed incumbents start to deploy next Europe, will be a strategic tool for generation networks and face increasing operators to drive uptake of additional competition from a wide range of new services, such as VoIP and TVoDSL. entrants and stronger alternative operators. We also expect players, The rise in broadband penetration has such as Google and Yahoo! to continue fuelled usage of Voice over IP services their forays into the telecom and media posing a big threat to incumbents’ PSTN space potentially disrupting the current set revenues to the order of €5bn by 2008. In up with innovative business models. The chapter 3, we explore whether the mobile exciting marketplace that Telecom & segment is the next frontier for VoIP by Media represents is set to remain so for assessing the voice quality, costs savings some time to come. and the user experience of making a mobile call over IP. We also quantify the near-term Jawad Shaikh & Jerome Buvat threat to operators’ mobile voice revenues. TME Strategy Lab

Mesh networks is another technology that could disrupt the current telecom set up. In chapter 4, we show that mesh networks have a strong user value proposition and could have a significant impact on operators’ revenues in the next 3 to 5 years.

2005 has also been the year of mobile broadband. More than 30 players launched 3G while 45 operators deployed EDGE networks. As 3G is starting to gain subscribers, alternative wireless technologies like TD-CDMA and Flash-

2 Telecom & Media Insights Journal 2005 the way we see it

1 The Changing Face of DSL Provision in Western Europe First published: October 2004

Objective of Study The rise of DSL as a preferred Internet but by the end of the year the actual figure access technology is creating new was more than 17m. Much of this growth challenges and opportunities for telecom has come in the past year, with 10 million operators and ISPs alike. DSL represents a new subscribers in Western Europe from 2 The increasing popularity of DSL creates both significant source of additional revenue for March 2003 to March 2004. challenges and opportunities; Capgemini incumbents and ISPs, but at the same time assessed the implications of the rise of the their traditional business is threatened by In some countries, the growth has been DSL Service Provider. the rise of DSL Service Providers (DSPs) even greater: in France, for example, the offering both Internet access and Voice DSL subscriber market grew by 124% in over IP at very attractive prices. 20033 vs. 90% in Western Europe, adding Capgemini’s TME Strategy Lab explores more than 2.2m new lines. France now the implications of the rise of DSPs for has one of the highest DSL penetration incumbents and alternative players, and rates in Western Europe (16% vs. 13% on for the market as a whole. average) and has around 75% (or 1.7m) more DSL lines than the UK, with the The DSL market is that rarity: a telecom same population. We analyzed the DSP sector whose growth has been significantly market, focusing on France as one of the underestimated by analysts. Three years leading DSL countries in Europe. ago, experts forecasted around 6m DSL connections in Western Europe for 2003,1 The Rise of the DSP A major driver behind the dramatic

Figure 1.1 Number of DSL Subscribers and Entry-Level 512K DSL Price in France (€/Month) growth of the French DSL market has been a rapid decline in prices (see Figure 1.1). Entry-level DSL prices were cut by 4 4,500,000 50 55% in 2 years. The price decline even accelerated in the first quarter of 2004 4,000,000 45 with a reduction of 15% vs. 10% on average since 2001. 3,500,000 40 35 3,000,000 One of the key factors that led to this 30 dramatic price decline in France has been 2,500,000 the rise of a new type of player: DSL 25 2,000,000 Service Providers (DSPs). DSPs lie at the 20 convergence of telecom network operator 1,500,000 15 and Internet Service Provider (ISP) business models. They provide DSL-based 1,000,000 10 Internet access and additional services that 500,000 5 ISPs reselling incumbents’ products do not offer, such as Voice over IP and/or 0 0 television/video on demand. 4Q01 1Q02 2Q023Q02 4Q021Q03 2Q03 3Q034Q03 1Q04 To offer these services, DSPs usually Subscribers Lowest price for 512K Internet access(€) operate GigaEthernet (GE) networks, which support very high Source: ECTA DSL Scorecard, 2001, 2002, 2003 and 2004; Capgemini analysis.

1 Gartner, “Residential Broadband: Western Europe, 2000-2005”, July 2001; Forrester, quoted by Goldman Sachs, “Technology: Internet-New Media”, 13 June 2001. 2 ECTA DSL Scorecard, March 2003 and 2004. 3 March 2003 to March 2004. 4 From 4Q01 to 4Q03.

The Changing Face of DSL Provision in Western Europe 3 requirements, and unbundle the local networks and national IP infrastructure, Figure 1.2 DSL Monthly Access and loop. When unbundling the local loop, have to handle two types of QoS (i.e. ATM Traffic Costs per Line in France, 2004, € DSPs have the choice between two and IP). options: shared vs. full unbundling. In the 23-25 first option, DSPs can only provide data As a result, DSPs typically enjoy a strong 20-22 services, be they broadband Internet or cost advantage not only over ISPs but also 13-15 VoIP. When opting for full unbundling, incumbents, which enables them to offer DSPs are also able to offer traditional very attractive prices for both DSL access PSTN voice in addition to data services; in and voice. a a a, b this option they will also collect the basic ISPs (Resale) ISPs DSPs (Bitstream) land-line subscription that the incumbent DSPs Have the Services Advantage normally receives. DSPs’ most attractive value proposition Source: Capgemini analysis. a. Including back-haul consists of very high bandwidth DSL costs. b. In unbundled areas DSPs Have the Cost Advantage access (up to 4–5Mb/s) combined with Local-loop unbundling gives DSPs a unlimited domestic fixed-line calls. Some significant cost advantage against ISPs players, such as Free, the largest DSP in reselling incumbents’ products, regardless France, also offer TV services over DSL. Figure 1.3 Comparison of Offering Tariffs in France of whether the latter use a “resale” or Free now provides a 5Mb/s DSL “bitstream” sourcing model (see Figure 1.2). connection with fixed-line local and national calls at no charge and TV services Provider Internet Un- TV Pricing Access limited Services (€) The “resale” model, which is only available for €29.99 a month. Free’s TV services (2MB) Callsa in a few European countries, such as comprise fifty-seven free channels, DSPs b France and the UK, enables ISPs to buy covering news, music, games, sport, and Free ü ü ü 29.9 Neuf ü ü 29.9 end-to-end DSL access from network content for ethnic minorities. operators. ISPs adopting this model can ISP offer DSL access with minimal capital In the French market, double and triple Club ü 34.9 Internet expenditure but do not have any plays are rapidly becoming the standard possibility to differentiate their services, DSP offering and are now priced at the Incumbent Wanadoo ü 44.9 apart from lowering prices. In France and same level or even below single plays from the UK, those players post very weak gross Wanadoo (France Telecom’s ISP) and ISPs margins: between 5 and 10%. reselling FT’s wholesale DSL access (see Source: Companies’ websites; Tariffs valid on 23 June Figure 1.3). 2004. a. Calls to domestic fixed-lines b. 5Mb/s “Bitstream” sourcing is accessible to all European ISPs, except in Switzerland. It To make matters worse, both national enables Internet providers to collect traffic operators and ISPs reselling the Figure 1.4 Share of Net DSL Additions, at regional points and use their own incumbent’s products are unable to match Q2 2003—Q4 2003 network for core transport, which gives DSPs’ services. Compared to DSPs’ GE them slightly superior margins than ISPs infrastructure, incumbents’ legacy ATM Q2 2003 46% opting for the resale option. backhaul networks are less scalable and Q4 2003 costlier to run, making it difficult and 32% Whatever the sourcing model, ISPs more expensive to offer TV over DSL or reselling incumbents’ products have a 4–5Mb/s Internet access. Even ISPs using significant cost disadvantage compared to the “bitstream” sourcing model are not 17% 13% DSPs, as most of their operational able to provide very high speed Internet 6% expenditure depends on incumbents’ own access as the parameters of the service 2% costs and prices. (downstream and upstream bandwidth) a are set by incumbents. In addition, voice DSPs AOL Wanadoo Source: Goldman Sachs, “Voice over Broadband”, 29 Incumbents are also disadvantaged relative and TV over DSL require high-quality April 2004. a. In unbundled areas only. to DSPs. In their home markets, service, something that incumbents do not incumbents operate legacy ATM networks guarantee, making it almost impossible for that are expensive to run and maintain, resellers to offer reliable VoIP and TV over while most DSPs use a GE infrastructure. DSL services. GE technology enables DSPs to cut network operational costs by managing an end-to-end (QoS) while incumbents, operating both legacy ATM

4 Telecom & Media Insights Journal 2005 the way we see it

Result: Incumbents and ISPs Are customers the possibility to drop France A War between Incumbents? Losing Out Telecom’s line. Alice prices its 1Mb/s DSL Deep-pocketed incumbents pursuing a Unsurprisingly, with these advantages access at €10.48 a month when customers DSP strategy outside of their home markets are DSPs are rapidly gaining market share in choose packages that include the basic likely to be successful. They can absorb France at the expense of both incumbents land-line subscription. In this package, initial losses and also enjoy a cost and and ISPs reselling incumbents’ products customers also benefit from cheap operational advantage over non-incumbent (see Figure 1.4). voice tariffs. rivals, as they benefit from scale and expertise in their processes and technologies. The development of DSPs in the market This suggests that incumbents, such as represents an increasing threat for Eircom and BT who rely on voice for In developing European DSP strategies, incumbents’ voice traffic and access respectively 73% and 44% of their incumbents will force other incumbents revenues. Voice, which has been at the revenues,5 are the most likely to suffer into a battle for their core business. In the core of traditional operators’ business from the rise of DSPs. next few years, the European DSL market models for as long as they have existed, could become a battleground for large becomes just another application when it Incumbents Are Adopting the DSP incumbent operators fighting to protect is a data service over DSL broadband Model their home market while attacking other technology and thus can be offered at very With their voice businesses in decline and national operators’ geographies to increase attractive prices. In France, most DSPs DSL revenues under pressure in their home their revenues. now include free unlimited calls to market, incumbents too are exploring the domestic fixed lines in their packages and DSP model in new geographies. France Telecom and Telecom Italia have this is likely to be the model that most already started, but Deutsche Telekom DSPs will adopt in Europe. France Telecom (FT), one of the (DT) and British Telecom’s future strategies incumbents that has suffered most from in Europe are uncertain. FT and DT The increasing popularity of full the arrival of DSPs on its home turf, is recently signed a co-operation agreement unbundling among DSPs is also likely to developing an aggressive European DSP to carry out joint R&D initiatives, so it is put incumbents’ voice access revenues strategy. Wanadoo, FT’s broadband arm, not clear whether DT would launch a under pressure. Indeed, full unbundling recently announced that it planned to direct attack against France Telecom on its enables DSPs to supply both DSL increase its ADSL market share to 20% in home turf. However, DT might want to connection and PSTN voice, which means Spain, UK, the Netherlands, Belgium, and leverage T-Mobile’s strong customer base they can collect the monthly subscription Switzerland, mostly by unbundling the in the UK to enter the emerging British fee that incumbents normally receive. local loop.6 DSP market. In Italy, most DSPs have chosen the full unbundling option, while in In Spain Wanadoo aims to cover 30 to Challenges Lying Ahead for DSPs France players such as Alice (a 40% of the population by the end of 2004 In order to develop a workable DSP subsidiary of Telecom via local loop unbundling. It will provide business model, there are many challenges Italia) and Neuf VoIP services and TV over DSL, leveraging that incumbents and ISPs need to tackle. Telecom are now a partnership with Spanish public offering broadcaster TVE. And in the UK, First, DSPs will need to find the necessary Wanadoo intends to offer voice over IP funds to invest in the unbundling of the and then video on demand through its local loop: between €150m and €300m to new gateway, called Livebox, next year. cover 60 to 80% of residential customers, according to the country’s population Likewise, last year Telecom Italia density. In France, Neuf Telecom’s announced an investment of around management estimates its total investment €250m in France to set up DSP operations,7 in local-loop unbundling to be €300m by and recently the company acquired end of 2004 to cover 75% of the German broadband provider Hansenet. population. Cegetel spent €150m on unbundling in 2003 in order to cover It is very likely that more incumbents will around 60% of households and 75% of follow the same path to benefit from DSL business customers. opportunities in new geographies and try to offset the losses they are likely to face in While it represents only 5 to 10% of their home markets. incumbents’ yearly fixed-line capex,

5 Goldman Sachs, “Voice over Broadband”, 29 April 2004. 6 Screen Digest, Newsletter, June 2004. 7 Enders Analysis, “Local Loop Unbundling in France”, November 2003.

The Changing Face of DSL Provision in Western Europe 5 €150m is a very significant investment for Conclusions In the next few years, the ISPs with revenues of less than €1bn and The arrival of DSPs in Europe will likely who typically spend €50m–100m on lead to a significant shake-out of the DSL European DSL market capex in total. Those ISPs will need to find market over the next 3 years. It is likely could become a ways to participate in the DSP world that only three or four players will survive battleground for large without having to invest large sums of in each country. cash; one solution could be to partner incumbent operators with DSPs that have unbundled the local Only a few ISPs will have enough financial fighting to protect their loop and offer wholesale services. muscle to convert into DSPs and compete home market while on a national scale. Smaller ISPs will most Second, DSPs wishing to offer TV over probably be forced out of the market as attacking other national DSL will have to strike deals with content they will not be able to compete on prices operators’ geographies to providers. This might prove difficult in and services. increase their revenues. countries where the largest content providers are also dominant broadcasters. Incumbents pursuing a DSP strategy will DSPs in the UK, for example, will have to play strong away from home. They benefit negotiate rights with Sky and get content from the deeper financial resources of at an attractive rate-something cable their parent companies, and because their operators have been negotiating for years scale may be more attractive for content without any significant success. It is partners. They are also more likely to unclear whether the UK regulator Ofcom survive the inevitable shakeouts that may will intervene in this new TV over DSL swallow their competitors. market. In France, DSPs also face significant difficulties: Free did not On their home turf, incumbents are likely manage to strike a deal with TF1, the to continue to lose market share. They will largest free-to-air broadcaster, and thus suffer from the competition of foreign does not offer the channel in its package. incumbents and large local DSPs with significant cost advantages. Third, DSPs will have to deal with a different regulatory environment in each country. French DSPs have benefited from very attractive local-loop unbundling prices, 30–60% cheaper than in the UK,8 for example, which partially explains their rapid success. In Italy, it is no surprise that 99% of unbundled lines are fully unbundled, given that prices for this option are the lowest in Europe.

Before launching operations, DSPs need to make sure that the economics look attractive and that the regulatory environment is conducive to their development. They will also have to put strong pressure on regulators to be able to strike equitable deals with content providers.

8 57% difference for shared local-loop unbundling (LLU) and 31% for full LLU before BT’s price cut announcement in June 2004.

6 Telecom & Media Insights Journal 2005 the way we see it

2 Home Gateways: A Business Imperative in a Box First published: June 2005

Objective of Study Home Gateways: Now a Reality in Moreover, telecom operators are not the Europe and Asia only players to be active in this emerging For years, realizing the “connected” home market. Consumer electronics companies, concept has been an important objective such as Sony, LG and Samsung are for telecom and media players. The manufacturing home gateways and selling The home gateway is the latest device that promises to realize the dream of a fully connected home was envisioned to link all them directly to consumers, competing connected home. We explored the home telecom and multimedia devices that head-on with network operators and ISPs. gateways market, assessing its drivers and existed in the home and connect them to Software/PC manufacturers are also the options for operators. external networks via high-speed Internet. entering the home gateways space.

Today, the connected home is getting Should operators launch home gateways, closer to reality. Over the past few months, and if so, what are the optimal strategies numerous operators, such as France they should pursue? In this report, Telecom and Korea Telecom, have launched Capgemini’s TME Strategy Lab explores home gateways that propose to link answers to these questions and investigates telecom and some multimedia devices. And the likely challenges that operators indeed, all five of the major DSL operators1 launching home gateways will face. in France now offer home gateways. What is a Home Gateway? The home gateway is a “box”, connected to a cable or telephone network, that Figure 2.1 The Home Gateway supports VoIP and Broadband Internet (double-play) or VoIP, Broadband Internet and TV services (triple-play), as Figure 2.1 shows. Some home gateways also enable other advanced services such as home networking and monitoring, i.e. going

s further into the “connected home” concept. e s i m e

r There are two major types of home

P Wireline or wireless

r connection gateways: “integrated” home gateways or e Wired

m “two terminal” gateways. Integrated

o connection t

s () gateways include a TV set-top box, while u

C for “two terminal” gateways, the TV set- HomeHome Gateway Gateway top box is a separate device. Typically, an integrated gateway costs around €150 to produce vs. around €100 for a “two Telephone/Cable terminal” gateway.2 However, costs are Socket k

r expected to decline rapidly from €150 to o

w €80 for an integrated box as manufacturers t e

N generate economies of scale. ’ ’ Broadband VoIP Platform TV services s

r Internet Platform platform o t

a Home Gateway Launches r e Local loop unbundlers were the first to p

O commercialize home gateways, with

1 Free, Tiscali, Wanadoo, Neuf Telecom and Cegetel. 2 CDC IXIS Securities, “Iliad”, July 2004 and Capgemini analysis.

Home Gateways: A Business Imperative in a Box 7 The success story of Free triggered fellow Figure 2.2 Timeline of Key Home Gateway Launches local loop unbundlers Tiscali, Neuf Telecom and Cegetel to develop similar plans in France. Wanadoo, France Telecom’s Internet division, also launched 2001 2H 2002 1H 2004 2H 2004 1H 2005 its home gateway, the Livebox, in France and the UK last summer, followed by Spain and the Netherlands in October 2004. Wanadoo experienced significant FastWeb Free Wanadoo KT Home Home Freebox Livebox Gateway demand for its Livebox, shipping 194,000 Access (France) (France, (Korea) terminals in France in Q4 2004, compared Gateway UK, Spain, (Italy) NL) to 40,000 in the previous quarter.

Other incumbents are likely to follow Yahoo! BB Trio Tiscali Triway Neuf Telecom Cegetel Box Wanadoo’s example and launch home (Japan) (France) N9ufbox (France) (France) gateways to pre-empt or respond to the rising penetration of local loop unbundlers. In March 2005, nine large incumbents3 created the Home Gateway Figure 2.3 Services Offered by Home Gateway Players Initiative to discuss standards and technical issues. It is very likely that some of these players will introduce home Internet Communication TV Services WiFi Home Services Services Capa- gateways in the near future. Operator Gateway TV HDTVd PVRd VoDd ADSL2 PSTN VoIP Access Telephony bility

Wanadoo Livebox ?üb, c ?ü b, c ?ü ?ü ?ü ?ü ?üa ?üa (France) Services Enabled by the Home Gateway

Free Home gateways enable operators to offer a Freebox ?ü Trial ?üa ?ü ?ü ?ü ?ü ?üa (France) wide range of Internet, voice and TV Korea Telecom Samsung ?ü SMT- ?üa ?ü ?ü n/a ?ü ?üc ?ü services as Figure 2.3 shows. Most newer (Korea) 7000S (DTH + IPTV)d

Home gateways are also compatible with Wi-Fi, FastWeb Access ?üb ?ü ?ü ?ü ?ü ?ü ?üa (Italy) Gateway which enable operators to provide wireless Tiscali ?üb, c Triway ?üc ?ü ?ü ?ü ?ü ?üa broadband and shared Internet connections. (France) (DTT + IPTV)d One of the most advanced gateways Neuf Telecom N9ufbox ?üb ?ü ?ü ?ü ?ü ?üa (France) available in the market is the one

Yahoo BB Trio ?üb ?ü ?ü ?ü ?ü a launched by Korea Telecom (KT) in June (Japan) 2004. The gateway has a flexible network interface, supporting both satellite TV and Source: Operators’ websites. Note: a. Requires physical add-on. b. TV only enabled through separate set-top-box. c. Service to be launched in 2005. d. HDTV: High Definition TV; PVR: Personal Video Recorder IPTV, and has numerous innovative service features. For example, KT’s gateway FastWeb in Italy and Free in France enables customers to send SMS from their launching in 2001 and 2002 respectively. TV set to mobile phones as well as view The home gateway enabled unbundlers, images of their household through a such as Free and Fastweb to be the first to camera. KT’s marketing plan shows the offer double and triple-play services in range of potential services operators can their respective markets. offer via a home gateway. In 2005, KT’s home gateway will enable the remote As a result of this double/triple-play control of household features, like door strategy and through very attractive DSL locks, lighting and heating, through access prices, local loop unbundlers mobile handsets. In addition, the operator managed to capture a significant share in plans to integrate video calling services the market. Free in France, for example, through the home gateway, where consumers succeeded in achieving 17% market share can view the other party on TV whilst in the residential DSL sector at the end of talking on the phone. 2004, with more than 50% of their subscribers having installed a home gateway.

3 Belgacom, BT, Deutsche Telekom, France Telecom, KPN, TeliaSonera, NTT, Telefonica and Telecom Italia.

8 Telecom & Media Insights Journal 2005 the way we see it

Similarly other players, such as Wanadoo, rate is forecasted to fall by half, from 40% 2004. In Italy, FastWeb has seen its plan to launch photo and music in 2004 to 19% by 2006. And it might fall annualized video services Average Revenue management services as well as access further if prices continue to decline. In the per User (ARPU) increase from €21 in Q2 management, where Internet access as Netherlands and France, broadband prices 2003 to €102 in Q1 2004, a steep increase well as IPTV can be restricted with regards already declined sharply by 54% and 50% of almost 400%. The ARPU of its basic to time and content. respectively in 2003. telecoms services, on the other hand, has only registered a growth rate of around The increasing number of services that With the slow down in broadband access 1.5% over the same period, to reach €806. operators are offering through home revenue growth, operators are searching gateways will likely make these intelligent for new sources of revenue. This is where Decrease Churn boxes a critical part of households’ equipment the home gateway comes into play. By Characteristically for any maturing, in the next few years. And increasing enabling services such as VoIP, IPTV and competitive market, DSL churn has also customers’ stickiness as well as getting an home security, home gateways will help become a major source of concern for increasing share of customers’ wallets are operators broaden their service portfolio operators. For example, in Q3 2004, precisely what operators aim to achieve. and achieve their revenue growth objectives. Wanadoo’s churn increased to 22% compared to 10% in 2002. Rationale for Launching Home Moreover, home gateways are designed to Gateways simplify the upselling of new services to To reduce churn, operators aim to By launching home gateways, operators customers. To activate these new services, transform the home gateway into an can address two key objectives: increase customers need make no additional indispensable piece of equipment for the upselling and decrease churn. investments because the necessary home. By enabling a wide range of hardware is already in the home. The services including double or triple play, Increase Upselling gateway communicates remotely with a home gateways will become a core Broadband access was network operators’ central server to upgrade its , element among household appliances. growth engine in 2004, accounting for install new services, fix program errors, There are some signs that this strategy is 34% of revenue growth for British and monitor and perform maintenance. starting to work: in France, for example, Telecom in H1 2004 and 13% of France This remote upgrade process is undertaken Free enjoyed about 30–50% lower churn Telecom’s revenue growth during 2004. by the operator and customers only need rates than players who had not deployed However, increasing broadband market to acknowledge service activation. home gateways. maturity and sharply declining prices have caused this growth engine to slow down. Operators are already experiencing some Innovative services such as home success with their home gateway strategy. automation or the management of As Figure 2.4 highlights, the worldwide In France, 75% of Wanadoo’s Livebox multimedia content like photos, music broadband access revenue YOY growth customers took up the VoIP service in Q3 and videos will also increase the perceived value of the fixed line, making home gateways a valuable defensive tool to help limit fixed-mobile substitution. Figure 2.4 Global Broadband Subscribers (m) & Revenue Growth (%) The proprietary nature of the box 300 80% contributes to operators’ retention efforts.

Subscriptions (millions) 260 As no international standards have been 70% YoY Revenue Growth (%) agreed, home gateways only work with 250 234 services launched by the same operator, 60% 203 which makes switching to another operator 200 50% more difficult because a new home 170 gateway has to be ordered and set up. 150 40% 135 Home gateways also enable operators to 99 30% 100 have a physical representation of their service offering in the home as most of the 20% boxes are branded. Tied up to that is the 50 10% design of the gateway that may play a role in attracting customers and increasing 0 0% loyalty. Some home gateways come in 2003 2004 2005 2006 2007 2008 attractive, futuristic designs, further Source: IDC, “Worldwide Broadband Access Services 2004-2008 Forecast Update”, July 2004

Home Gateways: A Business Imperative in a Box 9 enhancing their differentiation in the Long-term planning will help operators strategy. It makes upselling TV services market. This increasing visibility of avoid costly hardware replacement and much easier as it does not require the operators’ services might, in turn, complex migration issues. Organizationally, customer to purchase or rent any positively impact customers’ brand we recommend operators set up a additional hardware as the home gateway awareness and loyalty. centralized planning team to determine can be upgraded remotely and the long-term needs and resource automatically via middleware. Most Given the significant benefits, we believe allocation issues across the various importantly for operators, a one-box that operators should launch home business and product divisions. This is approach reduces the cost and complexity gateways. Incumbents in particular can especially true for operators active in of the logistics and distribution process. pre-empt the arrival of new entrants several markets or countries with inherently and/or respond to unbundlers’ increasing different local regulatory requirements and Under certain conditions, however, some market share through this strategy. market conditions, and operators wishing operators may prefer to offer a “two- to launch fixed-mobile services. terminal” home gateway. First, if they are What Gateway Strategies Should not ready to launch a one-box gateway Operators Follow? Home gateways should at a minimum and are under strong pressure to To remain competitive in the market, enable triple-play services to be an commercialize a box as soon as possible to providing customers with a home gateway effective revenue lever. As already avoid further market share loss to is becoming an imperative for many highlighted, Korea Telecom’s services unbundlers. Second, if they do not have operators. However, launching a gateway roadmap is a good illustration of the type enough capex headroom to afford the 50% is a complex project requiring significant of services operators can consider, increase in production costs that the investment and involving multiple stretching from telephony and television integrated gateway typically requires. functions across the organization as well services, through remote appliance control, as external providers, such as to innovative medical care and monitoring. Middleware Strategy manufacturers or middleware suppliers. Middleware enables the different internal Above all, it will require a clear strategy Product Design components of the home gateway to and a long-term roadmap of services. There are two important issues to consider communicate with each other. It also when designing the home gateway: how to enables communication between the home When launching home gateways, make it look aesthetically pleasing and gateway and the operator’s service operators will have to make four key whether it should be designed as an platforms. Operators can choose to decisions. Operators need to determine integrated one-piece or a two-terminal develop their middleware either externally the range of services the gateway will home gateway. through outsourcing or internally through enable, choose the type of home gateway product development. they want to launch, develop a The first issue is straightforward. Design middleware strategy and define the has become increasingly important in the We believe that operators should develop distribution strategy. world of technology products, as evident their middleware internally. Ownership of in the success of Apple’s iPod. The design the middleware is critical in creating a Services Roadmap of the home gateway should reflect its unique set of services. Internal Operators need to develop a long-term multiple functionality and appeal to middleware development will also enable services roadmap to have clear visibility of customers. We believe that home gateways greater flexibility in the prioritization and new services over the next 3–5 years—the should not have the same design as allocation of resources, leading to better expected lifetime of a home gateway. traditional single-functionality DSL modems. control and influence over the strategic timing of product launches. Some Sleek, attractive boxes such as Wanadoo’s operators are already looking towards Livebox mean the home gateway is more acquisitions or joint ventures to have Figure 2.5 Wanadoo’s “Livebox Fashion” likely to be a talking point in the home, middleware capabilities. For example, US- increasing its chances of becoming a must- based SBC recently formed a joint-venture have item. Wanadoo have gone so far as to with middleware company 2Wire, while introduce “Livebox Fashion” (see Figure Comcast acquired middleware company 2.5)—a limited series of Livebox terminals Liberate, in early 2005. We anticipate that in pink aimed at “introducing some fun in an increasing number of operators will the home.” build middleware capabilities either organically or through acquisitions. The second issue is more difficult and depends on operator-specific constraints. On the other hand, a lack of in-house We consider offering an integrated, one- middleware expertise or funding in many terminal home gateway as the optimal operators will drive the middleware

10 Telecom & Media Insights Journal 2005 the way we see it

outsourcing market. Although operators operators, especially new entrants, who do in churn in the medium term as existing that outsource enjoy the flexibility of not have a large, established base of customers face difficulties in accessing being able to select the best resources in customers, or deep pocketed incumbents. new services without the home gateway. the market, they are fully dependent on these middleware firms in terms of However, getting the strategy right is not Before launching gateways, operators need product launch timings and middleware all that needs to be in place. Operators to anticipate demand in line with market upgrades. In addition, since all operators need to anticipate implementation reality. They also have to ensure that their enjoy equal access to middleware firms, it challenges that they will likely face. suppliers have enough production implies that similar middleware will be capacity to meet the demand and can sold to several operators, commoditizing Challenges Facing Operators in ramp up production rapidly. its functionality. Launching Home Gateways Home gateways present significant Financial constraints and production Distribution Strategy opportunities for operators to rejuvenate capacity limits are common root causes of Developing a distribution strategy involves revenues and achieve growth through new provisioning problems. Operators with assessing both external market conditions services. But jumping onto the bandwagon such constraints face a critical challenge of as well as operator-specific factors. These without consideration for implementation managing the existing customer base, include closely examining competitor challenges could be a recipe for disaster since marginalizing existing customers in activities, market maturity of technology and market embarrassment. We see new product launches will inevitably advancements, and operators’ financial challenges in three areas in particular that destroy customer loyalty. and resource capacity. players must be wary of and plan for: provisioning, service activation and Service Activation Challenges Operators typically have three choices in customer service. Home Gateways’ identification tagging terms of distribution: system adds an additional, undesirable Provisioning Issues variable in the customer experience chain ■ Distribute to new customers only. Provisioning is one of the key challenges for some operators. Most home gateways 4 ■ Distribute to all new customers and that operators face when launching home have to be tagged with a unique MAC selected existing customers. gateways. Some French operators faced address in order to coordinate the billing, severe provisioning delays driven in part tracking and disconnection processes ■ Distribute to all new and existing by home gateway manufacturers who along the supply chain. customers. could not ramp up production quickly enough to meet the surge in demand. Activation of some home gateways in We believe the second option is the best Because of this, some customers in France France required customers to key in two strategy in most markets. Selective had to wait up to 2 months to get their codes, including the MAC address, of up distribution is key if an operator has a home gateways, compared to an official to 12 digits each, without which the large established base of existing delivery time of 3 to 4 days. One of the services would not work. Since service customers and does not have the financial largest French operators received between activation was manual, many customers capacity to provide every customer with a 2,000 and 3,000 orders a day, a significant mistyped the codes and chalked up PSTN home gateway, or if certain customer discrepancy from its internal forecast of telephony bills of as much as €400 under segments are unlikely to take up new 1,000 daily orders. the mistaken assumption that they were services. Selective distribution also makes making VoIP calls through the home sense if new subscribers generate most of Free, one of the largest unbundlers in gateway. Customer confusion and the growth in the DSL access market. France, is also facing provisioning issues. technical problems led in turn to a When the market matures and home Free chose to focus on new customers in significant increase in customer service calls. gateways become standard offerings, order to limit production costs-probably operators will have to change their because of financial constraints. It capped By contrast, an operator in the strategy and distribute gateways to all distribution to a maximum of 5,000 Netherlands adopted a different approach. customers to avoid an increase in churn. Freebox terminals per month for existing It pre-registered the home gateway codes customers, making it very difficult for before shipping them out, making service Restricting distribution to only new existing customers to get a Freebox and activation automatic for the customer. customers can prove to be a risky strategy. benefit from Free’s triple-play services. At Judging from the lower number of Subjected to “distribution discrimination”, current replacement levels, providing the customer complaints received at its Dutch frustrated existing customers may churn current customer base with a terminal call centers, the result was greater to competitors. Distributing to all would take around 7 years. A consequence customer satisfaction. customers makes sense for some of this strategy is likely to be an increase

4 MAC = Media Access Control

Home Gateways: A Business Imperative in a Box 11 To avoid the issues that some French understanding the full implications. As a recognize that home gateways will players faced, we believe that operators result, many players have struggled to dramatically impact their organizations, should make sure that critical service deliver home gateway services as promised. from provisioning and logistics to activation processes are automated. customer services and billing. Having the Conclusion right strategy and supporting processes in Customer Service Challenges Home gateways have proven to be a place will be critical in making the launch Customer services represent another key strategic tool for local loop unbundlers to of a home gateway successful. challenge for operators. In France, for rapidly gain market share in Europe and example, players faced a significant surge Japan. As the broadband access market is in the number of calls received following maturing and prices rapidly declining, we the launch of home gateways. It appears believe home gateways will be that most operators had not anticipated instrumental in helping incumbents offer this increase in calls, which explains why new services and increase revenues. some customers had to wait up to 30 Gateways will also enable incumbents to minutes in call queues vs. an industry respond to the rise of local loop average of around 5 minutes before the unbundlers and reduce churn. launch of gateways. In addition, the 1- to 2-day training that most operators Operators should also not wait too long to provided to Customer Service launch home gateways. Today, gateways Representatives (CSRs) proved insufficient, give most operators a competitive as customer service teams were unable to advantage, but in many maturing DSL answer many technical questions. Long markets, they are becoming a competitive call queues and CSRs’ difficulties to necessity. In France, for example, all large answer questions saw some customers DSL players have launched or are paying bills of up to €50 for customer planning to launch a home gateway. We service calls. expect this competitive environment will be replicated in many other European When launching home gateways, countries and that home gateways will operators will have to train CSRs on the likely become mainstream across Europe new services and functionalities enabled in the next couple of years. In 2006/2007, by the home gateway. This training should we anticipate that 70–80% of new DSL encompass a review of the most likely subscribers in France will opt for or be technical issues that customers will face. given a home gateway. In countries such To address complex questions, we believe as the UK, Spain and the Netherlands, that operators should consider creating a Wanadoo’s rollout of the Livebox will dedicated technical hot-line. Operators likely lead other players, including will also have to revise the size of their call incumbents, to follow suit, which will centers according to the anticipated drive mass market availability of gateways. demand for home gateways and the fact The decreasing cost of the boxes will also that most new customers will call the help encourage operators to jump onto the desk in the first 3 months. Free, for bandwagon. example, was forced to increase the size of its customer service team by 40% in order Before launch, operators will have to make to cope with Freebox-related calls. To key decisions on the design and reduce the number of potential calls, distribution of the gateways as well as the operators also need to make sure that the range of services they will offer. We home gateway user manual is written in recommend operators create one-box non-technical language understandable to terminals enabling triple-play services, any customer. develop their middleware internally, and distribute gateways to all new and selected To address the above challenges and existing customers. Operators will also anticipate other potential issues, operators need to carefully assess how gateways will need to assess the impacts of launching a affect their internal processes. Evaluating home gateway on their operations. the impact on customer services is critical However, in the rush to gain market share to avoid the difficulties that French most operators did not spend enough time operators faced. Operators need to

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3 Mobile VoIP: Knocking at the Gates? First published: March 2005

Objective of the study Over the past few years Voice over IP With the recent developments in Wi-Fi (VoIP) has emerged from its PC-to-PC enablement of mobile handsets and the based roots beset with static and glitches, possibility of seamless roaming across to become a credible threat to traditional cellular and Wi-Fi networks, voice over The prospect of using VoIP for calls over telephony revenues. Wi-Fi networks (VoWi-Fi) is also covered mobile and other wireless data networks can in our discussion as a possible threat to hold significant implications for mobile In Europe alone, VoIP is expected to mobile revenues. operators’ revenues. Capgemini’s TME contribute over 13% to telephony Strategy Lab analyzed the latest market revenues by 2008, and fixed-line Key requirements for VoIP developments and assessed the magnitude of incumbents could potentially lose over Fixed-line VoIP has successfully evolved the potential impact. €6.4 billion of revenues over the period from a “best-effort” quality service 2004–20081. In response, fixed- line accessible through computer software to operators have realized that they can no one that is no longer tied to a PC and is longer ignore this trend and have started readily available and affordable for offering VoIP bundled with their customers with broadband access. broadband services. Acceptable quality, ease of use, and cost So far this growth has been concentrated on advantages are the key factors working in VoIP calling over wired links; the question favor of fixed-line VoIP and are also pre- now is whether this trend will be repeated requisites for the success of mobile VoIP. in the wireless world. In this report, Capgemini’s TME Strategy Lab explores Acceptable voice quality the prospects of VoIP over wireless networks. The key measure for quality of service We consider the feasibility of carrying a (QoS) is latency, which accounts for the voice call over IP-based wireless networks delay between the dispatch and receipt at and the attractiveness of mobile VoIP the destination of voice packets. For services to consumers, to assess the threat mobile VoIP to be of the same quality as a it poses to traditional mobile voice revenues. standard mobile call, latency should be no greater than 150 milliseconds. What is mobile VoIP? Mobile VoIP refers to a voice call that is In a standard circuit-switched mobile call, transported as IP packets over both the all packets use a single path and are radio and core network of the service transported to the receiver in an orderly provider. The key difference from a fashion. With , delays can traditional circuit-switched mobile voice ensue as routers determine a path for each call is the use of IP protocol and the packet, such that they may reach the packet switched data network of the destination at different times and would mobile operators. have to be re-assembled on arrival. The network, therefore, would need to be Additionally, to qualify as mobile VoIP, the designed to identify and prioritize voice call must be made using a wireless handset packets over other applications that are and should remain connected even while less latency-sensitive. the user is in motion. Calls using data devices such as PDAs and laptops are not Compelling cost advantages considered in this discussion. VoIP over wireline has gained in

1 Analysys, “Voice Communications: From Public Service to Private Application”, November 2004.

Mobile VoIP: Knocking at the Gates? 13 popularity due to the significant cost Evaluating VoIP over cellular against Even after the deployment of 3G, data saving it brings to users. Customers with key requirements access tariffs remain expensive, such that broadband Internet connections can make As discussed in the previous section, consumers are unlikely to see any benefit unlimited calls within the country and acceptable quality, cost savings and a in switching from standard mobile international calls at a fraction of the positive user experience are critical to the telephony to VoIP. regular cost. Customers in the US, for success of VoIP. We take each factor in example, have indicated savings of more turn and assess how well cellular networks We estimate that a 5-minute VoIP call than 50% on their monthly bill through address it. utilizes approximately 1MB of data. For the use of VoIP services from providers 300 minutes of calling, equivalent to like .2 For VoIP to be attractive to Voice quality 60MB, a typical plan will charge £23.50 mobile users, it must similarly offer The quality of VoIP calls over a cellular for the data traffic and an additional £10 significant cost savings. The opportunity network is constrained by the availability per month for subscription to a VoIP for cost savings presented by VoIP could of adequate bandwidth, the network service. Compare this to the standard 300 be even greater given the more expensive processing time, and the ability to minutes at around £30, as offered by Orange rates and exorbitant roaming charges for differentiate and prioritize voice traffic UK for example, and the prospect of any mobile calls. over other data. cost saving stands essentially wiped out.

Ease of use Current 3G networks have higher data Figure 3.1 indicates the equivalent cost The user experience of making a VoIP call access download speeds of 384Kbps, but per minute of making a VoIP call for entry over wireline networks today is no uplink speed remains constrained at level to high-end data packages compared different from a traditional call made over 64Kbps, which is likely to be insufficient as with the cost of making a standard mobile PSTN. A simple VoIP adaptor allows more users log on within the same cell site. call (using Orange UK’s £30 monthly voice existing PSTN telephone sets to be used in plan with 300 inclusive minutes). exactly the same way as before. Moreover, while the air interface is optimized to correct errors for standard While it can be argued that the higher end Similarly in the mobile world, it is mobile calls, it is not designed to account plans are more cost effective on per MB imperative for a VoIP service over wireless for packet loss that is possible on data pricing, they also come at a high monthly to be intuitive and as simple as dialing a connections. Ideally, the network should cost that renders them unaffordable for regular mobile call. Any complications be able to detect corrupt packets and most consumers. around requirements to download retransmit quickly, but retransmission in software, set up a data session, and follow the current 3G deployments takes Moreover, standard voice tariffs are on the a multitude of other steps will only drive considerable time leading to latency. decline as operators are launching a slew interested users away and deter of promotions and discounts, which from widespread adoption. Combine these limitations with restricted a consumer standpoint will further negate radio channel availability during peak the case for using VoIP for calls over In the following sections, we examine how traffic and an error-prone radio link, and mobile networks. VoIP over wireless networks measures up the need for mechanisms ensuring against these three critical requirements of identification and prioritization of VoIP Ease of use providing adequate quality, cost saving, traffic over other data becomes self Making a VoIP call over mobile networks and ease of use. We assess the prospects of evident. However, such means are not yet does not score high on the ease of use mobile VoIP over cellular data as well as in place, implying that VoIP will be factor either. First, users need to procure a other wireless networks-including Wi-Fi. undifferentiated from other data traffic- device capable of running VoIP client likely resulting in quality degradation. software, which narrows the market to Assessment of VoIP over Cellular high-end smart phones running on a Data Networks In concert, the various limitations of Pocket-PC/Win-CE/Palm operating Some operators have already been existing cellular networks can result in system. Next, downloading and installing backhauling voice as IP packets on their overall latency to be over 400msec— VoIP software on the phone requires some core networks and realizing the substantially above the 150msec threshold technical know-how, which is a potential corresponding benefits of scalability and for acceptable voice quality. inhibitor for adoption. Once the software flexibility. This section explores the is installed, to make a call users will need prospect of using IP for end-to-end Cost advantage to initiate an Internet data session that transport of voice packets over cellular In addition to the QoS concerns, the typically takes a few seconds. After the networks-encompassing the current 3G economics of switching to VoIP over data call has been established, users will deployments as well as future technologies. cellular data network are not so clear cut. have to access the VoIP client to dial the

2 Compared to the cost of unlimited domestic calling packages offered by US fixed line service providers.

14 Telecom & Media Insights Journal 2005 the way we see it

call and then wait again for the call to go Figure 3.1 Cost of VoIP Call Over Various Data Packages Example: Orange UK (1p/minute) through. Currently, it is also not possible to integrate various handset related features and facilities such as phonebook and 20 direct dial from contact list to VoIP calling.

This drawn-out process that a customer

13 will have to go through to make a VoIP call compares unfavorably with the 10 convenience of quickly browsing through the stored contacts in the phone book of an average phone and making a regular mobile call. 2 Given these challenges of inadequate quality, the non-existent cost savings, and Monthly Data Plan the rather cumbersome user experience, Charges £88 £41 £16 the case for mobile VoIP over today’s Inclusive MBs / 1000 MB 80MB 25MB mobile networks is not very compelling. Equivalent VoIP 400 mins Minutes 5,000 mins 125 mins VoIP Subscription Charges £10 Future of VoIP with 3G Evolution Total Monthly The evolution path of 3G networks Charges £98 £51 £26 technology, however, holds some promise for VoIP, but not in the near term. HSDPA3, the next step in the evolution of WCDMA4, promises greater downlink

Figure 3.2 QoS–Related Issues for Mobile VoIP bandwidth, but the problematic uplink will remain unaddressed. The subsequent release of HSUPA will enable higher

Factors Issues with Current 3G Anticipated Evolution average uplink speeds of 600Kbps,

Impacting QoS Deployments making acceptable quality VoIP over • Currently 3G supports average • cellular data networks a possibility. In the HSDPA, the next evolution of throughput of 200–300Kbps, but WCDMA, will support up to meantime, specifications are also being only 4–5 users/sector are 1Mbps average throughput, supported simultaneously and however uplink will remain laid down for the identification and performance deteriorates with more constrained prioritization of different types of data Bandwidth users Availability • Evolution to HSUPA will enable traffic to enable better QoS support. • Voice requires both sufficient higher average uplink speeds of bandwidth availability for both 600 Kbps, which will improve uplink and downlink, but uplink is VoIP experience currently constrained to 64Kbps However, large-scale commercial availability of these upgrades is still a few • • The network should be able to In HSDPA, intelligence lies years in the future. The HSDPA network detect corrupt data and retransmit closer to air interface and a TTI Network upgrade is not expected before 2006 and quickly, but current WCDMA of 2ms ensures that the radio Processing networks can take 30ms or longer link quality is monitored more the HSUPA upgrades to WCDMA Time to receive the resent data packet 5 frequently reducing delay in retransmission of data packets networks are not expected to start before 2007. In addition to network upgrades, • • QoS-aware radio networks are Current 3G networks do not have availability of affordable consumer Traffic any mechanism for prioritizing VoIP part of HSDPA release, which will enable prioritization of VoIP handsets using these technologies is also Prioritization traffic in the network traffic for improved quality an issue.

Currently, the total latency is up to Upcoming developments promise 400 msec, compared to the desirable to reduce the network latency to Figure 3.2 highlights the key QoS-related level of <150ms less than 100 msec issues for mobile VoIP and the anticipated developments that may help address them.

3 HSDPA: High Speed Downlink Packet Access. 4 HSUPA: High Speed Uplink Packet Access, It is the next upgrade to HSDPA. 5 WCDMA has a Transmission Time Interval (TTI) of 10ms, which means that it can take 30ms or longer to receive the resent data packet. Mobile VoIP: Knocking at the Gates? 15 Potential impact of VoIP over cellular vendors have also launched or are close to are made from other indoor locations. The networks launching phones with Wi-Fi functionality. use of VoIP over Wi-Fi at home and the VoIP over cellular data networks today While the models available in the market office and some of the other indoor faces significant barriers to mass consumer currently are expensive and targeted more locations could cut the consumer charges adoption driven by inadequate quality, to the corporate market, the trend to for these calls by 50% or more. insufficient cost saving, and an integrate Wi-Fi into more and more unconvincing user experience. Third-party handsets will continue. Our calculations show that users can save players may enter the market targeting up to 24% on their total mobile bills by early adopters with VoIP services over the Compared to cellular, VoWi-Fi enjoys switching to VoIP in locations covered by operators’ Internet data access, but mobile clear advantages of greater bandwidth Wi-Fi (after accounting for the additional operators are in a position to stifle such availability and lower costs. However, it cost of VoIP subscription). moves. For example, mobile operators can still faces certain key challenges that will prioritize their own supported services inhibit its growth prospects. To assess its The enterprise segment is likely to take and relegate the rest of the traffic to a commercial attractiveness, we evaluated the first leap. They have already started lower priority, thus forcing the latency on the performance of VoIP over Wi-Fi deploying VoIP over fixed line in their the “unauthorized” VoIP calls to climb networks on the key considerations of offices and with Wi-Fi on the priority list above permissible limits-discouraging voice quality, affordability and user of most corporates, VoWi-Fi is the next potential users. experience. logical step of migration.

The emergence of VoIP over cellular data Voice quality User experience networks as a credible alternative to The key challenge facing VoWi-Fi is the While VoWi-Fi stands up to the cost traditional mobile voice calling will have limited range of coverage of Wi-Fi savings challenge, its inherent nature of to wait for operators to roll out HSUPA, networks. Even within enterprise being a short-range technology leads to lower data access tariffs, and for low-cost deployments where multiple access points coverage limitations, spelling mass market handsets with pre-loaded can be set up to increase coverage across inconvenience for users. A VoIP call will VoIP clients to be widely available. the campus, issues of radio dead spots and drop as soon as users move out of range of quality deterioration can crop up. Some a Wi-Fi network. Moreover, making VoWi- VoIP over Other Wireless packet loss is likely as users move between Fi calls in public areas requires Technologies access points, which may not only add to subscription to the hotspot service of an The most prominent “other” wireless latency but also lead to the call being operator. Since roaming between various technology today that could encourage dropped altogether. For example, if a service providers is still in its nascent VoIP adoption is Wi-Fi. Compared to caller moves between different access stages, most users will likely not opt for a making VoIP over cellular, voice over Wi- points, most PDAs, laptops and Wi-Fi monthly subscription. Users will therefore Fi networks (VoWi-Fi) is already gathering phones will perform a network scan, need to get an hourly or pay-as-you-go momentum, aided by the declining costs which can result in latency of around 400 pass each time they access an available of equipment and the rapid growth in to 600 milliseconds. hotspot, which can be cumbersome. broadband penetration. However, complex corporate deployments Furthermore, availability-of easy-to-use We will first evaluate developments in can plan the network to ensure that the devices at an affordable price is currently VoWi-Fi and its impact on mobile connection can be maintained in most an issue. Wi-Fi–only phones cost operators’ revenues and then explore cases while moving between access points. $150–200 and are comparatively bulkier selected other wireless technologies that Enterprises can also implement and have a shorter battery life. The are appearing on the horizon. prioritization of VoIP traffic over other likelihood that a large number of users data traffic to reduce QoS issues. All in all, would carry two phones—one mobile and Assessment of VoIP over Wi-Fi it is possible to hold an acceptable quality one Wi-Fi—is rather low. networks VoIP call over Wi-Fi networks in well- VoWi-Fi has started to emerge in the planned limited area implementations. Some of these concerns will get addressed market with the launch of Wi-Fi with the arrival of dual-mode devices, phones–113,000 were sold worldwide in Cost advantage which can roam across Wi-Fi and cellular 2004. Vonage and Net2Phone, both VoIP VoWi-Fi presents a sizable cost saving networks. These devices promise seamless pure plays, are among the players to have potential for users, especially with the switching of calls from a Wi-Fi to a mobile launched Wi-Fi handsets, while Skype, trend of increasing Wi-Fi enablement of network, when the caller moves out of the another VoIP service provider in the US, is homes and offices. An analysis of mobile range of a hotspot. However, early working on having its software preloaded calls by location shows that, on average, versions of these handsets have not been on a range of Wi-Fi enabled mobile smart 21% of mobile calls originate from home able to seamlessly switch between the phones. Most major mobile device and 23% at the office, while another 30% networks and have suffered battery-life

16 Telecom & Media Insights Journal 2005 the way we see it

issues. New and improved versions are What should be of concern for mobile Airdata-Germany expected to be launched this year, but will operators is that these emerging Airdata offers TDD-CDMA-based likely be very expensive (~$500) initially. technologies can offer a high range of broadband and has rolled out a VoIP While these may find takers in the business coverage and claim to support mobility service as well. segment, we expect wide-scale adoption and QoS for applications such as VoIP, only when the prices fall significantly. thus overcoming the challenges faced by The VoIP service is available for €8 per VoIP for deployments over cellular or Wi- month; customers get free on-net and 100 minutes of domestic calls while a So in aggregate, we see the case for VoWi- Fi networks. If these technologies start comparable package (100 minutes of gaining ground and encompass city-wide Fi starting to become compelling for on-net and fixed-line calls) from T-Mobile corporate users, but is still some ways deployments, they will present a definitive away for consumers. threat to mobile operators.

VoIP over Other Broadband Wireless But to date, these technologies have not Implications for Mobile Operators Technologies gained the backing of any large operator After assessing the development of VoIP Unrelated to 3G evolution, other and are still in the trial phase. They also over various wireless technologies, we technologies that promise a wider face issues of availability of handsets on a believe that the only significant impact to coverage range and greater support for commercial scale and regulatory traditional mobile revenues in the 2–3 mobility and QoS for applications such as constraints on offering mobility under years will come from the emergence of VoIP are also emerging. The key ones fixed wireless access licenses. Though we VoIP over Wi-Fi. VoIP over cellular deserving consideration are TDD-CDMA6, do not expect these technologies to networks will continue to face QoS issues Flash-OFDM7, and WiMAX/Mobile-Fi8. become mass-market in medium term, till the rollout of HSUPA and better QoS These technologies are in fact already they do present a long-term strategic support around 2008. Meanwhile the new being trialed and deployed by competitive threat and mobile operators need to broadband wireless technologies like players to take on the fixed line incumbents carefully track their development. TDD-CDMA, Wi-Max, and Flash OFDM for city-wide fixed-wireless access. will need to combat mobility constraints Potential impact of VoIP over Wi-Fi and imposed by license conditions and also look for big operator backing to be of any PCCW in the UK, Woosh in Australia, and other wireless broadband networks significant consequence. Clix in Portugal are some examples of While other broadband wireless competitive broadband players deploying technologies are struggling to gain a TDD-CDMA. PCCW plans to offer foothold, the emergence of VoWi-Fi is the Impact of VoIP on mobile operators’ broadband wireless service over TDD- first step towards availability of mobile revenues CDMA for up to 75% of the UK VoIP. Quality issues in limited area As noted above, we consider VoWi-Fi to population within 2 years. They intend to implementations such as enterprise be the only viable threat to mobile install over 2,200 sites across the UK that deployments are addressable through operator revenues in the near-term. VoWi- can support anywhere between 7,000 to careful network design to ensure Fi will primarily emerge in the enterprise 9,000 households per site. It has also overlapping coverage and faster segment over the next 2–3 years and will announced plans to offer VoIP. hand-offs when the user is mobile gain momentum in the consumer segment between access points. The potential only post-2008. Flash-OFDM and WiMax are similarly savings can be compelling for users, being trialed by several operators for fixed especially with broadband penetration and A key constraint to consumer adoption is wireless access and backhaul applications. Wi-Fi deployment in homes, offices, and the availability of dual-mode devices. Telabria, a UK-based start-up, has started public places set to increase. While these devices are likely to be construction of a WiMax network and launched this year, the heavy price tag will expects to launch later this year. It aims to However, wide-scale adoption will await limit adoption mainly to the business user use WiMax for both backhauling traffic availability of affordable, dual-mode segment. Consumers will likely wait for and to offer commercial services to its devices, which can seamlessly switch calls mass-market availability of these phones at enterprise customers with support for between Wi-Fi and cellular networks. more affordable prices. Current forecasts VoIP from the outset. With its promised Though these devices are starting to indicate that 100 million Wi-Fi—enabled latency of <50ms, Flash-OFDM can appear, issues of battery power and mobile phones will be sold in 2008, support delay-sensitive applications such switching between the two networks are which will account for nearly 5% of the as VoIP and is being trialed by Vodafone in still to be ironed out. Most significantly, expected 2 billion mobile subscriber base. Japan, T-Mobile in Europe, and Nextel in the expensive pricing of these early By then, Wi-Fi penetration is also the US. devices will likely keep them out of mass- expected to have reached 35–40% of market segment reach. broadband homes, allowing personal users

6 TDD is part of 3GPP specification and most UMTS licensees have some TDD spectrum. It offers 600-700Kbps average speeds. 7 Proprietary technology from Flarion in the US offering end-to-end VoIP support with low latency (<50ms). 8 These are the emerging IEEE wireless WAN standards. Mobile VoIP: Knocking at the Gates? 17 to save costs by switching mobile calls Telecom launched a similar service called clarify once PCCW goes live with voice made while at home to the Wi-Fi network. Du in August 2004 that proclaims to help services. users save 20% on their mobile phone bills. We estimate that VoWi-Fi will account for Regulators are also coming under roughly 7% of mobile revenue loss by So how will/should mobile operators increasing pressure from wireline players 2008 in Western Europe. The business respond? We see two main approaches to tax VoIP on the same terms as PSTN segment will contribute to €4.5 billion of prevailing in the market. services. Wireless players can join forces mobile revenue loss while the consumer with incumbents to slow down VoIP segment will account for nearly €1.3 Defend the turf progress, if not stop it altogether. billion. Any acceleration in broadband The first level of response from mobile uptake and device availability will operators is likely to be a reduction in In addition to the blocking tactics, expedite and increase the impact on mobile tariffs to reduce the potential operators should continue to press with revenues further. arbitrage benefit from using VoWi-Fi. The value-added services—particularly aimed increased voice capacity of mobile at business users—to differentiate from the Strategic options for mobile operators networks with 3G deployment is giving less “robust” competitor propositions. Though the near-term financial impact of operators more room to maneuver voice Mobile operators are already offering VoIP over wireless networks may not be tariffs. Many operators have already facilities such as closed-user groups, significant, mobile operators cannot ignore introduced lower charges after the launch ability to share inclusive minutes, usage these developments. Three types of players of 3G networks and future upgrades to capping and many more. Moreover, are knocking on the gates to threaten HSDPA and HSUPA will make it possible services such as Virtual PBX, which mobile operator hegemony: VoIP pure to drop prices even further. enables business users to enjoy PBX-like plays, broadband players offering fixed- features on a mobile phone without wireless access, and aggressive fixed-line Operators are also likely to block investing in a PBX infrastructure, will also incumbents looking at ways to stem fixed- competitive broadband players deploying help counter the VoWi-Fi threat. to-mobile substitution. In fact, some fixed- new wireless technologies from offering line incumbents have already announced mobile VoIP. For example, cellular Expand the turf VoWi-Fi initiatives. BT’s Bluephone, for operators are lobbying against PCCW in While defensive measures can help example, will enable calls to be the UK from offering any form of operators limit the impact of VoIP in the switched to the broadband connection portability even though the technology near term (~2 years), the approach is not a through Bluetooth or Wi-Fi when supports mobility and hand offs. Mobile sustainable one. 3G evolution will at home or the office. Korea operators argue that allowing customers to undoubtedly offer more bandwidth and link to multiple base stations amounts to speed, but operators will need to be portability and breaks the license terms, realistic about their ability to effectively an issue that regulator Ofcom will have to compete with other broadband wireless technologies. As these broadband wireless options become more viable, operators must ensure that they are not left sidelined

18 Telecom & Media Insights Journal 2005 the way we see it

and unable to participate in any growth from alternative technologies in the short stemming from these alternative range, the strategy is not sustainable over technologies. the long term. The threat from wireless broadband players will grow and Most mobile operators in Europe, for operators risk being cannibalized if they example, already have some unpaired do not actively position themselves to ride TDD spectrum as part of their 3G license the crest of any potential growth wave and can evaluate the prospect of using emanating from one of the alternative TDD-CDMA to offer data access services. technologies. This will allow operators to benefit from lower costs, as they will be able to use their existing infrastructure to co-locate We believe mobile VoIP base stations and share cell site equipment, including antennae. In poses little threat to addition, as 3G technologies are optimized operators’ traditional for outdoor coverage, providing in- mobile voice business in building coverage using 3G spectrum is likely to be more expensive than using the the short term, but alternative wireless technologies like Wi-Fi operators should position or TDD-CDMA. Mobile operators can also themselves to ride the push for dual-mode devices to accelerate fixed-to-mobile substitution. As cost and crest of any potential coverage are the key concerns voiced by growth wave emanating consumers in using the mobile as the from one of the alternative main phone, mobile operators can seize the opportunity afforded by cellular/Wi-Fi technologies. integration to encourage a complete replacement of the fixed-line phone.

Conclusions In conclusion, mobile VoIP is still in its nascent stages and we consider the near- term threat to operators’ traditional mobile voice business to be minor. Over cellular networks, the VoIP proposition today is not compelling, driven by a combination of quality issues, poor user experience, and insignificant cost savings potential. VoIP over Wi-Fi networks, on the other hand, can provide acceptable voice quality with careful network design and the opportunity for significant cost saving. However, widespread adoption of VoWi-Fi will depend on the availability of affordable dual-mode cellular/Wi-Fi devices. We see VoWi-Fi starting to take a significant toll on mobile operator revenues from 2008.

In the meantime, mobile operators should not ignore the march of newer wireless technologies, which are lowering the entry barriers for fixed-line, competitive broadband, and VoIP pure plays to offer wireless VoIP. While mobile operators can defend their turf to counter the threat

Mobile VoIP: Knocking at the Gates? 19 4 Charge of the Mesh Brigade: Hype or Disruption in Progress? First published: February 2005

Objective of Study What Are Wireless Mesh Networks? Unlike in a conventional network, end Throughout its history, the user devices in a mesh network in telecommunications sector has seen new addition to sending their own data, act as technologies evolve and offer better value router or repeater, relaying signals for The latest disruptive technology to arrive in propositions to the user, replacing older other devices. The routing information of the telecoms market is the mesh network; we technologies on the way. Events like the a conventional network resides in the analyzed what makes them disruptive and telephone replacing the telegraph, wireless central switch, whereas this intelligence is assessed the likely impact on the incumbents. surpassing fixed line, and VoIP evolving to distributed among the mesh entities, replace circuit-switched technology, bear giving it a decentralized nature. This in testimony to the fact that turn allows each meshed transmitter telecommunications is a breeding ground to relay signals to several other nodes, as for “disruptive technologies.” opposed to conventional transmitter nodes, which talk to each other through Disruptive technologies, as described by the central switch. Clayton Christensen in his 1997 book The Innovator’s Dilemma, are products or Additionally, backhaul communication of processes, often with performance issues, mesh networks is also over the air that establish themselves within a less interface, requiring substantially less demanding niche segment of an existing wiring than a conventional network to market. Through performance connect the transmitter nodes back to the improvements these innovations spread central switch. into mass segments, ultimately displacing the incumbents. Mesh network architecture Vendors are offering mesh solutions under Keeping true to the historical trend, a new two basic architectures, trying to balance technology is knocking on the doors of network scalability with its throughput. the telecommunications industry: the wireless mesh network. Like many of its The network mesh creates a wireless mesh Wireless Mesh Networks predecessors, it has significant potential to only among the transmitter nodes. In such disrupt the current telecom setup. networks the client devices do not relay data for other devices. This semi-mesh, by Mesh networks are peer-to-peer In this report, Capgemini’s TME Strategy virtue of dumb user devices, restricts the communication networks that allow two user Lab analyzes what makes mesh networks number of transmitters, allowing low devices to communicate directly, instead of disruptive, exploring what impact this routing signal overheads. Most vendors being routed through a central switch. technology is likely to have on the support this architecture as their routing incumbents, and how the incumbents can algorithms are not robust enough to face up to the challenge. handle large-scale signaling overheads.

The Semi-Mesh What is a mesh network? The client mesh, on the other hand, in Wireless mesh networks are peer-to-peer addition to the transmitter nodes, enables wireless communication systems that a wireless mesh among the client devices, Most vendors are offering a semi-mesh architecture because their routing algorithms allow two user devices to communicate allowing them to relay data for other do not support the huge signaling overheads directly, instead of being routed through a devices. The true mesh allows peer-to-peer associated with a large-scale true mesh central switch. networks, improving the coverage and deployment. robustness of the network. A small A mesh network differs from a number of vendors are pushing this conventional network in many ways. architecture, backed by proprietary

20 Telecom & Media Insights Journal 2005 the way we see it

High Speeds: Users get download speeds of Figure 4.1 Mesh network as compared to a conventional network 3x-6x cable/DSL, and about 12x-15x data speeds compared to a conventional 3G network. Mesh networks based on UWB are Internet Central Switch Internet slated to provide data speeds of up to 400Mbps.

Transmitter Node Low Price Points: Mesh wireless broadband User Device Wired Backbone offerings are available at nearly a fifth of cellular data prices, one third of DSL/cable

Coverage Area price points, and at nearly half the price of

Wi-Fi offerings. Customers can benefit A Conventional Network A Mesh Network Wired Communication from faster installation at lower cost due to Wireless Communication the reduced cabling requirements. Source: Capgemini TME Strategy Lab. Seamless Mobility: With mesh networks, users need not search for hotspots as they Figure 4.2 Mesh Network Architecture get a city-wide, fully mobile, broadband connection.

Internet Improved Service Quality: Mesh network customers get to experience a higher

Transmitter Node Transmitter Node quality service as high network redundancy Central Switch prevents link drops and outages, common Upper

Layer in other wireless networks.

Lowered entry barriers

User Device On the supply side, mesh networks lower User Device entry barriers, driving greenfield operators

Lower to launch turnkey operations: Layer

Reduced Regulatory Barriers: Mesh

Network or “Semi” Mesh Architecture Client Mesh or “True-Mesh” Architecture networks enable operators to shorten service-launch timelines by overcoming routing algorithms. Motorola is one such networks bring for the user and regulatory barriers. With their frequency- vendor offering client mesh architecture substantially lowered entry barriers for agnostic properties, mesh networks can be via its wireless PCMCIA cards. greenfield operators have prompted the launched on license-free technologies like uptake of this technology as an alternate Wi-Fi. This enables operators to bypass Wi-Fi finds favour with mesh network broadband solution. This is what makes it prolonged processes associated with vendors potentially so disruptive to incumbent spectrum allocations for commercial use. Mesh protocols are frequency agnostic and operators. can be used with technologies like Wi-Fi, Substantial Cost Benefits: Unlicensed Bluetooth, Zigbee, and Ultra-wide band Strong value proposition to the user spectrum and the absence of an expensive (UWB). But, with the growing customer On the demand side, mesh networks offer wired backbone enable operators to set up uptake of 802.11 Wi-Fi, vendors are substantial benefits to the users in terms of mesh networks with much lower capital increasingly using these standards for better features, lowered costs, and expenditure than networks based on other implementing mesh networks. Wi-Fi- enhanced experience: technologies. Automatic configuration and based mesh networks enable customers to topology selection enable low maintenance continue with their existing Wi-Fi devices, Private Networks: The peer-to-peer nature and operational costs. In addition, because without any hardware or software upgrade. of mesh networks encourages users to set of the shorter transmission distances The increasing availability of Wi-Fi devices up their own networks, with each involved, mesh transmitters consume less is likely to boost the deployment of Wi-Fi- participant in the network owning and power compared to other wireless based mesh networks. maintaining its own hardware. This could technologies (see Figure 4.3). allow some customers to bypass operators What Makes Meshes Potentially So for local communications. Enhanced Network Robustness: Dynamic Disruptive? routing and no central point of failure The strong value proposition mesh

Charge of the Mesh Brigade: Hype or Disruption in Progress? 21 enable the networks to operate even if nodes a network mesh based on the 802.11b While VoIP, ADSL, and digital cameras are are removed or damaged. standard. Once complete, the mesh some of the much publicized successful network will deliver free broadband disruptions, stories like betamax vs. VHS Ease of Installation: Mesh systems use Internet to city residents. and laserdisks vs. DVDs are some classic dynamic node discovery and automatic failures of disruptive technologies. selection of topology to install and According to industry estimates, around integrate the nodes with itself, without 100 municipalities around the world are Historically, successful disruptive further configuration requirements. using mesh-based networks in one form innovations have carried a proven user or the other.2 The level of threat from appeal. These technologies have Mesh Networks Are Already Here municipal-run businesses to incumbent established an efficient partner ecosystem But Can They Become Mainstream? operators can be gauged from the fact that and overcome performance issues early New entrants are already deploying the US incumbents have lobbied on. Regulatory support and technology city-wide mesh networks aggressively to prevent communities standardization have also helped these The past few months have seen increased launching non-commercial broadband innovations go mainstream. deployment of mesh networks around the services. And they have managed to get world. Like a true disruptive technology, favorable legislation passed in fourteen US If we analyze mesh networks against these mesh networks are largely being deployed states preventing municipalities from parameters, we find that: by new entrants like greenfield operators launching such services. and community-based network players. User Appeal: Mesh networks have an Path to Mainstream: The Mesh established primary target audience in Greenfield Operators: Taking advantage of Scorecard large geographical pockets still waiting to low set-up costs and reduced timelines, The significant increase in the number of go broadband live. It has already many start-ups have recently launched deployments and the move towards large- generated successful references for mesh-network-based broadband services. scale city-wide networks across the world commercial deployments in niche Qware Systems, for example, is deploying suggest that mesh networks may soon be a segments and is now moving towards a Wi-Fi-based, $70 million, city-wide mainstream phenomenon. large-scale city-wide deployments. wireless-network mesh in Taipei. The network will have 10,000 wireless access But not all innovations identified as Partner Ecosystem: For mesh networks to points in service by year-end 2005 and disruptive have become mainstream. become mainstream, an ecosystem of serve 90% of Taipei’s 2.65 million population Disruptive technologies have had their equipment vendors, application providers, in an area of 272 square kilometers. own fair share of successes and failures. CPE manufacturers, and operators has to Qware plans to charge a basic monthly fee of $4.50–12, compared to $24–30 charged by fixed-line broadband providers. Figure 4.3 Cost Performance Comparison of Mesh to Other Technologies

HotSpot Amsterdam, a start-up, deployed Number a a city-wide Wi-Fi (802.11)-based network Technology Throughput Cost (Million $) mesh in Amsterdam in August 2004, to of Cells provide commercial broadband services. DSLb 1000-1500 Kbps (Downlink) 200-385 Kbps (Uplink) - ~ 1,500-2,000 Community-based Network Players: With their low operating costs and easy c 1000-4000 Kbps Wi-Fi 600 ~ 9 manageability, mesh networks are enabling (Symmetric) city councils and campuses to launch their d own private community networks. In mid- 3G 300-500 Kbps (Downlink) 2003, authorities in Medford, Oregon in (CDMA: EVDO) ~ 50 Kbps (Uplink) 64 ~ 8 the US selected a client mesh solution over GPRS for town-wide, public services Mesh 500-2000 Kbps e data communications. The client mesh Networks (Symmetric) 600 ~ 2 enables city officials to form ad-hoc mesh networks with their access devices. a. Network deployment costs in Manhattan (34 square miles). b. Estimates for rebuilding the Verizon fixed network in Manhattan post 9/11. c. Airvana estimates for a Wi-Fi network @ $15000/ Wi-Fi node purchase and installation cost. d. Airvana estimates for an overlay EVDO network @ $125000/ per radio node purchase and installation costs. e. Wi-Fi- In September 2004, the city of based mesh networks; Tropos Networks data. Note: In the case of a WiMAX-based network, deployment costs would amount to around $135,000 for a similar 30-mile area.1 Just as mesh over Wi-Fi is more cost effective than Wi-Fi, the Philadelphia announced plans to invest in capital expenditure necessary for mesh over WiMax will be lower than for WiMAX.

1 California Performance Review, “Wireless Metropolitan Area Networks Provide Improved Broadband Access”, August 2004. 2 Ron Sege, president of Tropos Networks, in the International Herald Tribune article “A Turf War over Wi-Fi Wireless”, 10 January 2005. 22 Telecom & Media Insights Journal 2005 the way we see it

evolve to establish a robust value chain. It’s Technology Stability: The true scalability 2006, based on the performance results of imperative that R&D support is maintained potential of mesh networks, while broadband deployments in cities like upon current performance levels. maintaining the bandwidth, is still under Taipei and Philadelphia, we can expect the the scanner. A large city-wide mesh number of greenfield operators to mushroom Today mesh network vendors are network may have its bandwidth choked globally, trying to replicate the success. dominated by very small technology start- by too many routing information updates. ups, concentrating on niche segments of Similarly, the capability to maintain low A major boost to mesh networks may public safety and educational campuses. latencies over multiple hops is an area of come from the successful evolution of user The long-term capability of these vendors concern. Sustained bandwidth availability devices equipped with Wi-Fi/cellular to sell a new technology and to provide a with low latencies is a must for providing interoperability by 2006, as this would sustained support backbone remains to be services like Video on Demand (VoD) and lead to increased Wi-Fi–based mesh seen. But the mesh phenomenon has Voice over IP (VoIP). network usage. started to gather steam and big players like Motorola and have joined the Vendors have come up with innovative But the biggest trigger for mass mesh platform in the past few months. solutions to overcome these issues. On deployment of large scale mesh networks Large Wi-Fi operators like Boingo have offer are multi-radio solutions to provide will be the availability of the 802.11s also started tying up with mesh-based sustained bandwidth and software suites standardization in 2007, which will bring service providers. to create QoS solutions for applications the true disruptive potential of these like VoD and VoIP. But to date there is no networks to fruition. Standards and Regulations: All present mesh installation large enough to substantiate offerings are based on proprietary the claims. Potential Impact on Incumbents protocols and are not interoperable with In the next 2 to 3 years… each other. This may hinder faster uptake Additionally, in the case of client meshes, Until recently mesh technology was not of the technology as the incompatibilities due to the increased amount of processing considered ripe enough to challenge the between proprietary networks will prevent involved in user devices, they tend to incumbents. But over the past few groups of mesh users from communicating drain device batteries at a faster rate. months, this view has begun to change as with each other directly. But progress has mesh networks start to make their first been made towards standardization by But disruptive innovations often initially forays into city-wide deployments. Today setting up a new IEEE3 task group in July have performance issues. The small off- it is clear that mesh networks have the 2004. This group is working on wireless road motorcycles introduced by Honda in potential to severely impact the business mesh standards known as IEEE 802.11s. the 1960s, Apple’s first personal computer, of Wi-Fi, DSL, cable, and cellular service Publication of these standards is estimated and mobile communication itself all providers in the medium term. to be at least 3 years away. initially underperformed the mainstream offerings. Only once simple and less Wi-Fi Operators When used with Wi-Fi standards, mesh demanding setups have been introduced Users no longer need to search for a networks do not face any regulatory do these innovations improve enough to hotspot for broadband access as mesh challenges, as the 2.4Ghz band is globally relegate existing dominant firms to the networks provide wide area, ubiquitous license free. With regards to the 5Ghz sidelines. access to broadband services. Wi-Fi frequency band, although it is an operators will have to compete with a unlicensed band in Europe, some countries Mesh networks are likely to become a truly mobile, low-cost alternative. do not allow outdoor use of this band. reality in the next couple of years Mesh technology possesses most of the The Wi-Fi model can be compared to that Security Issues: As most current necessary success drivers and work is of payphones, wherein a user has to go to implementations of mesh networks are continuing on the remaining few glitches. a particular place to access the service. based on Wi-Fi, questions on the security As the barriers are removed over the next The emergence of mobile phones has aspect are bound to arise. To counter this, few years, and as the technology evolves, made payphones redundant. Similarly, mesh vendors claim to have developed ironing out its performance issues, the mesh networks with their potential for protocols providing built-in security disruptive potential of mesh networks will city-wide coverage render standalone Wi- mechanisms, like advanced encryption on grow in scale and scope. Fi networks outmoded. the backbone link and user authentication. Additionally, work is It is possible that 2005 will see niche In addition, unlike with Wi-Fi services, already in progress to incorporate the segment mesh implementations give way users will not face access point congestion IEEE 802.11i security standards into Wi- to increased deployments of large-scale, issues in mesh networks. Users also get to Fi mesh products. city-wide broadband networks. And by enjoy seamless roaming on mesh

3 Institute of Electrical and Electronics Engineers.

Charge of the Mesh Brigade: Hype or Disruption in Progress? 23 networks. And they can start using the Going forward, mesh networks even pose potential losses caused by disruption. service almost immediately as installation a challenge to the voice revenues of They find it difficult to adopt the cabling requirements are minimal. mobile operators. Currently, the non- innovation during the early stages of its ubiquitous nature of Wi-Fi networks is technology lifecycle, because of the DSL/Cable Operators detrimental to the spread of VoIP over Wi- significant capital sunk in the older Substantial network capex and opex savings Fi, as the prospect of going to a hotspot to technology. Additionally, the prospect of over fixed-line networks will make it make or receive a call defeats the purpose the cannibalization of established revenue- possible for mesh networks to offer lower of mobile VoIP. But meshes, with their generating products and unprofitability of service price points. This may lead to fixed- wide area coverage, will drive mobile VoIP. under-sized initial target segments keep line players facing intensive price-based the incumbents from accepting the change. competition from wireless mesh operators. 5 to 7 years from now… After municipalities, it will be the But when a disruption of the scale of mesh Similar speeds at substantially lower costs corporate and enterprise users who will technology knocks on the door, it is will impact broadband revenues by move away from operator services and see imperative that the threat is recognized driving customer churn. substantial cost savings to mesh-based and acknowledged at an early stage. Once communication networks. This can have a the risks are identified, the incumbents Users will also get the advantage of major impact on overall operators’ need to either carry out a preemptive or seamless mobility. But the mobility factor margins as corporates form the biggest retaliatory move. will be of limited impact as people use proportion of high-margin customers. broadband in the home for different reasons When faced with disruptions, historically to outdoor/in-transit use. The value In the longer term, even consumers may incumbents generally resort to one of the proposition instead lies in the fact that a set up their own mesh networks, however, following strategies: single connection will fulfill both needs. standardization of mesh protocols is essential to making this a reality. Side-step Mobile Operators One option for the operators is to ignore Mesh networks have the potential to Current proprietary solutions enable the threat from the new entrants because threaten both the data and voice revenues mesh-based micro networks to link up initially their offerings address only those of cellular operators—the same operators directly, only if all such networks are from segments that are either unserved or are that are looking to data to be the next the same vendor. With suitable firewall loss inducing/low profit for the incumbents. growth driver. permissions, the user device will Incumbents will undoubtedly find it dynamically link up with the neighbouring convenient to ignore or exit these segments In Europe, data revenues made up 16% of mesh. With evolving technology, the to concentrate on higher margin ones. operator revenues in 2004 and are routing overheads may come down further estimated to increase to 22% by 2007.4 to enable intercity mesh linkups. However, this strategy invariably leads to Mesh networks hold the potential to Standardization and proliferation of client new entrants following the incumbents steamroll the data plans of mobile meshes will further drive cross-city into these lucrative categories on the back operators, as they offer a better user linkups. Although not conceivable at of performance improvements. Mesh experience with no connection dropout current technology levels, a global mega networks are already graduating from low- and congestion issues. Users can network of linked-up local mesh networks interest niche segments to lucrative city- experience 10x data speeds symmetrically cannot be completely ruled out. wide deployments and side-stepping will for both uplink and downlink, unlike not be the right choice for incumbents. cellular services. As users move away from operator networks, revenues from network usage Confront A license-free spectrum gives mesh would be drastically hit. The take up of Another option for the incumbents is to networks substantial cost benefits over a VoIP over mesh networks will impact the take on the challenger and apply various . Mesh operators can pass voice revenues of incumbents. Operators’ tactics to confront the new entrants. To on the cost benefits to the customer. With control of mobile content distribution may compete with disruptive innovations, the the advent of Wi-Fi-compatible mobile be lost. And operator data revenues will incumbents could: phones by the end of 2005/early 2006, take a plunge as distribution gets Wi-Fi mesh networks are slated to provide fragmented across micro private networks. Set Up Regulatory Roadblocks: However, a better, more cost-effective alternative to this has proven to be more of a delaying customers’ data needs. Incumbent Response Strategies tactic rather than a blocking one and even The majority of incumbents facing then with only limited success. Moreover, disruption end up focusing on the mesh networks provide limited

4 Smith Barney, “European Mobile Returns”, September 2004.

24 Telecom & Media Insights Journal 2005 the way we see it

maneuverability in this context. In the case into their network strategy for faster roll opportunity and adapt to capture the of the US regulations against outs and greater coverage. value generated by mesh networks. municipalities, many groups including large companies like Intel have already Wi-Fi operators can dramatically enhance We see more large city-wide mesh joined forces to challenge the legislation. the value proposition of their offerings by network deployments emerging in the providing city-wide mesh network next 2 to 3 years, driven both by Undercut New Entrants: With their deep coverage instead of restricting their users greenfield operators as well as pockets incumbents may resort to to selective hotspots. With their municipalities. At the same time, undercutting the new entrants to drive ubiquitous coverage, mesh networks can enterprises will also start to trial and them out of the business. But with the also be a key driver for the VoIP over Wi- deploy the technology for their internal price advantage that mesh networks offer, Fi plans of these operators. communication and connectivity needs. In incumbents would be hard pressed to 5 to 7 years, we envision greater compete on prices. Existing wafer-thin In the case of DSL and cable players, standardization of protocols enabling margins also play against this strategy. meshed Wi-Fi networks provide a perfect wider adoption of mesh technology, extension to spread out their networks to encouraging communities of consumers to Differentiate Offerings: This strategy is best remote areas that would otherwise have set up their own networks. suited for incumbents as it will give them been financially unviable for a wired the opportunity of utilizing their strengths network. These operators need no longer While mesh networks do represent a while hitting on the weak spots of the wait for a critical customer mass to build substantial threat, they also provide a mesh operators. up and can launch mesh services within significant opportunity for incumbents to the shortest possible time and at offer a high-quality user experience in a While the competition will drive substantially lower costs. cost-effective manner. For incumbents, the bandwidth towards commoditization, it choice is between adopting and enjoying will be content deals that will differentiate With many of them already running the benefits of a better technology or one service provider from another. The commercial Wi-Fi services, mobile players fighting against opponents becoming incumbents can use exclusive content should also give serious consideration to stronger by the day. We recommend deals to differentiate themselves from plain Wi-Fi mesh networks. Mesh networks can the former. vanilla ISP offerings of the mesh operators. satisfy the demands of high bandwidth Also, with the scalability and latency data applications, and with Wi-Fi- issues currently faced by mesh networks, compatible mobile phones making their they would be hard pressed to offer first appearances in the market, a cellular/ services like VoIP and VoD in the near Wi-Fi combination network can work out term. Incumbents need to market VoIP to be a lucrative option. To start with, and VoD aggressively in the form of value- operators can use mesh networks as a data for-money bundles and accelerate their delivery network for high data usage areas, triple-play strategy. such as central business districts.

Integrate Conclusion While the differentiation strategy does give Disruptive technologies normally have a a competitive edge to the incumbents, it long gestation period. Launched in 1967, will not be a sustainable advantage in the minicomputers took nearly 2 decades to long term. Competition will hasten surpass mainframe dollar sales in the late performance improvements in mesh 1980s. And even after that mainframe networks and the new players will hone dollar sales did not show double-year their skills in the market. Once this declines until the early 1990s. Thus, both happens, the balance will start shifting markets continued to grow for some time towards the new players. after the initial emergence of the disruptive technology. According to Clark To circumvent this, incumbents should Gilbert, assistant professor at the Harvard consider incorporating mesh technology Business School, disruption always creates into their own plans for the long term. new net growth because it expands the Instead of seeing mesh networks as a total reach of products and services.5 competitive threat, Wi-Fi, DSL and cable Incumbents need to recognize this players can incorporate mesh networks

5 Harvard Business School, HBS Working Knowledge, “Read All About It! Newspapers Lose Web War”, January 2002

Charge of the Mesh Brigade: Hype or Disruption in Progress? 25 5 The Future of 3G: Assessing the Threat of Alternative Wireless Technologies First published: September 2005

Objective of the study With mobile penetration approaching higher speeds and greater efficiency and saturation in many European countries, whether the alternative wireless operators are relying on data services to technologies will match up to this generate growth. To enable access to mainstream evolution to become Various wireless technologies are emerging advanced data services at faster speeds and commercially successful on a large scale. that are set to compete with 3G in a fight for more affordable prices, mobile operators wireless data revenues. Capgemini analyzed around the world are upgrading their The Emergence of Alternative the latest market developments to assess second-generation (2G) GSM networks to Technologies whether 3G is under threat from these third-generation (3G) networks. Europe A host of broadband wireless technologies alternative wireless technologies. alone saw 48 3G network launches in are emerging that offer consumers much 2004, based on Wideband CDMA higher data speeds compared to WCDMA, (WCDMA), which has emerged as the 3G support VoIP, and in some cases, also technology of choice for GSM network provide mobile services. In this section, evolution worldwide. we profile the key emerging wireless broadband technologies, with the potential However, WCDMA networks are not to challenge WCDMA. adequately living up to expectations for delivering high data speeds and TD-CDMA supporting bandwidth-intensive Time Division Code Division Multiple applications. User experience indicates Access, or TD-CDMA, is an approved 3G that high-speed data access (200–300Kbps technology with mobile capabilities that throughput) is usually available to no offers better spectrum efficiency and more than 5–8 simultaneous users in a higher data speeds compared to WCDMA. cell, with performance deteriorating as It can provide peak data rates of 5Mbps more mobile data subscribers log in. The using 5MHz spectrum as compared to performance challenges have prompted only 2Mbps available with WCDMA on operators to start planning for and 2X5MHz spectrum.1 investing to upgrade their WCDMA networks—barely a year after the launch. Most European regulators awarded 5MHz spectrum for TD-CDMA bundled with the At the same time, other high-speed WCDMA spectrum in the 3G licences. wireless technologies are also emerging, However, mobile operators have thus far promising a broadband-like experience to concentrated their investments on the mobile users. These technologies have the mainstream WCDMA implementation, by potential to cannibalise the very data and large ignoring TD-CDMA. revenues that mobile operators are banking on to justify their 3G TD-CDMA has started attracting attention investments. recently after deployments by fixed players for wireless broadband data access. For In this report, Capgemini’s TME Strategy example, PCCW, a competitive broadband Lab explores whether WCDMA will operator in the UK, has won 40MHz of survive the onslaught of these emerging spectrum on the 3.5GHz band and is wireless technologies. We evaluate how rolling out its fixed wireless broadband WCDMA networks are evolving towards offering using TD-CDMA, with plans to

1 TD-CDMA uses the same 5MHz carrier for both uplink and downlink. WCDMA, however, uses separate 5MHz carriers for uplink and downlink and hence, is represented as 2X5MHz (or 2Xmultiples of 5MHz). 26 Telecom & Media Insights Journal 2005 the way we see it

reach 75% population coverage in the Figure 5.1 Users can expect much higher peak data speeds with alternative technology country. PCCW is offering portable options than WCDMA wireless services at DSL speeds and rates, and has plans to launch VoIP as well.

Mobile operators such as Orange France 54 and T-Mobile in Czech Republic have also started evaluating TD-CDMA and have recently announced trials, which may help Peak Data Speeds/User, Mbps2 the technology gain traction within the mobile community.

Flash-OFDM 14 Orthogonal Frequency Division (OFDM) is a radio technology that exhibits distinct advantages over CDMA in terms of efficiency and increasing capacity. Flarion Technologies Inc. in the US offers a 5 5.3 proprietary OFDM-based mobile technology, Flash-OFDM, which is an 2 end-to-end IP network. The technology has distinct performance advantages such as peak data rates of 5.3Mbps using lesser WCDMA TD-CDMA Flash-CFDM WiMAX Wi-Fi frequency spectrum than WCDMA and a round-trip delay of <50ms (compared to 300ms on WCDMA). 50km at peak data rates of up to 70Mbps. equipment manufacturers, operators, Though it will require licensed spectrum application providers, etc. Intel is at the Flash-OFDM is at various stages of trial for wide-scale deployment, the cost of forefront of promoting this technology and with operators such as T-Mobile in hardware for setting up a citywide WiMAX if successful, one can envisage a scenario Germany and Nextel in the US. The network will be much less than WCDMA. where all laptops and PDAs are WiMAX- Government of Finland has awarded a Current versions of the technology do not ready. In the event that regulatory conditions licence to build a nationwide mobile offer mobility but a mobile WiMAX also co-operate and move towards a broadband network using Flash-OFDM, standard (802.16e) is under development technology-neutral approach, mobile which will offer high-speed Internet as and is expected to be available by 2007. WiMAX deployments may start posing a well as VoIP. real threat to mobile operators’ data revenues. Many competitive players have already Standards bodies are considering started launching fixed wireless broadband Wi-Fi integrating OFDM with WCDMA for the services using WiMAX. For example, Wi-Fi provides wireless connectivity for next phase of 3G evolution with likely Libera, a UK broadband wireless start up, broadband users within a limited area or deployments by 2010. Qualcomm, which is providing pre-standard WiMAX-based hotspot (typically a radius of 20–25m). owns the IPR of CDMA technology, services in Bristol and has plans to cover Wi-Fi can support a peak data rate of recently acquired Flarion, with the 75% of UK businesses in the next two 54Mbps, which is shared amongst possible intention of using the latter’s years. Tower Stream in the US has the simultaneous users. It has rapidly gained expertise to develop an OFDM/CDMA largest pre-standard WiMAX deployment, popularity in light of its easy installation hybrid technology. In light of this offering fixed wireless broadband access to and affordable equipment. development, it is likely that Flash-OFDM the business segment across New York, will be subsumed in the WCDMA Los Angeles, Chicago, and San Francisco In contrast to WCDMA, Wi-Fi is deployed evolution rather than pose a threat to the with aggressive plans to extend the over unlicensed radio spectrum, which mainstream 3G technologies. coverage throughout the rest of the country. further lowers cost of deployment. This has led to many public hotspots springing WiMAX WiMAX is backed by the IEEE consortium up, run by private businesses at hotels, WiMAX promises to deliver wireless with more than 220 members restaurants, airports, etc. Even mobile and broadband within a coverage area of up to encompassing an entire ecosystem of fixed-line operators are investing in public

2 WCDMA uses 2X5MHz spectrum to deliver the indicated theoretical peak data rates which are available to a single user. Peak data speed on TD-CDMA is indicated as available on 5MHz, Flash-OFDM on 2X1.25MHz, WiMax on 2X5MHz. Wi-Fi uses unlicensed radio channels and hence, carrier bandwidth are not relevant. The Future of 3G: Assessing the Threat of Alternative Wireless Technologies 27 hotspots and striking alliances with other boundaries of user experience whether at existing WCDMA infrastructure, such that operators to offer as large a footprint as home, office or while mobile. operators will not need to build a new possible. Chaska.net, a wireless ISP in the network from scratch. city of Chaska, Minnesota has gone live HSUPA with its Wi-Fi network, which covers 16 High Speed Uplink Packet Access Figure 5.2 below profiles HSDPA, HSUPA square miles, and 20% of the city’s (HSUPA) is the next step in network and Super 3G upgrades to WCDMA, households have taken up the subscription enhancement to improve uplink speed illustrating that this mainstream evolution in the 4 months since launch. performance, again requiring only a path is rapidly narrowing down the software upgrade. Peak uplink throughput performance advantages currently enjoyed Wi-Fi does not directly compare with 3G increases to 14Mbps compared to 64Kbps by other wireless technologies. deployments in terms of true mobility, but on WCDMA/HSDPA. This means that real- a growing network of hotspots leading to time applications such as video telephony The argument over which technology city-wide deployment offers users an and voice, which are uplink-bandwidth– wins, however, does not rest solely on alternate mechanism to access data constrained on WCDMA and HSDPA data performance advantages. The IT and services than 3G. networks, can be made available on the communications industries are littered packet data networks. This will be the first with examples of excellent technical The WCDMA Evolution step to moving towards a converged solutions that failed commercially. In the With the current speeds that are available network over which both voice and data next section, we assess the 3G and on WCDMA proving inadequate, services can be delivered. alternative wireless technologies on operators are looking to upgrade their 3G parameters that constitute commercial networks—barely a year after launch. The HSUPA handsets and equipment are success. first step in the upgrade path is High expected to be available for wide-scale Speed Downlink Packet Access (HSDPA), deployment by 2008. The Battle for Commercial Success followed by High Speed Uplink Packet To become mainstream, a wireless Access (HSUPA). Beyond HSUPA, a “Super Super 3G technology should be able to adequately 3G” upgrade is being considered, to As the need for speed continues to grow, it perform on the factors that ensured GSM counter the threat of future “4G” is entirely plausible that in the not too success. It must therefore be able to technologies. distant future, consumer requirements will support seamless mobility and roaming outstrip what HSDPA/HSUPA can deliver. across locations and geographies; it should We will now profile the upcoming To meet this challenge, a step-change in have a smooth deployment path that WCDMA upgrades and assess the 3G evolution is being envisaged that enables integration with existing performance enhancement potential of each. integrates OFDM and CDMA. This upgrade, infrastructure investments; and it should referred to as Super 3G, could deliver offer affordable devices with similar appeal HSDPA 100Mbps of peak data capacity with to GSM handsets. In this section, we High Speed Downlink Packet Access average speeds of 5–10Mbps and higher. evaluate how the alternative wireless (HSDPA) only requires a software upgrade technologies stand-up to these success to the existing WCDMA network. It Super 3G aims to provide a smooth factors and whether they pose a significant enables a two-fold improvement in technological upgrade, leveraging the threat to WCDMA evolution. network capacity-enhancing download data speeds by more than five times the current WCDMA networks to 14Mbps and Figure 5.2 WCDMA upgrades will match the performance of alternative wireless technologies shortening the round-trip delay between the network and the terminal. These advances translate directly into improved WCDMA Evolution Alternative Wireless Technologies service delivery performance and a WCDMA HSDPA HSUPA Super 3G TD-CDMA Flash- Wi-Fi WiMax superior user experience, especially for OFDM (802.16e) services such as video streaming and Network Available 2006 2007 2010 Now Now Now 2008 bandwidth-intensive downloads. Availability Theoretical 2Mbps 14.4Mbps 14.4Mbps 100Mbps 11Mbps 5.3Mbps 54Mbps 70Mbps Max. Data Many operators across the world are Speed/User already trialing HSDPA, with large-scale Average Data 150- 1Mbps 2Mbps 5-10Mbps 1Mbps 1.5Mbps >10Mbps 5-10Mbps deployments expected in 2006 when Speed/ User 200Kbps handsets become widely available. In its Latency 300ms <200ms <100ms <25ms <100ms <50ms >200ms <100ms HSDPA trials in the Netherlands, T-Mobile VoIP No No Yes Yes Yes Yes Yes Yes has indicated the possibility of reaching Capability ADSL speeds, which can blur the

28 Telecom & Media Insights Journal 2005 the way we see it

Mobility and Roaming Moreover, networks based on the GSM and now WCDMA offer a single, alternative wireless technologies lack common standard for mobile networks to ubiquity and will require technological operators across the world. This standard developments for seamless hand-over enables consumers to be mobile from one across GSM/WCDMA networks. Other location to another without dropping the than for Wi-Fi, this seamless inter-working call, as well as roam across operator networks when a user moves from one network to and countries using the same device. another is currently non-existent.

While most of the alternative wireless An upgrade to HSDPA/HSUPA, on the technologies have or are developing other hand, only entails a software mobility capabilities, commercial upgrade to the WCDMA infrastructure availability of mobile services will depend and the specifications for inter-working GSM/WCDMA without altering the on regulatory constraints. European and seamless handovers with GSM or customer experience. regulators, for instance, do not allow fixed WCDMA are well established. operators deploying wireless broadband Having considered the factors critical for technologies to offer mobile services. Handset Availability commercial success, it becomes apparent Regulators also mandate which Existing cellular technologies have been in that the WCDMA evolution path enjoys a technologies can be used to offer mobile the market for nearly 15 years and clear edge. The factors that worked for services; for example only WCDMA and consumer devices for these networks have wide-scale acceptance of GSM as the TD-CDMA are approved 3G technologies gone through the various stages of the preferred cellular technology will continue for deployment in Europe with dedicated development cycle. GSM handsets today to influence the success of 3G and its spectrum allocation. Hence, operators are affordable, small in size, lightweight upgrade path. wishing to deploy other wireless and support long talk times. Consumer broadband technologies will have to devices for alternative technologies will As Figure 5.3 shows, with the purchase new spectrum and contend with have to go through a concerted HSDPA/HSUPA upgrades, WCDMA not the regulatory roadblock to offering development effort to be able to achieve only provides performance comparable to mobile services. comparability with GSM devices for mass- the alternative technologies, but also market acceptance. scores high on the other factors that are In addition to mobility, roaming will also needed to ensure commercial success. pose a significant issue for these The mainstream GSM/WCDMA world While emulating WCDMA’s advantages is alternative technologies. Unlike enjoys the support of a multitude of hard for emerging wireless technologies, GSM/WCDMA, which has been embraced handset vendors due to widespread some of them may find their own niches. for deployment globally, the alternative acceptance of the technology, which in In the next section, we outline our wireless technologies suffer from the lack turn enables economies of scale and recommendations on how mobile of large-scale support of operators or hence, more affordable devices. On operators should position themselves to vendors. We expect only a few operators alternative technologies, by contrast, only leverage some of these emerging to deploy these technologies, which will a handful of vendors are developing technologies. limit their use to the home networks in devices, hence limiting volumes and any select geographies. Even where deployed scale economies. The technology vendors Recommendations to Mobile by mobile operators, these technologies will have to develop partnerships with a Operators are predominantly seen as complementing broader set of handset vendors to Each of the alternative technologies that rather than competing with the current encourage the development and mass we have evaluated brings its own specific GSM/WCDMA investments. production of consumer devices at strengths. However, the window of affordable prices. opportunity for these wireless technologies Network Rollout Requirements is small, because the planned WCDMA To deploy alternative wireless Moreover, with the exception of Wi-Fi, upgrades are set to close the performance technologies, mobile operators with devices that seamlessly inter-work with gaps. As a result, the lack of a more existing GSM and 3G investments will GSM/WCDMA do not exist for the other compelling alternative, combined with the need to roll out a separate alternative technologies. This will require momentum that WCDMA evolution and, in most cases, invest in a new core operators to build nationwide networks already enjoys, makes it the safest option infrastructure as well. The integration and providing ubiquitous coverage for for mainstream deployment. However, management of two networks will be far customers to be able to use the same device some of the alternative technologies can from easy. anywhere, anytime. With HSDPA/HSUPA play an important role—but as a upgrades, on the other hand, the same complement rather than a replacement to device can work seamlessly across 3G deployments.

The Future of 3G: Assessing the Threat of Alternative Wireless Technologies 29 TD-CDMA Figure 5.3 Evaluation of HSDPA/HSUPA vs. Alternative Technologies TD-CDMA is an approved 3G standard technology with allocated spectrum available to most European mobile Mobility and Ease of AvailabilityAvailabilit operators. While it enjoys a clear Wireless Commercial Roaming Network Roll- yof of performance edge over WCDMA, the Technology Availability Support Out Handsets imminent HSDPA upgrades will close this gap. Moreover, big question marks HSDPA/HSUPA 2006-7 surround TD-CDMA deployment in light of the limited size of the spectrum that has TD-CDMA Now been made available for it and the investment that is required to deploy new Flash-OFDM Now radio infrastructure and develop dual- mode TD-CDMA/WCDMA handsets. Wi-Fi Now

2009 WiMax With capacity currently not an issue on (mobile version) WCDMA and the prospect of 3G over High GSM frequencies looming on the horizon, it is hard to see how the TDD spectrum Low could be gainfully deployed. Our recommendation to operators is to affordable consumer devices are the two launching Wi-Fi/cellular dual mode maintain focus on WCDMA evolution, main questions that remain unanswered. devices, while operators such as NTT rather than diverting attention and/or DoCoMo and BT amongst others are investment to TD-CDMA. Moreover, rolling out a consumer mobile readying commercial launches of WiMAX service will require building up a converged, seamless services. Flash-OFDM network from scratch, with a nearly Flash-OFDM suffers the drawback of equivalent cell density as the The benefits of Wi-Fi for fixed operators being a proprietary technology and is also HSDPA/HSUPA networks—an expensive are clear: an opportunity to stem and even unlikely to be used for mobile service proposition for mobile operators with potentially reverse the fixed-to-mobile deployment in most European countries existing investments in 3G. substitution trend. Mobile operators are due to regulatory constraints. Additionally, understandably less than keen on the a lack of support from most major As things stand currently, we see mobile service given its cannibalisation effect on vendors will translate into poor economies WiMAX as a relatively immature their profitable mobile voice franchise. of scale and hence, an expensive and technology that lacks a clear business case However, the momentum behind Wi-Fi is limited range of consumer devices. compared to the WCDMA evolution path. such that standing on the sidelines will However, due to its faster deployment and soon not be an option. Mobile operators However, Qualcomm’s acquisition of more favourable implementation should therefore ready their response, Flarion, the company behind this economics compared to fiber, operators adopting defensive measures to limit the technology, is setting the stage for OFDM's may consider fixed-WiMAX for point-to- revenue loss, if not a wholehearted move integration with CDMA, which may define point backhaul of cellular traffic. towards offering innovative, converged the next step of 3G enhancement. As Wi-Fi/mobile services to capture a higher discussed earlier, OFDM is also being Wi-Fi share of the customer wallet. envisaged to be the basis of the WCDMA Wi-Fi is a highly promising short-range evolution to “Super 3G,” implying that wireless technology with many things In summary, the best option for mobile operators should wait for this next phase working in its favour. Relatively cheap and operators is to invest in WCDMA of 3G upgrades rather than investing in easy to use consumer devices, increasing upgrades rather than build new mobile Flash-OFDM networks. Wi-Fi enablement of homes and offices, networks based on TD-CDMA, Flash- and a clear operator interest are some of OFDM or WiMAX. Only Wi-Fi, with the WiMAX the factors contributing to its success. significant advances made in its We consider WiMAX still to be at the hype integration with cellular networks, is well stage, with its promise of high-speed Wi-Fi is also being integrated with cellular positioned to complement operators’ mobile data access at least 3 years from devices and specifications to allow existing investments, allowing them to realization. Backward compatibility of the seamless handover between the two offer converged services. future mobile WiMAX standard equipment networks have been finalised. Major with its fixed counterpart available today vendors such as Motorola and Nokia are and the timeframe for availability of

30 Telecom & Media Insights Journal 2005 the way we see it

6 Growing Mobile Data Revenues: Opportunities in Infotainment First published: November 2005

Objective of the study While the core business of mobile revenues today to 23% (~ €10 billion by operators remains the provision of a high- our estimates) by 2009. In the absence of quality 2-minute phone call, as voice a standard definition of infotainment, for ARPUs steadily decline mobile data is key this study we included services that are Mobile data is key to the growth aspirations to the growth aspirations of many mobile not directly communication or of mobile operators—but the challenge is to operators. In Western Europe, mobile data transaction-related in this category. As create viable new data revenue streams other currently accounts for about 17% of total such, mobile TV, video streaming, music, than messaging. service revenues and is expected to grow games, information, ringtones, graphics, to 30% by 2009.1 internet browsing are all included, This paper discusses which services have the whereas messaging, m-commerce, data best chance of succeeding and what mobile Messaging has been the only significant cards, etc. are not. operators need to do to enhance their revenue generator in the mobile data space prospects. over the past 5 years, currently M-commerce and gambling-over-mobile,2 contributing about 84% of data revenues. together are projected to grow significantly Within messaging, SMS accounts for the as well. However, the margins retained by bulk of revenues—over 90%—and is mobile operators after accounting for the expected to remain the single biggest revenue share to third parties, credit and contributor to data revenues in the near- retail firms, is relatively small. This makes term. However, SMS is under substantial it a less attractive service compared to pricing pressure, with prices having mobile entertainment services. declined 65% between 2001 and 2004 and widely forecasted to continue to fall. In terms of the market potential of specific infotainment services (Figure 6.2), mobile The challenge, therefore, for operators is TV stands out because of its mass-market to create viable new data revenue streams appeal and the prospect of significant beyond messaging. This paper discusses growth potential. which services have the best chance of succeeding and what mobile operators In the following sections, we discuss in need to do to enhance their prospects. more detail the prospects for mobile TV as well as the other main infotainment Infotainment Will Drive Mobile Data services-music and games. We explore: Spending Growth market potential of the services and Mobile data revenues have been growing outline the challenges and opportunities at 21% CAGR in Western Europe over the that operators face with respect to each past 3 years. We expect this trend to one of them. continue with consumer spending growing across all data categories over the next Mobile Music Will Remain a Niche four years (Figure 6.1). Service Mobile music has been instrumental in While messaging will continue to form the helping mobile operators create an exciting bulk of data revenues in the near term, 3G story. However, despite the hype, “infotainment”—the convergence of mobile music is expected to account for information and entertainment services- only 2% of total data revenues by 2009.3 will become the main driver of growth, growing at 48% CAGR from 6% of data

1 Ovum, “Global Mobile Statistics Forecasts”, November 2004. 2 M-commerce and gambling revenues refer to the entire payment and bet amounts placed via the mobile, and hence is more than the actual revenue share retained by the mobile operator. 3 Credit Suisse First Boston, "CSFB Mobile Data Model", January 2005. Growing Mobile Data Revenues: Opportunities in Infotainment 31 Prices must fall for mobile music to be Figure 6.1 Mobile Data Revenue Evolution and Category Breakdown, Western Europe, 2004-2009, €billion attractive… To succeed with music, mobile operators have to significantly cut prices to come €51.1 bil close to parity with substitute offerings Internet Access CAGR (2004-2009) = 16% 1.2 like iTunes. Currently however, mobile (3%) (CAGR = 17%) 5.2 m-Commerce music pricing is based on the flawed (10%) (CAGR =92%) assumption that consumers will pay as much for a music track as for truetones or 12.8 Infotainment ringback tones,4 which are selling well (25%) (CAGR = 34%) despite being three times the cost of an €29.1 bil iTunes track. But this assumption fails to 0.9 take into account that content for private €24.2bil 0.3 5.1 entertainment consumption provides an (5%) 0.6 (5%) 0.2 (6%) inherently different value to consumers 3.0 than that meant for customising a mobile 31.8 Messaging (62%) (CAGR = 9%) phone. 22.9 (84%) 20.4 While there can be a premium attached to displaying one’s individuality, the same does not apply to privately consumed content like music. Consumer pricing 2004 2005 2009 expectation for music delivered over the mobile channel is, in part, defined by reference to the fixed online world (for which there is no equivalent in the

Figure 6.2 Market Potential of Services in the Mobile Entertainment Space, Western ringtone market), and this continues to Europe, 2009 become ever more competitive on price. Thus far, consumers have proven unwilling to pay 2–3 times more than 0.5 iTunes prices, which itself are expected to be reduced in 2006, implying that prices Ringtone prices expected to Ringtones fall sharply as current price for music via the mobile channel will need 0.4 levels are unsustainable ) )

€ to fall steeply. (

) 9

0 Games We expect mobile TV ARPU to 0 increase, given its mass-- 2

( But achieving price parity is difficult 0.3 market appeal and increasing U availability of premium TV P Information Given the already thin margins at current

R services A prices, operators will need to significantly y l h t Video Streaming/ reduce their costs to be able to materially

n 0.2

o Music WAP Mobile TV M cut pricing. The only viable option to Music prices have to fall achieve lower costs is to re-negotiate for significantly to achieve price 0.1 parity with competing mobile more favourable revenue-share music offerings (e.g. iTunes) Graphics arrangements with content providers. This is possible for top-tier players like

0.0 Vodafone, which can leverage its scale in -5% 15% 35% 55% 75% 95% negotiations. But the inherent higher cost Compound Annual Growth Rate % (2004-2009)- associated with mobile bandwidth will continue to constrain operators’ ability to Note: Bubble size relates to forecasted 2009 data revenues. Source: Credit Suisse First Boston, "European mobile data trends, Q4 2004", April 2005. match fixed Internet-based prices.

Emergence of iPod-like phones makes the future even gloomier The future for mobile music is further threatened by handset manufacturer

4 Truetones are high quality ringtones made from the original soundtrack while ringback tones are short clips of real music that replace the standard ring when called.

32 Telecom & Media Insights Journal 2005 the way we see it

moves to develop iPod-like phones and location-based and multiplayer games, the Figure 6.3 Amount consumers are willing form alliances with online music stores to development budgets for high-end games to pay for mobile TV, by age group (€) potentially bypass the mobile operator’s are touching $250,000 and fast network. Next-generation iPod-like approaching the $4 million plus 13.77 14 phones will eradicate traditional problems production budgets associated with 10.95 10.48 associated with the limited battery life and PC/console games. Realizing the ROI on memory. In addition, they encourage such investments will be a challenge in the consumers to download songs with ease mobile gaming market, which remains and at a lower cost via the Internet onto smaller in size and scope compared to the their PCs, which can then be transferred console or online market. 16-19 years 20-29 years 30-39 years 40-49 years via USB cable or Bluetooth onto their old old old old handset. Nokia, for example, has Low consumer awareness and developed the N91, which has an ineffective purchase experience integrated 4GB hard disk capable of In 2004, while a third of the European Figure 6.4 User occasions for watching TV on mobile handsets (% Respondents) storing up to 3,000 songs in a variety of mobile users were playing games pre- digital music formats. Users can installed on their handsets, only 5% were synchronise the device with their downloading games. A major reason for Waiting for 70.6 computers via USB 2.0 and create and this disparity is that consumers don't transport manage playlists that, in turn, can be know about the games provided by their In transport 60.8 shared with others via Bluetooth. service provider. This, in turn, is due to In office or school 33,9 the limited space on operators’ portals to On a trip 33.9 So whilst music on a mobile handset may promote games. carry a strong appeal, the demand for While walking 28.9 premium-priced music downloads over Moreover, it is a challenge to convince In a park 28.9 € In a fast the air is far less obvious. Given the consumers to shell out 5 on a game that food restaurant 27.8 difficulty in achieving price parity, at they can see only a picture of. Operators’ In own room 16.1 current pricing levels mobile music will websites and to some extent their mobile In rest room 13.3 continue to appeal only to a select group portals, therefore, should provide details of music lovers with high willingness-to- of the game, demos to help consumers pay and to consumers who are prepared decide, and a review section that allows to pay a premium when impulsively users to rate the games. buying music-on-the-go. Mobile gaming caters to a different Mobile Gaming: A Challenging Path taste from PC/consoles to Higher Revenues An average mobile gamer is different from Mobile games are projected to be a big the one playing games on a console or revenue generator in the mobile over the PC. The relatively poor infotainment segment, but their long-term experience on mobile handsets, due to growth potential is limited. The limitation screen size and button placement, keeps is imposed by the niche segment appeal of the hardcore console/online gamers away. the service and the growing complexity Surveys show that the majority of people and escalating costs associated with game interested in playing games on their development, which make it difficult to handsets are casual gamers who play establish a clear ROI. games to kill time. Therefore, it’s the easy- to-play games with low learning curves Big investments and efforts required to that have attracted a user base. In fact, the ensure mass-market readiness games currently topping the UK charts are Mobile game developers have to customise old arcade game favourites such as Tetris, the games to work with the multitude of Pac-Man and Space Invaders. Anticipating handset models in the market. For this trend, Jamdat paid $137m in April example, Gameloft currently targets 250 2005 to secure a 15-year exclusive different models and translates each game wireless telephony rights licence for Tetris. into 5 to 8 languages. This means that there can sometimes be more than 700 Females make up about 50% of the versions of the same game. Moreover, with mobile gamers but this segment remains the advent of features like 3D displays, under-targeted by the operators with most

Growing Mobile Data Revenues: Opportunities in Infotainment 33 of the games being male focused. Recognizing Start with offering Mobile TV on 3G, operators to quickly get their mobile TV the opportunity, game developer, In-Fusio, but plan ahead to DVB-H strategy defined in terms of the customer has come out with “Fruit Factory”, a game Operators should plan the launch of proposition, handset management, content with a female lead character. mobile TV services as a matter of priority, and partnership models. addressing issues of proposition design Operators face widely diverse preference and implementation of the relevant Conclusions and Implications for profiles exhibited by the mobile gamers technologies and IT infrastructure. Mobile Operators with regards to different game genres, and However, given bandwidth limitations, 3G The core business of mobile operators they are offering an increasingly vast array is not the preferred medium for mobile TV remains the provision of a high-quality 2- of games to cater to this diversity. O2 delivery in the long term. Instead, minute phone call, yet mobile data is key offered just ten games on two devices in broadcast technologies like DVB-H or to the growth aspirations of many mobile 2003 but now offers 300 games on sixty DMB for mobile TV offer a better solution. operators. Messaging has been the only devices. So concurrently with launching a 3G- significant revenue generator in the mobile based service, operators also need to start data space over the last five years, but the With the amount of operator effort going formulating their plans for DVB-H. picture is set to change. Infotainment-the in for the gaming segment, it is imperative convergence of information and that operators fine tune their strategies to Operators are already trialling and even entertainment-services are emerging as a realise the projected potential. Choosing launching mobile TV services using these key driver for the next phase of mobile the right content, widening the marketing alternative technologies. SK Telecom in data growth and are expected to generate channels and moving into new target Korea, for instance, has recently launched €10 billion in revenue by 2009. segments, will be key to making a success DMB-based mobile TV via satellite to out of the gaming category. handsets. The service bypasses the phone Taking a position on the market's network and is priced at around evolution and defining a corresponding Mobile TV Could Be the Star €13/month. infotainment strategy is therefore crucial Performer in Infotainment for operators. We believe that mobile Mobile TV is emerging as a key service Get the business model right operators should take the following steps: driven by its mass market appeal and The business model for broadcast intuitive usage. Surveys have found solutions, however, is more complex Ensure their strategies emphasise mass 40–60% of European mobile phone users compared to 3G-based offerings, as it market appeal to be interested in receiving TV on their introduces a new entity in the value It is tempting to focus on specific mobile phone. More importantly, users are chain—the TV broadcaster—which has customer niches, but this will limit willing to pay €8–12 per month for it implications for how revenue as well as opportunity when customer demand is (according to a survey conducted as part capital investment shared. not clearly established. As such, central to of the BMCO project in Germany). strategy design should be a clear emphasis The model finding favour in many of the on mass-market appeal, focusing on and Operators are already finding success current worldwide trials is one that embracing the commonalities across with Mobile TV envisages a TV broadcaster distributing segments, rather than continuing to more Orange France is offering live TV services content over its DVB-H network, with the finely slice the market and developing with over 42 channels on 3G and EDGE. mobile operator managing the customer services to address those niches. The Six months after launch, 50% of Orange’s relationship, and controlling main ingredients to mass market appeal in 3G users are watching TV on their mobile, authentication, authorisation, and billing. turn remain simplicity, ease of use, and with the average user logging in 25–30 The subscription and usage-based attractive pricing. minutes of usage in 10–14 sessions per revenues are shared by the value-chain month. Similarly, TV represents 50% of players, e.g. for the DMB-based mobile TV Contrary to much prevailing opinion, we 3G data traffic for SFR. service in South Korea, SK Telecom retains do not believe that mobile music is likely 25% of revenues with content providers to yield sustainable benefits for operators Operators are finding the mobile TV getting 35%. Additionally, in this model, due to a combination of factors. We are service to be a compelling mechanism for the mobile operator also controls the putting our money on Mobile TV. communicating the 3G value proposition return path and the revenues resulting to consumers. As a result, some operators from consumers using this path for Embrace the short-term opportunity have also repositioned their 3G video services related to the transmitted program represented by 3G-based Mobile TV streaming offerings as Mobile TV, which like voting, information, downloads, etc. and plan ahead for DVB-H has found favour with consumers who can We see mobile TV as a potential more easily relate the new service with We see TV heralding considerable revenue Infotainment star. The business case is their normal TV viewing habits. opportunities in the mobile space, fuelled by its mass-market appeal and necessitating concerted efforts from mobile proven consumer willingness to pay for

34 Telecom & Media Insights Journal 2005 the way we see it

the service. Given the rapid pace at which Figure 6.5 Illustrative business model for mobile TV broadcast over alternative technologies the mobile TV space is evolving, operators can scant afford to delay work on developing their business model and customer proposition. A key first next step TV Broadcaster for operators is to develop a detailed Broadcast Broadcaster business case to serve as a basis for Content Distribution Aggregator approaching potential partners. Time-to- Provider market is key for this service, so the process of forging partnerships with DedicatedDedicated TV TV Network Network broadcasters and content owners needs to Program related Dual content, such as be set in motion quickly. On the customer Mode ringtones front, the key next step is the design and Handset testing of the value propositions to Mobile Operator ascertain consumer interest and propensity Mobile Operator to pay for the service. AuthenticationAuthentication, Billing Control and ,Authorization Authorisation Be realistic about the nature of the Return path Mobile Network opportunity in mobile music and focus efforts elsewhere Mobile music on the other hand will remain a niche service despite the hype, as the consumer propensity to spend and current operator pricing are currently disjointed. There could be an upside for music on the mobile if prices approach parity with fixed-line alternatives, but that is unlikely given the already thin margins and the inherently higher cost associated with mobile bandwidth. If significant cost reduction proves impossible, a key next step is for operators to question the validity of their current mobile music strategy and its associated planned investments, and consider a re-channelling of resources towards higher revenue potential Infotainment services.

Growing Mobile Data Revenues: Opportunities in Infotainment 35 About the Authors

Jawad Shaikh led Priya Mehra is a Dillon Lim is a the TME Strategy Manager in the Senior Consultant Lab from 2003 to TME Strategy Lab. within the London 2005. He recently Her recent work office of co-authored with includes evaluating Capgemini’s INSEAD a study the mobile VoIP Telecom, Media & on mobile threat, analyzing Entertainment innovation, and trends in the practice. He has with French analysts IDATE a joint report mobile content space and assessing the extensive experience in helping telecom on exploring the hurdles faced by the enterprise mobile segment. Prior to joining operators in international marketing and European telecoms industry. He closely the Lab, Priya worked for a mobile branding issues, as well as co-authoring a follows the rollout of 3G and the uptake operator where she was instrumental in recent in-depth study on MVNO (Mobile of advanced mobile services, and is often launching voice and data products for the Virtual Network Operators) strategies. called on to speak at industry Enterprise market. conferences/events on these and other Ashish Sidhra is a telecom and media related topics. Erik Barstad Senior Consultant Hovdkinn is a in the TME Jerome Buvat is Senior Consultant Strategy Lab. His the Global Head of in the Oslo office. recent work the TME Strategy He has worked includes a study Lab. His recent extensively on on the disruptive studies include a channel strategies potential of review of the new for mobile emerging telecom DSL business operators in technologies and an analysis of trends in models in Europe Europe as well as evaluating entry Mobile Content. His current research and an in-depth strategies for the discount market. focuses on the fixed-mobile analysis of the home gateway market. convergence arena. Prior to joining the Lab, Jerome led a Dinesh Jindal is a variety of strategy projects in the telecom Senior Consultant sector; focusing particularly on the mobile, in the TME broadband and wholesale segments. Strategy Lab. His recent work includes analyzing developments in the Wi-Fi/WiMax technologies and VoIP Services. His current research focuses on the evolution of mobile networks. Prior to joining the Lab, Dinesh was responsible for tracking technology and industry developments in telecommunications for a research services organization.

36 Telecom & Media Insights Journal 2005 the way we see it

About TME Consulting Services The TME Strategy Lab About Capgemini The Telecom, Media & Entertainment Telecom & Media Insights is published by and the Collaborative (TME) Consulting Services practice is the the TME Strategy Lab, a global network of Business Experience leading global management consulting strategy consultants dedicated to Capgemini, one of group dedicated to helping CEOs and generating content-rich insights into the the world’s foremost senior executives in the converging telecom and media industries. The Lab providers of Consulting, communications industries address their conducts in-depth strategic research and Technology and Outsourcing services, most critical strategic and operational analysis to generate leading-edge points of has a unique way of working with challenges. We combine functional view on crucial industry topics that its clients, called the Collaborative expertise with industry knowledge around stimulate new ideas and help drive Business Experience. three core services: strategy formulation, innovation for our clients. business creation and launch, and Backed by over three decades of industry and service experience, the Collaborative operational excellence. Lab activities include: Business Experience is designed to ■ Research points of views on emerging help our clients achieve better, faster, A number of principles make our practice industry trends: The Lab develops in- more sustainable results through unique: depth strategic research reports on seamless access to our network of emerging industry issues that are world-leading technology partners and ■ We are totally dedicated to consulting in relatively under-explored, but have collaboration-focused methods and tools. the TME industries and have significant implications for players. The Through commitment to mutual success accumulated an extensive base of Lab conducts these studies and the achievement of tangible value, industry knowledge. independently or in collaboration with we help businesses implement growth strategies, leverage technology, and thrive ■ external partners. We are committed to our clients’ success through the power of collaboration. through our focus on measurable ■ Monitoring key developments in the engagement results. telecom and media market: The Lab Capgemini employs approximately closely monitors key developments ■ We are committed to investing in 60,000 people worldwide and reported content and leading-edge insights to relating to selected industry topical 2004 global revenues of 6.3 billion euros. bring innovative thinking to our clients. issues. This research is updated quarterly or bi-annually and generates data and More information about our services, ■ We have a unique collaborative style of insight-rich reports on the selected topics. offices and research is available at working with our clients, the www.capgemini.com. ■ Collaborative Business Experience, Tailored research and analysis: The Lab which forms a key part of our values. delivers a variety of strategic research and analysis projects to clients ranging For more information contact: ■ We employ people both with proven from market and competitor industry experience and from leading benchmarking analyses to monitoring Didier Bonnet business schools and universities, all Managing Director specific services or technologies. The united by a passion for the Telecom, Media & Entertainment primary value-add from the Lab is in the communications industries. +44 (0)870 905 3189 analysis and insight-rich synthesis built [email protected] on the foundations of solid research. Jerome Buvat For more information about Global Head TME Consulting visit TME Strategy Lab www.capgemini.com/tmeconsulting +44 (0)870 905 3186 [email protected]

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