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WiMax: weapon or threat as wired carriers lose to wireless?

Pressure on wired carriers

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The trend for Americans to dump wired phones altogether and use only mobiles is accelerating, putting new pressure on carriers to come up with long-term survival strategies. Cellular is the biggest threat this year, and has overtaken wireline in terms of numbers of subscribers for the first time in 2003. But in the 2-5 year time span, there is the additional specter of wireless voice over IP, providing integrated voice and data over wireless broadband connections such as WiMax.

Until recently, it has been assumed that broadband wireless access (BWA) technologies were mainly of relevance to operators setting up in remote areas or developing countries where it was uneconomical to build out wired or even cellular networks.

But with US cities starting to gain BWA networks – US Wireless Online announced this week that it is rolling one out in Louisville, Kentucky, for instance – carriers have a new set of problems. Just as they had to decide whether to embrace Wi-Fi or try to kill it, they must make a similar but far more critical decision about WiMAX.

Lehmann Brothers estimates that there are now eight million US households that have mobile phones but no wireline. Most of these belong to single, affluent, young people, a worrying demographic for the wireline operators since these are the users with most income to spend on added value services.

Similar moves are happening more slowly in Europe, and more rapidly in many other parts of the world. And now, to make matters worse, the carriers may face attack on two fronts, with alternative operators looking to WiMax to set up their own networks to the home. Until now, the lack of standards for BWA have prevented any major upsurge of independent operators.

This is less because of interoperability, which is not important for fixed wireless to the home, but because equipment has been expensive and voice quality poor. The emergence of commodity WiMax silicon from Intel and Fujitsu will help solve the former problem, with base stations predicted to cost $10,000 and falling, and Nokia already working on low-cost stations aimed at alternative and developing world operators. And the 802.16 specifications incorporate Quality of Service elements necessary for voice quality.

The fixed, non-line of sight version of WiMax, 802.16a, is a serious contender to wired broadband and telephone lines. As Intel's CTO Pat Gelsinger said earlier this month: "What we're saying is no more copper." The dilemma for the carriers is whether to regard WiMax as a threat or a savior from death at the hands of cellular.

Like cellular, WiMax can offer both fixed, home-based communications and mobile functions – unlike Wi-Fi, which is fixed, or Mobile-Fi, which is mobile only - and so it does give wired-only carriers the opportunity to build a mobile business of their own at less cost than going into cellular. If the population is moving inexorably towards unwired communications, this is their only sensible move. Price cuts and added value services may preserve their wired services for a while, but to rely on fighting off wireless long term would be a strategy of Canute-like blindness.

So we see many of the world's large carriers at least trialling systems based on BWA technologies. The question is whether they can make sufficient revenue and profit from such networks to compensate for the decline of their wired networks and, especially for those in the US and Europe that are laden with debt, to retain the confidence of their investors.

Their obvious route will be to provide WiMax-based options as premium services, bundling various added value incentives, in order to set the market expectation of pricing far above what it needs to be in terms of the actual cost of deploying a WiMax network. This, of course, only works if the independents can be kept out of the market. With the cost of entry to BWA-based services so low compared to any preceding wired or wireless technology, relatively small companies have the chance to enter the sector, plus they will be able to price aggressively because they do not have to support legacy systems and the debt associated with those.

The entrenched players will have three weapons – their influence over regulators and governments, their brand (not necessarily an asset, given the poor reputation of many operators for customer service), and their ability to bundle many services together and to provide na-tional coverage.

The strength of these weapons will depend very greatly on the regulatory situation in their country. The US FCC and regulators in many areas of Asia are increasingly inclined to open up spectrum for new entrants and new networks, while Europe remains far more controlled.

In Europe, the advantage probably lies with the cellular operators, which have plenty of spare spectrum and could launch BWA alongside their GSM services. In the US and broadband-hungry countries like South Korea, frequency is in short supply and there will be far greater focus on the potential of WiMax to run in unlicensed spectrum, and the consequent ability of new operators to enter the fray.

Bundling and coverage have been the main weapons used successfully so far in the Wi-Fi market, where wired and wireless carriers have largely taken control of the hotspot and home Wi-Fi sectors from the independent WISPs. The same pattern may apply in WiMax, though there is one key difference. Carriers have embraced Wi-Fi to offer a value add to their existing services, often bundling it as an incentive to users to subscribe to DSL or other offerings.

With BWA of course, the other offerings would gradually be replaced altogether and so the business model needs to be far more convincing. But with alternative operators already setting up networks based on pre-WiMax technologies, not just in remote areas but in US cities, they may be faced with a stark choice – strike the WiMAX blow to their wired networks themselves, or wait for somebody else to do it for them. ®

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