LTE - Learnings from first movers

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1 LTE - Learnings from first movers Dominic Arena Partner Cheryl Lim Senior Manager Since the first LTE commercial deployment two years ago, more than 50 operators have launched LTE networks. As initial results emerge, it is becoming clear that the LTE play is distinctive and an opportunity that mobile operators can leverage to improve their businesses in a variety of ways to boost both top and bottom line. In this perspective, Value Partners examines the top LTE operators by subscriber base, how they have positioned the technology especially in terms of tariff and devices and the key learnings from these early experiences. Ishan Singhal Consultant Over the last 2 years, since TeliaSonera announced the world s first LTE commercial deployment, more than 50 LTE networks have been launched around the world, with another 40 expected to be launched in the next 2-3 years. LTE deployments planned and in-service at the end of 2011 Commercial LTE deployment Planned/In trial countries Top 10 LTE operators by subscriber base LTE has already been commercially deployed by more than 50 operators......in more than 30 countries......with another 40 more countries planning to launch LTE services in next 2-3 years NBN Co. to use 2.3GHz LTE for Regional & Remote Last Mile Source: Press reports, LTE Maps, operator websites. 1

2 While this might seem to be a rather rapid rollout pace, the ~50 LTE deployments represent only about 6% of the more than 800 MNOs operating around the world today and therefore it is still early days. It is nonetheless interesting to study LTE first movers results and how they are attempting to use this technology. Therefore, the focus of this study is to review the results so far, understand how LTE first movers are positioning the technology in terms of differentiation, tariff and device offerings and extract learnings from these early experiences that may be useful to operators currently planning to launch LTE. The results so far In terms of subscriber base, Verizon Wireless in the US and NTT Docomo in Japan have the largest subscriber base, having signed up more than 4 million and 1.5 million subscribers respectively. These represent ~4% and ~3% of their total subscriber base respectively, which is an impressive result compared to the other first movers who have ~0.2% - 1% LTE as a percentage of their total subscriber base on average. Top LTE operators by subscriber base and in Asia Operator LTE Subscribers in 000 LTE subs as % of total subs Network coverage Deployment date LTE band Verizon Wireless, US 4, % 50% population Dec MHz NTT Docomo, Japan 1, % 30% population Dec GHz Top LTE operators by subscriber base AT&T, US % 20% population Sep 2011 Metro PCS, US % Vodafone D2, Germany % 14 metropolitan areas 1,500 municipalities at end of May 2011 Sep 2010 Dec 2010 T-Mobile, Germany % 1,800 rural areas Apr 2011 SK Telecom, South Korea % Capital city, Seoul Jul MHz 1.7 GHz & 2.1 GHz 1.7 GHz 2.1 GHz 800 MHz 2.6 GHz 800 MHz 1.8 GHz 800 MHz LTE-A band TeliaSonera, Sweden % 161 cities around Sweden Dec GHz Selected Asian LTE operators M1, Singapore % Smart Communications, Philippines Financial district areas Jun GHz 2.6 GHz % 8 metro cities Apr 2011 N.A. CSL, Hong Kong % Selected urban areas Nov GHz Source: Informa, press reports, LTE Maps, Value Partners Analysis. 2

3 This may seem low, however when compared to the 3G migration, where many countries experienced typical penetration rates of ~0.3% in the first year after launch and ~2.2% in the second year, all the first movers appear to be performing as or better than expected. Of course it still remains to be seen if LTE will enjoy a similar take-up inflection point in 3-4 years after launch, as it was seen in the 3G experience and highlighted below. 3G penetration in selected countries against years after launch 60% 3G penetration Inflection point typically reached ~3 years after 3G launch when operator network roll-outs have reached meaningful coverage and 3G handsets have reached mass South Africa (2004) Mauritius (2004) Seychelles (2006) Australia (2003) Indonesia (2006) Taiwan (2005) Argentina (2007) Brazil (2007) Chile (2007) France (2004) Italy (2003) Germany (2004) Spain (2004) 40% Average 3G penetration in Yr 2: 2.2% 20% Average 3G penetration in Yr 1: 0.3% 0% Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Year after 3G launch Source: Informa, Value Partners analysis. LTE offering and tariff structure Among the LTE first movers, the most popular approach has been to position LTE as a premium extension to current mobile internet offerings, i.e., new LTE plans offer up to 50Mbps 100Mbps and are priced at least ~40% higher than the most expensive 3G plan. Although seemingly expensive, the LTE tariffs are consistent with consumer expectations and do not represent an excessive premium for higher speeds. Furthermore, from the standpoint of the per GB charge, the LTE plans are actually cheaper around 30% cheaper per GB than the highest 3G plan in fact. This pricing reflects the high-usage target segmentation for LTE in this early stage, and is quite consistent with market expectations in our view. The relatively small gap in per GB charging relative to 3G also shows that operators are not being overly generous with data caps/allowances and this may be telling of things to come. 3

4 Speed-based pricing monthly rate comparison of mobile internet plans for selected operators Up to 7.2 Mbps Up to 14.4 Mbps Up to 21.6 Mbps Above 50 Mbps NTT docomo 58% Flat-Rate Data Plans Value Standard JPY 3, Mbps, Unlimited download Xi Two-Year Data Plan FLAT JPY 5, Mbps, Unlimited download Vodafone D2 67% 40% 29% 44% Mobile Internet Flat Light 3.6 EUR Mbps, 1GB limit Mobile Internet Flat 7.2 EUR Mbps, 5GB limit Mobile Internet Flat 14.4 EUR 34.99* 14.4 Mbps, 7.5GB limit Mobile Internet Flat 21.6 EUR 44.99* 21.6 Mbps, 10GB limit Mobile Internet Flat 50.0 EUR Mbps, 20GB limit T-Mobile 33% 38% 36% L Basic EUR Mbps, 3GB limit** L Premium EUR Mbps, 5GB limit** XL XXL EUR EUR Mbps, 10GB limit** 100 Mbps, 20GB limit** TeliaSonera 152% 40% 100% Small SEK 99 <6 Mbps, 2GB limit Between SEK Mbps, 10GB limit Large Total SEK 349 SEK Mbps, 20GB limit Mbps, 30GB limit Speed-based pricing per GB charge comparison of mobile internet plans for selected operators Up to 7.2 Mbps Up to 14.4 Mbps Up to 21.6 Mbps Above 50 Mbps Vodafone D2-67% -7% -4% -18% Mobile Internet Flat Light 3.6 EUR per GB 3.6 Mbps, 1GB limit Mobile Internet Flat 7.2 EUR 5.00 per GB 7.2 Mbps, 5GB limit Mobile Internet Flat 14.4 EUR 4.67 per GB* 14.4 Mbps, 7.5GB limit Mobile Internet Flat 21.6 EUR 4.50 per GB* 21.6 Mbps, 10GB limit Mobile Internet Flat 50.0 EUR 3.25 per GB 50 Mbps, 20GB limit T-Mobile -20% -31% -32% L Basic EUR 9.98 per GB 7.2 Mbps, 3GB limit** L Premium EUR 7.99 per GB 7.2 Mbps, 5GB limit** XL XXL EUR 5.50 per GB EUR 3.75 per GB 21.6 Mbps, 10GB limit** 100 Mbps, 20GB limit** TeliaSonera -50% -30% -33% Small SEK 50 per GB <6 Mbps, 2GB limit * LTE hardware provided ** Speed throttling once is reached 3G monthly tariff plans 4G LTE monthly tariff plans % premium for 4G Source: Operator websites, IHS, Value Partners analysis. Between SEK 24.9 per GB 5-20 Mbps, 10GB limit Large Total SEK 17.5 per GB SEK 16.6 per GB Mbps, 20GB limit Mbps, 30GB limit 4

5 Volume-based pricing monthly rate comparison of mobile internet plans for selected operators Up to 100MB Up to 4GB Up to 8GB Above 8GB Verizon Wireless With personal (3g/4g) With personal and mobile hotspot (3G/4G) AT&T USD 10 75MB download No distinction made between networks; subscribers may access both 3G and 4G USD 30 2GB download USD 50 4GB download USD 50 5GB download USD 70 7GB download USD 80 10GB download USD GB download 3G USB modem data plan USD 60 5GB download -17% 4G USB modem data plan USD 50 5GB download LTE access is purely dependent on device readiness and network coverage as no extra charges are levied by US operators for using LTE network 3G monthly tariff plans 4G LTE monthly tariff plans 3G/4G monthly tariff plans % premium for 4G Comparison of mobile phone plans for SK Telecom Up to 500MB Up to 2GB Up to 5GB Above 7GB Tariff plans on absolute basis 3G Tariff plans on GB basis LTE All in One 34 KRW 34, MB limit LTE 34 KRW 34, MB limit All in One 44 KRW 44, MB limit LTE 42 KRW 42, MB limit LTE 52 KRW 52, GB limit All other plans are unlimited All in One 54 KRW 54,000 unlimited LTE 62 KRW 62,000 3GB limit All in One 64 KRW 64,000 unlimited All other plans are unlimited LTE 72 KRW 72,000 5GB limit All in One 79 KRW 79,000 unlimited LTE 85 KRW 85,000 7GB limit All in One 94 KRW 94,000 unlimited LTE 100 KRW 100,000 10GB limit 3G LTE All in One 34 KRW 340 per MB 100MB limit LTE 34 KRW 97 per MB 350MB limit All in One 44 KRW 88 per MB 500MB limit LTE 42 KRW 60 per MB 700MB limit LTE 52 KRW 42 per MB 1.2GB limit LTE 62 KRW 20 per MB 3GB limit LTE 72 KRW 14 per MB 5GB limit LTE 85 KRW 12 per MB 7GB limit LTE 100 KRW 10 per MB 10GB limit 3G monthly tariff plans 4G LTE monthly tariff plans Source: Operator websites, IHS, Value Partners analysis. 5

6 A minority group of operators notably the ones from the US are utilizing volume-based pricing and making no distinction between 3G and 4G (including LTE) networks, i.e., charging no premium to encourage 3G users to upgrade. In these cases, access to LTE speeds is purely dependent on whether the subscriber has an LTE-enabled device and whether LTE network coverage is available. An interesting point to note is that today AT&T s 4G plans (i.e., HSPA+ and LTE) are ~17% cheaper than its 3G ones. This strategy, however, may have as much to say about the need for the operator to offload high-usage customers from its 3G network which has in the recent past experienced some widely reported performance issues than about LTE itself. In terms of LTE mobile handset plans, SK Telecom is the only example among the first movers to have a comprehensive mobile handset offering. The interesting point to note here is that SK Telecom prices LTE at a similar level to its 3G; however, LTE plans are all data-capped while the 3G plans are mostly unlimited. In our view this points to a strategy of margin enhancement; i.e., attempting to temper the unlimited usage culture prior to mass take up of the LTE platform which enables far higher data consumption potential, and therefore cost to the operator. LTE device offerings The LTE devices offered by the first movers are surprisingly varied. Apart from USB modems and personal mobile hotspots, many of the first movers already offer a range of smartphones, tablets and LTE modems (for provision of fixed broadband via LTE). LTE device offerings of first mover LTE operators Operator USB modems Handsets Tablets Netbooks Others Verizon Wireless, US 2 12 smartphone 3 Android 2 Mobile hotspots 2 NTT Docomo, Japan 3 4 smartphone 2 Android AT&T, US 2 9 smartphone 3 Android Mobile hotspot 1 model Metro PCS, US 3 smartphone Vodafone D2, Germany 2 LTE modem (fixed) 1 model T-Mobile, Germany 1 model 1 Android model LTE modem (fixed) 1 model SK Telecom, South Korea 1 model 7 smartphone 1 Android model Mobile hotspot 2 model TeliaSonera, Sweden 1 model Source: Informa, press reports, operator websites, IHS, LTE Maps, Value Partners analysis. 6

7 LTE smartphone prices at Verizon Wireless and AT&T range from US$0 to US$ with a two-year contract exactly the same price range for their 3G smartphones, indicating that LTE handsets are not being sold at a premium in an attempt to encourage migration from 3G to the more data-efficient LTE platform. In terms of tablet offerings, both operators offer a range of 5 tablets, out of which 3 are LTE-enabled (the non-lte being the Apple ipad and another Android model), indicating an LTE emphasis in tablets. The other notable development is Vodafone D2 s fixed broadband offering via LTE, which is positioned as a direct substitute to its current DSL offering. It reportedly plans to migrate all its DSL customers (which it currently wholesales from Deutsche Telecom at a high cost of ~EUR 500m a year) to LTE, as well as to broadcast Vodafone TV via LTE. One of the notable highlights in the LTE device line-up, due to their absence, is that of Apple and BlackBerry devices (handsets and tablets). However it has recently been reported that the Apple ipad 3 may include an LTE version to run on Verizon Wireless and AT&T networks around March Key learnings from first movers While it is still early days for LTE, there are useful learnings and interesting insights for mobile operators who are planning or considering an LTE launch. Here we offer some key takeaways from our analysis of the LTE first movers. LTE take-up remains low even for the most successful operators which means LTE s role in relieving network congestion/data off-load could be limited in the short-term (however looking back at 3G, the early LTE take up curve is similar). Secondly, most first mover operators position LTE as: an extension to current mobile data offerings at a reasonable premium per package (but cheaper per GB) i.e. aimed at high usage users; an opportunity to make changes to their businesses, e.g., to migrate from previous unlimited plans, as replacement for fixed broadband (i.e. DSL), to offer IPTV, etc. In addition, smartphones and tablets are emerging as key LTE device offerings at price points similar to 3G devices (with notable exceptions of Apple devices to date), which means that quality of experience (QoE) could be the key competitive lever. 7

8 Conclusions Value Partners believes that new entrants can learn a lot from the initial experience of the LTE first movers. A close look at their current LTE strategy, portfolio and propositions will provide useful insights to new entrants in terms of both LTE pricing and device offering. Even at this early stage, distinctive characteristics of the LTE play are becoming clearly discernible. What we have demonstrated is that LTE is typically positioned as a premium service targeting users with advanced mobile data needs, while at the same time showing its commercial potential as a fixed broadband substitute. LTE operators offer high-speed data plans up to 100Mbps and price these services at similar to low premium levels to existing 3G plans. Though slightly more expensive per absolute package, LTE offers better value to its consumers on the basis of per GB data pricing, which will suit premium early adopters. Unlike 3G however, LTE devices are likely to become affordable much sooner. Tablets, along with smartphones, are likely to be a key consumption device. LTE take-up may be much more dependent on operators holistic commercial decisions, and therefore competitive dynamics, than technological barriers such as device availability. More importantly, LTE is an opportunity for operators to make changes to their business model to address the great margin squeeze; changes that could both boost their top line and make a material difference to their bottom line. Therefore, such as is the case with each technology evolution, operators should define an holistic approach to mobile broadband across 3G and 4G in order to get the most out of the LTE opportunity. 8

9 About Value Partners Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. Founded in Milan in 1993, today it draws on 25 partners and over 275 professionals from 23 nations, working out of 10 offices in Milan, Rome, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. Value Partners has built a portfolio of more than 350 international clients from the original 10 in 1993 with a worldwide revenue mix, as over 60 percent of the management consulting revenues are generated outside Europe. Value Partners combines methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, new media, financial services, energy, manufacturing and hi-tech. In 2007 Value Partners acquired Spectrum Strategy Consultants a leading UK company specialized in publishing, broadcasting, entertainment, IPTV and mobile thus further strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide. At the beginning of the 2000s, Value Partners decided to expand its service offerings beyond management consulting to include complex, innovative and business-critical IT services: Value Team was created and, in less than 10 years, reached on 3,000 professionals active out of offices in 4 countries. In April 2011 NTT DATA one of the main players in the IT sector in Japan acquired Value Team for an enterprise value of over 270 million Euros, to make its platform for growth in the key European and Latin American markets. Value Partners and Value Team will continue to co-operate on complementary projects for individual customers. In Asia, Value Partners has been active since 2004 and has established a strong presence over the years, with offices in Hong Kong, Shanghai, Beijing, Singapore and Mumbai. We are committed to Asia and have capitalised on the opportunities that exist in both developed and emerging markets across the region. Value Partners serves clients in diverse industry sectors, including telecoms & media, industrials, consumer goods and retail amongst others. We also work across multiple functional areas and provide assistance to organizations in various capacities, ranging from corporate strategy, company valuation and international expansion, to cost optimization and business turnaround. For more information on the issues raised in this note please contact: dominic.arena@valuepartners.com cheryl.lim@valuepartners.com Find all the contact details on Milan Rome London Istanbul São Paulo Buenos Aires Beijing Shanghai Hong Kong Singapore 9