Report The economics of small cells and Wi-Fi offload. The economics of small cells and Wi-Fi offload. By Monica Paolini SENZA CONSULTING

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1 The economics of small cells and Wi-Fi offload By Monica Paolini SENZA CONSULTING

2 Key results Expected increase in data traffic requires a massive increase in capacity in mobile networks. Small cells and Wi-Fi are crucial to providing the increase in capacity density that operators need and subscribers expect. Operators need both small cells and Wi-Fi to cost-effectively meet their capacity requirements. The small-cell and Wi-Fi infrastructure can be colocated to increase efficiency and reduce per-bit costs. Source: Senza Fili To maximize the benefits of small-cell and Wi-Fi colocations, integration of Wi-Fi into the mobile network core is required. The TCO analysis shows that adding more interfaces and sectors to small cells leads to only modest marginal increases in the TCO. Even at low densities, LTE small cells and Wi-Fi quickly take on a dominant role relative to macro cells in transporting mobile traffic. Small cells and Wi-Fi enable operators to slash per-bit TCO by at least half. Per-bit TCO shows that Wi-Fi added to small cells greatly improves the small-cell business case, especially for 3G small cells. Source: Senza Fili Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited Source: Senza Fili 2

3 Table of contents 1. Introduction: Why small cells and Wi-Fi? Two complementary tools, both needed to address traffic growth 5 2. Capacity and capacity density Where will the growth in capacity come from? 7 3. Small cells versus Wi-Fi A comparison of two complementary approaches to capacity increase Small cells and Wi-Fi Why it makes sense to deploy them alongside each other Past and future of Wi-Fi Integration into mobile networks is key to maximizing Wi-Fi s contribution Small cells, Wi-Fi access and Wi-Fi offload Defining terms and scope used in the report Cost assumptions Building the TCO model Comparing the costs for macro cells, small cells and Wi-Fi The base TCO model The capacity contribution of small cells and Wi-Fi Incremental capacity increase with more small cells per macro cell Per-bit TCO Assessing the cost-effectiveness of small cells and Wi-Fi Findings: two (or three) is better than one Synergies among LTE, 3G and Wi-Fi strengthen small-cell business case Acronyms Senza Fili Consulting Reproduction and redistribution prohibited 3

4 List of figures Figure 1. Capacity density 5 Figure 2. Combining small cells and Wi-Fi 6 Figure 3. Mobile IP traffic 7 Figure 4. Europe data traffic and revenue growth 7 Figure 5. Fixed, mobile and Wi-Fi IP traffic 8 Figure 6. Capacity increase, past and future 9 Figure 7. Integrating Wi-Fi in the mobile network: looser and tighter coupling 14 Figure 8. Outdoor and indoor TCO 19 Figure 9. TCO for outdoor and indoor small cells, as a percentage of macro-cell TCO 20 Figure 10. Capex and equipment as a percentage of TCO 21 Figure 11. Backhaul capex and opex as a percentage of TCO for macro cells, indoor and outdoor small cells, and Wi-Fi 22 Figure 12. Capacity contribution of small cells and Wi-Fi as the density of small cells increases 24 Figure 13. Per-mbps TCO for LTE and 3G small cells and macro cells, and Wi-Fi 25 Figure 14. Per-bit TCO for LTE and 3G small cells and Wi-Fi as a percentage of per-bit TCO for macro cells 26 List of tables Table 1. Sources of capacity increase in the RAN 9 Table 2. Comparison of Wi-Fi offload and small cells 10 Table 3. Small cells and Wi-Fi: Together or separate? 11 Table 4. What is a small cell? 15 Table 5. Cost, capacity and backhaul assumptions for outdoor sites 17 Table 6. Cost, capacity and backhaul assumptions for indoor sites Senza Fili Consulting Reproduction and redistribution prohibited 4

5 1. Introduction: Why small cells and Wi-Fi? Two complementary tools, both needed to address traffic growth Under pressure from more users, more devices and more applications, mobile networks have to transport higher traffic loads, which are straining the current infrastructure and frustrating subscribers when they cannot use the services they have paid for (Figure 1). The increase in traffic load will continue over the coming years and is profoundly changing how mobile operators plan, deploy and operate mobile networks, and charge for access. Until recently, mobile networks mostly expanded horizontally to reach new areas or obstructed locations or to improve indoor coverage. The new wave of expansion is orthogonal and aimed at providing depth of coverage that is, more capacity in already covered areas. The initial horizontal expansion of mobile networks was achieved mostly through the deployment of additional macro cells. This is no longer sufficient to get depth of coverage. This report is based on the premise that both small cells and Wi-Fi are necessary to provide the additional capacity needed, where it is needed. Small cells and Wi-Fi add capacity to mobile networks in ways that are complementary, and in sufficiently distinct ways that it is not possible to substitute one for the other across the mobile footprint. Subscribers will not give up Wi-Fi access in the foreseeable future, and only cellular networks can provide the coverage and mobility support that subscribers have come to expect. Higher traffic load Growing smartphone penetration Multi-device subscribers More applications Higher persubscriber traffic Higher capacity needed More base stations More spectrum New technologies Multiple interfaces Effective traffic management Higher capacity density Traffic load unevenly distributed across footprint and time of day Two directions: Dense metro areas Indoor coverage (home, office) But the report will go a few steps further and explore the implications of the coexistence of small cells and Wi-Fi. Where should operators deploy small cells instead of Wi-Fi? Where is Wi-Fi more cost effective? Should small cells and Wi-Fi be deployed in largely segregated networks, or should they be integrated both in the RAN and in the core network? We argue in favor of a deep integration of the two. Figure 1. Capacity density. Source: Senza Fili In many locations where either Wi-Fi or small cells are installed or planned, it will often make sense to add the other wireless interface as well. This is especially true if mobile operators integrate Wi-Fi within their core network and can manage cellular and Wi-Fi traffic effectively 2012 Senza Fili Consulting Reproduction and redistribution prohibited 5

6 using the same tools to support the same services on both interfaces. We envision a deployment model in which locations with the higher traffic levels (e.g., dense metro areas, stadiums, airports) benefit from small cells with Wi-Fi, but in which small cells with a lower traffic load (e.g., in suburban areas) and a wider range may not warrant the addition of Wi-Fi. Similarly, in residential and most enterprise locations, Wi-Fi meets the capacity requirements, thus making the addition of small cells unnecessary (Figure 2). The report explores how this model addresses some of the deployment and business model challenges of small cells and, to a lesser extent, Wi-Fi mostly from an economic perspective, by looking at the TCO for different small-cell and Wi-Fi configurations along multiple dimensions: Location: outdoor versus indoor Equipment: single-sector versus multi-sector small cells Interface: LTE versus 3G small cells Capacity: number of small cells per macro cell. Figure 2. Combining small cells and Wi-Fi. Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited 6

7 2. Capacity and capacity density Where will the growth in capacity come from? According to the widely cited Cisco VNI, mobile traffic will increase by a multiple of 18 between 2011 and It will account for 10% of global IP traffic by 2016 (Figure 3) and represent five times the volume that global internet traffic had in One fact less frequently cited is that this figure assumes the growth rate is decreasing, a trend that Vodafone has already started to observe (Figure 4). This decrease in mobile traffic growth rate is to be expected the same happened to fixed internet traffic and likely has multiple causes. One is that new recruits to the mobile internet do not use it as heavily as the early adopters. Another is that traffic caps and better understanding of what drives traffic volume among subscribers may discourage some traffic. Finally, easier Wi-Fi connectivity and devices, such as tablets, that connect predominantly through Wi-Fi are moving a higher percentage of what used to be cellular traffic over to Wi-Fi. But even when we take all these factors into account, the strong growth in cellular traffic will continue in the coming years. However, to put the role of mobile traffic in perspective, it is helpful to view its contribution to overall global IP traffic and to Wi-Fi traffic. In 2011, mobile data traffic accounted for 2% of global IP traffic, and this percentage is expected to grow to 10% by 2016, again according to Cisco VNI. In comparison, Wi-Fi plays a much larger role, although most traffic is generated in a fixed environment. Cisco expects that Wi-Fi traffic will surpass wired traffic by 2015 and account for 51% of global IP traffic by 2016 (Figure 5). While mobile data CAGR at 92% over the period outstrips the Wi-Fi CAGR by 39%, mobile traffic will be only 17% of the volume of Wi-Fi traffic by Figure 3. Mobile IP traffic. Source: Cisco VNI When we look at the overall mobile device market and usage models, these data indicate that Wi-Fi is and will continue to be a major driver and enabler of mobile connectivity, not an interim, second-best access interface in relationship to cellular. This carries important implications for mobile operators. It is not to their advantage to consider Wi-Fi solely as an offload technology onto which they can conveniently funnel all the traffic that would overload their networks and forget about it. Rather, they will be better served by taking Wi-Fi into the Figure 4. Europe data traffic and revenue growth. Source: Vodafone 2012 Senza Fili Consulting Reproduction and redistribution prohibited 7

8 fold and integrating it with their mobile networks and, as we will argue in this report, in particular with small-cell deployments. Even if the Cisco VNI forecast turns out to be overly generous, new spectrum allocations and technological innovation will not be sufficient to address the anticipated steep traffic increase. Take spectrum, for instance. While new allocations will make capacity expansion possible by providing new channels and enabling the adoption of more spectrally efficient technologies like LTE, the new spectrum on its own may at best allow two or three times the current capacity across the network footprint. A similar case can be made with technological improvements in spectral efficiency brought by LTE and LTE Advanced especially in light of the fact that, for many years, most networks will still use 2G and 3G technologies. Not only does this fall short of providing for the capacity needs implied in the Cisco VNI forecast and in even more conservative ones but it does not take into account the fact that the growth in traffic load is not uniformly distributed in space or time. If it were, new spectrum and new technology would be more valuable at increasing capacity, because they can be used across the entire network footprint. Instead, traffic load increase is concentrated mostly in the areas where traffic loads are already high and where macro-cell density is, as a result, equally high. To make things worse, traffic demand is not equally distributed throughout the day, but has different time-of-day traffic curves that depend on the type of location. In metro areas, peaks tend to be during work hours. In residential areas, traffic surges at night. Figure 5. Fixed, mobile and Wi-Fi IP traffic. Source: Cisco VNI Because required capacity is based on peak-hour loads and not on average traffic, the need for additional capacity is most acute in a limited subset of locations and a few hours of the day. This makes it much more challenging to meet the new capacity requirements, because the capacity injection has to be carefully targeted. The main way to achieve this is to increase cell density. This should not come as a surprise. Most of the increase in RAN capacity over recent decades has been accomplished by adding cell sites, or by adding base stations to existing ones (Figure 6). In the future, vendors and operators agree, cell density will continue to be a crucial driver of increase in capacity density. The tools to get more capacity, however, will be different. Many mobile operators have exhausted, or nearly exhausted, their ability to increase capacity in high-density areas by 2012 Senza Fili Consulting Reproduction and redistribution prohibited 8

9 simply adding macro cells, without increasing interference and costs and hence without seeing much lower marginal returns on their investments. This is where small cells and Wi-Fi come in, bringing the RAN infrastructure closer to the user hence affording a better link budget, which translates into a more efficient use of spectrum and network resources to provide a highly targeted capacity increase where needed and at a much lower per-bit cost (Table 1). Table 1. Sources of capacity increase in the RAN Benefits Macro cell Well-understood deployment model Mature technology Good support for mobility Fewer sites to manage Small cell Femto cell (residential and enterprise) Wi-Fi High increase in capacity density Better spectrum and resource utilization Lower cost per bit Better link budget because cell is closer to subscribers Efficient way to add coverage or capacity in areas where they are limited Cost-effective equipment Do not require deployment or direct management by operator Mature technology Inexpensive access point equipment Ubiquitous in mobile devices Familiar to subscribers, who use it extensively (and want to continue to do so) Challenges High lease costs Higher per-bit costs for mobile broadband Greater interference, caused by higher density Impact of interference still not fully understood Higher number of cell sites to identify, install and manage Cells located on non-telecom assets such as lampposts, which are difficult to protect Expensive or limited availability backhaul options Interference triggered by high density or improper placement by subscribers (i.e., not under control of the operator) Higher cost and less availability than Wi-Fi Interference due to high utilization of the technology No support for mobility (i.e., handoffs) Limited mobile voice support Not yet integrated with the mobile network (or limited integration) Most of Wi-Fi traffic is outside the control of the operator Figure 6. Capacity increase, past and future. Source: Alcatel-Lucent, Arraycomm, KDDI, Senza Fili Senza Fili Consulting Reproduction and redistribution prohibited 9

10 3. Small cells versus Wi-Fi A comparison of two complementary approaches to capacity increase Both small cells and Wi-Fi bring an important contribution to capacity increase, but they do so in different ways, which are largely complementary (Table 2). Some of these differences stem from the fact that Wi-Fi is already a widely adopted, mature technology, while small cells are still in the planning stage, despite the strong commitment from operators. Another difference that will continue to play an important role is the use of license-exempt spectrum in Wi-Fi networks and of licensed spectrum in small cells. This imposes some limitations on the effectiveness of traffic and interference management in Wi-Fi. At the same time, small cells have to address interference from the macro layer (if the small cells are deployed in the same channels, as is expected in most cases). This is a source of interference that the operator controls but cannot eliminate. Table 2. Comparison of Wi-Fi offload and small cells Wi-Fi Already deployed, but being expanded License-exempt spectrum Interference from other Wi-Fi networks Mostly indoors Small cells A few deployments launched, major deployments in two to three years Licensed spectrum, but often shared with the macro layer Interference with macro layer Mostly outdoors In both cases, the main challenges are due to the integration with the mobile network, as well as to the business case and the operational aspects of deploying and managing a high number of cell sites (e.g., site acquisitions, lease agreements, and backhaul in outdoor locations). Another important difference is that Wi-Fi is used mostly at indoor locations (both for home and residential networks, and for public hotspots), while small cells are initially targeted mostly at outdoor locations. This difference is largely handed down by prevailing practice, rather than performance or cost benefits. Wi-Fi has been predominantly deployed indoors because this is where most usage (both for Wi-Fi and mobile) comes from. Small cells are often initially positioned to fill the gap between macro wide-area coverage and Wi-Fi indoor coverage. As more small cells are installed and indoor usage grows, small cells will start to also occupy indoor locations. As a result, we expect that this difference will wane over time and that the availability of equipment to support both cellular and Wi-Fi in the same enclosure will accelerate the convergence of small cells and Wi-Fi in the underlay public networks. Residential offload is major benefit to mobile operators Operators can benefit from third-party networks even without building own hotspot network Best-efforts Next steps: Transparent access to subscribers Introduction of Hotspot 2.0 / Passpoint with SIM-based authentication to improve user experience Integration of Wi-Fi traffic management within the cellular network Focus on high-traffic urban areas Infrastructure sharing or neutral-host wholesale arrangements may be used to contain costs and widen footprint QoS tiered services can be implemented Next steps: Network coordination and management of interference with macro network Selection of backhaul that is affordable and meets performance requirements Site acquisition and lease agreements 2012 Senza Fili Consulting Reproduction and redistribution prohibited 10

11 4. Small cells and Wi-Fi Why it makes sense to deploy them alongside each other Despite the somewhat divergent paths that Wi-Fi and small cells have taken, there are many reasons to add Wi-Fi within the small-cell enclosure (Table 3), either by adding a Wi-Fi module or by swapping out an already installed Wi-Fi access point in favor of a small cell with embedded Wi-Fi. Fundamentally, this is all made possible by the fact that equipment costs play a small role in the overall TCO for small cells and Wi-Fi hotspots (and, in fact, for macro cells as well), and that adding Wi-Fi to small cells does not substantially increase the equipment cost. Once a network is planned, the marginal capex and opex associated with the addition of Wi-Fi is minimal, but the increase in capacity is substantial. This is especially true for 3G small cells, which gain most of their capacity from the Wi-Fi component. As a result, the 3G small-cell business case is strengthened by the addition of Wi-Fi, because Wi-Fi lowers the per-bit prices of the combined 3G and Wi-Fi small cell. In the case of LTE cells, Wi-Fi has a positive impact on the per-bit costs and does not substantially affect the opex and capex. It is a Why not? consideration more than an element that is necessary to close a business case. A good case for adding Wi-Fi to small cells is the fact that by joining the cellular and Wi-Fi infrastructure, mobile operators will be able to deploy and operate fewer sites. However, because Wi-Fi and small cells are not necessarily deployed in the same locations, the gains will be determined by the distribution of small cells with Wi-Fi and the traffic distribution across the covered area. For instance, if an operator plans to deploy 50 small cells and 50 Wi-Fi access points within the same area, it does not mean that adding Wi-Fi to each small cell will result in the operator achieving the same capacity target with 50 cell sites. It may need more than 50 cells if the initial plan called for Wi-Fi and small cells to cover different zones (e.g., Wi-Fi for indoor Table 3. Small cells and Wi-Fi: Together or separate? Reasons to combine LTE small cells: Increase capacity per small cell at a low marginal cost 3G small cells: Improve an otherwise challenging business case Operate a smaller number of cell / access point sites Accelerate deployment of small cells by leveraging already-acquired Wi-Fi locations Address limitations in number of sites for small cells and Wi-Fi access points Facilitate indoor deployments of small cells for operators who already have a Wi-Fi network in indoor locations Expand outdoor Wi-Fi coverage for operators deploying outdoor small cells Reasons to keep separate Can meet traffic demand with just one interface (LTE, 3G or Wi-Fi) Leverage own spectrum, if operator has sufficient spectrum to get capacity needed from small cells, without relying on its own Wi-Fi network Optimally place small cells and Wi-Fi where each performs best or where acquiring new sites is neither expensive nor difficult Avoid Wi-Fi because high levels of Wi-Fi availability make an operator-run Wi-Fi network redundant Keep indoor deployments limited to Wi-Fi, and deploy small cells outdoors Avoid delaying Wi-Fi deployments, if operator is not yet ready for small cells Adopt a Wi-Fi first strategy that requires small-cell deployments only when and where Wi-Fi is no longer able to cost-effectively provide additional capacity 2012 Senza Fili Consulting Reproduction and redistribution prohibited 11

12 coverage and LTE for outdoor areas). Conversely, it is also possible that the operator may need fewer than 50 sites if the reduced site count enables it to pick more effective but also more expensive locations that have a higher utilization. In this case, the 50 cells have the same capacity as the 100 cells, but they are used more intensively and therefore carry more traffic. In general, though, operators should see a decline in the number of sites while preserving the capacity, and this will have a positive effect on their bottom line. The swap of a Wi-Fi access point for a small cell with embedded Wi-Fi has a very different value proposition. In this case, time-to-market considerations and the ability to gain a foothold in indoor coverage are key advantages. When deploying small cells, the process of identifying a site, getting a lease, bringing backhaul and power, and installing the equipment can take a long time and require protracted efforts. If swapping Wi-Fi access points with small cells, operators already have many of these elements accounted for. The site, backhaul and power are already in place. In most cases, the operator simply needs to replace the access point with a small cell. The downside of this approach is that it may force the operator to pick existing Wi-Fi locations that serve subscribers well yet fail, with the new small cell, to cover areas with a high density of subscribers that the existing Wi-Fi infrastructure does not serve. To be fair, there are also many reasons not to combine small cells and Wi-Fi (Table 3). In areas where there is a need for Wi-Fi or small cells, there may not be sufficient demand to justify the further capacity injection provided by either Wi-Fi or LTE. Even though the addition of Wi-Fi has little impact on the TCO, there is no reason to add it if it would not provide any benefit. A mobile operator might also have good reasons not to deploy Wi-Fi if it does not need its own Wi-Fi network (e.g., if the operator has sufficient spectrum to deploy all the small cells it needs, or if the area targeted with small cells already has sufficient free Wi-Fi access and a new Wi-Fi access point could suffer from high levels of interference). Alternatively, the operator might want to use Wi-Fi for indoor coverage and small cells for outdoor coverage, or use Wi-Fi to its full capabilities before starting to deploy small cells Senza Fili Consulting Reproduction and redistribution prohibited 12

13 5. Past and future of Wi-Fi Integration into mobile networks is key to maximizing Wi-Fi s contribution Mobile operators have embraced Wi-Fi, initially, with considerable circumspection and suspicion. From a network infrastructure, they ended up encouraging people to use license-exempt spectrum, after paying princely sums for the spectrum allocations and while lobbying for additional spectrum to be made available. How could it be that freely available spectrum could be more efficient at providing wireless broadband than operator-controlled spectrum? And if it is, why not expand availability of license-exempt spectrum instead of licensed spectrum? Of course we need both, but from the operators perspective, this can be a slippery slope. Equally important, operators saw in Wi-Fi the potential for cannibalization or reduction of perceived value of the service they provided to their subscribers. Why should a subscriber pay high monthly fees for data connectivity, when Wi-Fi is widely available for free and it is even faster? Even as they adopted Wi-Fi, most operators tried to keep their distance from it. Subscribers could of course use Wi-Fi, but they were often not actively encouraged to take full advantage of it, because operators saw a risk that Wi-Fi usage would reduce their control over the devices and the subscriber. To some extent, this has happened: usage behavior suggests that their subscribers perceive their devices to have two distinct personalities the paid-for and slower cellular one, and the fastand-free Wi-Fi one, usually with their heart going to the second one. In this context, it is easy to understand the mobile operators initial attitude that Wi-Fi was an interim fix until the arrival of LTE and small cells. But it has become clear that Wi-Fi will continue to play a central role in mobile networks, and many mobile operators acknowledge this. Some are moving further, to go beyond don t-ask, don t-tell offload and start integrating Wi-Fi access into their network. In addition to providing relief from the traffic crunch, Wi-Fi gives operators The future of Wi-Fi Wi-Fi is a mature technology that has greatly improved in performance and functionality through the years, with the introduction of IEEE n (throughput), WPA2 (security), WMM (QoS), Power Save (battery life), Miracast (video) and streamlined setup interfaces. In 2013, IEEE ac will open Wi-Fi to additional 5 GHz spectrum bands and use wider channels. This will bring more capacity and throughput in the gbps range (i.e., doubling the current n throughput). IEEE ad will extend Wi-Fi to the 60 GHz spectrum to provide very high throughput but within a shorter range than current Wi-Fi access points have. It will complement existing Wi-Fi and provide better performance for video and other highthroughput applications in environments with a high density of devices. Passpoint, the Wi-Fi Alliance certification program based on the Hotspots 2.0 specification, enables seamless access, with SIM-based authentication, to Wi-Fi hotspots managed by the mobile operator and its partners. Because the device is authenticated with the same SIM-based credentials used for the cellular network, the operator can extend to the Wi-Fi network the security, policy and charging frameworks used for mobile services. Early commercial launches are expected for To improve Wi-Fi roaming, the Wireless Broadband Alliance has launched the Next Generation Hotspot (NGH) initiative to establish roaming best practices for Wi-Fi and facilitate the creation of roaming partnerships among mobile operators. 3GPP efforts to provide a framework that integrates mobile and Wi-Fi networks have created ANDSF to enable mobile devices to discover and select non-3gpp networks on the basis of PCRF-defined rules. ANDSF enables real-time traffic management and policy enforcement, and it improves power-saving management on the mobile device Senza Fili Consulting Reproduction and redistribution prohibited 13

14 a way to offer a wider range of personalized and revenue-generating services. Most Wi-Fi offload models today keep all traffic (user plane and control plane) outside the mobile network. As a result, the mobile operator loses all visibility into offloaded traffic, which precludes the ability to enforce security, to use policy, to manage traffic and to use load balancing for network selection. Solutions that enable a deep integration of Wi-Fi into mobile networks are now available and allow mobile operators to retain full control of Wi-Fi traffic in the control plane, while offloading user-plane traffic to avoid congestion in the core network (Figure 7). By integrating Wi-Fi within their core networks, operators can treat Wi-Fi traffic in the same way they do cellular traffic and benefit from the same functionality for traffic management, policy, charging and security. This integration makes the combination of small cells and Wi-Fi even more powerful. Not only does Wi-Fi add capacity to the small cells, it also enables the operator to allocate traffic to one or the other interface based on real-time traffic load and available throughput (which in turn may depend on network and interference conditions that change through time), subscriber preference and plan-based policy, or traffic type (e.g., voice, video, browsing). Although this adds complexity to the small-cell management, in areas where capacity comes at a premium these tools may provide operators the ability to maximize network resource utilization. As a result, they can either increase the transported traffic load (improving service to subscribers), or delay the need to deploy more small cells (reducing costs, but maintaining a good service level). Figure 7. Integrating Wi-Fi in the mobile network: looser and tighter coupling. Source: 4G Americas 2012 Senza Fili Consulting Reproduction and redistribution prohibited 14

15 6. Small cells, Wi-Fi access and Wi-Fi offload Defining terms and scope used in the report The terminology and definitions for small-cell and Wi-Fi are not yet firmly established; the industry is still trying to find small cells and Wi-Fi s role in mobile networks. For instance, initially small cells had only one sector, but multi-sector small cells are now available. They can be used in high-traffic areas to share a site location among operators or to combine multiple wireless interfaces (e.g., 3G and LTE) in the same site. Interfaces Table 4. What is a small cell? LTE, 3G, with the optional addition of Wi-Fi added as a module in a single enclosure. Similarly, what should be included in Wi-Fi offload? Definitely the traffic from a laptop without cellular connectivity is not included, but what about the traffic from a tablet with a cellular connection that is only sporadically used? With time the industry will settle on definitions that will emerge from established practices. In the meantime we simply lay out the working definitions and scope used in this report. The TCO financial analysis in this paper covers only traffic from small cells and Wi-Fi access points that are managed by the mobile operator. Furthermore: Sectorization Initially mostly single sector, with an omnidirectional antenna. Two-sector and three-sector small cells are also available. We expect multi-sector small cells to become common, because they can support multiple interfaces (e.g., LTE and 3G) or facilitate infrastructure sharing or colocation arrangements, or simply be used in multi-sector arrangements with directional antennas. Coverage Up to 200 meters radius, but typically deployed to cover a 50- meter range. Macro-cell traffic is used as a reference to compare small-cell and Wi-Fi TCO. Residential and enterprise femto cells are excluded from the analysis. The same equipment can be used both for a small cell and a femto cell, so we distinguish small cells from femto cells on a functional basis. Residential and enterprise femto cells are managed by the homeowner or enterprise and share a backhaul connection that is not owned or controlled by the mobile operator. Small cells are deployed, backhauled and managed by mobile operators, and provide access to all subscribers within the coverage area. Only the Wi-Fi traffic that crosses the mobile operator s Wi-Fi infrastructure is included in the TCO analysis. Wi-Fi offload that takes place at home or in the enterprise, in networks owned and managed by homeowners or enterprises, is excluded even when it involves devices with mobile connectivity. Similarly, Wi-Fi offload traffic that uses free public access points or third-party Wi-Fi operators is not included in the TCO model. Form factor Small-tomacro ratio Capacity Up to 10 kg compact enclosure, typically with a SoC architecture, with integrated antennas. Small cells can be installed on a variety of street-level or indoor assets, including utility poles, building walls, and MSO cable strands. For some operators, a one-box form factor (small cell and backhaul module, with antenna in the same enclosure) is a desirable form factor. The ratio of small cells to macro cells is still subject to heated debate, but eventually it will depend on how rapidly traffic grows. In the report we consider ratios up to 15 small cells to a macro cell. We assume that the small cell has the same capacity as a macro cell that uses the same channel Senza Fili Consulting Reproduction and redistribution prohibited 15

16 7. Cost assumptions Building the TCO model To look at the economics of adding capacity to mobile networks through small cells, Wi-Fi access points and small cells with Wi-Fi embedded modules, we built a five-year TCO model. The model computes the TCO for a single small cell and, for reference, a threesector macro cell. Only RAN and backhaul costs are included in the model. While small cells and Wi-Fi deployments require additional costs in the core network, these costs play a minor role in the TCO and their impact is similar for all small-cell configurations and, hence, does not have a substantial impact in the comparison among configurations. The TCO model includes multiple small-cell configurations to allow comparisons among them, which vary along three dimensions: Wireless interface: LTE, Wi-Fi and/or 3G Location: indoor and outdoor Number of sectors: one, two or three (these options are needed for configurations that include both LTE and 3G, and also to explore business models that require multiple sectors). Capex and opex inputs (Table 5 and Table 6) are used to generate the base TCO. They derived from input from vendors, operators and independent research. We assume a mix of wireless and wireline backhaul for each small-cell configuration that is listed in Table 5 and Table 6. Capacity assumptions are used to compute per-bit costs for each small-cell configuration. The estimates are intended to reflect values averaged across multiple locations, because the capacity of cells will depend on a large number of environmental factors that the model does not intend to capture. To show the impact that small cells and Wi-Fi have on overall network capacity, we looked at the overall (macro, small-cell and Wi-Fi) TCO for a varying number (from zero to 15) of small cells per macro cell. We chose this metric because it provides an easy-tounderstand framework for the comparison among configurations. The analysis can be extended to networks of any size by using the macro cell as the basic unit, or by calculating the contribution of each interface as a percentage. Per-bit costs are computed as the TCO divided by the mbps. This provides a measure of the marginal cost of adding capacity. Calculating this per-mbps cost for each small-cell configuration is useful for comparing the cost-effectiveness of different configurations and of small cells and Wi-Fi access points in reference to macro cells. Cost assumptions vary greatly across countries, operators and individual markets within the operator footprints, so we went one step further and computed the per-bit TCO as a percentage of the macro-cell TCO. This approach increases the applicability of the results across environments, because cost assumptions may change, but the relative differences among small-cell configurations and between small cells and macro cells are less variable Senza Fili Consulting Reproduction and redistribution prohibited 16

17 Table 5. Cost, capacity and backhaul assumptions for outdoor sites Macro Three LTE sectors LTE One sector LTE Three sectors 3G One sector LTE, 3G Two sectors LTE One sector, Wi-Fi 3G One sector, Wi-Fi LTE, 3G Two sectors, Wi-Fi Wi-Fi CAPEX Equipment: base station $27,500 $3,500 $7,000 $3,500 $5,250 $4,200 $4,200 $5,950 $1,750 Equipment: wireless backhaul $7,500 $2,500 $3,500 $2,000 $3,000 $3,125 $2,500 $3,625 $1,250 Equipment: wireline backhaul $2,000 $1,000 $1,400 $800 $1,200 $1,250 $1,000 $1,450 $500 Planning, installation, commissioning $40,000 $6,500 $7,000 $6,500 $6,750 $6,600 $6,600 $6,850 $3,600 OPEX Site lease: base station $15,000 $1,200 $1,440 $1,200 $1,320 $1,320 $1,320 $1,440 $900 Backhaul: wireless $6,000 $1,800 $1,980 $1,800 $1,980 $1,980 $1,980 $2,160 $540 Backhaul: wireline $24,000 $10,000 $12,000 $8,000 $11,000 $11,000 $8,800 $12,000 $6,000 Power, maintenance, etc. $10,000 $1,250 $1,640 $1,250 $1,445 $1,445 $1,445 $1,640 $765 Capacity Mbps Backhaul % wireless 50% 70% % wireline 50% 30% 2012 Senza Fili Consulting Reproduction and redistribution prohibited 17

18 Table 6. Cost, capacity and backhaul assumptions for indoor sites LTE One sector LTE Three sectors 3G One sector LTE, 3G Two sectors LTE One sector, Wi-Fi 3G One sector, Wi-Fi LTE, 3G Two sectors, Wi-Fi Wi-Fi CAPEX Equipment: base station $2,975 $5,950 $2,975 $4,463 $3,570 $3,570 $5,058 $1,488 Equipment: wireless backhaul $1,875 $2,250 $1,500 $2,250 $2,250 $1,800 $2,625 $2,000 Equipment: wireline backhaul $400 $480 $320 $480 $500 $400 $580 $400 Planning, installation, commissioning $5,225 $5,650 $5,225 $5,438 $5,310 $5,310 $5,523 $3,093 OPEX Site lease: base station $720 $864 $720 $792 $792 $792 $864 $540 Backhaul: wireless $800 $1,080 $990 $990 $990 $990 $1,080 $990 Backhaul: wireline $5,000 $6,000 $4,400 $5,500 $5,500 $4,400 $6,000 $4,000 Power, maintenance, etc. $970 $988 $970 $979 $979 $979 $988 $596 Capacity Mbps Backhaul % wireless 10% % wireline 90% 2012 Senza Fili Consulting Reproduction and redistribution prohibited 18

19 8. Comparing the costs for macro cells, small cells and Wi-Fi The base TCO model Macro cells versus small cells. The TCO for a three-sector LTE macro cell over a fiveyear period is $279,412, assuming a 50:50 mix of wireless and fiber backhaul (Figure 8). A macro cell can cost more than six times as much as a small cell (in this case the 3G small cell, which has the lowest TCO among the configurations considered). For the three-sector LTE small cell with Wi-Fi, which is the most expensive small cell to deploy in our lineup, the TCO as a percentage of macro-cell TCO ranges from 16% to 23% for outdoor small cells, and from 13% to 20% for indoor small cells, which are less expensive to deploy and operate than outdoor ones (Figure 9). The TCO for Wi-Fi is even lower, at 10% of macro-cell TCO for outdoor access points and 11% for indoor ones. The differences in cost stem from the larger size and more stringent requirements of macro cells, which in turn drive higher backhaul, lease and equipment costs. The percentage of the TCO that is due to capex and equipment is approximately the same for macro and small cells, and slightly lower for Wi-Fi (Figure 10). One major difference in the TCO comes from backhaul. In macro cells, backhaul accounts for 36% of TCO, while for small cells it accounts for 60% to 48%, and for Wi-Fi for 65% to 46% (Figure 11). The higher impact of backhaul is due to the relatively higher costs associated with RAN equipment for macro cells. In small cells, RAN and backhaul equipment are much closer in size and cost, so the RAN and backhaul account for comparable portions of the overall TCO. Small cells versus Wi-Fi. In our TCO model, Wi-Fi costs less than a small cell to deploy and operate not primarily because of the equipment costs (which account for 10% to 14% of the TCO), but because Wi-Fi access points are operated under less stringent performance and reliability requirements than small cells. The need to coordinate transmission with the macro network to manage interference makes it Figure 8. Outdoor and indoor TCO. Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited 19

20 imperative that small cells have carrier grade or near-carrier-grade reliability and low latency. A mobile operator may choose to deploy a carrier-grade Wi-Fi hotspot network, and in that case the TCO would be the same as for small cells, but typically this is not how Wi-Fi access points are deployed today. They are managed independently from the mobile network and used as complementary but not essential network resources, so carrier grade is not required. Wi-Fi networks that are not carrier-grade are likely to have a lower TCO, but also have lower reliability and performance. This has to be kept in mind this when comparing the Wi-Fi TCO to the small-cells TCO as it accounts for most of the cost differences between the two solutions. Because of this, the model assumes that outdoor Wi-Fi access points may use lowercost sub-6 GHz license-exempt spectrum for backhaul, while small cells use only licensed spectrum in the sub-6 GHz band. Small cells in the model can also use license-exempt spectrum in the 60 GHz band, but in that band, interference is not an issue yet because it is lightly used and uses PTP transmission. Incidentally, the use of license-exempt sub-6 GHz backhaul at outdoor locations accounts for the higher cost of indoor Wi-Fi access points, which do not take equal advantage of the cheaper wireless backhaul. In the small-cell case, indoor TCO is slightly lower because outdoor backhaul is more expensive (and in turn this is due to the fact that outdoor small cells use only licensed spectrum for NLOS backhaul). Figure 9. TCO for outdoor and indoor small cells, as a percentage of macro-cell TCO. Source: Senza Fili The TCO for an outdoor Wi-Fi access point is 57% of that of a single-sector LTE small cell, and 61% of a 3G small cell. For an indoor Wi-Fi access point, which is relatively more expensive than an outdoor one, the TCO is 65% of that for a single-sector LTE small cell, and 82% of the TCO of a single-sector 3G small cell. Adding Wi-Fi to a small cell. To compute the cost of a small-cell and Wi-Fi enclosure, we assumed that a Wi-Fi module was added to the small cell. Because the requirements for small cells are more stringent, we consider this to be more appropriate than adding an LTE or 3G radio module to a Wi-Fi access point. The marginal equipment cost of adding Wi-Fi to a small cell is $800 for an outdoor one and $580 for an indoor one. The addition of Wi-Fi leaves most of the other cost 2012 Senza Fili Consulting Reproduction and redistribution prohibited 20

21 items unaffected, with the exception of the backhaul, whose cost increases due to the higher backhaul requirements driven by Wi-Fi. As a result, the TCO for the same small-cell configuration with and without Wi-Fi increases by only a small percentage. The addition of Wi-Fi to an LTE or 3G outdoor small cell drives an increase in TCO ranging from 9% (three sectors) to 11% (one sector). For indoor small cells, the corresponding figures are 8% and 11%, respectively. LTE and 3G. While the future is LTE small cells, there is a role for 3G small cells today, because network congestion is almost exclusively a 3G issue today. Many operators still don t have an LTE network (or even the spectrum to deploy it), but they need additional capacity today. From a TCO viewpoint, however, 3G small cells are less cost effective, because their cost is very similar to LTE but their capacity is lower. For an outdoor location, the TCO for a single-sector 3G small cell is 92% of the LTE TCO, and for an indoor small cell the percentage is 88%. The difference in TCO mostly depends on the more limited backhaul requirements for 3G cells. If they have an LTE network or plan to deploy one, mobile operators may deploy LTE and 3G in a two-sector small cell (or deploy 3G initially and add LTE when the network is available), or as doing so makes the deployment more cost effective. The addition of an LTE module to a 3G small cell adds only 13% to the TCO of an outdoor or indoor small cell. As in the previous cases, the additional module does not have a major impact on the cost base. How many sectors? Unless high traffic, business model (e.g., ability to share infrastructure), or other considerations justify it, it does not make sense to deploy multi-sector small cells. But where a multi-sector small cell provides a benefit to the operator, the TCO comparison to a single-sector small cell is positive. With an additional 27% of TCO (outdoor) or 26% (indoor), the operator can move from an LTE single-sector small cell to a three-sector small cell with three times as much capacity. Figure 10. Capex and equipment as a percentage of TCO. Source: Senza Fili Indoor versus outdoor. We noted above that indoor small cells have a lower TCO. The capex is slightly lower for indoor small cells, but the main difference comes from the opex, which for all configurations and interfaces accounts, not surprisingly, for 2012 Senza Fili Consulting Reproduction and redistribution prohibited 21

22 most of the TCO (72% to 79% in our analysis). Specifically, indoor small cells have access to lower-cost wireline backhaul and lower leases. Backhaul costs. As noted above, the impact of backhaul costs is substantially higher for small cells because, in small cells, backhaul scales less effectively than RAN equipment. Specifically, fiber and LOS wireless backhaul links are less expensive for a small cell than for a macro cell, but the decrease in cost is, as a percentage, smaller than for other items, such as RAN equipment, power or lease costs. Backhaul costs do not increase linearly with the increase in capacity. Rather, across small cells, backhaul costs vary as a percentage of TCO, with the percentage decreasing as the number of sectors increases. An exception to this is 3G small cells, where a substantially lower capacity allows operators to select less-expensive backhaul technologies. The differences are small, though, with backhaul accounting for 48% to 60% of the TCO across the indoor and outdoor small-cell configurations considered. Wi-Fi backhaul is lower than for small cells in the outdoor case, because we assume that Wi-Fi access points use license-exempt spectrum. In indoor configurations, Wi-Fi backhaul costs are similar to those for small cells, but because the non-backhaul costs are lower for Wi-Fi, the percentage of TCO accounted for by the backhaul is higher. Figure 11. Backhaul capex and opex as a percentage of TCO for macro cells, indoor and outdoor small cells, and Wi-Fi. Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited 22

23 9. The capacity contribution of small cells and Wi-Fi Incremental capacity increase with more small cells per macro cell Small cells and Wi-Fi hotspots are deployed to increase capacity, so when examining the business case, capacity assumptions and per-bit costs take center stage. In this section we look at the capacity assumptions, so that in the following sections we can move to examine the per-bit costs. Our model relies on a capacity estimate for each cell configuration, as shown in Table 5 and Table 6. These estimates were derived from the standards-defined estimates of the maximum and average throughput of the wireless interface considered (10 MHz channels for LTE, 5 MHz for HSPA; Wi-Fi n). But they include a further reduction in throughput due to the impact of interference and other environmental variables that affect transmission, such as obstruction, to ensure that the TCO model did not overestimate the contribution of small cells. This defensive approach is necessary because of the complexity of estimating the capacity for macro cells, small cells and Wi-Fi. They are deployed in a wide range of environments and subscriber distribution that create a large variability in the throughput for the same base station in different locations. In the case of small cells, there are additional considerations that further complicate estimates of capacity. In the macro network, cells are placed in a way that minimizes the overlap in their coverage area. On the other hand, small cells use the same frequency as macro cells, and their coverage area is located within the macro coverage area. This creates interference, at levels that depend on the location of the small cell within the macro-cell coverage area, the transmission power and other environmental factors. 3GPPbased interference management tools such as COMP and eicic are being introduced to coordinate macro-cell and small-cell transmission, but their impact is still unclear, as is the rate of adoption that they will have among operators. At the same time, small cells being placed closer to subscribers can be more spectrally efficient than more-distant macro base stations, because the small cell uses a better modulation scheme. If placed close to where the demand is, a small cell can be highly beneficial and can add more capacity than a macro cell with the same number of sectors and using the same spectrum but located farther away. At the same time, the reverse may be true if the small cell is not in a well-suited location. While the uncertainty of capacity estimates cannot be avoided in a model that tries to generalize across countries and operators, we focused on the relative contribution of different interfaces in different small-cell configurations and assumed that the capacity of a single-sector base station is the same in a macro cell and in a small cell. As a result, the capacity of a three-sector LTE macro cell is the same as that of a three-sector LTE small cell, installed either indoors or outdoors. For simplicity we also assumed that, as the density of small cells increases that is, as the number of small cells per macro cell grows the capacity increases linearly for the range of cell densities (from zero to 15) that we considered. So, for instance, five small cells add a fivefold increase in capacity over one cell. Commercial deployments of small cells are 2012 Senza Fili Consulting Reproduction and redistribution prohibited 23

24 still rare and limited in size and have low small-cell to macro-cell ratios, so it is not yet known what the capacity gains will be as the density of small cells increases. So the linear assumption offers a straightforward estimate that allows us to do a preliminary exploration of the contribution that small cells and Wi-Fi bring to mobile networks. The results are shown in Figure 12, for eight small-cell and Wi-Fi configurations and using small-cell to macro-cell ratios that range from zero to 15. Capacity increases as the number of sectors increases with the addition of Wi-Fi, with the transition from 3G to LTE, and, of course with the small-cell density. Small-cell and Wi-Fi capacity quickly surpasses macro-cell capacity. Four one-sector LTE small cells or two three-sector LTE small cells contribute more capacity than a macro cell. So do three Wi-Fi access points within the macro-cell coverage area. We need 13 single-sector 3G small cells to reach the capacity of an LTE macro cell (but the number drops to three if we use a 3G macro cell for the comparison). Wi-Fi adds 89% to the capacity of a single-sector LTE small cell and 30% to a three-sector LTE small cell. In a 3G small cell, the Wi-Fi contribution is larger and represents 3.5 times the small-cell capacity. Figure 12. Capacity contribution of small cells and Wi-Fi as the density of small cells increases. Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited 24

25 10. Per-bit TCO Assessing the cost-effectiveness of small cells and Wi-Fi As the next step in our analysis, we used the TCO and capacity results from the previous sections to compute the per-bit costs as: Per-mbps TCO over the five-year period (Figure 13) Per-bit TCO for small cells and Wi-Fi access points as a percentage of macro-cell per-bit TCO. (Figure 14) For both analyses, we compare the per-bit TCO to an LTE macro cell and to a 3G macro cell, depending on the configuration of the small cell. Wi-Fi access points were included in both cases. The split in the comparison is due to the fact that an operator with an LTE network is likely to include LTE in its small-cell deployments. On the other hand, comparing the per-bit TCO for a 3G small cell to an LTE macro cell is not very relevant, because only operators with 3G-only networks are likely to deploy 3G-only small cells. Across all the configurations, the 3G per-mbps TCO is much higher than LTE. This reflects the lower per-bit costs of LTE due to its greater spectrum efficiency and wider channels. Also consistently across configurations, indoor small cells have a lower per-mbps TCO than outdoor, which reflects a lower TCO but equal capacity. For Wi-Fi access points, the difference is reversed, following the lower TCO for outdoor Wi-Fi access points due to the lower backhaul costs. As the number of sectors increases or when Wi-Fi is added, per-bit costs decrease, showing that as the total capacity of the small cell increases, the per-bit costs go down. In other words, multi-sector small cells and small cells with Wi-Fi are more expensive to deploy and operate, but are more cost effective. In the single-sector outdoor small cells, the per-bit costs are 50% of the macro cell costs in the LTE case and 47% in the 3G case. Adding two more sectors brings the costs of an LTE small cell Figure 13. Per-mbps TCO for LTE and 3G small cells and macro cells, and Wi-Fi. down to 21% of the macro per-bit costs. The addition of Wi-Fi to the single-sector LTE lowers Source: Senza Fili 2012 Senza Fili Consulting Reproduction and redistribution prohibited 25