DELIVERING BROADBAND: WIMAX IN THE MIDDLE EAST

 

November 2007

 

Authors		Federico Membrillera - Partner
		Ingrid Flores - Senior Associate
		Matthew Beckner - Analyst

 

 

 

 

 

 

 

WiMAX, the much touted 4th generation technology, has arrived and is already making waves in the Middle East and North Africa

 

 

The MENA region’s low broadband penetration represents a large untapped market that operators are keen to target, especially as regulators start opening up the fixed arena to expand connectivity. Numerous WiMAX licenses have been awarded to date and several more are expected in countries like Qatar, Egypt and Oman in the near future and there are also several deployments already underway. Furthermore, if the technology lives up to its promise of full mobility, the whole industry will be shaken up as new entrants join the market and fixed and mobile players are forced to compete head-on.

 

 

WiMAX at a glance

 

 

 

What is WiMAX

 

 

WiMAX is essentially a wireless last-mile extension of IP infrastructure. This allows WiMAX to leverage on existing IP network equipment and take full advantage of IP-based innovations. The technology was originally designed for fixed data connectivity, but the latest revision (IEEE 802.16e) allows for nomadic and mobile services. This will pit WiMAX against different technologies as it progresses from fixed to nomadic to mobile in its evolution.

 

In a fixed setting, WiMAX can be utilized as a ‘gap in the wire’ to provide DSL (Digital Subscriber Line) like services. For providing standard internet services, WiMAX will offer DSL-like speeds but will struggle to cost effectively provide bandwidth intensive services such as IPTV, particularly as a mass market application. Since the MENA region is largely dominated by satellite TV, the demand for alternative services is expected to be limited. Therefore, the principle end-user WiMAX device will be the PC, enabled through a WiMAX CPE (customer premise equipment). The primary service over this connection will be internet access. Additionally, the use of analogue telephone adaptors (ATAs) will allow VoIP (voice over IP) services through a WiMAX CPE using a standard phone, enhancing revenue generating potential.

 

In a nomadic setting, WiMAX can be used to offer an ‘on the go’ connection allowing Wi-Fi-like services over a greater coverage area and with quality of service guarantees. The principle end-user device will continue to be the PC, which will be enabled by a PCMCIA card inserted directly into the PC, and the primary WiMAX service will be internet access. Intel plans to provide WiMAX integrated chips to PC makers, giving direct access via a laptop, similar to Wi-Fi, without the need for additional equipment. Large network and device vendors (Nokia, Motorola, and Samsung) plan to launch WiMAX enabled devices by late 2008 / early 2009, allowing nomadic users to access their WiMAX network over PDA-like devices. This would permit more data-rich applications such as video streaming and music downloads to be offered over the network to highly portable devices.

 

WiMAX will compete against different technologies as it progresses from fixed to nomadic to mobile in its evolution

 

In a mobile setting, WiMAX will offer mobile data services similar to 3.5 G mobile technologies such as HSPA and EV-DO but at higher speeds and potentially lower network costs. True cellular handover for data services is unlikely anytime soon since first generation devices are not planned until late 2008. Even when handover is available, there are currently few data applications that would benefit from it. Therefore, the end-user device will likely be a mobile phone with integrated WiMAX/GSM, utilizing a GSM network for voice handover and WiMAX for nomadic data services. The principle WiMAX service will continue to be internet access, though by that time data-rich applications should have matured offering a wide array of value added services such as video on demand, peer-to-peer gaming, and video conferencing.

 

 

 

 

Why WiMAX

 

 

Though this is fundamentally a multi-dimensional decision, it is easiest to analyze utilizing the fixed, nomadic, and mobile distinctions.

 

Fixed deployments will represent the bulk of WiMAX offerings for the rest of the decade. These deployments will be targeted mainly in emerging markets where broadband penetration is still low and fixed line infrastructure is poor, offering fixed internet and voice services. In this setting, WiMAX will compete against DSL and fiber.

WiMAX is essentially a DSL replacement with no real differentiation as a fixed service. In markets where wireline connectivity is low and poor in quality, WiMAX offers the greatest benefits. WiMAX is both less expensive and faster to deploy than copper line commonly used for DSL, while offering similar data speeds for broadband internet services. The current high cost of CPE devices represents the largest single factor limiting the adoption of WiMAX in most emerging markets. Current prices for outdoor CPE ($350-$500) and indoor CPE ($250-$300) will require most operators to offer entry subsidies to attract new customers. This is likely to change as CPE prices, particularly on indoor models, continue to fall. The expressed target of several vendors is a $100 CPE, which could be reached in late 2008, permitting mass market WiMAX deployments across emerging markets.

Fiber can also be seen as a competitive technology, as some fixed line providers will choose to invest in laying Fiber to the Home (FTTH) or Fiber to the Curb (FTTC) to offer high-speed services both WiMAX and DSL are incapable of offering. Fiber is considered a ‘future proof’ technology in that it has the highest bandwidth potential of any known technology. Fiber is more likely to be used in developed markets where broadband penetration is already high, though it is already being deployed in several GCC countries where large real estate developments are utilizing the technology. WiMAX will not be able to compete with fiber in terms of speed, but will be much faster to deploy allowing new entrants to capture much needed market share and return on investments more quickly. It also has the added benefit of evolving into a nomadic or mobile network in order to differentiate itself from purely fixed technologies like fiber.

Wireless local loop (WLL) technologies should also be seen as competitors to the WiMAX technology. Several of these solutions exist, including CDMA EV-DO which is being used across sub-Saharan Africa for internet and data services. This is a more cost effective solution when data usage is low, but WiMAX will be more cost effective in high data use networks due to inherent spectral efficiencies.

 

 

 

 

Nomadic deployments will become more prevalent as WiMAX evolves bringing new devices to market and lowering the capital requirements to cover large geographical areas. This will be seen in both emerging and developed markets where data use extends beyond the home and office. Nomadic internet connectivity will be the key service, though value added services such as video streaming and music downloads will increase as WiMAX enabled devices become available. In this setting, WiMAX will compete against Wi-Fi, HSPA, and EV-DO.

Compared to Wi-Fi, WiMAX has two distinct advantages despite its higher cost of deployment. First, it allows for quality of service (QoS) guarantees from the operator. And second, it has a larger coverage area than Wi-Fi. However, it is unlikely that WiMAX will compete directly with Wi-Fi. It is more likely that Wi-Fi will complement WiMAX deployments, where Wi-Fi will help to fill gaps in coverage areas, particularly in difficult to penetrate indoor public spaces. Integrated WiMAX and Wi-Fi devices are already being considered for this scenario.

HSPA and EV-DO, as high-speed mobile technologies, represent the main nomadic challengers to WiMAX. All three technologies offer PCMCIA cards allowing connectivity directly to a customer’s PC. HSPA and EV-DO offer the added advantage of mobile handsets which are already on the market and provide fully mobile voice connectivity. WiMAX is specifically designed for data and will have lower CAPEX requirements when the network is predominantly used for nomadic internet connectivity. It also benefits from the ability to start as a purely fixed technology and grow into a nomadic offering, where an operator can capitalize on key market segments for revenue growth. Due to the high cost of 3G licenses and the technologies used for mobile data services, it is unlikely that any 3G deployments would be targeted solely for nomadic offerings. This would mean that 3G startups would incur higher CAPEX to cover large areas for ubiquitous mobile services from the beginning of operation. Operators with existing 3G deployments will be unlikely to switch to WiMAX, opening the space to fixed operators or new entrants looking to capitalize on new spectrum allocations. Nomadic deployment is also a natural evolution for WiMAX operators who started as fixed providers.

 

Mobile deployments of WiMAX are not to be expected over the next few years. The technology is still undergoing testing and lacks the capacity to saturate a coverage area necessary for ubiquitous mobile coverage. Instead, it is more likely that dual mode WiMAX/ GSM devices will fill the space in the medium-term. This will be seen in both developed and emerging markets where mobile operators will face increasing competition and need to diversify and find new revenue streams. New services such as video on demand, peer-to-peer gaming, and video conferencing will become available as devices mature, allowing additional revenue streams for WiMAX operators. In this setting, WiMAX will compete against HSPA and EV-DO, and later against their long-term evolutions, LTE and Rev B.

 

Benefits of WiMAX for all players

 

 

 

WiMAX Players

 

 

WiMAX enables new revenue streams, but also new competition. It is a unique opportunity for new entrants who can take advantage of the new spectrum to gain entry to a lucrative market, but need to consider what the real revenue streams will be.

 

Existing fixed players can use WiMAX to complement their existing networks and generate additional revenue streams by offering a DSL-like connection with VoIP capabilities. Fixed operators can increase coverage and gain efficiencies, allowing them to profitably tap new market segments where fixed line connectivity is non-existent or poor in quality. Furthermore, it allows operators to serve remote or difficult to access areas where deploying traditional DSL infrastructure would not be economically vibale. Once the residential users are locked in, fixed operators can also leverage WiMAX to offer nomadic, broadband ‘on the go’ services, to increase their value proposition and defend against new entrants. There is little distinction between a fixed connection via WiMAX and one via wireline for the customer. With the utilization of ‘on the go’ nomadic services, a fixed provider will be able to differentiate from its competitors by offering the customer a ‘pay once, access anywhere’ service.

 

Existing mobile players can use WiMAX to capitalize on growing broadband revenues that their current mobile network cannot effectively access. By offering fixed-broadband services to new market segments underserved by fixed line players, mobile operators can create new revenue streams with relatively little additional investment and in a very short time compared to traditional technology. Bundling with existing mobile services will create an attractive value proposition by being able to provide an end to end solution for each segment. However, WiMAX also represents some relevant challenges for mobile operators since it will require the development of new skills. On the technical side, operators will have to learn how to handle an all-IP network, including billing and other components while, on the business side, they will need to learn how to manage new data services and bundled offers.

In the medium term, the arrival of WiMAX enabled devices will allow enriched nomadic services such as streaming video and music downloads. Similar services can be offered using 3G, especially HSPA, WiMAX provides better cost efficiencies (particularly for operators who have not already deployed 3G networks) and as a complete IP-based network is better suited than HSPA to handle data. Besides, HSPA implies the use of spectrum for mobile services which tends to be fully assigned and in use in most countries.

In the long term, mobile devices, particularly dual mode WiMAX/ GSM devices, will allow converged voice and data services over mobile networks. Enriched data applications such as video on demand, peer-to-peer gaming, and video conferencing will create more revenue generating potential.

 

 

Green fielders are possibly the best suited to win with WiMAX. With no restrictions of legacy systems and the possibilities offered by this flexible technology, a newcomer can offer today fixed or nomadic broadband access, at a relatively low investment compared with other broadband technologies. Most start-ups will launch as a fixed player and have the same advantages already discussed for utilizing WiMAX to offer fixed and nomadic services. Green field operators may also find themselves operating in the wholesale market, offering their network to niche ISP players and to the established fixed and mobile operators to expand their coverage without the up-front capital expenditures. By offering its own content and applications, a new operator can maximize revenue potential while tapping several value propositions targeted through fixed and mobile players with existing brands.

In the mid term, if the technology lives up to its mobility promise and if regulators are willing to allow the licensing, green fielders could be positioned to enter the mobile arena as well and compete with a more robust offering against existing players

 

 

 

Regulatory Implications

 

 

Any regulator contemplating WiMAX will consider the impact on existing competition as well as the technology’s ability to enrich the country’s infrastructure. WiMAX has been praised as an excellent technology to extend broadband services to regions which cannot be easily reached by fixed wireline, thus it is likely that a regulator will put coverage obligations on any license offering. Due to the limited availability of rural designed base stations and low-cost CPE, this will increase an operator’s CAPEX without necessarily compensating revenues in the early years. Regulators may also choose to restrict VoIP offerings to protect the existing infrastructure players. This will limit the WiMAX operators’ revenue generating capabilities. Mobility will also be restricted, particularly for the potential impact of mobile VoIP on existing players, though unified licenses are expected in most markets in the future. In some cases, there may also be restrictions on nomadic offerings which would further limit an operator’s service differentiation by essentially creating a DSL-replacement business model.

An operator looking at a WiMAX license will need to balance the regulatory restrictions with the market conditions to see if a profitable business opportunity exists. As several countries are yet to issue WiMAX licenses, lobbying regulatory groups for more favorable license conditions is a viable option for anyone looking to enter the market.

 

 

 

 

MENA opportunities

 

 

The MENA region is undergoing somewhat of a WiMAX revolution with the fixed market being the central target of the shake up. Long dominated by state-owned telecoms giants, the fixed industry has stagnated despite rapid growth in the mobile market. Several markets still have only one fixed operator while having three, or even four mobile players. However, this situation can quickly reverse, as seen in the Saudi market where three new fixed licenses were awarded this year. The new licenses were targeted at expanding broadband penetration, hoping to stimulate economic growth and connect the country’s population with the larger world. Internet connectivity is in many ways the defining characteristic of the 21st century, and WiMAX provides this connectivity at a faster and cheaper manner than any other technology.

 

 

 

 

The region has seen fixed, mobile, and new entrants exploit this opportunity, each providing a unique insight into what drives WiMAX adoption. STC, the largest company in the region by market capitalization, recently acquired a WiMAX spectrum in the opening of the Saudi market, hoping to extend coverage beyond their aging wireline infrastructure. Zain (formerly MTC-Vodafone), a mobile operator with licenses in 21 countries, has launched nomadic WiMAX services in Bahrain. The move can be seen as a litmus test of the technology in a region known for early technology adoption, as well as a competitive move in the most technologically advanced country in the region. Atheeb, recently awarded a fixed license in Saudi, is looking to launch WiMAX services to capitalize on low broadband penetration ahead of other new entrants, most notably Verizon Consortium who is looking to deploy fiber to the home.

 

WiMAX is invariably a part of the MENA region’s telecom future. The operators who are able to capitalize on its advantages or protect against those who do, are best positioned for success.

 

 

Challenges

 

 

First, the technology needs to complete its development roadmap and prove its reliability and stability on full-scale operations. In addition, operators will have to learn how to roll out complete networks of an unproven technology and ensure that the service offered is reliable. Making WiMAX available at affordable prices, particularly the CPE of the final user, will be an additional challenge . Finally, finding the right market positioning may be challenging considering that the benefits of new data services may be unfamiliar for consumers