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Service providers have dramatically increased their investment in Wi-Fi, a trend we expect will continue for years to come. Dell’Oro Group predicts that by 2016, over nine million service provider Wi-Fi access points will be in operation, a ten-fold increase over 2011 levels. Smartphones are driving this segment to become one of the fastest growing telecommunications markets. Half of smartphone traffic will be carried over Wi-Fi. Wi-Fi is the common access method of portable devices and is used worldwide by mobile data users when they are stationary.
The move towards Wi-Fi benefits many constituents including service providers, equipment vendors and consumers.
Service providers: There are many advantages in delivering data to customers over Wi-Fi. 1) The spectrum is unlicensed, and hence free, which reduces the investment and time-to-market. 2) Billions of Wi-Fi-enabled devices have shipped, many of which are portable and can be used on the operator networks. 3) Due to the fact that Wi-Fi works the same in nearly every country, operators can host other operators’ customers on their network to potentially generate roaming fees. 4) A wireline provider can enter the mobile market by offering Wi-Fi to its own customers, as well as those of mobile operators for generation of roaming fees. 5) Most heavy data usage occurs while stationary and while indoors – at schools, shopping malls, retail locations and the like – and indoor Wi-Fi equipment is far less expensive than traditional outdoor cellular equipment.
We infer that the financial returns of service providers are improved by offloading traffic to Wi-Fi because there is strong evidence that service provider Wi-Fi traffic growth is surging. For instance, in March, China Mobile disclosed that its 2011 Wi-Fi traffic grew 398% year-over-year. Japanese operator KDDI announced plans to increase data offload from current levels of 20% to 50% by its March 2013 fiscal year, chiefly by leveraging its investment in over 100,000 service provider Wi-Fi locations. AT&T disclosed that during the first quarter its Wi-Fi traffic on its own infrastructure was up three-fold versus a year ago.
We suspect there is another reason for the rapid uptake of service provider Wi-Fi by certain operators – the first mover advantage. Unlicensed spectrum is a limited resource, and the first to operate in the spectrum has a compelling advantage – the next operators to install in the same spectrum will interfere with the first. This produces a diminishing return for latecomers to a market and an advantage to early participants. Practically speaking, this means that operators who contractually tie up key real estate locations with their service provider Wi-Fi equipment are likely to benefit the most. This sense of urgency is benefitting another constituency, the equipment vendors.
Equipment vendors: The service provider Wi-Fi equipment market surged last year – Wi-Fi access point unit shipments to service providers for use in public services more than doubled over 2010 levels. Activity in Asia was the big driver – mostly to China, followed next in magnitude by Japan – and accounted for 79% of worldwide service provider Wi-Fi access point unit shipments. We anticipate service providers in other regions will follow Asia’s lead.
Today, a small number of WLAN infrastructure equipment vendors benefit from the service provider Wi-Fi market – during the first quarter only three vendors achieved over 10% unit share in this market: Cisco Systems, Hewlett-Packard and new entrant, Ruckus Wireless. In 2011, Alcatel-Lucent also reached over 10% of unit share in this market. The vendor list could expand as new innovative technologies are brought to the service provider Wi-Fi market. To illustrate the importance of this market, we highlight two points:
–Service provider Wi-Fi solutions have become so important to Cisco Systems that the sector is one of the key topics featured from its fiscal April 2012 quarter, when Cisco senior executives cited that service provider Wi-Fi orders grew 127% year-over-year.
–HP’s WLAN business grew over 40% during 2011; we attribute two-thirds of that growth to service provider Wi-Fi sales in China.
Today’s service provider Wi-Fi share leaders are likely to clash with mobile RAN vendors such as Alcatel-Lucent, Ericsson, Nokia Siemens, Huawei and ZTE as the latter group delivers Wi-Fi/cellular devices.
In recent months, alliances have formed in this market. In April, Ericsson completed its acquisition of the share leader in the outdoor mesh nodes category, BelAir Networks. Ruckus Wireless has recently signed a global reseller agreement with Nokia Siemens. And in May, Ruckus formally announced a contract with Time Warner Cable. In April, Bloomberg quoted Ruckus’ CEO as having said Ruckus won deals with Telekom Malaysia, Axtel SAB and Telefonica’s O2 network, the last of which is planned for the 2012 London Olympics.
New technologies are emerging, including the aforementioned integrated cellular and Wi-Fi device, as well as traffic management systems and security equipment, all which may benefit consumers.
Consumers: Consumers benefit from service provider Wi-Fi thanks mainly to the ubiquity of Wi-Fi and the lower cost of spectrum. There is evidence that lower monthly fees will come to consumers who use Wi-Fi as an access method. Republic Wireless, for example, is offering at its beta stage a $20 per month mobile data and voice plan that leverages most users’ proximity to some type of free Wi-Fi network. This compares to about $60 per month from H2O Wireless, a price competitive service provider, and even higher fees for a tier-one provider such as AT&T. Given the evidence that most smartphone and tablet data usage occurs when users are stationary and indoors, advanced cellular base station equipment is far more complex and expensive than necessary. It is no wonder that the Wi-Fi market is flourishing when it provides robust services quickly and inexpensively.
Chris DePuy is responsible for Dell’Oro Group’s Carrier IP Telephony, Wireless LAN, and Wireless Packet Core market research programs. DePuy brings to Dell’Oro Group more than 20 years of financial and business analysis, and engineering experience. Prior to Dell’Oro Group, DePuy worked with TS Cap, L.L.C., performing consulting services for clients ranging from investors to technology industry startups. He has been involved with numerous startups, including as a co-founding board member of Wireless Security Corp., later sold to McAfee. For ten years, DePuy worked as a research analyst covering software, communications and Internet sectors with investment companies such as Bowman Capital and Morgan Stanley. DePuy received a Masters in Engineering from Cornell University, Ithaca, N.Y., and holds a Bachelor in Science in Engineering from Union College, Schenectady, N.Y.