Will WiMAX Cut the Wires to Your Home

Technology Strategy Final Paper Will WiMAX Cut the Wires to Your Home? Will WiMAX Cut the Wires to Your Home? WiMAX technology has the potential to upset the way internet data is delivered to both mobile and home users. With high performance in both distance and throughput, WiMAX technology could be a boon to current internet providers seeking to become the leader of next generation wireless internet access. This paper explores the reasons WiMAX is likely to become the dominant protocol for next generation wireless data transfer to end users, discusses which industry is best positioned to take advantage of the technology, and presents recommendations for how a company in that industry can move forward with WiMAX technology. WiMAX Technology WiMAX is a standard for wireless data transmission, which has bandwidth exceeding WiFi, and covering a range similar to cellular phone towers. WiMAX has the potential to supplant wireline internet provided through DSL and Cable Modem and to supplement or replace existing wireless internet currently provided by cellular phone companies. WiMAX technology has high performance on several metrics related to wireless data transfer. Figure 1 shows the data throughput or “bandwidth” performance characteristics of WiMAX compared to both WiFi and cellular 3G technologies. In addition to having high bandwidth, WiMAX also allows for data access at long distances, comparable to the distance attainable by cellular 3G, as shown in Figure 2. Furthermore, WiMAX is comparably reliable to both WiFi and 3G, as seen in Figure 3. With these performance characteristics, WiMAX has strong potential to disrupt the wireless internet access industry, offering both bandwidth and mobility. As seen in Figure 4, WiMAX pushes the bandwidth-distance boundary outward creating a new market opportunity. Because of the distance over which WiMAX operates, WiMAX is a potential competitor with traditional wireline internet data access from DSL or cable modems. The bandwidth of WiMAX far exceeds most “broadband” internet connections allowing futuristic dreams of streaming high definition video to become reality. Furthermore, WiMAX allows users to connect to internet access without wiring in the home, which is a major benefit in both rural and urban environments. Current technologists envision a WiMAX receiver in a person’s home, with a WiFi transmitter to serve in-home connections, and longer term having laptops and personal devices capable of transmitting directly to WiMAX towers. WiMAX also makes ubiquitous internet access possible. WiMAX, operating at comparable distances as cellular phones, can be installed on cellular towers and allow internet data access in as many places as cellular phone access. This adds a new dimension to what internet access providers can offer: a broadband connection that a person can take with them when they travel. Such a configuration is difficult to replicate with WiFi technology since so many WiFi transmitters would be required to compensate for the shorter range possible with WiFi. It would also be difficult to replicate with wireline technologies, since wires are only associated with certain buildings. Market An analysis of the value chain for internet service providers reveals the players who might be able to capture value from WiMAX, and gives insight into whether those players should attempt to vertically integrate. Our recommendation is that cellular providers of voice and internet should adopt WiMAX and attempt to move into additional value streams, but avoid trying to vertically integrate into equipment manufacturing. As seen in the value chain for internet service providers (Figure 5), cellular providers are the customer facing element in the value stream. Upstream sit equipment providers and owners of the external voice and data networks. The value in this industry is highest in the area where the cellular providers sit. Despite large fixed costs of installation, providers can extract moderate margins and reduce their costs by adding additional customers. Equipment providers have less power, in that equipment is, to a degree, customized for the cellular provider, but are essentially adding value through electronics capabilities. Furthermore, as cellular providers increase their installed base and thus market power, the price for customizing the equipment is reduced or eliminated. Cellular providers could attempt to move into this area by either utilizing a contract manufacturer or by acquiring equipment firms, however, cellular providers do not bring any useful complementary assets to the table. Furthermore, by becoming their own supplier, a cellular provider would likely dissolve relationships with other equipment providers and thus eliminate hardware options for customers. For example, if a Sprint customer could only purchase a Sprint phone, they may choose to switch to Cingular, a provider with whom they may choose a Motorola, Nokia, or Samsung phone. The external voice and data networks are not attractive to cellular providers, either, in that those networks have already been established and would be extremely costly to replicate and extract any value from. Within their part of the value stream, cellular providers can continue to compete in the data transmission market on the dimension of bandwidth and reliable coverage. The WiMAX technology would allow a cellular provider to far exceed the bandwidth offered by other cellular providers and would additionally allow them to offer their service in a different market, that of home internet service. In this market, the cellular provider would be in the same part of the value stream as cable and DSL internet providers: just upstream of the customer, and downstream of equipment makers and owners of data and voice networks. Cellular providers would be able to compete at par on the dimension of bandwidth, and would exceed cable and DSL competition on the ability to “take your broadband with you”. Cellular providers could leverage their nationwide networks which were loosely held complementary assets when compared with other cellular providers but when compared against DSL and cable internet service providers, they are considered easily maintained unique assets. It would technically be possible for wireline internet providers to contract the wireless internet access from cellular providers; however, because cellular providers have equal ability to access the customer, they have no incentive to make such a contract. If cellular providers did choose contract, they would likely extract most of the value. With just technology specific equipment upgrades and no additional changes to their infrastructure, cellular providers could allow customers to receive their broadband internet everywhere cellular coverage existed. Wireline internet providers would not be able to offer the same service, arguably, even if they made substantial changes to their infrastructure. For example, if Comcast installed a WiFi router at each end point of their cable service, they could provide a fairly wide area of coverage. However, this coverage would be in residential areas, rather than on highways and commercial areas where many people would like to have broadband “on-the-go”. Say for example Comcast were even able to offer service broadly in the residential and commercial areas, they still do not have a nationwide footprint and thus have a significant barrier to overcome if they were to try and offer such a service. Instead, some cable companies are trying to compete on uniqueness as they begin to backward integrate with content companies such as Disney. The real risk for them is to blindly play in their sandbox and not realize that the cellular companies can with an investment in equipment play in every sandbox across the nation while offering its customers the ability to play in any of those sandboxes at higher bandwidths (Figure 6). Cellular companies should not backward integrate within their own value chain but rather realize that their complementary asset combined with a capital equipment investment would be a significant unique asset compared to the home internet service industry. They could create significant value by offering a truly nationwide broadband access in which customers could roam as they do currently with their voice networks. Recommendations In order to provide recommendations for going forward, the cellular service industry needs to be analyzed first. There are four major players with several smaller regional service operators. Each company has a nationwide network and operates on different network technologies. Companies subsidize company specific phones in order to lock-in the customer to pay for service. In addition to “locked” phones, firms have contracts with early termination penalties in order to increase the switching costs and reduce buyer power. The companies in the past have competed on price driving the cellular service cost (depending on the number of minutes allocated) below landline phones. However, today firms are competing on branding (“most reliable network” vs. “largest all digital network”) and service features (picture messaging, ring tones, wallpapers, callback tones). Along with the brand and service features, firms are trying to create network externalities by offering free in-network calling to their installed base. This motivates consumers to recruit their friends and families in joining the same service provider, thus creating another switching cost. Friends will not want to switch if they all use the same service provider. Firms in this industry need to modify their strategy and determine the key industry drivers in order to effectively utilize WiMAX technology to provide mobile broadband and capture value from the traditional fixed line broadband markets. Since WiMAX technology is based on an open standard, firms adopting this technology will have a difficult time preventing customers from switching over. This new industry of mobile broadband will have few learning curves, low switching costs, high spillover, high fixed costs, and a standards based technology. However, because WiMAX is an open standard with strong industry backing especially from Intel, the cost of adoption from the consumer side should be relatively low. Intel would love to see WiMAX adopted similarly to WiFi so that consumers demand that their laptops or data devices come with the capability built-in. The strong industry backing and open standards should make WiMAX adoption occur quickly by lowering the cost to the consumers for the hardware. In the cellular service industry, firms would subsidize some of the hardware costs in order to increase their installed base and, in the case of WiMAX, this subsidy would no longer be required. Unfortunately, the cost savings from not having to subsidize the hardware would then be shifted to the high fixed costs to install the WiMAX capability. Since the mobile broadband industry dynamics are evolving and appear to be slightly different than the voice industry, firms must choose the right principle drivers for the industry. Due to the high fixed costs of rolling out a nationwide WiMAX network, there probably is not enough demand to support building four WiMAX networks without having significant overcapacity. This overcapacity leads to underutilization of the assets and firms won’t be able to justify the investment in the new technology. As a result, a first mover has a significant advantage in increasing their probability of “capturing” the consumer. The first mover also signals to the rest of industry that they are going to take on the sunk costs to implement the WiMAX network and thus will price/compete aggressively to maintain their installed base. This will make the competitors think twice about investing heavily into WiMAX especially if there isn’t enough demand to support multiple networks. Besides being the first mover, firms need to establish a brand for having either the most extensive coverage or most reliable network. Consumers who are accustomed to landline broadband access expect that the service work reliably all the time. Comcast recently experienced two cases of network outages that caused significant negative publicity. If these outages were to continue, consumers would surely look for other providers assuming that they have other options. Consumers expect their internet service to work all the time, similar to how they expect water, electricity, cable, and phone service to always work. Assuming that there are multiple firms offering mobile broadband access, the open standards and relatively low switching costs makes it very easy for consumers to leave the unreliable network and switch to another provider. Being known for and actually having the best network will be a key driver in capturing value. Being the first mover and having a strong brand, though, do not guarantee that firms will capture the value. Even though open standards and strong industry support lower the hardware costs and thus increase likelihood of adopting, the ability of firms to “lock-in” consumers greatly diminishes. As a result, firms could leverage their existing cellular phone installed base and bundle this mobile broadband access with their existing cell phone service. Offering discounts to existing customers should hopefully increase the probability of adopting and increasing the installed base. Increases in installed base create more profits which mean that firms can continue to invest in rolling out the network and improving the reliability and coverage. Having a large installed base creates a positive reinforcing loop which allows firms to continue investing in the industry drivers. Besides having the benefits of a positive reinforcing loop, bundling with cell phone service provides a means for cell phone providers to create a higher switching cost. Although the switching cost is not very large, consumers are less likely to switch firms provided that they have not had any network problems. Another area for firms to exploit is the determination of the public’s willingness to pay for mobile broadband capability. First thoughts are that the typical laptop user would not pay $10-$20 above their current landline broadband service. For customers who travel more or business travelers who need to stay in touch all the time, their willingness to pay increases tremendously. Firms would need to understand how to charge everyone’s willingness to pay in order to capture the most value. However, the assumption is that most of the population would not be willing to pay more than $20 additional a month to have the WiMAX capability. As a result, a large installed base becomes even more important in ensuring that the technology investment has a positive NPV. Lastly, many of the industry dynamics assumes that hardware data devices will have WiMAX built-in or available at a low cost. This highlights the importance of ensuring that WiMAX technology tips the industry. By having the industry adopt WiMAX as the next WiFi, cellular service firms can make the decision to invest heavily and be the first mover without significant worries that there won’t be a large potential customer base. If it seems as if WiMAX might not have enough industry support, firms might never invest resulting in many players standing on the sidelines incrementally innovating. Summary Our vision of the future is that WiMAX will enable mobile broadband at an affordable price. This will be achieved through the adoption of WiMAX by a cellular provider seeking to make a jump to this disruptive technology. That first mover has great potential to extract value and exploit the positive reinforcing loops of having an installed base. WiMAX has a great chance of success if industry players are willing to adopt the open standard and actively promote the technology, thus lowering the cost for consumers to adopt WiMAX. Throughput (Actual) 75Mbps Wi-Fi WiMAX 30Mbps 300Kbps 3G Time Figure 1 – Data transmission protocol throughput performance vs. time Coverage Distance 5 Mi 3G WiMAX 1 Mi 300 ft Wi-Fi 0 ft Time Figure 2 - Data transmission protocol distance performance vs. time Reliability (block error rate) 10-3 Wi-Fi WiMAX 3G 10-2 10-1 Time Figure 3 - Data transmission protocol reliability performance vs. time Throughput (Actual) 75Mbps WiMAX 30Mbps Wi-Fi 1 Mbps 3G 300Kbps 0 5 Coverage Distance Figure 4 - Data transmission protocol throughput performance vs. coverage distance Internet Service Providers Handset Base Stations Towers Wireless Components Equipment ISPs Cellular Internet Data Network Wireline Components Equipment Customers Voice Data Network ISPs Wire Figure 5 – Value chain for internet service providers Customers 75Mbps Throughput (Actual) WiMAX 30Mbps Cable, DSL 1 Mbps 3G 300Kbps 0 20 50 Coverage (States) Figure 6 - Data transmission protocol throughput performance vs. predicted coverage by state