A perspective devoted to the overestimated risk of frequency crunch and the new technologies for managing the growing data traffic.

1. PERSPECTIVE MARCH 2013
WHAT CAPACITY
CRUNCH?
AN EXAMINATION
OF THE TRUTH
BEHIND THE
IMPENDING MOBILE
SPECTRUM
“APOCALYPSE”
Enrico Lanzavecchia, Faizal Patel, Adele Sinclair

2. What capacity crunch?
An examination of the truth behind
the impending mobile spectrum
“apocalypse”
Published by
Value Partners Management Consulting
Limited, 16 Smith Square, 7th floor,
Kings Building, London SW1P 3JJ, UK
March 2013
Written and edited by:
Enrico Lanzavecchia, Faizal Patel,
Adele Sinclair
If you would like an electronic copy
please write to:
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For more information on the issues
raised in the report please contact:
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adele.sinclair@valuepartners.com
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3. 3
OVERVIEW
THE ‘CAPACITY CRUNCH’ IS A POPULAR TOPIC OF
DISCUSSION IN THE TELECOMMUNICATIONS INDUSTRY,
AND NUMEROUS OBSERVERS ARE PREDICTING A SHORTAGE
OF SPECTRUM CAPACITY IN THE MEDIUM TO LONG TERM.
INDEED, DATA TRAFFIC IS GROWING EXTREMELY RAPIDLY,
WITH SOME OPERATORS ATTRIBUTING DROPS IN THEIR
QUALITY OF SERVICE TO CONGESTION ON BOTH FIXED
AND WIRELESS NETWORKS.
REGULATORS ARE RESPONDING BY OPENING ACCESS
TO MORE FREQUENCY BANDS, HOWEVER AN INCREASING
BODY OF RESEARCH SUGGESTS THAT THE IMPACT AND
URGENCY OF THE ‘CAPACITY CRUNCH’ MAY BE SOMEWHAT
OVERSTATED.
SOME OPERATORS SEEM TO AGREE, OR AT LEAST ARE
OF THE OPINION THAT ACQUIRING MORE SPECTRUM
ISN’T THE ANSWER, AS EVIDENCED BY THE DISAPPOINTING
RESULTS IN A NUMBER OF RECENT AUCTIONS.
INSTEAD THEY ARE TURNING TO ALTERNATIVE COMMERCIAL
AND TECHNICAL OPTIONS WHICH THEY HOPE CAN BE
LESS EXPENSIVE AND MORE EFFICIENT THAN SPECTRUM
ACQUISITION.
PERSPECTIVE WHAT CAPACITY CRUNCH?

4. 4
Global mobile data traffic growth is expected to be explosive
MOBILE DATA
100.000
90.000
Next 3-5 years: operators
will become increasingly
capcity constrained as mobile
data usage expands
80.000
70.000
60.000
50.000
40.000
Current situation: MNOs
reaching capacity in high
usage towers and turning
on 2nd and 3rd carriers
throughout rest of networks
30.000
20.000
10.000
0
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
MONTHS
Source: Value Partners Market Research
PERSPECTIVE WHAT CAPACITY CRUNCH?

5. 5
MOBILE DATA TRAFFIC
IS EXPLODING
‘Promoting the shared use
of radio spectrum resources
in the internal market’, European
Commission, September 2012.
1
2
Vodafone annual report 2012.
‘Sky Broadband struggles
with demand after adding
subscribers’, BBC, January 2013.
3
Mobile data traffic is experiencing significant growth, placing pressure on the
capacity of networks. It is well documented that data traffic is exploding;
users are now consuming more data,
in more places and on more devices.
The European Commission recently
published a report stating that it
expects mobile data traffic to increase
at an annual rate of 26% over the next
3 years1, whilst Ofcom predicted that
by 2030 Britain will consume up to 300
times more mobile data than today.
Network traffic is
experiencing a systematic
shift away from voice
towards the transfer of data
Network traffic is experiencing a systematic shift away from voice towards
the transfer of data (for example,
approximately 70% of traffic on Vodafone’s network is now data2) and this
is only expected to continue over the
coming years as an increasing number
of users adopt the data-hungry services
(such as video streaming) on offer.
PERSPECTIVE WHAT CAPACITY CRUNCH?
This increased data consumption is
taking place both in and outside of the
home, with implications for fixed and
mobile operators, and on an increasing
number of devices.
Tablets and smartphones are now well
on their way to becoming ubiquitous,
but this is not the end of the matter;
the advent of machine-to-machine
(M2M) communications promises
further proliferation of network-connected devices.
It is within this context that operators
are trying to maintain their quality of
service and plan for the future, with
some high usage areas already reaching
full capacity on some networks3.

6. 6
4
CNet.
5
TechWeek Europe.
Many observers are warning of an
impending ‘spectrum capacity crunch’
As data usage has really taken off,
operators and regulators have begun to
fear that the supply of spectrum may be
inadequate to meet future demand. The
perceived threat has been sufficient to
lead operators and vendors to take action, with both Verizon and AT&T in the
USA stating the ‘capacity crunch’ as the
key driver for their respective attempted
acquisitions of competitors4. Similarly,
Cisco’s acquisition of network management specialist Intucell reflects its belief
that network efficiency and optimisation
will be of critical importance to operators in the near future5.
Operators need spectrum
for multiple reasons
Operators have clear drivers for needing new spectrum, each of which has
different implications. In addition to
changes in usage patterns, operators’
spectrum strategies are heavily influenced by their existing network and
infrastructure, as well as commercial
considerations. They must acquire
spectrum to satisfy their desire to cover
broad geographical areas in order to
reach the greatest number of potential
customers, whilst these bands can also
offer good indoor coverage, penetrating buildings to improve reception
inside buildings. Shorter wavelength
bands are required in densely populated urban areas to satisfy peak hour
capacity demands.
There are also commercial drivers for
the acquisition of new spectrum; operators are keen to use new spectrum to
launch superfast LTE services ahead
of or at the same time as competitors,
which they hope will drive ARPU and
reduce churn. Some mobile operators
also hope that their ability to launch
advanced wireless broadband services
using LTE will enable them to compete
with fixed broadband players, a factor which is particularly relevant in
developing markets with limited fixed
infrastructure.
PERSPECTIVE WHAT CAPACITY CRUNCH?

7. 7
REGULATORS ARE
PLAYING THEIR PART
Regulators are taking action to avoid
spectrum congestion, leading to a range
of opportunities and challenges for
operators. Their natural response to the
threat of congestion has been to open
access to more spectra, particularly with
a view to enabling the deployment of
LTE services. Regulators have broadly
taken the following approaches to address mobile traffic growth:
•
800 MHz Digital Dividend: bands
previously reserved for analogue
television are being allocated to
mobile data use, with the European Union deadline for the ‘digital
switchover’ elapsing in 2012 and set
for 2015 for the 119 member states
of the GE06 agreement
•
2600 MHz auctions: many regulators have chosen to auction the
2600 MHz band simultaneously
with the 800 MHz band, enabling a
paired band approach to deploying
LTE
Regulators are taking
action to avoid spectrum
congestion, leading to a
range of opportunities and
challenges for operators.
PERSPECTIVE WHAT CAPACITY CRUNCH?
•
Refarming of 900 / 1800 MHz:
regulators are allowing operators
to repurpose spectrum in the 900
MHz and 1800 MHz band for use in
deploying LTE
•
Use of 700 MHz: use of 700 MHz
for LTE deployments, currently
mainly restricted to North America,
will become more commonplace
thanks to a resolution signalling the
intention to use the band for LTE
deployments passed at the 2012
World Radio Conference.

8. 8
Not everyone is in agreement
There is a body of evidence, however,
that suggests that the threat of insufficient spectrum capacity may be being
overstated.
A number of papers examining future
demand for spectrum have been published disputing the ‘capacity crunch’
narrative, and there is little consensus
between third-party observers (such
as analysts and vendors) as to whether
additional spectrum will be needed in
the future.
For example two recent reports (from
Ofcom in the UK and NITA in Denmark)
did not identify any requirement for additional spectrum over and above what
governments could be reasonably expected to release. This view is shared by
many who cite both a slowdown in data
traffic growth and the use of mechanisms other than spectrum acquisition
as the two major factors influencing
their predictions.
Recent auction results have thrown
up some surprises
Some operators seem to agree, and results from a number of recent auctions
have been disappointing, reflecting a
decrease in appetite for new spectrum.
Regulator expectations regarding the
outcomes of auctions have naturally
been high given the pressures on operators and the scarcity of spectrum, but
this has not always translated into the
expected outcome. A number of recent
auctions have failed to spark interest
amongst operators:
In the UK, the 2013 4G auction
raised just 67% (£2.34bn) of the
previously anticipated target of
£3.5bn
•
In the recent Romanian auction,
15% of the 757 MHz on offer went
unallocated
•
India’s recent 2G auction raised less
than one quarter of the expected
revenue for the government, selling
just 42% of the spectrum on sale
•
In Thailand, the recent 3G auction
raised revenues of just 3% over the
reserve prices
•
PERSPECTIVE WHAT CAPACITY CRUNCH?
•
Vodafone Australia has withdrawn
from the forthcoming 4G auction,
and Optus are considering a boycott, due to the high reserve prices
set by the regulator.

9. 9
6
Cisco
There are other options
Operators are beginning to consider
other technical and commercial avenues
in order to manage demand instead
of spectrum acquisition. Alternatives
to large investments in spectrum are
increasingly being considered by operators deterred by high reserve prices and
uncertain returns.
Commercial strategies to curb data
consumption are now common, with
operators replacing unlimited usage
plans with data caps and metered data,
introducing severe overage charges,
and charging premium prices for smartphone and tablet plans.
Operators are beginning
to consider other technical
and commercial avenues
in order to manage demand
instead of spectrum
acquisition.
Wireless offloading through use of
Wi-Fi and femtocells has also emerged
as a key strategy for operators, who
have introduced free Wi-Fi in crowded
hotspots in order to encourage consumers to move off cellular networks, with
some estimates suggesting that 31% of
handset and tablet data traffic will be
through Wi-Fi networks by 20166.
PERSPECTIVE WHAT CAPACITY CRUNCH?
Recent announcements by Telefonica
O2 UK, Orange UK and Bouygues Telecom unveiling femtocell rollout plans
mean that all operators in the UK and
France now offer femtocell services.
Improved technology is also enabling
operators to increase the efficiency
of their existing networks without
the prohibitive costs associated with
complicated technologies (such as cell
splitting).
For example, Alcatel-Lucent have
developed hardware containing the
components of an antenna and base
station inside a 2.3 inch block;
MIT have developed technology
enabling seamless transition of data
streams between Wi-Fi and LTE without
dropping packets of data, boosting
bandwidth from 1 to 16 Mbps.
Other technologies, such as transcoding
video into smaller and more efficient
formats or limiting the amount of video
downloaded in advance of viewing, are
already available from vendors.

10. 10
A NEW MODEL
MAY BE ROUND THE
CORNER
Spectrum sharing is another possibility,
although the business case for operators is uncertain. It involves the authorised use of a given frequency band by
multiple users (either sharing the band
in time or in geographical area).
Their concerns include lack of clarity
regarding business models for sharing,
lack of regulation, concerns regarding
the readiness of spectrum sharing technologies and potential security issues to
name but a few.
Steps have been taken by major regulators worldwide (including the Federal
Communications Commission in the
US and the European Commission) to
encourage the adoption of shared spectrum access models, who expect the
introduction of shared spectrum access
to deliver significant benefits to society.
Operator positioning is likely to have a
significant impact on receptiveness to
spectrum sharing, with Tier 1 operators
hesitant to share spectrum, fearing loss
of competitive advantage, whilst Tier
2 operators are likely to be keener to
exploit the benefits of shared access to
spectrum. Indeed, T-Mobile in the USA
has already entered into an agreement
with the government to test spectrum
sharing.
These include increased occupancy
of bands (currently estimated to be
only 10% in Europe), the creation of
additional network capacity (both in
terms of traffic levels and geographical
coverage) and lower access costs for
consumers.
Operators, however, whilst not entirely
dismissive, remain somewhat less enthusiastic about prospects for spectrum
sharing in the short to medium term.
PERSPECTIVE WHAT CAPACITY CRUNCH?

11. 11
Operators will have to navigate
a complex environment
Whilst the reality of the ‘capacity
crunch’ may not be as threatening
as some are saying, it still poses some
difficult questions to operators.
That mobile traffic is growing rapidly,
and that operators’ networks are likely
to come under strain as a result,
are very real issues for operators
to address.
Network performance is of utmost importance to consumers as they consume
more and more content over mobile
networks. Spectrum strategies designed
to meet these requirements must
be cognisant of the options which are
available both in the short and the
longer term, and of course the implication for actions taken now in terms
of acquisitions, lobbying positions and
network investment.
Operators with a thorough understanding of the impact of technological and
regulatory changes on their existing
network, and ultimately customers, will
be best placed to take decisions which
ensure long term competitiveness.
PERSPECTIVE WHAT CAPACITY CRUNCH?

12. 12
AUTHORS
Enrico Lanzavecchia
Faizal Patel
Adele Sinclair
Director
Manager
Associate
Managing Partner of Value Partners
London office
Based in Value Partners London
office
Based in Value Partners London
office
enrico.lanzavecchia@valuepartners.com
faizal.patel@valuepartners.com
adele.sinclair@valuepartners.com
PERSPECTIVE WHAT CAPACITY CRUNCH?

13. 13
ABOUT
VALUE PARTNERS
Value Partners is a leading international strategy consultancy focused
on the converging industries
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We work with the world’s leading
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value enhancement initiatives across
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Founded in Milan in 1993, today
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Value Partners has built a portfolio of more than 350 international
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For more information on the issues
raised in this note please contact the
authors.
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PERSPECTIVE WHAT CAPACITY CRUNCH?