the effects of wi-fi in the 3g telecom landscape
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MGMT 463 – Management and Strategy
Term Paper:The Effects of Wi-Fi in the 3G Telecom Landscape
December 4, 2003
Lisa Sato Whitelock, Robert E. Lee, and Christopher Kelson
Abstract
The telecommunication industry in the US has gone through probably the worst downturn
in its history. The buildup of excess capacity in the late 1990s contributed to the subsequent
reduction in capital spending by service providers. Fortunately, the arrival of wireless data is
slowly helping the industry to recover. While the industry is recouping from this “telecom
bubble” there is nonetheless a looming technical challenge that may subtly but fundamentally
alter the competitive landscape. This challenger disguises itself in the form of Wireless Fidelity,
or Wi-Fi. The purpose of this paper is to present the argument that Wi-Fi could significantly
delay or limit the need to deploy 3G cellular technologies for high-speed wireless data. To do
so, this paper will first provide a high-level overview of different 2G/2.5G cellular technologies
and Wi-Fi technology that are being used today. Next it will substantiate this argument with
several key observations. Finally this paper will conclude with a couple of suggestions to the
cellular service providers on how to quickly integrate Wi-Fi and turn it from a potentially
disruptive technology into a major source of wireless data revenue.
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Table of Contents
2003 US Cellular Industry Overview..............................................................................................4Background – Today’s 2G Cellular Technology.........................................................................5CDMA Technology Migration....................................................................................................5GSM Technology Migration........................................................................................................6
Emergence of Wireless Fidelity.......................................................................................................7Wi-Fi Technology Adoption............................................................................................................8Argument for Delay of 3G Deployment..........................................................................................9Summary & Recommendations.....................................................................................................12Additional References Used in This Report..................................................................................17
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2003 US Cellular Industry Overview
Although today’s cellular industry has only a few handful of operators (Exhibit 1) that
survived the telecom bubble of the late 90’s, analysts expect further consolidation so that there
will be less competition and improvement in profit margin. Worst still, the wireless number
portability legislation, which just went into effect in November 24 of this year, will further
intensified price competition amongst US cellular operators due to the expected increase in user
turnover rate. A study released by Yankee Group in July 2003 showed that if similar legislation
in Hong Kong is of any indication the EBITDA margin could erode further as the result of this
legislation1.
In spite of the continuing consolidation and pricing pressures (especially on the voice
services) the governing consortium of US cellular industry, Telecommunications Industry of
America (TIA), which is the leading U.S. non-profit trade association serving the
communications and information technology industry, projects that the total wireless
communications spending is expected to increase from $123.4 billion to $164.5 billion during
2003-2006 at a 9.6 percent compound annual rate. The bulk of this projected revenue will come
from wireless data services such as Internet access and text messaging2. The phenomenal
success of high-resolution camera phones in the Asia markets, where wireless phones with build-
in cameras with image resolution of over 1 mega-pixel are first introduced, is expected to further
fuel the surge in wireless data usage in the US market.
1 Yankee Group, Brief US wireless market overview and the impact of wireless number portability, July 2003, http://www.lightbridge.com/files/pdfs/wnp_impact.pdf 2 TIA, http://www.tiaonline.org/media/press_releases/index.cfm?parelease=03-14
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Background – Today’s 2G Cellular Technology
Anticipating user demand for multi-media applications, Internet browsing, and other data
capabilities, the US cellular operators have begun the migration toward 3G cellular technologies.
Currently there are two separate and non-compatible cellular technologies that are used by US
cellular service providers. For operators such as Verizon Wireless and Sprint PCS, CDMA is the
preferred technology. On the other hand, cellular operators such as AT&T and Cingular have
chosen GSM. Both CDMA and GSM allow the cellular service providers to build off their
current 2G architectures (Exhibit 2 & 3).
CDMA Technology Migration
CDMA-based (Code Division Multiple Access) wireless providers started deploying
Qualcomm’s cdmaOne (we shall refer to it as “CDMA” for the remainder of this paper)
technology in the mid-1990s. CDMA uses spread spectrum technology to break up speech into
small, digitized segments and encode them to identify each call and transmits them over
1.25MHz wide RF (Radio Frequency) channels. CDMA technology is spectrally more efficient
than the alternate GSM technology. In other words, CDMA allows more data to be transmitted
in the same size frequency band. US vendors such Verizon Wireless and Sprint PCS have
already upgraded most of their systems to the cdma2000 1X, which is a 2.5G cellular technology
with maximum data rate of 153 kbps and which also doubles the voice channel capacity. To
obtain even higher data rates to handle the projected increase of wireless data usage, cellular
providers need to upgrade their networks again to either 1xEVDO or 1xEVDV (both are 3G
cellular technologies). 1xEVDO, or EVolution Data Only, is commercially available today and
offers peak data rates of up to 2.4 Mbps. 1xEVDV, Evolution Data and Voice, will be offered in
the future and it will achieve rates of up to 3.09 Mbps. The main appeal of both 1xEVDO and
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1xEVDV is that both are backward compatible to the existing 2G platform. Unfortunately, the
cost to convert today’s 2.5G CDMA system is estimated to be in the billions of dollars.
GSM Technology Migration
Global Systems for Mobile Communications (GSM) is the world’s leading 2G wireless
voice and text-only data technology. GSM is a TDMA (Time Division Multiple Access)
technology which divides a 200 KHz frequency band into 8 timeslots. Each timeslot is dedicated
to one user for up to 9.6kbps voice/data rates. New data technologies have been added to the
GSM family - General Packet Radio Service (GPRS). GPRS, which is available today, is a
higher capacity, Internet-based content and packet-based data service with advertised speed of
114 kbps. GPRS can evolve to EDGE, which stands for Enhanced Data Rate for GSM Evolution
and can support maximum speed of 384 kbps and is therefore more suitable for advanced mobile
services that require even higher data speed. EDGE allows providers who do not have 3G
licenses to offer “3G-like” data rates if they desired. Upgrading the entire network to either
GPRS or EDGE is expensive and only provides data rates comparable to the lowest 3G speeds,
but is backwards compatible to existing 2G platform. To achieve even higher data rates, GSM-
based providers will need to migrate to a CDMA-based 3G technology, the most likely standard
will be W-CDMA (Wideband CDMA or commonly refer to as Universal Mobile
Telecommunications System or UMTS). Today W-CDMA offers data speed up to 2Mbps but by
2005 should offer speeds up to 10Mbps. Though commercially available today, W-CDMA is in
its infancy and there are still technical issues that need to be resolved (e.g. handoff). Also W-
CDMA will be expensive to upgrade (estimated to be in the billions) and will not be backwards
compatible to the old EDGE/GPRS/GSM architectures; hence, to migrate to W-CDMA would
require “fork-lift” hardware changes by the GSM cellular providers.
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Emergence of Wireless Fidelity
Wireless Fidelity (Wi-Fi) is a networking protocol designed to create a wireless local area
network (LAN) topology. Wi-Fi is the Institute of Electrical and Electronics Engineers (IEEE)
specification 802.11. There are several versions of Wi-Fi based on the variant of the 802.11
specification being used to create the wireless LAN. Even though there are variants of 802.11,
each serves the same purpose; “the IEEE 802.11 specifications are wireless standards that
specify an ‘over-the-air’ interface between a wireless client and a based station or access point,
as well as among wireless clients.”3 For the purpose of this paper we will not address the
variants of the 802.11 specifications individually; instead, we will simply refer any variant as
Wi-Fi.
As already stated, there are two principal components within the Wi-Fi topology, the
client and the access point. The client is any Wi-Fi capable platform like a PC or PDA. The
access point is the network interface that enables the client to have access to the LAN. Because
the purpose of Wi-Fi is to create a wireless LAN, the implementation of the LAN is modeled
after the existing LAN dominant protocol of Ethernet. IEEE describes the rational as follow: the
802.11 standards can be compared to the IEEE 802.3TM standard for Ethernet for wired LANs.
The IEEE 802.11 specifications address both the Physical (PHY) and Media Access Control
(MAC) layers and are tailored to resolve compatibility issues between manufacturers of Wireless
LAN equipment.
All Wi-Fi variants operate at either 2.4G-Hz (802.11b/g) or at 5-Ghz (802.11a)
frequencies. By operating in the 1G-Hz range frequencies, the Wi-Fi LAN is able to deliver
11Mbps/55Mbps peak bandwidth at 2.4G-Hz or 54Mbps at 5-Ghz. The tradeoff for that
bandwidth is that the effective range of the LAN is much shorter than that of cellular
3 IEEE, http://standards.ieee.org/wireless/overview.html#802.11
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technologies. That tradeoff is not a significant issue however, because Wi-Fi is only meant to
create a local network, not a public network. Another advantage is that Wi-Fi frequencies are
not government regulated. As such there are no licenses required to set up a Wi-Fi LAN.
Wi-Fi Technology Adoption
The initial technology requirement document for 802.11 was submitted to IEEE in May
1992. This initial document outlined what eventually became 802.11b, the first variant of Wi-Fi.
Since its conception in 1992, Wi-Fi has rapidly diffused throughout the United States.
Unfortunately, it is very difficult to determine the present Wi-Fi coverage throughout the United
States, known as footprint, because Wi-Fi does not operate in government-regulated frequencies.
Instead we can use examples of Wi-Fi LAN implementations, or “hot spots”, as a rough model
for its availability. According to Intel there are 11,983 hot spots available within the United
States alone that are Wi-Fi compatible.4 Most of the hot spots are in high traffic areas like
airports, coffee shops, cafes, hotels and even some McDonalds.5
Wi-Fi adoption has accelerated in the past couple of years for a couple of key reasons.
First, there is the large base of traditional Ethernet LAN applications that are also suited for
Wireless LANs, specifically E-mail and Internet access. E-mail and Internet access are
applications native to the PC and both are dependent on LAN connectivity. United States is
becoming an increasing mobile society where business and personal travelers now bring their
laptop PCs with them on trips. Before the introduction of Wi-Fi business travelers would rely on
either dial-up landline services or cellular 3G technologies, which may not available, convenient,
or fast enough for quick wireless data downloads. In contrast, Wi-Fi hot spots provide a very
familiar LAN topology for these PC based applications.
4 Intel, http://intel.jiwire.com/5 McDonalds, http://www.mcdonalds.com/countries/usa/whatsnew/pressrelease/2003/08122003/index.html
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Second, Wi-Fi adoption has benefited from the commoditization of the equipment used to
create the wireless LAN network. On the client side, the PC industry has aggressively pushed
chip prices down to enable rapid development of inexpensive Wi-Fi capable PC platforms. Intel
has aggressively pushed the adoption of Wi-Fi with the release of its Centrino microprocessor
technology. Even enterprise systems for large Wi-Fi hot spots are now extremely inexpensive.
For example, a Symbol 256 user Access Point is available on CDW for about $1000.6 Even
software giant Microsoft has entered the Wi-Fi equipment market with a line of home and small
enterprise offerings.7
The need for LAN connectivity away from home/office and the commoditization of the
equipment has created a very compelling Return on Investment (ROI) for Wi-Fi service
providers. Although equipment varies, the cost to deploy a “Hot-Spot” in a coffee shop or café
is significantly less than a cellular system. This enables investors to create a very a large number
of Wi-Fi LANs in high traffic areas at a fraction of the cost of traditional cellular technologies.
And because each hot spot is standards based, every Wi-Fi client with that variant is immediately
able to gain access to the LAN unlike cellular networks that require exclusive contracts.
Argument for Delay of 3G Deployment
Executives at US cellular companies can easily dismiss Wi-Fi as a PC-based wireless
data technology on the grounds that it serves a different purpose—provide high-speed wireless
data access to users at pedestrian speeds only. Yet they need to recognize that Wi-Fi is not only
a supplemental wireless data technology today but a potential threat as well. To see this, they
need to re-examine current assumptions about wireless data usage, take note of the projected
increase in Wi-Fi coverage, and recognize the deployment cost advantage of Wi-Fi system.
6 CDW, http://www.cdw.com/shop/products/default.aspx?EDC=2422067 Computer World, http://www.computerworld.com/networkingtopics/networking/story/0,10801,85012,00.html
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First, today’s mobile data users can be classified into two groups: cellular owners and
laptop PC & PDA owners. The predominant data application for the cellular users is text
messaging that requires relatively lower data throughput than web browsing and file transfer
(ringer download or sending a digital picture). In contrast, the usage pattern for laptop PC &
PDA owners is reversed since most of the time they use their laptop PC or PDA to surf the web
and download files. For these laptop PC & PDA owners Wi-Fi, not 3G cellular, is the preferred
technology for wireless data transport in part due to the aggressive integration of Wi-Fi into most
laptop PCs and PDAs sold today. If cellular service providers do not quickly add Wi-Fi into
their service offerings, they may lose out to the Wi-Fi service providers and miss out on revenue
from wireless data may not materialize either. Furthermore, one of the key arguments in favor of
3G is that users want to be able talk and access data any time, anywhere. However, users don’t
have an unlimited demand for data while traveling. It is also presumptuous for cellular operator
executives to assume that users need data access at all time. The airphone business model is a
similar example of such overconfidence in the user demand for mobile connectivity during flight.
Even if the users require wireless data access on demand, the usage-based pricing of 3G data
services makes flat-rate pricing of Wi-Fi service more appealing. The price advantage of Wi-Fi
becomes even more appealing for heavy wireless data users for large file transfer.
Second, proponents of cellular technologies have argued that Wi-Fi does not offer
ubiquitous coverage and true mobility like 3G cellular technologies since its coverage is
confined to hot spots such as airport, coffee shops, etc. This argument does not consider the fact
that PC industry is aggressively integrating Wi-Fi into every laptop and PDA devices. This
means that buildup of Wi-Fi hot spots will most likely accelerate. In fact according to Gartner
Dataquest, there will be significant increase of Wi-Fi coverage in community hot spots, retail
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outlets, and hotels. Exhibit 4 shows Gartner Dataquest’s projected Wi-Fi public hot spot
locations worldwide8. One could argue that it would only be a matter of time before Wi-Fi
reaches high market penetration and becomes the default technology for high-speed wireless
data. In addition, new enhancements to Wi-Fi could expand coverage of Wi-Fi and eliminate
one of the key disadvantages of Wi-Fi. From a competitive standpoint this would make 3G
cellular technologies even less appealing for high-speed wireless data transport.
Third, deployment of 3G cellular networks is a very complex and expensive process that
requires significant lead-time for network planning and setting. It would take may take months if
not years for a cellular operator to build up sufficient national coverage. And the cellular service
provider would have to bare the cost alone. For example, the announced cost of deployment for
Nortel Network’s 1xRTT and EV-DO equipment by Verizon Wireless is valued at $1 billion US
dollars9. In contrast, deploying a Wi-Fi hotspot is much simpler and significantly less costly.
Public or private IP LAN and WAN can be used to provide the backbone to interconnect network
of Wi-Fi hotspots; therefore, the cost of deploying Wi-Fi system, which include Access Point
equipment within the coverage area, network management equipment, and billing system is a
fraction of that for a 3G cellular system.
Finally, there are two additional issues worth mentioning. One is that the form factor of
current generation of cellular phones (some with integrated PDA function) limits the
effectiveness of this type of mobile devices for web browsing and therefore reduces the appeal to
heavy data users such as laptop PC and PDA owners. Furthermore, upgrading to 3G cellular
technologies requires users to purchase new cell phones. In contrast, most if not all of the
laptops PC, PDA, and Wi-Fi access cards are designed to access all available Wi-Fi
8 Gartner Dataquest Market Trends, Public Wireless LAN Hot Spots: Worldwide, 2002-2008 http://www.itaa.org/isec/pubs/e20037-04.pdf9 ZDNet, http://zdnet.com.com/2100-1103-5070870.html
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technologies. The other issue is that once Voice over IP technology begins to offer the same
voice quality as circuit switch technology, the once distinct boundary between wireless and
landline will disappear. By then additional entrants may use Wi-Fi to compete against cellular
operators. It would therefore be a good strategic move for wireless service to accelerate the
deployment of Wi-Fi to gain expertise and to thwart these future threats.
Summary & Recommendations
The revenue potential of wireless data market presents a clear business opportunity for
cellular service providers. Given the arguments we have laid out in the previous section, it
would be far easier and less costly to deploy Wi-Fi to capture the projected increase of wireless
data traffic than with 3G cellular technologies. 3G cellular technologies have their own merit,
such as offering true mobility to users, and we do not go so far as stating that they will become
obsolete because of the emergence of Wi-Fi. Instead, we believe that there will be unique but
limited situations where this technology is the best or perhaps the only solution for wireless data
access. For instance, even a train equipped with Wi-Fi inside the cabin would require 3G
cellular technologies to transmit while moving at high speeds.
To capture the anticipated revenue opportunity for wireless data and to gain first-mover
advantage, cellular service providers should figure out how to quickly deploy Wi-Fi. There are
two possible options: a) partner with or outsource to third party enterprise companies; b) develop
expertise in-house to provide a full suite of system setup services. Given the commoditization
and popularity of Wi-Fi, many vendors and enterprises have sprung up to support all aspects of
Wi-Fi deployment. Consequently, cellular service providers can harness this growing enterprise
to economically and quickly deploy Wi-Fi hot spots and thereby integrate Wi-Fi into its service
offerings. As a result, cellular providers can rapidly implement Wi-Fi hotspots in strategic
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locations where there is a dense population of wireless data users to capture this untapped
revenue stream.
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Exhibit 1: US Carriers Subscribers Market Share 1Q2003
S
Source: Yankee Group
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Subscriber Market Share
Verizon Wireless23%
Cingular16%Sprint PCS & Affiliates
13%
Qwest1% Dobson
1%
Others3%
Centennial0%
Leap 1%
Nextel8%
AT&T & Affiliates16%
Alltel 6%
US Cellular3%
Wester Wireless1%
T-Mobile8%
Exhibit 2: Comparison of Different Cellular Technologies
Source: http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2897313,00.html
Exhibit 3: Overview of Migration Path from 2G to 3G
Source: http://www.cdg.org/technology/3g/migration.asp, “3G Migration.” CDMA Development Group
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Transport technology Description
Typical use/Data Transmission Speed Pros/cons
TDMA Time Division Multiple Access is 2G technology
Voice and data Low battery consumption, but transmission is one-way, and its speed pales next to 3G technologies
Up to 9.6kbps
GSM Global System for Mobile Communications is a 2G digital cell phone technology
Voice and data. This European system uses the 900MHz and 1.8GHz frequencies. In the United States it operates in the 1.9GHz PCS band
Popular around the globe. Worldwide roaming in about 180 countries, but GSM's short messaging service (GSM-SMS) only transmits one-way, and can only deliver messages up to 160 characters long
Up to 9.6kbps
GPRS General Packet Radio Service is a 2.5G network that supports data packets
Data only Messages not limited to 160 characters, like GSM SMS
Up to 115kbps; the AT&T Wireless GPRS network will transmit data at 40kbps to 60kbps
EDGE Enhanced Data GSM Environment is a 3G digital network
Data only May be temporary solution for operators unable to get W-CDMA licenses
Up to 384kbps
CDMA Code Division Multiple Access is a 2G technology developed by Qualcomm that is transitioning to 3G
Although behind TDMA in number of subscribers, this fast-growing technology has more capacity than TDMA
W-CDMA (UMTS) Wideband CDMA (also known as Universal Mobile Telecommunications System--UMTS) is 3G technology. On November 6, 2002, NTT DoCoMo, Ericsson, Nokia, and Siemens agreed on licensing arrangements for W-CDMA, which should set a benchmark for royalty rates
Voice and data. UMTS is being designed to offer speeds of at least 144kbps to users in fast-moving vehicles
Likely to be dominant outside the United States, and therefore good for roaming globally. Commitments from U.S. operators are currently lacking, though AT&T Wireless performed UMTS tests in 2002. Primarily to be implemented in Asia-Pacific region
Up to 2Mbps initially. Up to 10Mbps by 2005, according to designers
CDMA2000 1xRTT A 3G technology, 1xRTT is the first phase of CDMA2000
Voice and data Proponents say migration from TDMA is simpler with CDMA2000 than W-CDMA, and that spectrum use is more efficient. But W-CDMA will likely be more common in Europe
Up to 144kbps
CDMA2000 1xEV-DO Delivers data on a separate channel Date only (see CDMA2000 1xRTT above)
Up to 2.4Mbps
CDMA2000 1xEV-DV Integrates voice and data on the same channel
Voice and data (see CDMA2000 1xRTT above)
Up to 2.4Mbps
Exhibit 4: Public WLAN Hot Spot Locations Worldwide
Source: Gartner Dataquest Market Trends, Public Wireless LAN Hot Spots: Worldwide, 2002-2008 http://www.itaa.org/isec/pubs/e20037-04.pdf
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Location 2001 2002 2003 2004 2005Airports 8 152 292 378 423Hotels 569 2,274 11,687 22,021 23,663Retail Outlets 474 11,109 50,287 82,149 85,567Enterprise Guesting Areas 84 624 1,762 3,708 5,413Stations and Ports 88 623 2,143 3,887Community Hot Spots 2 266 5,637 20,561 30,659Others 240 790 1,526 2,156
Additional References Used in This Report
1. http://www.qualcomm.com/cdma/1xEV/web_papers.html , “1xEV: 1xEVolution IS-856 TIA/EIA Standard, Airlink Overview,” Revision 7.2, November 7, 2003
2. http://www.radio-electronics.com/info/cellulartelecomms/edgeinfo/edge.htm , “An Overview of EDGE”
3. http://www.s3.kth.se/signal/edu/seminar/01/GPRS-EDGE_20010315.pdf , “GPRS/EDGE Overview,” Fukusar, Anders
4. http://ccnga.uwaterloo.ca/~jscouria/GSM/gsmreport.html , “Overview of the Global System for Mobile Communications,” Scourias, John, October 14, 1997
5. http://www.cdg.org/technology/3g/migration.asp , “3G Migration.” CDMA Development Group
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