Managing the Wireless Data Deluge
It wasn't so many years ago that U.S. wireless carriers wanted nothing more than to convince their customers to use their phones for more than talking. Having invested billions to bring data applications like Web browsing and video to their networks, carriers saw little interest from consumers. Of course, that was before the latest generation of smartphones like Apple's (AAPL) iPhone, Motorola's (MOT) Droid, and Research In Motion's (RIMM) BlackBerry made using wireless data applications so compelling and popular. Now there's a new problem: Networks are starting to groan under the surging demand, causing service to deteriorate for everyone. Helping wireless companies cope with ever-escalating demands for data with software and services is turning into a huge opportunity for companies that service the wireless industry. Updating the networks to handle the greater volume of wireless data could mean massive expenditures for carriers such as AT&T (T), Verizon Wireless, the joint venture of Verizon (VZW) and Vodafone (VOD), and others in the coming years. Capital spending by major carriers in the U.S. could rise to $28.7 billion in 2011 from $19.3 billion in 2009, according to research firm IDC. That surge in spending could prove to be good news for companies that sell products and services to the wireless industry. Software companies such as Oracle (ORCL) and computing giant IBM (IBM), as well as smaller concerns like Camiant and Bridgewater Systems (BWC:CN), which provide software for managing subscribers' data usage, are gunning for new opportunities to help wireless carriers better manage their networks. Subscriber ManagementMeanwhile, Qwest (Q) and Level 3 Communications (LVLT), which help carriers handle more traffic could benefit, as well. And so could infrastructure players like American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC), which own cell towers. Software that helps carriers manage subscribers' data use can shave 10% to 20% off the cost of supporting growing data traffic, according to wireless consultant Chetan Sharma. So far, fewer than 10% of carriers have implemented so-called subscriber management software, which can tell carriers how much data particular subscribers are using, and which applications they're allowed to access. Research firm Infonetics expects the market for this type of software to grow from $145 million in 2008 to nearly $800 million by 2013, benefiting startups such as Blueslice Networks, Camiant, and Bridgewater, and larger companies like Oracle, IBM, and Alcatel-Lucent. At Bridgewater, whose customers include Verizon Wireless as well as Sprint (S) and Clearwire (CLWR), sales are growing at a healthy 30% annually and are expected to reach $60 million in 2009, the company says. "We believe we are at an early stage of a large market here," says Ed Ogonek, Bridgewater's CEO. Telecom equipment makers are starting to get in on the traffic management game themselves. In 2008, Nokia Siemens Networks snapped up Apertio, whose software helps carriers authenticate and manage subscribers, for $205 million. "There's definitely an opportunity for some M&A activity," says Shira Levine, an analyst at Infonetics. Deploying FemtocellsCompanies that sell equipment such as femtocells and special Wi-Fi access points—devices that let carriers off-load data traffic from their main wireless networks—could benefit, too. Femtocells are basically mini cell towers about the size of home routers that can be installed in homes and offices. When in use, they funnel cell-phone calls over wired Internet broadband lines, taking pressure off the cellular network. Sharma reckons that by deploying femtocells from companies like Alcatel-Lucent and Sagem, Netgear (NTGR), and Ubiquisys, carriers can reduce their costs by up to 35% in the next four to five years—more than the cost savings they could realize by moving to faster 4G networks, which would offer much fatter pipes for handling wireless data. Femtocells have yet to take off in the U.S., Sharma says, primarily because carriers charge for them. T-Mobile USA (DT) charges fees of $10 a month for using femtocells. But in 2010 the cost savings might push carriers to offer them to customers for free, Sharma says. Global shipments of femtocells are expected to rise more than sixfold to 2.3 million units in 2010, from 359,000 this year, and grow to 40 million units in 2014, according to ABI Research. Also hot is the software that can reduce the burden that streaming video places on wireless networks, Levine says. The software comes from vendors like Openwave (OPWV), Bytemobile, and Ericsson (ERIC), and allows for compression and intelligent caching of information on the smartphone during off-peak hours: If you watch CNN every morning, your device might fetch clips an hour before the rush on the wireless network starts. The software could help carriers handle the data deluge without enraging their users. Recently, AT&T Mobility CEO Ralph de la Vega said the company is mulling incentives to curb usage by its heaviest users.When, earlier this year, cable company Time Warner Cable (TWC) tried charging its home Internet-access customers based on their data usage, "there was a lot of customer backlash," says James Ratcliffe, a vice-president at Barclays Capital."Congressmen were up in arms." Next year, federal regulators may restrict wireless carriers' ability to slow down bandwidth-thirsty video applications and prevent them from banning specific applications. Network InvestmentImproved efficiency will only get them so far. In the end, carriers may have to beef up their investments in their networks to support the data deluge. A chunk of that spending will go to telecom equipment giants such as Ericsson and Alcatel-Lucent (ALU), which are helping carriers build next-generation networks offering fatter bandwidth pipes for traffic. But these advanced, 4G networks will only cover 5% of U.S. markets by 2013, Sharma says. "Carriers will need to look at other ways to control costs," he says. Wireless networks themselves would have to expand, as well. Already, AT&T has been working feverishly to increase its network capacity in New York and San Francisco, where users have complained of poor service. The carrier has added 2,000 cell sites this year. Indeed, the number of wireless towers will continue to grow, from 228,000 sites in the U.S. today to more than 300,000 by 2012, according to the consulting firm Yankee Group. Large cell-tower owners like American Tower and Crown Castle, which lease towers to carriers, should see extra demand, Ratcliffe says. He has an overweight rating on both American Tower and Crown Castle's stock. Another area of network investment: wireless backhaul equipment and services, the big pipes that move data between cell sites. That data highway between cities will have to widen as people not only talk but also send text messages, e-mails, and photos with their smartphones. Many carriers are now investing in laying their own fiber-optic lines or leasing fiber lines from companies like Qwest. Till now, Qwest has serviced carriers at cell sites only occasionally, such as near major airports. That changed this year. "This was the year wireless carriers said, 'Now is the time for change,' " says Qwest CTO Pieter Poll. "What changed in 2009 was, rather than looking at this site or that, [carriers are now looking to buy backhaul service] for entire cities because their demand is going up overall." A carrier can increase its capacity by signing up in a matter of weeks, he says. Good times for Qwest and its ilk will mean better times ahead for wireless backhaul equipment vendors. "Everybody's struggling to upgrade their infrastructure," says Kittur Nagesh, director of service provider marketing at Cisco (CSCO), which expects mobile data traffic to jump 66 times between now and 2014. "We are seeing huge traction worldwide in this segment. The crisis has already hit the operators. But they can come out of this crisis."