Mobile Broadband Is Taking Off

New technology finally has users flocking to the mobile Net. But how are the operators going to make money?

In the early days of third-generation (3G) mobile networks, expectations for the so-called Wireless Web were high, to put it mildly. The thought was the mobile Internet could become bigger than the Internet itself, since the number of mobile phones in use dwarfs the number of PCs, and handsets are personal devices that are always with you.

This vision led telecom operators and regulators to a spectrum licensing binge during which European carriers such as Vodafone (VOD), Orange (FTE), and T-Mobile (DT) spent over €100 billion (then about $100 billion) on 3G licenses between 1999 and 2002. When this debauch was over, a nasty hangover set in, and the mobile Internet became a solution in search of a problem. Despite many attempts by operators to launch advanced 3G services, most 3G phone users are quite happy with good old voice and messaging.

Besides trying to promote advanced services on mobile phones, mobile operators also launched so-called “mobile broadband” offerings—high-speed wireless connections for laptops. Using a 3G modem, typically plugged into a USB port, these services let on-the-go workers send and receive data from, say, the back of a cab or on a train whooshing through the countryside. But the early services were hampered by low speeds (maximum 384 kilobits per second) and high usage costs, so most laptop users continued connecting to the Internet via Wi-Fi (embedded in more than 90% of all new laptops) or the trusty network cable.

Fastest-Growing Mobile Service

Last year, though, something really interesting happened—and for once, without all the usual mobile industry hype. Mobile broadband quietly graduated to a zippy new generation of technology called High-Speed Packet Access (HSPA), which increases the data speed of mobile networks. Just as important, mobile operators started setting low, often flat-rate tariffs for HSPA mobile broadband service—in some cases even undercutting their own "all you can eat" fixed broadband prices. All of a sudden, both desktops and laptops (which have been outselling desktops since 2006 in both the U.S. and Europe) had a viable mobile option for connecting to the Internet.

The result has been astonishing. Mobile broadband has become probably the fastest-growing mobile service since the launch of pre-paid services and SMS text messaging. In some countries, new mobile broadband subscribers now outnumber new subscribers for fixed broadband services. Plug-in 3G modems are outselling even the most popular mobile phone models in some markets. If I weren't allergic to the term "killer application," I would say that mobile broadband actually is one. Its success has led to capacity shortages for many operators, who are now busily planning for growing demand.

But before predicting mobile broadband-fueled growth for operators, some key questions must be answered. The first has to do with economics: With mobile broadband often being sold at prices that match or even beat fixed broadband services such as DSL, is there a sound business case supporting the mobile camp? After all, once user data reaches a carrier's antenna, the operator still has to pay "backhaul" charges to carry it onto the Internet. The cost of backhaul for mobile operators is as much as, and sometimes more than, what fixed-line operators pay to route DSL traffic.

Keeping Up With Demand

Indeed, the current pricing model for mobile broadband is predicated on the fact that 3G networks have been underutilized. Mobile broadband has been a good way to fill up that spare capacity with paying traffic. But going forward—especially if mobile broadband usage continues to skyrocket—carriers are going to have to make investments in both networks and backhaul to keep up with demand.

As a result, the continued success of mobile broadband—and ultimately, of the carriers themselves—depends on whether they can increase their data capacity in a cost-efficient way. Bear in mind we have seen overall Internet traffic increase by more than 100% annually for the past 10 years. That's a rate of growth unheard of for mobile operators, and even some fixed-line operators are challenged to keep up.

We've even started to hear fixed-line providers complaining they make all the investments in the networks while their slice of the revenue pie is limited to the access fees they can charge users. Witness the grumbling from British ISPs about the traffic load generated by the BBC's iPlayer set-top box. If you examine today's network and transmission costs, it's clear that something dramatic has to happen if mobile operators are going to be able to compete financially with their fixed-line rivals.

Extensive Coverage

One interesting opportunity for mobile broadband is in developing countries such as Russia and Central and Eastern Europe, where mobile operators face less competition from fixed-line broadband. According to Russian market research firm SmartMarketing, these regions will rapidly adopt Wi-Fi and WiMAX, its emerging high-capacity successor backed by the likes of Intel (INTC), because both provide scalable and easily accessible routes to broadband speeds and services.

My view is that mobile operators are even better positioned to succeed in these markets because of the maturity of their technology and the extensive coverage they already provide. They certainly don't have to worry about lack of interest from users: Internet access is a killer app everywhere.

No question, the battle for top spot in the broadband market is set to intensify. It will be fought in homes, offices, and public spaces. Fixed broadband and its wireless extension via Wi-Fi have had a head start, but now mobile operators launching HSPA services are catching up. Wired networks will continue to offer greater throughput, so for data-intensive applications such as IPTV, fixed broadband will continue to dominate. But many users are mainly interested in using the Net for news and e-mail, and for these applications, mobile operators have a good chance of succeeding as long as they can harness cost-effective technology from suppliers.

Bumpy Ride to the Mobile World

Should the mobile operators succeed in mobile broadband, they may increasingly come to resemble ISPs—a prospect about which they have mixed feelings. Internet innovations and dynamics will drive their businesses as never before, and they will spend most of their time figuring out how to double the capacity of their networks every year at the lowest possible cost without compromising too much on quality.

The era of transformation from mobile operator to mobile ISP is starting now—just as seven years ago, phone companies began morphing into fixed broadband providers. That was a bumpy ride, and so too will it be in the mobile world.

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