iPhone 5: More pain for operators?

18 Sep 2012

Mobile operators across Asia announced almost in unison last Wednesday they will offer Apple's latest creation, the "thinnest and lightest iPhone ever", on September 21. And yesterday AT&T informs us that, surprise, surprise, the iPhone 5 is selling faster than any iPhone before.

Beyond the tiresome hype, the big question is what will be the impact of an LTE version on operators' bottom-line as customers stampede to retail shops to sign up for subsidized LTE packages?

When you look at the potential impact on their newly-launched LTE networks, the verdict is still out. Some analysts say the better economics of LTE networks means telcos' costs will go down even as data usage soars.

According to Validas, which tracks mobile usage in the US, LTE users consume on average more than twice the data compared to 3G subscribers -- 1.2 Gbps per month vs 500 Mbps.

But is LTE twice as efficient as 3G networks, with operators able to handle double the usage per subscriber at the same or a lower cost? That is doubtful.

Phil Marshall, chief research office at Tolaga, told Telecomasia.net that capacity improvements really depend on the level of LTE network deployment and the radio spectrum resources available. "LTE technology alone does not enable an operator to double capacity."

He said Verizon in the US has a pretty good LTE footprint at 700-MHz and is just now implementing LTE in the AWS band. "This spectrum effectively creates new capacity and, therefore, Verizon will be able to double its capacity."

He said the situation is somewhat similar for AT&T, although it is further behind Verizon in its LTE deployment.

With so many variables, the impact of a doubling in usage is impossible to predict without looking at the spectrum and configuration of each network. Suffice to say, some will fare the impending surge better than others.

The US carriers, however, are in a better position than most. First, is the point made above by Tolaga's Marshall. Second, they have migrated off unlimited plans and strictly enforce caps due to high congestion in many markets and, third, mobile rates in the US are significantly higher than in most Asian markets -- actually twice as high as Hong Kong in some cases.

As always, telcos are betting that the monthly tariffs over a two-year contract will more than make up for the one-time subsidy without overburdening their networks. It has worked wonders for AT&T, whose profits in Q2 were a staggering $6.8 billion, with a 30% margin!

But in the short term operators will take a huge upfront hit as customers upgrade to the new model. AT&T Wireless' profit margin dropped by 30% in Q4 last year as a flood of customers signed new two-year contracts and it gave away cheap phones. This time around, Rethink Research reported yesterday that analysts at Stifel Nicolaus have downgraded AT&T and Verizon for that reason.

It will be interesting to see how LTE devices, not just the iPhone 5, drive data consumption, how LTE networks will cope with any jump in usage, and finally how that translates into a hit or a boon to their bottom-line.

One last note, a number of operators have already announced that their iPhone 5 data plans will support FaceTime over cellular, which everyone knows is bandwidth intensive. Users will have to monitor their usage so they don’t exceed their caps. But even in a more optimistic scenario where users don't go over but a majority do start hitting their caps, operators will soon be contemplating costly network upgrades.


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