Mobile Network Capacity Issues

1

Gnostam LTE Network Issue 15th April 2012

Performance Through Independent Research

Wireless network capacity issues: Threats and opportunities

“Cloud” economics are pushing mobile network capacity constraints. Mobile devices have memory and speed limitations that might prevent them from acting as media consumption devices, were it not for cloud applications and services. Cloud applications and services such as Netflix, YouTube, Pandora, and Spotify allow mobile users to overcome the memory capacity and processing power limitations of mobile devices. A user with an 8 GB smartphone who streams cloud video and music will consume more content over the course of 2 years than can be stored on the device itself. A smartphone user adopting Netflix, Pandora, and Facebook will generate more than twice the volume of traffic generated by a smartphone user adopting only email and web applications

Capacity constraint is at Radio Link

1

EXECUTIVE SUMMARY: The Problem with Mobile wireless: In simple terms, demand is outstripping supply, and costs per gigabyte are rising faster than revenues. Supply is constrained by physics. One single fiber optic cable has more capacity than the entire RF spectrum. To avoid mobile networks being overwhelmed by a flood of data, these networks which support widely desired mobility applications, [e.g. Apple I-pad 3] these networks capacity must be upgraded. Reliability and access are key to long term survival, as we witnessed with Blackberry. However this is not just an IT technical issue. It is fundamentally a business model issue. The business issue is how to capture traffic

2

that clients will pay for, without clogging up the network with unprofitable users. While most operators are managing to grow their top line with mobile data, margins on mobile data have been under severe pressure for operators. Mobile data ARPUs are not delivering the same EBITDA margins as voice: this leads to a significant share of customers being unprofitable. The carrier choice of mobile data bundled plans has limited the market segmentation capacity of these operators. Examples: the price of data plans are decreasing at a rate of 60 percent p.a. on average. Plus, individual users can place a huge strain on the network: 10% are responsible for 50% of the network data traffic – without contributing one cent more in revenues. Actual revenues per megabyte are decreasing at around 50% p.a. – a

Continued on Page 4

2


Units used: Tera = 1012 Exta = 1018 Zetta = 1021

A “Flood of Data” s being generated by the I-pad type applications. In 2011, a fourth-generation (4G) connection generated 28 times more traffic on average than a non-4G connection. Although 4G connections represent only 0.2 percent of mobile connections today, they already account for 6 percent of mobile data traffic. Data storage costs have also dropped, allowing for more “cloud” based solutions.

3


The Mobile Network Through 2016 Mobile data traffic will reach the following milestones within the next five years.

• Monthly global mobile data traffic will surpass 10 exabytes in 2016. • Over 100 million smartphone users will belong to the "gigabyte club" (over 1 GB per month) by 2012.

• The number of mobile-connected devices will exceed the world's population in 2012. • The average mobile connection speed will surpass 1 Mbps in 2014. • Due to increased usage on smartphones, handsets will exceed 50 percent of mobile data traffic in 2014.

• Monthly global mobile data traffic will surpass 10 exabytes in 2016. • Monthly mobile tablet traffic will surpass 1 exabyte per month in 2016. • Tablets will exceed 10 percent of global mobile data traffic in 2016.

• China will exceed 10 percent of global mobile data traffic in 2016.

4


3

trend expected to continue over the next few years if radical action is not taken soon. The solutions…………………………?

1. Choice of spectrum and technology upgrade path. Operators [carriers and enterprise solution providers] need to decide on the succession of technology upgrades that will best fit their current data ~ corporate strategy and expected market demand for mobile broadband. Does the company already have a dominant technology and service position, or is it a value-for- money price leader? What is the spectrum application plan and spectrum auction positioning in their arena, including reservation prices? And what technology succession in spectrum bands will align best with the expected demand development?

2. Given that the main constraint is now supply and not demand, the main issue becomes the choice of tactical implementation and timing of network upgrades, be they 3G LTE, 4G or some other evolution. Only optimal tactical

4

pacing within the overall mobile broadband strategy will ensure success and optimize the road to 4G business cases. Operators need to focus on topics such as regional rollout priorities, fixed substitution propositions, and further capacity extension strategies. For instance, reforming 1,800 MHz 2G spectrum could be a viable strategy to build additional LTE capacity networks, but this requires advance planning. Partnering opportunities could offer operators great value creation potential as well. Those operators that pool spectrum based on network-sharing agreements will reap a significant cost-to-serve advantage.

MOBILE WIRELESS CAPACITY AS AN ECONOMIC OPPORTUNITY: We have witnessed the collapse of Blackberry, [RIMM] a casualty of “failed” supply side network management. All major participants in the carrier and

Continued on page 6

5


The LTE standard only supports packet switching with its all-IP network. Voice calls in GSM, UMTS and CDMA2000 are circuit switched, so with the adoption of LTE, carriers will have to re-engineer their voice call network. Three different approaches sprang up: 1.CSFB (Circuit Switched Fallback): In this

approach, LTE just provides data services, and when a voice call is to be initiated or received, it will fall back to the CS domain. When using this solution, operators just need to upgrade the MSC instead of deploying the IMS, and therefore, can provide services quickly. However, the disadvantage is longer call setup delay.

▪ SVLTE (Simultaneous Voice and LTE): In this approach, the handset works simultaneously in the LTE and CS modes, with the LTE mode providing data services and the CS mode providing the voice service. This is a solution solely based on the handset, which does not have special requirements on the network and does not require the deployment of IMS either. The disadvantage of this solution is that the phone can become expensive with high power consumption.

VoLTE (Voice Over LTE): This approach is based on the IP Multimedia Subsystem network.

The diagram above shows the increased volume in wireless data capacity usage from different mobile devices. A smartphone on average uses 35 x more capacity than a regular cell phone. A Tablet, on average uses 121 x more capacity than a regular cell phone. Demand for tablets and I–pad’s is growing exponentially because these tools are seen as the single most important productivity tool [source Information Week 8/2011, mobile device management and security survey of 323 business technology professionals].

Diagrammatic representation of an LTE wireless network switched into a PSTN. It only supports the IP protocol for voice calls.

6


5

enterprise areas are at risk, as are the dominant mobile device and application suppliers. The 4-G network will be an evolution of , many different types of “internet protocol” {IP} based networks. As can be seen in the schematic on page 5, these networks are real evolutions of technologies and know how, with the common objective of utilizing Radio Frequency band-width more efficiently. Any technology that allows a mobile network greater service portability and interoperability will be utilized, using the IP platform that has been made ubiquitous by Cisco Systems. With the proliferation of mobile and portable devices, there is an imminent need for networks to allow all these devices to be connected transparently, with the network providing high-performance computing and delivering enhanced real-time video and multimedia. This openness will broaden the range of applications and services that can be shared, creating a highly enhanced mobile broadband experience. The expansion of wireless presence will increase the number of consumers who access and rely on mobile networks, creating a need for greater economies of scale and lower cost per bit. While the net neutrality regulatory process and business models of operators evolve, there is an unmet demand from consumers for the highest quality and speeds. As wireless technologies aim to provide experiences formerly only available through wired networks, the next few years will be critical for operators and service providers to plan future network deployments that will create an adaptable platform upon which will deploy the multitude of mobile-enabled devices and applications of the future. We have focused on the manufacturers of the Radio Frequency chipsets, ARMH,

6

BRCM, RFMD, as these suppliers to network capacity, along with Nokia Siemens, Alcatel Lucent, the Chinese manufacturer Huwaei offer the most bang for our investment buck. However this is a very complex transition and there are bound to be more RIMM type occurences for those who are not able to build redundancies into their mobile broadband networks. Examples of unpredictability of LTE evolution: Operators initially deployed High Speed Packet Access (HSPA) in 5 MHz + 5 MHz radio channels. HSPA uses a 5 MHz radio channel, so this means one channel was for the base-station to mobile- user (forward) direction and one channel was for the reverse direction. Based on a spectral efficiency of .5 bps/Hz, the HSPA initial deployments data capacity was 2.5 Mbps in each sector17 and EV-DO in a 1.25 MHz radio channel with the same spectral efficiency had a data capacity of 600 kbps. With improvements in radio technology, we expect a 50% increase in the capacity. But one can see how small a number of simultaneous YouTube viewers each at almost 1 Mbps can occupy the entire bandwidth of the data channel, which really puts a strain on network capacity. Looking forward to advanced technologies such as LTE, capacity will be higher, but it will still be extremely limited compared to wireline capacity. Verizon Wireless’ LTE network will operate in the 700 MHz band using 10 MHz radio channels. With a spectral efficiency of 1.5 bps/Hz, this delivers a sector throughput of 15 Mbps. Meanwhile, there are about 1000 subscribers in the US for every cell site, which makes for an average of 333 subscribers per sector. If 10% of them were using the LTE data service, that would mean 33 users for the 15 Mbps data channel. Now, compare this with a subscriber of a

7


Investing in the pressure points in the LTE system

7

wireline high-speed Internet service of 50 Mbps that is dedicated, and not shared. Asia's mobile networks are also getting more filled, rising from 54 percent utilization two years ago to 62 percent in 2011. Western European networks are getting less constrained, falling from 66 percent to 56 percent. Both regions will be well over 60 percent within two years, however. Latin America's mobile networks will hit 85 percent average utilization within a year, according to the survey. The point is not that the wireless network cannot deliver extremely valuable mobile services, but that wireless capacity is inherently limited compared to wireline capacity.

8

One network in the US that has considerably more capacity is Clearwire’s WiMAX network. This has been deployed in 30 MHz of spectrum, which is considerably more than what any 3G operator has deployed for data so far. As demand increases, Clearwire has indicated it can make up to 120 MHz of spectrum available. Whereas many 3G networks place caps of 5 Gbytes on monthly data usage, the Clearwire network currently has no caps. Even the Clearwire network, however, cannot match the capacity of wireline access networks that are fiber oriented (e.g., fiber to the home).

Cloud media applications and services such as Netflix, YouTube, Pandora, and Spotify allow mobile users to overcome the memory capacity and processing power limitations of mobile devices.

8


INDIVIDUAL RECOMMENDATIONS:

1

Most of the suppliers to this exploding market are discounting the economic benefits of the market. As with many growth markets, the early hype tends to push valuations into the stratosphere. Nevertheless there are certain stocks which we believe should be on a watch list for an opportunity to buy on market sell offs. The best buy in the current market is Broadcom, followed by Cisco. Arm Holdings is a buy, and since it is a very difficult stock to buy, it is best to buy on weakness. Ciena is also a long term buy. The upside on Ciena is not huge at moment, $20.

Ciena is likely to see revenue rise faster than the broader telecom landscape’s 3 to 5% rate over the next three years, perhaps seeing more like 11% pa.

The move from traditional telco “SONET” gear to “dense wavelength division multiplexing,” or DWDM, fiber optic equipment — a move that’s been going on for years now but seems finally to be happening in earnest – should benefit Ciena, as it has only 5% of the SONET market but 12% of the DWDM market.

If management can keep operating expense growth to just 2.2% over that three-year term, combined with a 2.5% expansion of its gross profit margin, the company could see operating margin widen to 8.5% in 2013 and 11.5% in 2014.

2

As for Broadcom, it has been winning some baseband share at Samsung this year. However, we believe the magnitude of these share gains is fairly meaningful, and likely underestimated by the Street. Samsung seems to be pushing for massive smartphone shipment growth in 2012, forcing smartphones into as many different price points as possible.

Independent handset supply chain checks suggest that Broadcom could supply 30%-40% of Samsung’s smartphone basebands in 2012 (60M-80M units out of Samsung’s 195M unit smartphone target), plus some of Samsung’s non-smartphone shipments (some portion of another 150M-170M handsets). This meaningful growth this year should help to stem the impacts from Broadcom’s falling 2G baseband shipments to Nokia and Samsung.

ARMH’s smartphone and the tablet markets are larger than thought, producing 10% greater earnings than expected for this year and next.

ARM maintains the upper hand, in the mobile market relative to its competitors including Intel. After 31% growth in ARM’s total chip unit volume in 2011, growth will cool to more like 16% for 2012 but then it will resume 20% growth in 2013.

9


COMPONENTS IN I-Pad 3 SUPPLIER Dual Core ASX processor ARM Architecture, Samsung Fab LCD Display Screen Samsung, LG HSPA & LTE Baseband processors Qualcomm MAC/Baseband/Radio/Bluetooth Broadcom BCM4330 802.11a/b/g/n NETWORK OPERATORS IN US AT&T Mobility (NYSE:T) and Verizon Wireless (NYSE:VZ) will launch LTE-compatible versions of the device in the United States. Analysts have said that Verizon, which has an LTE network covering 200 million POPs, may be the largest carrier beneficiary of the new device, though AT&T has been quick to point out that even though its LTE network covers 74 million POPs, customers can still drop back to its faster HSPA+21 network outside of LTE coverage. Market research firm Gartner Inc. estimates 103.5 million tablets will be sold in 2012, with Apple accounting for two- thirds of those, rising to 326.3 million in 2015, Apple Share 46% Source: FierceWireless-FierceWireless

10


11


CONCLUSIONS: The mobile-broadband industry is experiencing tremendous success, yet its very success is undermining its ability to deliver a consistent, reliable trouble-free experience. As the number of users increases with ever more demanding applications, it is inevitable that there will be ever more cases in which the volume of traffic in different coverage areas exceeds capacity, resulting in congested operation. More efficient applications not only reduce the likelihood of congestion occurring in the first place, but they also are inherently more resilient, since they require less time and data to operate. They also reduce battery consumption, and most importantly for users, reduce costs, especially with usage-based pricing plans. Beyond user benefits, greater application efficiency results in significant savings for operators including lower costs in the radio network, lower costs in backhaul, lower infrastructure costs and the need for less new spectrum. We think this environment is an opportunity to buy several of the LTE emerged technologies, namely, ARMH, RFMD, CIEN, CSCO, BRCM. GLOSSARY OF ACRONYMS: GSM: Global System for Mobile Communications; LTE- Long Term Evolution, [of 4-g networks from 3-g wireless networks]; HPSA: High Speed Packet Access UE: Ultra Edit, a software text editor for Microsoft Windows; MSC: Message Sequencing Chart; IMS: IBM Information Management System; SGSN: Serving a GPRS Service Node; MME: Mobility Management Entity, System Architecture Evolution, core of 3GPP LTE; GERAN: GSM EDGE Radio Access Network; UTRAN: Universal Terrestrial Radio Access Network; E-UTRAN: air interface of 3GPP's Long Term Evolution (LTE) upgrade path for mobile networks. Sources & References: Cisco Networks White Paper – Global mobile data traffic: Forecast update 2011-2016; Accelerate Technology Challenges in technology roll-out, 2012; Infonetics 2011 White Paper, Research in optical equipment leaders; Rysavy 2011 Mobile broadband capacity constraints; Infonetics: The road to plain 4G survey excerpts 2011; Net neutrality regulatory proposals, Rysavy Research; Shifting the supply axis: The road to 4-G McKinsey White Paper; Wireless design magazine: Testing LTE network, benefits and challenges; Mobile broadband with HSPA and LTE – capacity and cost aspects, Nokia Siemens White Paper; Dragonwave: The Road to 4G is Easier with Microcellular Solutions; Agilent: The road to 4G IMT Advanced LTE Advanced webinar;

12


Gnostam LLC performance Graphs

Gnostam was established February 4th 2004. Since inception the annualized rate for return for a client portfolio managed by Gnostam LLC has returned a total 8.4%% to February 29th 2012.

13


Disclaimer:

The information and any statistical data contained herein have been obtained from sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short positions or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The securities mentioned in this report may not be suitable for all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.

Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted.

Investment Disclaimer All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made. All products sold are subject to market risk and may result in the entire loss to the client's investment. (For example: excessive withdrawals may result in the depletion of your account). Please understand that any losses are attributed to market forces beyond the control or prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.

Gnostam LLC PO Box 960 Inverness, CA 94937 USA Tel: 206 384 0069 E-‐mail: [email protected] www.gnostam.com

Mobile Network Capacity Issues

Documents

Transcript of Mobile Network Capacity Issues