It's a Long Way to 4G NirvanaPublished: March 17, 2010 in Knowledge@Wharton
Spurred by the data consumption of devices like Apple's iPhone, Motorola's Droid and the latest smartphones, wireless carriers are planning to upgrade their networks. Verizon Wireless is planning to roll out faster wireless service beginning this year. AT&T is plotting a 2011 network upgrade. And Clearwire, a young company backed by Sprint and Comcast, is promising to cover 120 million people with mobile broadband access by the end of 2010.
These services -- commonly referred to as 4G, or fourth generation, wireless networks -- promise speeds fast enough to replace wired Internet connections and the ability to enable a wide range of new applications for mobile consumers involving rich media such as video. "The 3G [third generation wireless] technical standards were developed years ago, when voice still dominated on mobile networks. That's changing fast," says Wharton legal studies and business ethics professor Kevin Werbach. "The iPhone and similar devices typically generate 10 to 50 times the data usage of prior mobile phones. For consumers, 4G will make their current smartphones work better and more reliably."
Gerald Faulhaber, a business and public policy professor at Wharton, agrees. "4G mobile technology holds a lot of promise. [It] presages the notion that you can use your phone as a computer."
Although 4G service will be rolled out over the next two years, experts at Wharton say it's still unclear when wireless broadband access will become a mass market phenomenon. First, service providers will need to create the necessary infrastructure for a 4G rollout. Meanwhile, there's a looming wireless spectrum crunch: The various frequencies needed to deliver services are in short supply. Without more spectrum, Faulhaber and others predict that 4G services will be hampered.
At present, there are two primary technologies behind 4G services. The first, used by Clearwire and Sprint, is WiMax (short for Worldwide Interoperability for Microwave Access). Unlike conventional Wi-Fi (wireless fidelity), which allows coverage for a range of 300 to 400 feet depending on physical interference, WiMax uses fixed towers to provide broadband access for up to 30 miles, with access speeds of one to six megabits per second (Mbps). The rival technology, which has been chosen by major telecom giants like Verizon and AT&T, is Long Term Evolution, or LTE. In field trials, Verizon has claimed download speeds of 50 Mbps with LTE. In reality, speeds will range from six Mbps to 12 Mbps, or about the same as with a conventional cable modem.
Despite any differences in these technologies, one thing is clear: Faster wireless broadband speeds are expected to be a game changer. Scott Snyder, who wrote The New World of Wireless: How to Compete in the 4G Revolution, published by Wharton School Publishing, argues that 4G's promises -- faster downloads, interoperability between various devices and the improved ability to share data -- will change user behavior. "[4G] will shift more power to the user and lessto the network providers. And that's kind of a disruptive effect," Snyder said in a podcast interview with Knowledge@Wharton. (See: "Wireless Technology: The Birds and the Bees ... and 4G.") "This technology platform will really allow much more interconnectivity across the planet." With all of that connectivity, innovation and productivity should blossom, he adds.
The 4G Building Boom
But before Snyder's vision can become a reality, the wireless industry needs a building boom to upgrade from 3G hardware and software to the next generation.
Eric Clemons, an operations and information management professor at Wharton, says there is a never-ending need for wireless speed for consumers, so the build-out is justified. He likens the jump to 4G to going from dial-up to cable modem. According to Clemons, faster wireless broadband speeds are likely to lead to more usage. "3G is barely fast enough for today's apps. I can't surf for data at 3G speeds. When we have 4G, we will watch videos and treat our smart phones more like laptops."
One wild card is how long the 4G build-out will take. Kartik Hosanagar, an operations and information management professor at Wharton, says he doubts that mass 4G services will be available on the timelines provided by wireless carriers. "4G will be great when it happens, but these things always take longer than you expect."
Nevertheless, wireless providers are forging ahead. Ivan Seidenberg, CEO of Verizon, said in January that the company plans to offer its LTE 4G service in multiple markets by the end of the year. "We will continue to focus on growing revenue and market share, expanding data penetration and growing data revenue, developing LTE and offering 4G services in 25 to 30 markets before year end," he said on an earnings conference call with analysts. Anthony Melone, chief technology officer at Verizon Wireless, told The Wall Street Journal earlier this month that the company was planning to offer its first LTE handsets in 2011. These phones will be compatible with Verizon Wireless's 3G network.
Clearwire CEO Bill Morrow also has big plans for 4G services. "Throughout the year, we will continue to lay the foundation to take a reasonable share of this growing demand by substantially expanding our 4G networks," he said in February on a company earnings call. Clearwire, which has launched services in cities including Philadelphia and Dallas, plans to launch 4G service in San Francisco, New York, Boston and Washington, D.C., later this year.
AT&T CEO Randall Stephenson said his company will test LTE in 2010 with a more aggressive rollout planned for 2012. "We will be trialing in a couple of markets this year. We are not in a tremendous hurry on LTE," he said at a Morgan Stanley investment conference on March 2. "[It] is going to take a while to develop the handset selections and the ecosystem around [4G]."
Werbach notes that the 4G build-out may move more rapidly than some observers think. "4G will roll out faster than 3G in the U.S. for several reasons. Some of them have to do with competition" between the providers, none of which are likely to remain dormant while others pull ahead. The most time-consuming component of the mobile infrastructure to upgrade is the towers, he adds, "[but] tens of thousands have been built around the U.S. over the past decade, so the 3G to 4G upgrade should be easier than in the past."
A 'Laptop Play'
Payoff for 4G investments will largely depend on pricing of services, according to Clemons. Carriers can target niche markets -- say, business travelers who want the fastest connections for their laptops -- or try to go mainstream with lower prices. But going mass market with 4G won't be the first priority, Clemons predicts. Verizon and AT&T have both hinted at tiered pricing models where heavy broadband consumers pay more. Carriers are likely to attempt to recoup their investments through higher prices for 4G services.
"If 4G is expensive, its use will be limited," Clemons notes. "What we are doing with 3G is hardly worth vast sums of money, so how much will doing it faster be worth?"
Faulhaber expects Verizon to initially offer LTE services as "a laptop play," or as a service geared toward business users. "It's difficult at this stage to see 4G as a mass product," he says "There's a lot of money [in] focusing on high-end business people and professionals who will want high speed access on the road."
Hosanagar agrees. "These services will first be marketed as mobile broadband for businesses. I don't think this will be coming to consumers anytime soon."
Over time, Hosanagar and others predict that broadband substitution will occur as consumers drop wired access for wireless. "The substitution effect will eventually happen, but it will take time," Hosanagar says. "It took time for consumers to get comfortable with dropping their phone lines for cell phones."
According to Faulhaber, the biggest issue likely to confront 4G is a shortage of wireless spectrum. Wireless spectrum refers to the airways licensed by the Federal Communications Commission that carry services from Verizon, AT&T and other operators. Without more spectrum, 4G services will ultimately get squeezed like water moving through a big pipe that narrows down to the size of a straw at the endpoint.
"The FCC needs to release new spectrum," says Faulhaber. "If people start using 4G a lot, it will eat up bandwidth, just like the iPhone is stressing 3G networks. You can either get more spectrum, or build more cell towers closer together -- although there are already 225,000 cell towers." That spectrum squeeze is one of the reasons 4G is likely to start by focusing on business users instead of the mass market, he adds.
The FCC is aware of these spectrum issues and knows that recent auctions only go so far. FCC chairman Julius Genachowski said in February that the potential for mobile broadband is "limitless," but "its oxygen supply is not.... Spectrum -- our airwaves -- really is the oxygen of mobile broadband service. Without sufficient spectrum, we will starve mobile broadband of the nourishment it needs to thrive as a platform for innovation, job creation and economic growth."
Genachowski added that the U.S. National Broadband Plan will set a goal of freeing up to 500 megahertz of spectrum by 2020. To acquire this spectrum, the FCC plans to convince owners of unused airways allocated to television broadcasters to relinquish rights in exchange for a share of auction proceeds.
Faulhaber estimates that to meet future wireless demand, the U.S. needs to double the spectrum Genachowski is proposing. The FCC is on the right path by looking to television broadcasters, but it should cobble together more by making government uses more efficient. For instance, he notes that some spectrum is allocated to the military in the event of an attack. The FCC could use that spectrum under normal circumstances and then pre-empt it if the military needed it.
The spectrum shortage will be a lingering problem for years to come, Werbach predicts, but it can be managed. "There will always be a spectrum crunch, because new wireless capacity makes possible new applications and networks, which use up capacity," he says. "The laws of physics and legacy spectrum allocations impose limits on what can be done. On the other hand, spectrum is wildly under-utilized. We actually use only a small percentage of the potential capacity of current spectrum allocations because of inefficient technologies, inefficient regulation, allocations to legacy services and hoarding."
As efficient solutions unfold in the future, so will the promise of 4G.