MGMT 463 – Management and Strategy

Term Paper:The Effects of Wi-Fi in the 3G Telecom Landscape

December 4, 2003

Lisa Sato Whitelock, Robert E. Lee, and Christopher Kelson

Abstract

The telecommunication industry in the US has gone through probably the worst downturn

in its history. The buildup of excess capacity in the late 1990s contributed to the subsequent

reduction in capital spending by service providers. Fortunately, the arrival of wireless data is

slowly helping the industry to recover. While the industry is recouping from this “telecom

bubble” there is nonetheless a looming technical challenge that may subtly but fundamentally

alter the competitive landscape. This challenger disguises itself in the form of Wireless Fidelity,

or Wi-Fi. The purpose of this paper is to present the argument that Wi-Fi could significantly

delay or limit the need to deploy 3G cellular technologies for high-speed wireless data. To do

so, this paper will first provide a high-level overview of different 2G/2.5G cellular technologies

and Wi-Fi technology that are being used today. Next it will substantiate this argument with

several key observations. Finally this paper will conclude with a couple of suggestions to the

cellular service providers on how to quickly integrate Wi-Fi and turn it from a potentially

disruptive technology into a major source of wireless data revenue.

Page 2 of 17

Table of Contents

2003 US Cellular Industry Overview..............................................................................................4Background – Today’s 2G Cellular Technology.........................................................................5CDMA Technology Migration....................................................................................................5GSM Technology Migration........................................................................................................6

Emergence of Wireless Fidelity.......................................................................................................7Wi-Fi Technology Adoption............................................................................................................8Argument for Delay of 3G Deployment..........................................................................................9Summary & Recommendations.....................................................................................................12Additional References Used in This Report..................................................................................17

Page 3 of 17

2003 US Cellular Industry Overview

Although today’s cellular industry has only a few handful of operators (Exhibit 1) that

survived the telecom bubble of the late 90’s, analysts expect further consolidation so that there

will be less competition and improvement in profit margin. Worst still, the wireless number

portability legislation, which just went into effect in November 24 of this year, will further

intensified price competition amongst US cellular operators due to the expected increase in user

turnover rate. A study released by Yankee Group in July 2003 showed that if similar legislation

in Hong Kong is of any indication the EBITDA margin could erode further as the result of this

legislation1.

In spite of the continuing consolidation and pricing pressures (especially on the voice

services) the governing consortium of US cellular industry, Telecommunications Industry of

America (TIA), which is the leading U.S. non-profit trade association serving the

communications and information technology industry, projects that the total wireless

communications spending is expected to increase from $123.4 billion to $164.5 billion during

2003-2006 at a 9.6 percent compound annual rate. The bulk of this projected revenue will come

from wireless data services such as Internet access and text messaging2. The phenomenal

success of high-resolution camera phones in the Asia markets, where wireless phones with build-

in cameras with image resolution of over 1 mega-pixel are first introduced, is expected to further

fuel the surge in wireless data usage in the US market.

1 Yankee Group, Brief US wireless market overview and the impact of wireless number portability, July 2003, http://www.lightbridge.com/files/pdfs/wnp_impact.pdf 2 TIA, http://www.tiaonline.org/media/press_releases/index.cfm?parelease=03-14

Page 4 of 17

Background – Today’s 2G Cellular Technology

Anticipating user demand for multi-media applications, Internet browsing, and other data

capabilities, the US cellular operators have begun the migration toward 3G cellular technologies.

Currently there are two separate and non-compatible cellular technologies that are used by US

cellular service providers. For operators such as Verizon Wireless and Sprint PCS, CDMA is the

preferred technology. On the other hand, cellular operators such as AT&T and Cingular have

chosen GSM. Both CDMA and GSM allow the cellular service providers to build off their

current 2G architectures (Exhibit 2 & 3).

CDMA Technology Migration

CDMA-based (Code Division Multiple Access) wireless providers started deploying

Qualcomm’s cdmaOne (we shall refer to it as “CDMA” for the remainder of this paper)

technology in the mid-1990s. CDMA uses spread spectrum technology to break up speech into

small, digitized segments and encode them to identify each call and transmits them over

1.25MHz wide RF (Radio Frequency) channels. CDMA technology is spectrally more efficient

than the alternate GSM technology. In other words, CDMA allows more data to be transmitted

in the same size frequency band. US vendors such Verizon Wireless and Sprint PCS have

already upgraded most of their systems to the cdma2000 1X, which is a 2.5G cellular technology

with maximum data rate of 153 kbps and which also doubles the voice channel capacity. To

obtain even higher data rates to handle the projected increase of wireless data usage, cellular

providers need to upgrade their networks again to either 1xEVDO or 1xEVDV (both are 3G

cellular technologies). 1xEVDO, or EVolution Data Only, is commercially available today and

offers peak data rates of up to 2.4 Mbps. 1xEVDV, Evolution Data and Voice, will be offered in

the future and it will achieve rates of up to 3.09 Mbps. The main appeal of both 1xEVDO and

Page 5 of 17

1xEVDV is that both are backward compatible to the existing 2G platform. Unfortunately, the

cost to convert today’s 2.5G CDMA system is estimated to be in the billions of dollars.

GSM Technology Migration

Global Systems for Mobile Communications (GSM) is the world’s leading 2G wireless

voice and text-only data technology. GSM is a TDMA (Time Division Multiple Access)

technology which divides a 200 KHz frequency band into 8 timeslots. Each timeslot is dedicated

to one user for up to 9.6kbps voice/data rates. New data technologies have been added to the

GSM family - General Packet Radio Service (GPRS). GPRS, which is available today, is a

higher capacity, Internet-based content and packet-based data service with advertised speed of

114 kbps. GPRS can evolve to EDGE, which stands for Enhanced Data Rate for GSM Evolution

and can support maximum speed of 384 kbps and is therefore more suitable for advanced mobile

services that require even higher data speed. EDGE allows providers who do not have 3G

licenses to offer “3G-like” data rates if they desired. Upgrading the entire network to either

GPRS or EDGE is expensive and only provides data rates comparable to the lowest 3G speeds,

but is backwards compatible to existing 2G platform. To achieve even higher data rates, GSM-

based providers will need to migrate to a CDMA-based 3G technology, the most likely standard

will be W-CDMA (Wideband CDMA or commonly refer to as Universal Mobile

Telecommunications System or UMTS). Today W-CDMA offers data speed up to 2Mbps but by

2005 should offer speeds up to 10Mbps. Though commercially available today, W-CDMA is in

its infancy and there are still technical issues that need to be resolved (e.g. handoff). Also W-

CDMA will be expensive to upgrade (estimated to be in the billions) and will not be backwards

compatible to the old EDGE/GPRS/GSM architectures; hence, to migrate to W-CDMA would

require “fork-lift” hardware changes by the GSM cellular providers.

Page 6 of 17

Emergence of Wireless Fidelity

Wireless Fidelity (Wi-Fi) is a networking protocol designed to create a wireless local area

network (LAN) topology. Wi-Fi is the Institute of Electrical and Electronics Engineers (IEEE)

specification 802.11. There are several versions of Wi-Fi based on the variant of the 802.11

specification being used to create the wireless LAN. Even though there are variants of 802.11,

each serves the same purpose; “the IEEE 802.11 specifications are wireless standards that

specify an ‘over-the-air’ interface between a wireless client and a based station or access point,

as well as among wireless clients.”3 For the purpose of this paper we will not address the

variants of the 802.11 specifications individually; instead, we will simply refer any variant as

Wi-Fi.

As already stated, there are two principal components within the Wi-Fi topology, the

client and the access point. The client is any Wi-Fi capable platform like a PC or PDA. The

access point is the network interface that enables the client to have access to the LAN. Because

the purpose of Wi-Fi is to create a wireless LAN, the implementation of the LAN is modeled

after the existing LAN dominant protocol of Ethernet. IEEE describes the rational as follow: the

802.11 standards can be compared to the IEEE 802.3TM standard for Ethernet for wired LANs.

The IEEE 802.11 specifications address both the Physical (PHY) and Media Access Control

(MAC) layers and are tailored to resolve compatibility issues between manufacturers of Wireless

LAN equipment.

All Wi-Fi variants operate at either 2.4G-Hz (802.11b/g) or at 5-Ghz (802.11a)

frequencies. By operating in the 1G-Hz range frequencies, the Wi-Fi LAN is able to deliver

11Mbps/55Mbps peak bandwidth at 2.4G-Hz or 54Mbps at 5-Ghz. The tradeoff for that

bandwidth is that the effective range of the LAN is much shorter than that of cellular

3 IEEE, http://standards.ieee.org/wireless/overview.html#802.11

Page 7 of 17

technologies. That tradeoff is not a significant issue however, because Wi-Fi is only meant to

create a local network, not a public network. Another advantage is that Wi-Fi frequencies are

not government regulated. As such there are no licenses required to set up a Wi-Fi LAN.

Wi-Fi Technology Adoption

The initial technology requirement document for 802.11 was submitted to IEEE in May

1992. This initial document outlined what eventually became 802.11b, the first variant of Wi-Fi.

Since its conception in 1992, Wi-Fi has rapidly diffused throughout the United States.

Unfortunately, it is very difficult to determine the present Wi-Fi coverage throughout the United

States, known as footprint, because Wi-Fi does not operate in government-regulated frequencies.

Instead we can use examples of Wi-Fi LAN implementations, or “hot spots”, as a rough model

for its availability. According to Intel there are 11,983 hot spots available within the United

States alone that are Wi-Fi compatible.4 Most of the hot spots are in high traffic areas like

airports, coffee shops, cafes, hotels and even some McDonalds.5

Wi-Fi adoption has accelerated in the past couple of years for a couple of key reasons.

First, there is the large base of traditional Ethernet LAN applications that are also suited for

Wireless LANs, specifically E-mail and Internet access. E-mail and Internet access are

applications native to the PC and both are dependent on LAN connectivity. United States is

becoming an increasing mobile society where business and personal travelers now bring their

laptop PCs with them on trips. Before the introduction of Wi-Fi business travelers would rely on

either dial-up landline services or cellular 3G technologies, which may not available, convenient,

or fast enough for quick wireless data downloads. In contrast, Wi-Fi hot spots provide a very

familiar LAN topology for these PC based applications.

4 Intel, http://intel.jiwire.com/5 McDonalds, http://www.mcdonalds.com/countries/usa/whatsnew/pressrelease/2003/08122003/index.html

Page 8 of 17

Second, Wi-Fi adoption has benefited from the commoditization of the equipment used to

create the wireless LAN network. On the client side, the PC industry has aggressively pushed

chip prices down to enable rapid development of inexpensive Wi-Fi capable PC platforms. Intel

has aggressively pushed the adoption of Wi-Fi with the release of its Centrino microprocessor

technology. Even enterprise systems for large Wi-Fi hot spots are now extremely inexpensive.

For example, a Symbol 256 user Access Point is available on CDW for about $1000.6 Even

software giant Microsoft has entered the Wi-Fi equipment market with a line of home and small

enterprise offerings.7

The need for LAN connectivity away from home/office and the commoditization of the

equipment has created a very compelling Return on Investment (ROI) for Wi-Fi service

providers. Although equipment varies, the cost to deploy a “Hot-Spot” in a coffee shop or café

is significantly less than a cellular system. This enables investors to create a very a large number

of Wi-Fi LANs in high traffic areas at a fraction of the cost of traditional cellular technologies.

And because each hot spot is standards based, every Wi-Fi client with that variant is immediately

able to gain access to the LAN unlike cellular networks that require exclusive contracts.

Argument for Delay of 3G Deployment

Executives at US cellular companies can easily dismiss Wi-Fi as a PC-based wireless

data technology on the grounds that it serves a different purpose—provide high-speed wireless

data access to users at pedestrian speeds only. Yet they need to recognize that Wi-Fi is not only

a supplemental wireless data technology today but a potential threat as well. To see this, they

need to re-examine current assumptions about wireless data usage, take note of the projected

increase in Wi-Fi coverage, and recognize the deployment cost advantage of Wi-Fi system.

6 CDW, http://www.cdw.com/shop/products/default.aspx?EDC=2422067 Computer World, http://www.computerworld.com/networkingtopics/networking/story/0,10801,85012,00.html

Page 9 of 17

First, today’s mobile data users can be classified into two groups: cellular owners and

laptop PC & PDA owners. The predominant data application for the cellular users is text

messaging that requires relatively lower data throughput than web browsing and file transfer

(ringer download or sending a digital picture). In contrast, the usage pattern for laptop PC &

PDA owners is reversed since most of the time they use their laptop PC or PDA to surf the web

and download files. For these laptop PC & PDA owners Wi-Fi, not 3G cellular, is the preferred

technology for wireless data transport in part due to the aggressive integration of Wi-Fi into most

laptop PCs and PDAs sold today. If cellular service providers do not quickly add Wi-Fi into

their service offerings, they may lose out to the Wi-Fi service providers and miss out on revenue

from wireless data may not materialize either. Furthermore, one of the key arguments in favor of

3G is that users want to be able talk and access data any time, anywhere. However, users don’t

have an unlimited demand for data while traveling. It is also presumptuous for cellular operator

executives to assume that users need data access at all time. The airphone business model is a

similar example of such overconfidence in the user demand for mobile connectivity during flight.

Even if the users require wireless data access on demand, the usage-based pricing of 3G data

services makes flat-rate pricing of Wi-Fi service more appealing. The price advantage of Wi-Fi

becomes even more appealing for heavy wireless data users for large file transfer.

Second, proponents of cellular technologies have argued that Wi-Fi does not offer

ubiquitous coverage and true mobility like 3G cellular technologies since its coverage is

confined to hot spots such as airport, coffee shops, etc. This argument does not consider the fact

that PC industry is aggressively integrating Wi-Fi into every laptop and PDA devices. This

means that buildup of Wi-Fi hot spots will most likely accelerate. In fact according to Gartner

Dataquest, there will be significant increase of Wi-Fi coverage in community hot spots, retail

Page 10 of 17

outlets, and hotels. Exhibit 4 shows Gartner Dataquest’s projected Wi-Fi public hot spot

locations worldwide8. One could argue that it would only be a matter of time before Wi-Fi

reaches high market penetration and becomes the default technology for high-speed wireless

data. In addition, new enhancements to Wi-Fi could expand coverage of Wi-Fi and eliminate

one of the key disadvantages of Wi-Fi. From a competitive standpoint this would make 3G

cellular technologies even less appealing for high-speed wireless data transport.

Third, deployment of 3G cellular networks is a very complex and expensive process that

requires significant lead-time for network planning and setting. It would take may take months if

not years for a cellular operator to build up sufficient national coverage. And the cellular service

provider would have to bare the cost alone. For example, the announced cost of deployment for

Nortel Network’s 1xRTT and EV-DO equipment by Verizon Wireless is valued at $1 billion US

dollars9. In contrast, deploying a Wi-Fi hotspot is much simpler and significantly less costly.

Public or private IP LAN and WAN can be used to provide the backbone to interconnect network

of Wi-Fi hotspots; therefore, the cost of deploying Wi-Fi system, which include Access Point

equipment within the coverage area, network management equipment, and billing system is a

fraction of that for a 3G cellular system.

Finally, there are two additional issues worth mentioning. One is that the form factor of

current generation of cellular phones (some with integrated PDA function) limits the

effectiveness of this type of mobile devices for web browsing and therefore reduces the appeal to

heavy data users such as laptop PC and PDA owners. Furthermore, upgrading to 3G cellular

technologies requires users to purchase new cell phones. In contrast, most if not all of the

laptops PC, PDA, and Wi-Fi access cards are designed to access all available Wi-Fi

8 Gartner Dataquest Market Trends, Public Wireless LAN Hot Spots: Worldwide, 2002-2008 http://www.itaa.org/isec/pubs/e20037-04.pdf9 ZDNet, http://zdnet.com.com/2100-1103-5070870.html

Page 11 of 17

technologies. The other issue is that once Voice over IP technology begins to offer the same

voice quality as circuit switch technology, the once distinct boundary between wireless and

landline will disappear. By then additional entrants may use Wi-Fi to compete against cellular

operators. It would therefore be a good strategic move for wireless service to accelerate the

deployment of Wi-Fi to gain expertise and to thwart these future threats.

Summary & Recommendations

The revenue potential of wireless data market presents a clear business opportunity for

cellular service providers. Given the arguments we have laid out in the previous section, it

would be far easier and less costly to deploy Wi-Fi to capture the projected increase of wireless

data traffic than with 3G cellular technologies. 3G cellular technologies have their own merit,

such as offering true mobility to users, and we do not go so far as stating that they will become

obsolete because of the emergence of Wi-Fi. Instead, we believe that there will be unique but

limited situations where this technology is the best or perhaps the only solution for wireless data

access. For instance, even a train equipped with Wi-Fi inside the cabin would require 3G

cellular technologies to transmit while moving at high speeds.

To capture the anticipated revenue opportunity for wireless data and to gain first-mover

advantage, cellular service providers should figure out how to quickly deploy Wi-Fi. There are

two possible options: a) partner with or outsource to third party enterprise companies; b) develop

expertise in-house to provide a full suite of system setup services. Given the commoditization

and popularity of Wi-Fi, many vendors and enterprises have sprung up to support all aspects of

Wi-Fi deployment. Consequently, cellular service providers can harness this growing enterprise

to economically and quickly deploy Wi-Fi hot spots and thereby integrate Wi-Fi into its service

offerings. As a result, cellular providers can rapidly implement Wi-Fi hotspots in strategic

Page 12 of 17

locations where there is a dense population of wireless data users to capture this untapped

revenue stream.

Page 13 of 17

Exhibit 1: US Carriers Subscribers Market Share 1Q2003

S

Source: Yankee Group

Page 14 of 17

Subscriber Market Share

Verizon Wireless23%

Cingular16%Sprint PCS & Affiliates

13%

Qwest1% Dobson

1%

Others3%

Centennial0%

Leap 1%

Nextel8%

AT&T & Affiliates16%

Alltel 6%

US Cellular3%

Wester Wireless1%

T-Mobile8%

Exhibit 2: Comparison of Different Cellular Technologies

Source: http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2897313,00.html

Exhibit 3: Overview of Migration Path from 2G to 3G

Source: http://www.cdg.org/technology/3g/migration.asp, “3G Migration.” CDMA Development Group

Page 15 of 17

Transport technology Description

Typical use/Data Transmission Speed Pros/cons

TDMA Time Division Multiple Access is 2G technology

Voice and data Low battery consumption, but transmission is one-way, and its speed pales next to 3G technologies

Up to 9.6kbps

GSM Global System for Mobile Communications is a 2G digital cell phone technology

Voice and data. This European system uses the 900MHz and 1.8GHz frequencies. In the United States it operates in the 1.9GHz PCS band

Popular around the globe. Worldwide roaming in about 180 countries, but GSM's short messaging service (GSM-SMS) only transmits one-way, and can only deliver messages up to 160 characters long

Up to 9.6kbps

GPRS General Packet Radio Service is a 2.5G network that supports data packets

Data only Messages not limited to 160 characters, like GSM SMS

Up to 115kbps; the AT&T Wireless GPRS network will transmit data at 40kbps to 60kbps

EDGE Enhanced Data GSM Environment is a 3G digital network

Data only May be temporary solution for operators unable to get W-CDMA licenses

Up to 384kbps

CDMA Code Division Multiple Access is a 2G technology developed by Qualcomm that is transitioning to 3G

Although behind TDMA in number of subscribers, this fast-growing technology has more capacity than TDMA

W-CDMA (UMTS) Wideband CDMA (also known as Universal Mobile Telecommunications System--UMTS) is 3G technology. On November 6, 2002, NTT DoCoMo, Ericsson, Nokia, and Siemens agreed on licensing arrangements for W-CDMA, which should set a benchmark for royalty rates

Voice and data. UMTS is being designed to offer speeds of at least 144kbps to users in fast-moving vehicles

Likely to be dominant outside the United States, and therefore good for roaming globally. Commitments from U.S. operators are currently lacking, though AT&T Wireless performed UMTS tests in 2002. Primarily to be implemented in Asia-Pacific region

Up to 2Mbps initially. Up to 10Mbps by 2005, according to designers

CDMA2000 1xRTT A 3G technology, 1xRTT is the first phase of CDMA2000

Voice and data Proponents say migration from TDMA is simpler with CDMA2000 than W-CDMA, and that spectrum use is more efficient. But W-CDMA will likely be more common in Europe

Up to 144kbps

CDMA2000 1xEV-DO Delivers data on a separate channel Date only (see CDMA2000 1xRTT above)

Up to 2.4Mbps

CDMA2000 1xEV-DV Integrates voice and data on the same channel

Voice and data (see CDMA2000 1xRTT above)

Up to 2.4Mbps

Exhibit 4: Public WLAN Hot Spot Locations Worldwide

Source: Gartner Dataquest Market Trends, Public Wireless LAN Hot Spots: Worldwide, 2002-2008 http://www.itaa.org/isec/pubs/e20037-04.pdf

Page 16 of 17

Location 2001 2002 2003 2004 2005Airports 8 152 292 378 423Hotels 569 2,274 11,687 22,021 23,663Retail Outlets 474 11,109 50,287 82,149 85,567Enterprise Guesting Areas 84 624 1,762 3,708 5,413Stations and Ports 88 623 2,143 3,887Community Hot Spots 2 266 5,637 20,561 30,659Others 240 790 1,526 2,156

Additional References Used in This Report

1. http://www.qualcomm.com/cdma/1xEV/web_papers.html , “1xEV: 1xEVolution IS-856 TIA/EIA Standard, Airlink Overview,” Revision 7.2, November 7, 2003

2. http://www.radio-electronics.com/info/cellulartelecomms/edgeinfo/edge.htm , “An Overview of EDGE”

3. http://www.s3.kth.se/signal/edu/seminar/01/GPRS-EDGE_20010315.pdf , “GPRS/EDGE Overview,” Fukusar, Anders

4. http://ccnga.uwaterloo.ca/~jscouria/GSM/gsmreport.html , “Overview of the Global System for Mobile Communications,” Scourias, John, October 14, 1997

5. http://www.cdg.org/technology/3g/migration.asp , “3G Migration.” CDMA Development Group

Page 17 of 17