The buildout of 4G networks in the US is progressing at full steam. By the end of 2010, Clearwire plans to have built out its 4G WiMAX network to all major markets in the United States (120 Pop’s) and Verizon expects to be offering its 4G Long-Term Evolution (LTE) services commercially in between 25 to 30 major U.S. markets.
Despite optimistic projections, carriers with 4G networks abroad (like TeliaSonera in Sweden and KT in South Korea) haven’t seen subscribers rush to adopt the new technologies as originally expected. Even though 4G technologies today are ‘data-only’ (i.e. no voice service), almost everyone in the wireless industry believes that the demand for 4G data services will increase in the years ahead. But so far it has been difficult to predict ‘when’ this demand will materialize. To understand when customers will actually make the switch to 4G, I propose a fairly simplistic model.
Value: Customers will make the switch to 4G when they perceive ‘value’ in the service. For the purposes of this model, customers’ perceived ‘value’ for access, is determined as a tradeoff between their bandwidth needs (need for speed) and the costs involved with a particular access method (switching costs + service costs). Depending on their need for speed and their willingness to pay, customers can fulfill their needs with services offered through various technologies like Dial-up, DSL, Cable, MBB, etc.
Impact of Mobility on Value: In his book, ‘The Power of Mobility’, Russ McGuire argues that building ‘mobility’ into a product, greatly enhances its value, and therefore customers are willing to pay more for such a product. Consequently, customers perceive value in 3G MBB in spite of its performance deficiencies (as compared to cable) and are willing to pay a premium for ‘on-the-go’ access. That said, customers willingness to pay is still restrained by their bandwidth needs. In other words, if customers can satisfy their current bandwidth needs with 3G, they will not pay a ‘mobility’ premium for 4G.
From the ‘value map’ above, we can draw the following conclusions:
- Dial-up is no longer relevant. Even though it is the least cost access method, customers need for bandwidth has outpaced what it can deliver.
- DSL is probably most ‘valuable’ access method, but the customers need for speed is beginning to push it into the zone of irrelevance.
- Performance of 3G MBB is similar to that of DSL, but it is still relevant because of the ‘Impact of Mobility’ described above. 3G MBB is able to satisfy customers’ current on-the-go bandwidth needs fairly well with existing 3G speeds.
- As customers hunger for bandwidth increases, cable/fiber is the next obvious step-up from DSL. There have been recent news reports that Broadband providers are planning on delivering 100MBps speeds to residential customers in the US in the near future. Given the significant monthly costs involved, I predict that this service will be a niche play for a few years to come.
- Theoretically, customers should be willing to pay a 'mobility premium' for 4G service, but in reality the demand for 4G hasn’t caught up simply because 3G MBB is able to satisfy customers’ current on-the-go bandwidth needs. Also, there is the cost angle - 4G costs more than 3G. Therefore customers have thus far not been willing to upgrade to 4G.
Implications: To increase their 4G subs, wireless carriers must choose between these two options.
- Bring costs (to the customer) in line with 3G MBB costs (Sprint has already started down this path), or
- Wait for customers bandwidth needs to catch up and exceed what 3G can deliver.
‘When’ customers will switch to 4G is dependent on the approach wireless carriers choose to take.