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The telcos’ dilemma: LTE or HSPA+ (deja vu 2002)

Will financially burdened telco operators postpone investments in the 4G technology LTE? This has been an ongoing topic within the industry for over a year. LTE provides the operators with higher capacity, spectral efficiency, and data rates but requires heavy investments in new infrastructure. The alternative is to settle for the 3G upgrade HSPA or to upgrade the installed networks with HSPA+ (“turbo 3G”). An investment in HSPA+ is both a faster and cheaper solution which can work for several years unless the traffic soars too fast.

Due to the economic crisis there have been speculations that almost all operators will choose the incremental upgrade HSPA+ to save money and wait with LTE until the crisis is over. In that case, LTE deployment would not begin until some time after 2012-2013. Such a scenario would put the market leader Ericsson in a difficult situation if expected revenues are delayed several years. In addition, the competing technology WiMax might be able to establish a foothold if LTE is late to market.

This development will most likely not take place. Some operators have a different strategic position and for them HSPA+ is not an alternative. They are already investing in LTE and their networks are scheduled for operation in 2010. These early customers give the vendors the opportunity to get volume production started, test their products “live”, and stabilize the technology.

China Mobile is stuck in a local 3G standard (TD-SCDMA) that has failed to compete with WCDMA and CDMA2000. By investing in LTE, China Mobile can begin to migrate their customer base to a global standard where economics of scale and fiercer competition between the vendors will result in lower prices. The same logic applies to Verizon Wireless which is investing in LTE in order to move away from the peripheral standard Cdma/EVDO faster. NTT DoCoMo is investing in LTE networks and follows its tradition of early upgrades to new technologies (compare with DoCoMo’s early upgrades to WCDMA after the millennium). It is no surprise that the Scandinavian rivals TeliaSonera and Telenor/Tele2 also have made the decision to build LTE networks.

There are interesting parallels between the operators’ dilemma today and their investment choice around 2001 – 2002. At that time their decision was between a cheap upgrade of the GSM networks to GPRS/EDGE or heavy investments in 3G (if we disregard the spectrum auctions that forced the operators to invest in 3G). Today the choice is between HSPA+ and new LTE networks.

In hindsight the notion that investments in GPRS/EDGE and 3G were mutually exclusive was exaggerated. Directly after the major 3G decisions were made, the EDGE technology was almost considered to be outdated. But when data traffic increased the operators that had begun to deploy 3G networks upgraded their old 2G networks anyway. As the EDGE technology matured and prices fell it became a simple business decision to upgrade.

By the end of 2008 more than 80 percent of all GPRS networks had been upgraded to EDGE with few paying any attention to this. Today there are additional upgrades planned with EDGE Evolution, which will deliver data rates of 1.2 and 0,474 Mbit/s in the down-link and up-link respectively and an improvement of spectral efficiency and latency by a factor of two.

The total global market size makes it possible to support and develop several overlapping technology standards simultaneously. (There is even development of plain GSM, now with the innovation orthogonal sub channel from Nokia Siemens, which doubles voice capacity.)

The categorization of technologies such as 2G, 3G and 4G becomes increasingly irrelevant with a market where competitive standards from both 2G (EDGE), 3G (HSPA) and 4G (LTE) are developed and upgraded simultaneously. The choice between HPSA+ and LTE doesn’t have to be an either or, it can be both. My estimate is that the operators that are currently investing in LTE will eventually upgrade their old 3G networks to HPSA+ when the technology has matured and the prices have decreased.

This article has previously been published on my Swedish blog.

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