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WLAN-Cellular Convergence: The Mobile Carrier

Business Case for WLAN, UMA and VoWLAN

By Svetlana Issaeva, Manager, CMT Research

WLAN-Cellular Convergence

©2006 Pyramid Research www.pyramidresearch.com Reproduction Prohibited

i

© 2006, Pyramid Research. All rights reserved. No material contained in this

report may be reproduced in whole or in part without the prior written

permission of the publisher. Neither the information nor the opinions

expressed in the report should be construed as a recommendation for the

purchase or sale of any security. The information contained in this report has

been obtained from sources we believe to be reliable, but neither its

completeness nor accuracy can be guaranteed. Opinions expressed are based on

our interpretation of the available information, and are subject to change.

C L I E N T C O N F I D E N T I A L

Lead Author: Svetlana Issaeva

Co-authors: Nick Holland, Emily Liu

WLAN-Cellular Convergence ii

Table of Contents Table of Contents................................................................................................................................................... ii

List of Exhibits.........................................................................................................................................................vi

Acronyms and Abbreviations ......................................................................................................................... ix

Companies Mentioned in this Report ......................................................................................................... x

Executive Summary ..............................................................................................................................................1

Section 1: Charting the WLAN Boom, from Portable Broadband to Voice and Mobility....4

1.1 WLAN Boom: Why Telcos Can’t Ignore WLAN ..........................................................................4

1.2 The Next Step for WLAN: Enabling Voice and Mobility .................................................... 13

1.2.1 Is VoWLAN Ready?.................................................................................................................. 13

1.2.2 New Wi-Fi Standards: Enabling Voice and Multimedia ........................................ 14

1.2.3 Wi-Fi Security: At Last in Place, But Still Doubted by Many................................ 15

1.2.4 Unlicensed Mobile Access.................................................................................................. 16

Section 2: Do Mobile Carriers Need WLAN? .......................................................................................... 18

2.1 What Carriers Want............................................................................................................................. 18

2.2 What WLAN Offers: From Broadband Portability to Fixed-Mobile Convergence 20

2.3 Nomadic WLAN: Looks Good on Paper, Generally Falls Short ...................................... 23

2.3.1 Positioning: High Speed at a Fraction of Mobile Cost.......................................... 23

2.3.2 Pricing: Predominantly Prepaid ....................................................................................... 24

2.3.3 A Vulnerable Business Model............................................................................................ 25

2.3.4 New Models for Nomadic WLAN: From Wi-Fi to WIMESH................................... 26

2.4 Bundled WLAN-Cellular: A Necessary Marriage of Technology and Convenience

............................................................................................................................................................................. 28

2.4.1 Positioning: From Prepaid Wi-Fi to Bundles............................................................... 29


WLAN-Cellular Convergence iii

2.4.2 Extending the Hotspot Network: The Roaming Challenge ............................... 29

2.4.3 Convenience of Bundled Pricing: Many Networks — One Bill ......................... 31

2.4.4 WLAN Bundles: Uptake and Revenue Potential....................................................... 32

2.4.5 The Next Step in Bundling: Toward Ubiquitous Networks................................. 34

2.4.6 Technology Alternatives: WLAN vs. Mobile 3G Networks................................... 36

2.4.7 The Business Case for Bundled WLAN: From Add-on to Integration ............ 37

2.5 Transformational WLAN: Delivering the Unavoidable VoWLAN.................................. 38

2.5.1 FMC Value Proposition: Clear for Mobile Data, Not So Much for Mobile

Voice......................................................................................................................................................... 38

2.5.2 VoWLAN: More Threat than an Opportunity for Mobile Carriers, But Is It

Avoidable?............................................................................................................................................. 39

2.5.3 Impact of WLAN as Part of a UMA Consumer Solution........................................ 40

2.5.4 UMA Business Models .......................................................................................................... 41

2.5.5 Alternative Solutions: Versions of UMA ....................................................................... 44

2.5.6 A New Type of MVNO: Wi-Fi for Youth .......................................................................... 46

2.5.7 Enterprise VoWLAN: Predominantly Niche Use in the Short Term................. 48

2.6 Carrier Strategy: Choosing the Right Path.............................................................................. 51

Section 3: Impact of Cellular-WLAN Convergence............................................................................. 53

3.1 Impact of Cellular-WLAN Convergence: Market Perspective........................................ 53

3.1.1 WLAN Mobile Data Adoption and Revenue Implications: Small

Contribution......................................................................................................................................... 53

3.1.2 UMA Revenue Potential and Churn Implications ................................................... 55

3.1.3 WLAN and VoWLAN Implications for Mobile Traffic .............................................. 57

3.2 Cellular-WLAN Convergence: Competitive Perspective.................................................. 58

3.3 Integration of WLAN Technology by Tier 1 Vendors.......................................................... 59


WLAN-Cellular Convergence iv

Section 4: Regional Analysis .......................................................................................................................... 61

4.1. WLAN in North America.................................................................................................................. 61

4.1.1 Cingular Wireless..................................................................................................................... 64

4.1.2 T-Mobile....................................................................................................................................... 65

4.1.3 Verizon Wireless ....................................................................................................................... 67

4.1.4 Helio .............................................................................................................................................. 68

4.1.5 Boingo .......................................................................................................................................... 69

4.1.6 Wayport ....................................................................................................................................... 70

4.2 Regional Analysis: WLAN in Asia Pacific ................................................................................... 71

4.2.1. Telstra Australia: The Fastest-growing Wi-Fi Provider in 2005.......................... 74

4.2.2. China: Low Broadband and Wi-Fi Device Numbers Inhibit Growth ............. 75

4.2.3. India: WLAN for Rural Broadband .................................................................................. 77

4.2.4. Japan: MVNOs and 3G Entrants to Drive Future Wi-Fi Rollouts ...................... 78

4.2.5. KT: WLAN Lull after Initial Strong Growth.................................................................. 84

4.2.6. Taiwan: Using Wi-Fi to Achieve a Ubiquitously Wired Society......................... 85

4.3 Wi-Fi and Cellular in Europe........................................................................................................... 86

4.3.1. Orange: WLAN for Ubiquitous Wireless ...................................................................... 89

4.3.2. T-Mobile: WLAN in the Center of Seamless Data Services ................................ 91

4.3.3. KPN HotSpot: Flat Data Access, but No Wi-Fi Bundling Yet ............................. 93

4.3.4 Vodafone: Wi-Fi Skeptic? ..................................................................................................... 94

4.3.5 The Cloud: New Business Models for WISPs.............................................................. 97

4.3.6. TeliaSonera HomeRun: WLAN for Convergent Fixed-Mobile Services ....... 98

4.4 WiFi and Cellular in Latin America ............................................................................................100

4.4.1 Brazil: Major LA Market for Enterprise Mobility .....................................................102


WLAN-Cellular Convergence v

4.4.2 Mexico: WiFi as Broadband VAS Differentiator.......................................................104

4.4.3 Chile: No Mobile Carrier Presence So Far..................................................................105

4.4.4 Argentina: 2006 to Become a Year of WLAN-Cellular Bundling ....................106


WLAN-Cellular Convergence vi

List of Exhibits

Exhibit 1: Major Carrier WLAN Launches....................................................................................................5

Exhibit 2: Wi-Fi-Enabled Device Sales, 2005-2010..................................................................................6

Exhibit 3: Global Hotspots, by Region, 2005E and 2009F ..................................................................7

Exhibit 4: Selected Wi-Fi and UMA Handsets ...........................................................................................8

Exhibit 5: Global Broadband Penetration, by Region, 2001-2010..................................................9

Exhibit 6: Broadband and WLAN Penetration Is Correlated..............................................................9

Exhibit 7: Voice ARPU by Region: Price Decline Continues ............................................................ 10

Exhibit 8: Mobile Churn Remains High..................................................................................................... 11

Exhibit 9: Pending Plans for Selected MVNO and UMA Launches.............................................. 12

Exhibit 10: UMA Network Architecture .................................................................................................... 17

Exhibit 11: Global Fixed-Revenue Growth, 2001-2010 ..................................................................... 19

Exhibit 12: Global Mobile Data Revenue Growth, 2001-2010....................................................... 20

Exhibit 13: WLAN and Changing Carrier Strategic Objectives...................................................... 21

Exhibit 14: WLAN Suite of Services............................................................................................................. 22

Exhibit 15: WLAN vs. Cellular: Technology Comparison .................................................................. 23

Exhibit 16: Nomadic WLAN Hotspot Carrier Business Case ........................................................... 24

Exhibit 17: Prepaid WLAN Access Prices .................................................................................................. 24

Exhibit 18: Nomadic WLAN Roadmap and Universe of Service Providers.............................. 28

Exhibit 19: Wi-Fi Roaming: Payment Structure ..................................................................................... 30

Exhibit 20: The Largest WLAN Providers and Roaming Partners ................................................. 31

Exhibit 21: Selected Examples of Subscription and Bundled WLAN Plans............................. 32

Exhibit 22: KT: WLAN Subscribers in South Korea............................................................................... 33

Exhibit 23: Many Services — One Network............................................................................................ 34

Exhibit 24: Orange France Mobile Broadband Launch .................................................................... 35


WLAN-Cellular Convergence vii

Exhibit 25: WLAN vs. 3G Technologies...................................................................................................... 37

Exhibit 26: A Case for Converged and Mobile Carriers: Subscriber Gains .............................. 42

Exhibit 27: UMA Revenue Calculations for a Converged Provider and a Mobile Operator

...................................................................................................................................................................................... 43

Exhibit 28: O2 Genion and Surf@home solution................................................................................. 45

Exhibit 29: UMA vs Home Zone Solutions .............................................................................................. 46

Exhibit 30: Enterprise Data Revenue: Private Circuit and Mobile Remote Access .............. 48

Exhibit 31: Smartphone and PDA Forecast, 2004-2010 ................................................................... 49

Exhibit 32: VoWLAN vs. DECT for Enterprise Customers.................................................................. 50

Exhibit 33: Carrier WLAN Strategies ........................................................................................................... 52

Exhibit 34: Paid WLAN Subscriber Forecast, 2004-2010................................................................... 54

Exhibit 35: Fixed WiMAX (802.16d) Adoption Forecast, 2005-2010............................................ 55

Exhibit 36: UMA: Global Household Subscribers, by region, 2005-2010 ................................. 56

Exhibit 37: UMA: Global Consumer Revenue by region, 2005-2010, US$bn ......................... 56

Exhibit 38: Mobile VoWLAN: Churn Implications (US$).................................................................... 57

Exhibit 39: MVNO Subscriber Share, NA and Europe ........................................................................ 58

Exhibit 40: Vendors and Their Strategic Approach to WLAN and WiMAX............................... 59

Exhibit 41: Number of Paid Wi-Fi Hotspots, North America........................................................... 63

Exhibit 42: North American Top Paid Hotspot Providers 2005..................................................... 63

Source: Pyramid Research. ............................................................................................................................. 63

Exhibit 43: Cingular Data Plans .................................................................................................................... 64

Exhibit 44: Wi-Fi Bundling Strategy ............................................................................................................ 66

Exhibit 45: Wayport Service Pricing ........................................................................................................... 70

Exhibit 46: Developed Asia Pacific Markets: Broadband and Mobile Data Penetration in

2005 ........................................................................................................................................................................... 71

Exhibit 47: Selected Asia Pacific Wi-Fi Prices.......................................................................................... 73


WLAN-Cellular Convergence viii

Exhibit 48: Telstra Wi-Fi Pricing ..................................................................................................................... 75

Exhibit 49: WLAN services in China ............................................................................................................ 77

Exhibit 50: Major Pan-European Wi-Fi Hotspot Provider Market Share.................................... 87

Exhibit 51: France and UK: Orange Holds a Significant Share of Mobile Workers .............. 90

Exhibit 52: T-Mobile European Hotspots................................................................................................. 92

Exhibit 53: T-Mobile Bundled Wi-Fi Pricing............................................................................................. 93

Exhibit 54: KPN Hotspot Pricing................................................................................................................... 94

Exhibit 55: Selective Vodafone Wi-Fi Pricing.......................................................................................... 96

Exhibit 56: TeliaSonera Sweden and Finland: Capitalizing on Market Leadership in All

Areas.......................................................................................................................................................................... 98

Exhibit 57: Selective TeliaSonera Wi-Fi Pricing...................................................................................... 99

Exhibit 58: Latin American Hotspots .......................................................................................................100


WLAN-Cellular Convergence ix

Acronyms and Abbreviations

Acronym Definition 3GPP 3rd Generation Partnership Project ARPS Average revenue per subscription ARPU Average revenue per user CDMA Code Division Multiple Access CPE Customer premises equipment DECT Digital Enhanced Cordless Telecommunications EDGE Enhanced Data for Global Evolution EV-DO Evolution, Data-Only FMC Fixed-mobile convergence GSM Global System for Mobile Communications HSDPA/HSUPA High-Speed Downlink Packet Access IEEE Institute of Electrical and Electronic Engineers IMS IP Multimedia Subsystem ISP Integrated service provider KPI Key performance indicator MNO Mobile network operator MVNO Mobile virtual network operator PBX Private Branch Exchange POS Point of sale PSTN Public switched telephone network PWLAN Public wireless local area network QoS Quality of service SIP Session-Initiated Protocol, or Session Initiation Protocol SME Small and medium enterprise SMS Short message service TCO Total cost of ownership UMA Unlicensed Mobile Access UNC UMA Network Controller VoIP Voice over Internet Protocol VoWLAN Voice over WLAN VPN Virtual private network WBA Wireless Broadband Alliance WEP Wired Equivalent Policy WiMAX Worldwide Interoperability for Microwave Access WISP Wireless Internet service provider WLAN Wireless local area network WMM™ Wi-Fi Multimedia WPA Wi-Fi Protected Access


WLAN-Cellular Convergence x

Companies Mentioned in this Report

3i Accel Partners Airespace Airnyx Airspan Alcatel Alvarion America Movil American Airlines Amp’d Arnet Aruba Wireless Networks AT&T Wireless Atheros Avaya Bell Canada BellSouth Boeing Boingo Borders Bouygues Télécom Brasil Telecom BridgePort Networks British Telecom (BT) BroadBand Telecom Broadcom Broadreach Networks BT Infonet Cegetel Chantry China Netcom Cingular Cisco Claro Colubris Comcast Concourse CTC CTI Dacom Delta Airlines Deutsche Telecom Earthlink Entel EPlus Ericsson Equant Eurotel FedEx Kinko’s Office and Print Centers Fiberlink France Telecom Google Hanaro

McDonald’s MCI Megacable Meru Networks Metronet Millicom Mitel Networks MobileStar Network Corp. Motorota Movicom Nintendo Nokia Nortel NTT Communications NTT DoCoMo O2 Ofcom Oi Oleane Orange Persona Software Portugal Telecom (PT) Prodigy Movil Rogers Wireless Samsung Saunalahti SBC SFR Siemens Singtel SK Telecom Skype SNCF/Cegetel Sony SpectraLink Sprint Nextel Starbucks StarHub Swisscom Swisscom Eurosport T-Com TDC Telecom Telecom Italia Telefónica Telemar Telenor Telfort TeliaSonera Telmex Telstra Telsur The Cloud


WLAN-Cellular Convergence xi

Helio Hertz Car Rental Hub Télécom HubHop Hyatt Hotels IHOP Intel iPass Italia Coffee Kineto Wireless Kodak Korea Telecom (KT) KPN LG Linksys Manquehue Net Marriott Hotels Maxis

T-Mobile Trapeze Networks Unifon United Airlines US Airways Verizon Vex Virgin Vivo Vodafone Vonage VTR Wanadoo Wayport WeRoam Yahoo!


WLAN-Cellular Convergence 1

Executive Summary

In the last two years, Wi-Fi technology has matured. The cost of infrastructure and devices has fallen, its security has improved (at least technologically), and third-party solutions have been introduced to support on-network Wi-Fi roaming and seamless call handover between wireless local area network (WLAN) and cellular. Mobile operators took advantage of some of the new Wi-Fi capabilities, using the technology to support delivery of mobile data bundles, but they now face a new challenge: “Mobilizing” WLAN and enabling Voice over Internet Protocol (VoIP) on WLAN networks seems to be giving fixed carriers and mobile virtual network operators (MVNOs) a chance to get some of their voice business back from mobile carriers. This raises questions about the extent of danger to the traditional mobile operator business, as well as the nature of the WLAN technology in the future. In this report, we ask — and provide answers to — the following questions: Where does WLAN stand today?

• The main transformation of WLAN took place in the last two years, as it developed from a network of standalone hotspots into a supporting technology for delivering convergent solutions. We identified three major stages and models of WLAN development. At the first stage, WLAN is used to provide predominantly prepaid broadband access on the road. At the second stage, most aggressively pursued by mobile carriers today, WLAN is bundled with cellular 2.5G and 3G technologies. Unlike nomadic WLAN access, such bundled services make a contribution toward mobile subscriber ARPS (average revenue per subscriber), improve the service and decrease churn. Finally, a new phase of WLAN development is starting with its support for IP voice. Of initial interest primarily to fixed carriers, WLAN in this role will also be used by a host of new-breed MVNOs and — from 2006 — by reluctant mobile carriers.

Is the nomadic WLAN business model still viable?

• We have not seen the end of nomadic Wi-Fi access yet, although it is certain to change and become more subscription-based. We expect that to serve the business road warriors, the roadmap for nomadic WLAN access will follow the same path as mobile services in general: Pay-as-you-go access will remain an option, but a large number of subscribers will be registered with a single service provider, roaming on other provider hotspot networks. Yet, demand for ad hoc Internet access is sure to remain, increasingly so from consumers. Going forward, the nomadic model will remain of interest to a limited number of mobile carriers that own extensive hotspot networks. They will be able to benefit not only from retail WLAN offers, but also wholesale partnerships with such new players as municipalities and gaming providers.



What are the benefits of WLAN-cellular bundling for mobile carriers?

• The WLAN-cellular bundle model offers a clear value proposition of improving mobile data experience and fits into mobile carriers’ 3G network deployment path. We expect that the revenue impact of WLAN-cellular data bundling will be moderate by comparison — about US$12bn will be generated by mobile operators globally from remote data access in 2010, 6.5% of the global mobile data total. At least half of this total is likely to be attributed to WLAN — about US$6bn in total, a 3.2% share of US$187bn in total mobile data revenue at that time. But WLAN’s impact is most valuable as it helps to improve the quality of service (QoS) and value to the customers, lowers churn and improves retention.

Can WLAN co-exist with 3G?

• Mobile 3G technologies, such as CDMA Evolution, Data-Only (CDMA EV-DO) and High-Speed Downlink Packet Access (HSDPA), will come a long way to catch up with WLAN in terms of speed. Their ubiquity also makes them more appealing. WLAN will never match the coverage of mobile 3G networks, but by contrast it is cheap, easy to install, delivers better indoor coverage, and can satisfy demand for high-speed connectivity on the road. For these reasons, WLAN is here to stay, and its inclusion in all Tier 1 providers’ product portfolios attests to that.

Is the introduction of voice over WLAN (VoWLAN) inevitable?

• A combination of factors, such as demand for mobility emanating from fixed carriers, mobile providers’ search for cheap technology to carry IP voice bundles, and WLAN technology’s near-readiness to support voice, makes the introduction of VoWLAN inevitable. Whether in combination with other technologies, such as 3G, Worldwide Interoperability for Microwave Access (WiMAX) or DSL, or on its own in city-wide hotspots, WLAN will be used to deliver voice as early as 2006. It is unreasonable to expect that the cost of delivering VoWLAN will be cheap — with the addition of QoS and roaming bells and whistles, the price of VoWLAN solutions will go up. Yet, if it remains below the cost of 3G, better indoor coverage and the possibility of new value-added services will present a potentially attractive VoWLAN business case to mobile carriers.

When will VoWLAN be ready?

• VoWLAN is already possible, but it is still the early days for the technology.

For most systems currently in place, coverage, delays, jitter and dropped calls

still present a challenge. Standardization of QoS is a must and the first step

toward the success of the future VoWLAN. Mass-market supporting devices



will also appear only by 2H06, which means that VoWLAN will become reality

only from 2007 on. How can mobile carriers respond to the introduction of VoWLAN?

• The strategy that states “If you can’t beat them, join them” might work again for mobile carriers. Mobile carriers will be able to deliver retail as well as wholesale Unlicensed Mobile Access (UMA) solutions and managed voice and data services to businesses. Further market segmentation is one of the main goals mobile operators will be able to achieve through offering VoWLAN solutions. For example, WLAN systems will be able to carry voice traffic for low-income groups of customers (e.g., students), achieving a similar effect to launching a budget MVNO. In the business segment, voice over WLAN will allow small and medium enterprise (SME) and SOHO customers to lower costs through integration of voice and data systems.

What will be the adoption and revenue of UMA and VoWLAN solutions?

• We forecast 40.5 million UMA households and 121.6m UMA subscribers in

2010. The annual consumer revenue potential from the technology in five

years’ time will stand as high as US$26.6bn, and part of it will be captured by

mobile carriers. Europe, where several UMA and seamless WLAN/cellular trials

are already in place, will lead the adoption of the technology with 43% of the

global revenue. Asia will have the largest number of subscribers at 45% of the

global total.



Section 1: Charting the WLAN Boom, from Portable Broadband to Voice and Mobility

SUMMARY

This section focuses on the following questions:

• What are Wi-Fi drivers and inhibitors? Since the first commercial Wi-Fi

services were launched in 2002, the business environment has changed, but

main drivers of WLAN adoption remain the same: growing number of

WLAN-enabled devices, increased demand for high-speed connectivity, focus

on mobile data services and client retention, and fixed-mobile substitution.

At the same time, as the mobile carriers prepare to invest in faster 3G

networks, WLAN loses some of its attraction, and it is a new breed of mobility

service providers, among them fixed carriers and MVNOs, that now look at

voice over Wi-Fi opportunities.

• How have Wi-Fi’s technical capabilities changed? Is VoWLAN now possible?

Wi-Fi technology has now matured: The cost of infrastructure and devices has

fallen, security has improved, and third-party solutions have been launched

to provide on-network Wi-Fi roaming and seamless call handover between

WLAN and cellular. VoWLAN is there, but not quite ready — ratification of

several new WLAN standards that support QoS and roaming (e.g., 802.11e

and 802.11r) will give service providers and enterprise users the tools to offer

VoIP and a host of multimedia services over WLAN.

1.1 WLAN Boom: Why Telcos Can’t Ignore WLAN Telcos have long considered WLAN as a potential solution to offer broadband services.

As early as 1999-2001, a handful of Western European providers, such as TeliaSonera,

Telenor and T-Mobile, launched their first services. But it was in 2002-2003 that

service provider WLAN adoption truly picked up (see Exhibit 1).



Exhibit 1: Major Carrier WLAN Launches

Carrier Country Launch Date

Carrier Country Launch Date

Western Europe Asia Pacific TeliaSonera Sweden 1H99 Singtel Singapore 2002 Telenor Mobile Norway Feb. 2001 Korea Telecom

(KT) Korea 2002

T-Mobile Austria Nov. 2001

NTT Comms Japan May 2002

T-Mobile Germany Nov. 2002

KT Korea 2002

Telefónica Móviles Spain Feb. 2002

PCCW Hong Kong 2002

BT Openzone UK Apr. 2002

China Netcom China 2002

Vodafone Germany Nov. 2002

North America

Vodafone Ireland Feb. 2003

Boingo USA Jan 2002

Vodafone UK Sept. 2004; roam with BT Openzone

Sip&Surf USA 2002

Swisscom Eurosport Pan- European

Dec. 2002

Wayport USA 2001

O2 Germany, Ireland

Feb. 2003

T-Mobile (formerly VoiceStream)

USA End 2002

FT/Orange France Feb. 2003

Verizon USA Dec. 2002

Telecom Italia Italy Summer 2003

Bell Canada Canada 2002

Central and Eastern Europe Latin America Connex (now Vodafone RO)

Romania Nov. 2002

Brazil Telecom Brazil Mar. 2003

Radiolinja Eesti Estonia Nov. 2002

Telmex Mexico 2003

Eurotel (now Telefónica)

Czech R. Summer 2003

Telefónica Chile 2003

Africa Middle East Telkom South Africa 2003 Small wireless integrated service providers (WISPs)

Israel, Dubai, UAE, Nigeria

2003

Source: Pyramid Research.

A number of developments have accelerated WLAN’s rise to prominence,

compelling carriers to refine their stance:

• WLAN is becoming more popular and is moving from the laptop to the

living room: Today, Wi-Fi-enabled laptops, remote connect cards and

PDA/smartphones constitute the bulk of Wi-Fi devices. Over 90% of laptops

and notebooks sold today are Wi-Fi-enabled. According to Broadcom, more

than 200m Wi-Fi products were sold globally as of mid-2005, and the Wi-Fi

Alliance expected that over 120m Wi-Fi chipsets would be shipped in 2005.

The decreasing cost of such devices is an important driver of Wi-Fi



proliferation: The price of wireless laptop cards has come down to US$30 from

more than US$100 in 2002, while the cost of a “light” access point fell to

US$500-$600. Dual-mode Wi-Fi-cellular handset prices are expected to

decline after 2006. The certification of Wi-Fi Multimedia (WMM™)

interoperable features in 2004 heralded the next step in expanding the Wi-Fi

device universe to consumer electronics devices, such as Wi-Fi-enabled

gaming consoles, DVD players, TV sets, cameras and home networking hubs,

the anticipated nerve center of the home entertainment universe.

Exhibit 2: Wi-Fi-Enabled Device Sales, 2005-2010

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010

Wi-

Fi D

evic

e Sa

les

(mn

)

Total Dual-Mode Handsets Sold Wi-Fi Phones Smartphones/PDAs with WiFi


• WLAN hotspot growth has remained solid across the world, with Europe

taking over the lead from Asia Pacific. The number of public wireless local

area network (PWLAN) hotspots doubled in the first two years following the

commercial launch of WLAN services, exceeding 100,000 globally at YE04

and on pace to reach 112,600 by YE05. Until 2005, Asia Pacific accounted for

the largest share of the world’s PWLAN hotspots, thanks to aggressive rollouts

in South Korea and Japan, but its share has declined from 74% in 2002 to 31%

in 2005, and is forecast to decline further to 26% in 2009 (see Exhibit 3).

Europe took over the leadership with 33% market share in 2005, which we

forecast to increase to 41% in 2010. With much of the prime hotspot real

estate in hotels, airports and cafés covered, service providers’ WLAN strategies

are shifting to city-wide zones, transport, private home and enterprise

networks. PWLAN hotspots today may be prolific, but they are far from

ubiquitous; rather than accelerate hotspot build-outs, many carriers have

started to rely on roaming agreements to increase their coverage.



Exhibit 3: Global Hotspots, by Region, 2005E and 2009F

2005E: 112,600 hot spots

Asia-Pacific31%

Western Europe33%

CEE2%

North America28%

Latin America5%

Africa/Middle East1%

2009F: 256,800 hot spots

Asia-Pacific26%

Western Europe41%

CEE4%

North America22%

Latin America6%

Africa/Middle East1%


• The dual-mode Wi-Fi-cellular handset market appears on the verge of

taking off: In 2006, the launch of the mid-tier dual-mode Wi-Fi-cellular

handsets by the largest handset manufacturers (e.g., Nokia, Motorola, LG and

Samsung) will bring UMA and VoWLAN services to consumers. Several

high-end models are already available commercially, but it is the expansion of

the handset portfolio to about 25 mass market-priced models by YE06 (see

Exhibit 4) that will drive service adoption. Convergent operators that

currently trial UMA will launch UMA and broadband service bundles to

further lower subscriber churn. Likewise, a handful of Wi-Fi-only phones with



Skype and Vonage software have already been launched, supporting VoIP calls

over any open Wi-Fi network.

Exhibit 4: Selected Wi-Fi and UMA Handsets

Existing Phones

Coming out in 2006

BenQ P50 Pocket PC

Motorola V560 (UMA Bluetooth)

Nokia Communicator

9500

LG CL-400 UMA/850/1800/1900

WiFi UMA

Motorola Razr (UMA Bluetooth)

Motorola M1000 Nokia N-series Samsung SPH

V6800 SonyEricsson P990

Motorola A910 UMA

Existing Phones

Coming out in 2006

BenQ P50 Pocket PCBenQ P50 Pocket PC



Nokia Communicator

9500

Nokia Communicator

9500

LG CL-400 UMA/850/1800/1900

LG CL-400 UMA/850/1800/1900

WiFi UMA

Motorola Razr (UMA Bluetooth)

Motorola M1000 Nokia N-series Samsung SPH

V6800 SonyEricsson P990

Motorola A910 UMAMotorola A910 UMA

Source: Handset manufacturers, Pyramid Research.

• Consumers increasingly want broadband connectivity outside the home or

the office: In developed markets, high-speed Internet access has become a

killer application, with home and enterprise users yearning for more

bandwidth. In Western Europe and North America broadband penetration

reached 15% in 2005 (see Exhibit 5). There is a strong correlation between

broadband and WLAN adoption (see Exhibit 6), as both are likely to benefit

from higher income and PC penetration in the developed markets. At the

same time, bundling Wi-Fi with satellite and WiMAX is emerging as a solution

for satisfying demand for broadband connectivity outside of urban areas. We

expect that in emerging markets with low fixed-line penetration levels, WLAN

adoption will be driven by government initiatives to connect rural

communities to the Internet. Support for voice will further strengthen the

WLAN-WiMAX proposition, potentially making integrated WLAN-

WiMAX/satellite networks a full substitute for public switched telephone

network (PSTN).



Exhibit 5: Global Broadband Penetration, by Region, 2001-2010

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pen

etra

tio

n, %

po

p

NA WE LA AP CEE AME

Source: Pyramid Research, Fixed Communications Forecasts, 4Q05.

Exhibit 6: Broadband and WLAN Penetration Is Correlated

South Korea

USA

Canada

UK

Germany

France

SpainItaly

Switzerland

AustriaPortugal

Czech Rep.

Hungary

Estonia

Australia

China

Japan

Philippines

Hong Kong

0%

5%

10%

15%

20%

25%

30%

35%

-1.0% 9.0% 19.0% 29.0% 39.0% 49.0%

Hot Spot Penetration, % pop

Bro

adb

and

Pen

etra

tio

n P

op

ula

tio

n

Note: The size of the bubble indicates the number of hot spots relative to the total global hot

spots.




• Growing adoption of mobile data becomes a life buoy for cellcos in fighting

against revenue decline and growing customer churn. Mobile market

maturity is not a new phenomenon in the developed world. In Western

Europe and North America, mobile penetration in 2005 rose as high as 98.7%

(mostly thanks to multiple SIM ownership in the GSM world) and 67%,

respectively. The mobile carrier response to the service commoditization,

voice ARPU decline and high churn (see Exhibits 7 and 8) that have

accompanied the penetration growth resulted in the increased focus on

mobile data, aggressive pursuit of fixed-voice subscribers and traffic, and

bundling voice and data products.

Exhibit 7: Voice ARPU by Region: Price Decline Continues

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Vo

ice

AR

PS,

US$

NA WE CEE LA AP

Source: Pyramid Research Mobile Demand Forecasts, 4Q05.



Exhibit 8: Mobile Churn Remains High

0%

5%

10%

15%

20%

25%

30%

35%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ch

urn

, %

NA WE LA AP CEE

Source: Pyramid Research Mobile Demand Forecasts, 4Q05.

• Initial delays in the launch of 3G services provided an additional incentive

for Wi-Fi deployment. T-Mobile, Verizon and NTT were the first to add Wi-Fi

to their service portfolios in 2002, adding hotspots and offering paid access

for enterprise customers. The next step was bundling Wi-Fi with cellular

services; WLAN was initially bundled with GPRS and Enhanced Data for

Global Evolution (EDGE), and later with 3G in a single wireless connect card

that offered remote intranet access through a unified interface (e.g.,

Vodafone’s Dashboard, T-Mobile’s Communication Center). Even Wi-Fi

skeptic Vodafone launched its WLAN access service in the UK in September

2004, roaming on BT Openzone’s hotspot network. Mobile usage levels have

also been growing in emerging markets. In 2005, global mobile penetration

edged to 36.1% from 25% in 2003, but the pressure to focus on mobile data is

not as strong. However, mobile data roamers present an attractive source of

revenue, which means that WLAN is quickly becoming a common feature in

business hotels, airports and conference centers around the world.

• As 3G adoption increased, however, the relevance of Wi-Fi-cellular bundles

has come into question, with carriers ultimately focusing their investment on

extending 3G network coverage and preparing to roll out HSDPA/HSUPA.

Mobile providers face a combination of license rollout requirements and

competitive pressures to offer faster data services. In the US, for example,

Verizon and Sprint Nextel have raced to roll out EV-DO, and the latter decided

to discard WLAN. Carriers without imminent 3G plans, such as T-Mobile USA,

continue to look closely at Wi-Fi. T-Mobile is planning to go directly to



HSDPA in late 2006/early 2007. In the interim, the company will leverage an

extensive Wi-Fi hotspot network to provide fast-speed data services. In Europe

and Asia, Orange France and NTT DoCoMo — both with commercial 3G

services in place, also continue incorporating Wi-Fi into their portfolios of

mobile data services. An important difference between the above mentioned

three players and Verizon in the US lies in the extensive ownership of WLAN

hotspots by the former.

• In the meantime, strong fixed-mobile substitution trends lead to the

interest in WLAN among fixed players seeking competitive responses to the

loss of fixed traffic and lines to mobile carriers. A new model offered by UMA

technology promises to improve customer retention and reduce churn for

mobile, fixed voice and broadband Internet services. Similarly, a new breed of

MVNOs is planning to leverage WLAN to provide high-end services at a lower

cost. Both categories of competitors are exploring the potential behind Wi-Fi.

Exhibit 9: Pending Plans for Selected MVNO and UMA Launches

Carrier Country Type of Service Timeline MVNO SK Telecom — Earthlink

USA MVNO MVNO to be launched under brand name Helio.

JCI USA MVNO Japan’s MVNO plans to launch MVNO in the US. Comcast USA MVNO Plans to launch in 2006. UMA/VoWLAN TeliaSonera Sweden UMA Trial phase. Denmark UMA Trial phase. Saunalahti Finland UMA Trial phase. Cingular USA UMA Trial phase. Telelar Brazil UMA Plans. France Telecom France VoWLAN for

home Plans to launch LiveCom and HomeZone fixed-mobile voice and broadband services in 2006.

Cegetel Neuf France Voice over WLAN for home

BeautifulPhone service is currently trialed and tentatively scheduled for launch in Q2’06.

Deutsche Telecom/T-Mobile

Germany UMTS/WLAN broadband & voice service

Plans to launch fixed-mobile voice and data services in Q2’06

Source: Pyramid Research, Kineto Wireless.

• Despite much new interest, lingering perception of Wi-Fi security

vulnerability dictates caution to carriers: Last but not least, WLAN’s

perceived security weakness remains an important inhibitor of the technology

uptake. While no deterrent to the majority of consumers, it is a serious barrier

to the adoption of WLAN among large businesses, especially those as highly

sensitive to data protection as the financial sector. Similarly, mobile carriers

remain suspicious of the unlicensed nature of WLAN spectrum, which

subjects it to potential QoS and security problems. It is important to

emphasize, however, that technologically, security problems have been



resolved, and it is the implementation of the new solution that still presents a

challenge.

1.2 The Next Step for WLAN: Enabling Voice and Mobility

The main drivers of the interest in Wi-Fi are innovations and improvements that

strengthen security and enable voice, multimedia and mobility.

1.2.1 Is VoWLAN Ready? VoWLAN is already possible, but it is still the early days for the technology. A number

of VoWLAN solutions have appeared over the last two years. Among major vendors

currently supporting voice on their WLAN switches are Cisco/Airespace, Aruba

Wireless Networks, Azaire Networks, BridgePort Networks, Colubris, Siemens (via

acquired Chantry Networks), Meru Networks and Trapeze Networks. But several

important issues still remain:

• Coverage: Provision of good indoor coverage at lower cost is the main value

proposition of VoWLAN systems. This means covering hard to reach areas,

such as elevators and stairwells, through additional access points and RF

planning. The latter does not fit well into the small company demand of

solution in the box, limiting the initial VoWLAN uptake to medium-size

businesses.

• QoS and limited capacity: All vendors currently offer QoS and voice

prioritization, and after enabling QoS, the audio quality on voice-only WLAN

systems approaches toll levels. However, only six to seven concurrent calls can

be carried on a single access point. Plus, when data traffic is simultaneously

carried on the network, the call drop rate and delays become a problem.

Moving toward convergence will mix voice and data on the same WLAN

network, which will require more work to ensure satisfactory voice quality, or

mandate installation of additional access points designated to carrying voice.

One of the examples of tackling this problem is Motorola’s solution that

enables 5GHz spectrum for voice, continuing to use 2.4Ghz band for data.

• Mobility on WLAN is the main driver of new interest in the technology. For

most systems, however, delays, jitter and dropped calls still present a

challenge during roaming from one access point to another. Delays of 0.5

seconds per call — and over 1 second for six to seven concurrent calls — have

been observed during the recent roaming tests, which are noticeable by the

human ear. UMA technology developed by Kineto Wireless, is currently the



only mature solution for seamless handover between Wi-Fi and cellular

networks.

In conclusion, VoWLAN is here, but more work needs to be done to improve its

quality. Standardization of QoS is a must for the success of future VoWLAN.

1.2.2 New Wi-Fi Standards: Enabling Voice and Multimedia Two major bodies oversee the development of Wi-Fi standards: the standardization

body Institute of Electrical and Electronic Engineers (IEEE) and Wi-Fi Alliance

(www.wi-fi.org), which oversees practical implementation, interoperability testing

and certification of Wi-Fi products. Additionally, the Third Generation Partnership

Project (3GPP), the operator-run group that defines future mobile network standards,

works to include Wi-Fi interface into mobile standard releases. Of several 802.11

standards currently under development at the IEEE, three are worth special mention:

802.11e, 802.11n and 802.11r:

• The 802.11e standard, ratified in September 2005, supports QoS

• 802.11n standard will support higher rate throughput of up to 600Mbps (from

current 54Mbps of 802.11g)

• 802.11r will support WLAN roaming, once ratified in 2006

802.11e — Enabling QoS for IP Voice and Video

802.11e standard, ratified by IEEE in September 2005, provides support for QoS. In the

existing Wi-Fi networks, IP voice falls victim to contention and insufficient capacity,

resulting in poor quality and high dropout rates. The solution lies in enabling service

prioritization, which is currently supported by proprietary Wi-Fi vendor solutions.

Avaya, Cisco, Nortel and Mitel Networks licensed SpectraLink Voice Priority protocol,

which gives prioritization to voice traffic. Wi-Fi Alliance has certified the use of some

pre-802.11e standards called Wireless Media Extensions (WME) to dissuade the

development of proprietary solutions. WMM™ became a profile for the upcoming

802.11e, prioritizing traffic.

802.11e sets the highest priority to the voice calls and the next priority to video; the

remaining bandwidth is allocated to data. Additionally, the standard will support

traffic scheduling, which will improve network management.


http://www.wi-fi.org/


802.11r — Enabling Roaming for VoWLAN

The Fast Roaming standard, expected to be ratified in mid-to-late 2006, will address

maintaining connectivity as a user moves from one access point to another. This is

especially important in applications that need low latency and high QoS standards,

such as VoWLAN.

In addition to WLAN mobility, solutions for cellular-WLAN seamless mobility have

already been introduced by several vendors. Call handover between WLAN and

mobile networks is currently the major point of contention, and a number of

technological solutions are being trialed (e.g., software-based solutions from Persona

Software, Meru Networks and Colubris Networks).

802.11n — Faster Speeds for WLAN

802.11n standard, which is expected to be ratified in 2007, will be offering speeds of

up to 600 Mbps (starting at about 140Mbps in 2006). The standard will be built on

spatial multiplexing using multiple-input multiple-output (MIMO) technology.

Covering a range of 200m, 802.11n can become a primary home network backbone

technology. In mobile devices, it is expected to achieve data rates of 50Mbps. There

are currently three groups of supporters developing the standard: the Enhanced

Wireless Consortium (EWC), a total of 27 companies led by Intel, Broadcom and

Atheros; TGn Synch, primarily made up of home appliance manufacturers; and

WWISE groups, primarily supported by WLAN chip manufacturers and vendors.

1.2.3 Wi-Fi Security: At Last in Place, But Still Doubted by Many Network security, along with scalability and stability, are the main requirements of a

WLAN network manager. Two major areas addressed by today’s WLAN security

solutions are:

• Data privacy and encryption

• Authentication and access control

Wi-Fi still cannot live down the bad name given to it by the shortcomings of the

earlier 802.11 standard and Wired Equivalent Policy (WEP), which addressed only the

encryption/data privacy area and was highly vulnerable to hacker attacks. To work

around the WEP problems, enterprise IT units widely used virtual private network

(VPN) solutions, the downside of which is the high cost and high consumption of

bandwidth.



The main advance in Wi-Fi security took place in June 2004, when IEEE ratified a new

standard, 802.11i. Two other standards have been introduced in the meantime —

Wi-Fi Protected Access (WPA), an improvement of WEP, and WPA2, a fully

interoperable version of the full 802.11i specifications. The new standards use

128-bit-and-above Advanced Encryption Standard (AES), check message integrity, and

provide fast roaming support (pre-authentication).

With the standards in place, among the major challenges of Wi-Fi security today is

implementation. In essence, the outdated WEP-secured hardware needs to be replaced

by WPA-certified equipment, which inevitably takes a long time to do, leaving in

place a large unsecured installed base. Additionally, WPA2 standard requires IT staff of

an enterprise using Wi-Fi to manage key certificates, which is not always feasible.

Moreover, Wi-Fi security is not foolproof. As Wi-Fi technology uses unlicensed

spectrum and is therefore open to all, it requires constant monitoring and

disciplining of the end-users to ensure that all authentication procedures are

followed.

1.2.4 Unlicensed Mobile Access UMA standard developed by Kineto Wireless provides access to GSM and GPRS mobile

services over unlicensed spectrum technologies, including Bluetooth and 802.11 (see

Exhibit 10). UMA currently works only with GSM networks, primarily due to the

larger size of the GSM market and initial interest in the technology among GSM

operators.

At the end of May 2005, the UMA group, whose participants included BT, O2, Rogers

Wireless and a number of vendors, disbanded and folded its standard into the 3GPP.

3GPP, the operator-run group that defines future mobile network standards, now

decides how UMA and SIP will be implemented in the fixed-mobile convergent

networks. In Q2 2005, UMA became part of the 3GPP’s Release 6 specification.

The closure of the group had an important implication for the technology

development. Several trials of the technology are ongoing in Europe and the US, some

are currently using Bluetooth, but most plan to use WLAN going forward. Other

transformations are also to be expected: 3GPP Release 6 will come after Release 5,

which includes IP Multimedia Subsystem (IMS) and HSDPA. Both of these

technologies are based on SIP, which underlies a number of alternative fixed-mobile

convergence (FMC) solutions. It might lead to the evolution of UMA from 2G to 3G

networks to the eventual full integration into IMS.



Exhibit 10: UMA Network Architecture

Broadband

Access

Home / Enterprise / Public hotspots

GSN MSC

UMA Controller

Handover

Base Station Controller

Mobile Core Network

Carrier cellular access network

IP Access Network

AccessPoint

BTS

Broadband

Access

Home / Enterprise / Public hotspots

GSN MSC

UMA Controller

Handover

Base Station Controller

Mobile Core Network

Carrier cellular access network

IP Access Network

AccessPoint

BTS

Source: Nokia, Pyramid Research.

Among the most significant recent developments is licensing of UMA technology

from Kineto by LG and Samsung in July 2005. Along with Motorola’s announced

A910 and RAZR handsets, these will be available from 1Q-2Q06, improving UMA’s

availability to the consumers. Another endorsement for the technology came with

the announcement of UMA trials in Europe by Motorola and Ericsson.

Beyond Wi-Fi: Mobile WiMAX (802.16e)

The majority of vendors agree that mobile WiMAX will be of interest to a wide range

of service providers. Recently ratified, the certification of 802.16e standard is set to

take place within the next year, and the first commercial products are expected to

come out before YE06.

802.16e standard defines QoS, prioritizes traffic and provides for dynamic bandwidth

allocation — all preparing the technology for the provision of voice and multimedia

services. Mobile WiMAX will provide full mobility at high speeds and seamless call

handoffs, compared to nomadic and portable (also called “basic”) mobility. This will

present a potential threat to the mobile operator business and a new, interesting value

proposition to a host of new providers.



Section 2: Do Mobile Carriers Need WLAN?

SUMMARY

This section focuses on the following questions:

• What is the optimal WLAN value proposition for carriers?

• What are the WLAN business model options?

• Can WLAN co-exist with 3G?

• Can WLAN be more than a complementary technology — a transformational

one?

2.1 What Carriers Want

The suitability of WLAN has to be assessed in light of carriers’ key strategic

objectives and requirements: We evaluated WLAN and other technologies based on

their ability to address the following service provider requirements:

• Network efficiency and ubiquity:

o Create ubiquitous coverage and achieve synergies between different

networks and business units

o Use the cheapest technology on a price-per-Mb basis

o Create new business models for the future

• End-user ownership:

o Improve customer loyalty

o Increase penetration of digital home and penetration of business users

• Revenue generation:

o Create new business through the introduction of innovative mobile

data services and migration of content from media and broadcasting

The WLAN window of opportunity is a function of those requirements and of the

ability the technology provides to take advantage of a number of key trends:

• The emergence of broadband as a killer application: With the erosion in

fixed-voice revenue over the last four years putting tremendous pressure on

carriers to find alternative sources of revenue, broadband has offered fixed

carriers a second lease on life. Between 2001 and 2005, global broadband

revenue grew at CAGR of 46%, while voice and dial-up revenue declined at

-3% and -1% respectively. While downward pressure on other revenue streams



will continue over the next five years, broadband revenue will continue to

expand at 13% year-on-year (see Exhibit 11).

Exhibit 11: Global Fixed-Revenue Growth, 2001-2010

0

100

200

300

400

500

600

700

20012002

20032004

20052006

20072008

20092010

Rev

enu

e (U

S$

m)

Voice Dial-up Internet Broadband Private Circuit

Source: Pyramid Research, 4Q05 Fixed-Advisory Forecasts.

• The shortcomings of 2.5G: Cellcos now want not only a piece of fixed-voice

traffic, but also a share of the overall broadband pie. Since the launch of the

first GPRS and Code Division Multiple Access (CDMA) 1x networks in 2000,

mobile data has gained momentum, growing at CAGR of 55% between 2001

and 2005, and forecast to grow at a further 22% over the next five years (see

Exhibit 12). However, marrying IP and cellular networks has proven

challenging. Instead of an upgrade of existing infrastructure, as with DSL,

mobile carriers (especially those from the GSM family) have had to build

overlay IP networks, a costly and time-consuming endeavor. 2.5G

technologies have generally not met carrier need; neither GPRS, CDMA 1x

nor EGDE throughputs of 40Kbps, 64Kbps and 110Kbps respectively are

attractive enough for users accustomed to office LANs and home broadband

connections. WLAN may not provide the ubiquity of mobile networks, but

by contrast is cheap, easy to install and can satisfy demand for high-speed

connectivity on the road.



Exhibit 12: Global Mobile Data Revenue Growth, 2001-2010

0100200300400500600700800900

20012002

20032004

20052006

20072008

20092010

Rev

enu

e (U

S$

m)

Mobile Voice Messaging Data and Internet

Source: Pyramid Research, 4Q05 Mobile Data-Advisory Forecasts.

2.2 What WLAN Offers: From Broadband Portability to Fixed-Mobile Convergence

Wi-Fi’s major attraction has so far lied in enabling portability for broadband Internet

users. The delivery of fast Internet away from an office desk or a home PC station — at

business hotels, cafés, trains and planes, among many other places — with access to

all personal content and applications made Wi-Fi a perfect complementary

technology to wired and wireless networks. As Wi-Fi’s popularity grows, the question

becomes whether it can become more than a complementary technology, a

transformational solution in its own right.

In that context, three main models have emerged (see Exhibit 13), each aligned with

carriers’ strategic objectives and providing a platform for the offering of a suite of

services.



Exhibit 13: WLAN and Changing Carrier Strategic Objectives

Nomadic WLAN modelProvision of cheap, fast,

high-speed Internet access.

Bundled WLAN-cellular model

Provide ubiquitous mobile

data access

2002 2004 2006

FMC modelMove toward unified

IP platform

Mobile CarrierStrategic

Objectives:

• Defend mobile voice against fixed

and MVNO• Move to all-IP infrastructure

• Improve customer segmentation by

deliveringmore personalization

and service localization


Objectives:• Grow mobile data

revenue to make up for declining voice

ARPS•Improve mobile IP

network speeds• Cut churn rates and

improve customer mobile data experience


Objectives:

• Prioritize mobile data

• Move to mobile IP • Create attractive

packages for business customers

Nomadic WLAN modelProvision of cheap, fast,

high-speed Internet access.

Bundled WLAN-cellular model

Provide ubiquitous mobile

data access

2002 2004 2006

FMC modelMove toward unified

IP platform


Objectives:

• Defend mobile voice against fixed

and MVNO• Move to all-IP infrastructure

• Improve customer segmentation by

deliveringmore personalization

and service localization


Objectives:• Grow mobile data

revenue to make up for declining voice

ARPS•Improve mobile IP

network speeds• Cut churn rates and

improve customer mobile data experience


Objectives:

• Prioritize mobile data

• Move to mobile IP • Create attractive

packages for business customers


• Nomadic, portable data: Offering Internet access through a network of public

WLAN hotspots — via PC or mobile connect cards — marked mobile carriers’

first foray into the world of WLAN connectivity. In their traditional structure,

nomadic (largely pay-as-you-go) data carries little to no customer

differentiation; both enterprise customers and a growing number of

residential users access WLAN public hotspots. Subscription-

based services are more targeted, aiming to serve primarily enterprise and

self-employed workers accessing the Internet away from home. Similarly, new

city-wide hotspots and Wi-Fi gaming services will be providing broadband

access to consumers.

• Bundled WLAN services are an extension of subscription-based WLAN.

Bundles of WLAN with other mobile and fixed technologies — DSL, CDMA 1x,

GPRS, EDGE and 3G — provide access to the best available network without a

hassle of separate payment (to the end-user) or a separate bill (to end-user and

carrier alike).

• Solutions integrating WLAN into FMC array of services currently include

UMA for consumers along with VoWLAN and SIP-based WLAN solutions for

businesses.



Exhibit 14: WLAN Suite of Services

Target Customer

Location Nomadic/Standalone WLAN Access

Bundled WLAN/Cellular or WLAN/Broadband

WLAN as Part of FMC Services

Out of the office

Prepaid WLAN Monthly fee-based Limited/Unlimited WLAN Access

One bill for WLAN and cellular services Add-on WLAN charge or access-independent flat fee

Business

On-site WLAN for internal enterprise use

--

Private Branch Exchange (PBX)-based solutions, intranet applications access on laptops/PDAs (data) SIP VoWLAN solutions

Away from home

Prepaid WLAN Monthly fee-based limited/unlimited WLAN access

One bill for WLAN and cellular services Add-on WLAN charge or access-independent flat fee

Consumer

At home WLAN-based last-mile access for broadband

Bundled home and public hotspot broadband access

UMA WLAN-based convergent voice solutions Mobile voice + WLAN/3G broadband connection


Two of the above three models are largely complementary to existing technologies.

WLAN is essentially an intermediary technology between wired, which lacks mobility,

and wireless, which does not offer adequate speeds. Wi-Fi delivers portability to

broadband data, enhancing coverage indoors and unloading traffic off mobile

networks.

For WLAN to be transformational, it will have to support voice and ultimately be

integrated into an FMC infrastructure. Enabling VoIP makes it particularly attractive

to a host of mobile voice wannabes: fixed carriers and MVNOs. The most likely service

roadmap is similar to that of VoIP on fixed networks, but most mobile carriers have

not yet come to terms with it. Moreover, the questions remain whether VoWLAN will

arrive before VoIP over mobile networks and WiMAX, and how these technologies

will work together. Exhibit 15 provides a technology comparison.



Exhibit 15: WLAN vs. Cellular: Technology Comparison

WLAN (802.11n and e)

WiMAX (802.16e)

WiBRO WCDMA HSDPA EV-DO 1x EV-DO rev. A

Frequency 2.4GHz, 5Ghz

3.5Ghz, 2.4Ghz

2.3- 2.4Ghz

1.9- 2.1Ghz

Same as WCDMA

800MHz- 1800MHz

800MHz- 1800MHz

Max Data Rate — Down

600Mbps in 802.11n

15 Mbps at 5MHz

18.4Mbps 2Mbps

14Mbps 2.4Mbps 3Mbps

Max Data Rate — Up

600Mbps 15 Mbps at 5MHz

6.1Mbps/ user

2Mbps/ user

2Mbps/ user

153Kbps/ user

1.2Mbps/ user

Commercial network deployment

2007 End-2007/ 2008

2006 (Korea)

2005 2007 2003 2005

Support for voice

Yes, in 802.11e

Yes, VoIP Yes, VoIP Yes Yes Yes Yes

Source: KT, Pyramid Research.

2.3 Nomadic WLAN: Looks Good on Paper, Generally Falls Short

Nomadic WLAN is primarily a transitional model. The nomadic WLAN model was

first introduced in 2002, catering to demand for ad hoc broadband Internet access.

The majority of the existing WLAN providers offer nomadic WLAN services as part of

their WLAN portfolio. There is, however, little evidence that the WLAN nomadic

model of today delivers much revenue, traffic or customer loyalty. We expect that

most network operators will move to subscription-based WLAN access models, while

large hot spot owners, aggregators and WISPs will take over the provision of

occasional pay per use access and look for new capacity sales opportunities. Building

and managing Wi-Fi networks for municipalities and Wi-Fi gaming providers is only a

preview of the new emerging business models to come.

2.3.1 Positioning: High Speed at a Fraction of Mobile Cost The main attraction of the model to carriers lies in the low cost of setting up a hotspot

and promise of a short payback period. The recurring cost of maintaining hotspots is

low to carriers and hotspot providers alike. With a large enough number of visitors,

hotspot providers and carriers can expect to quickly recoup their initial investment,

although it would take carriers longer depending on their share of retained revenue

(see Exhibit 16). Some carriers choose to install, run and manage the hotspot entirely

by themselves, leaving the hotspot owners only the marketing benefit of offering

Wi-Fi to their customers. The main catch is attracting a sufficient number of end-users;

without it the whole model falls apart.



Exhibit 16: Nomadic WLAN Hotspot Carrier Business Case

Assumptions Sunk Investment: WLAN setup and authentication servers

US$2.5m

Total unique visitors per month

150

Total length of a log-in

1 hour

Price per hour, US$

US$6.00

Total hotspots 200 User growth rate (monthly) 10%

Usage growth rate (monthly)

5%

Recurring cost

10% of revenue

Retained share of revenue

30%

Payback time

18 months


2.3.2 Pricing: Predominantly Prepaid Prepaid scratch card vouchers have been a predominant payment method. However, a

variety of payment mechanisms have emerged in the last two years, including credit

card payments, short message service (SMS)-based billing and direct billing by a

hotspot provider (e.g., adding the charge to a hotel bill). The majority of providers

charge nomadic WLAN access on a time basis, charging per minute for roaming access

and daily/monthly for domestic WLAN access. (See Exhibit 17 for selected pricing

comparison.)

Exhibit 17: Prepaid WLAN Access Prices

Carrier Country Cost of 1 hour of access Cost of 24-hour access T-Mobile Hot Spot

USA US$6/hr. US$9.99

NTT DoCoMo M-Zone

Japan Not offered US$5.52 — DoCoMo offers daily subscription plans to its mobile users, billed on a monthly basis

KT Netspot South Korea US$2.9 (3,000 won)/hr. US$11.7 (13,200 won)

Orange France US$3 (2.5 euro)/ hr.; US$6.1 (5 euro) for 2 hrs.

US$24.5 (20 euro)

O2 Germany Germany US$5.3-$10.5/hr. (4.31 euro for 30 min. or 8.62 euro for 120 min.)

Not offered

Eurotel WiFi Jet Czech Republic US$1.7 if purchased on prepaid GO coupon; US$3 if paid by SMS

US$15 if paid by SMS

Source: Service Providers, Pyramid Research.



2.3.3 A Vulnerable Business Model

The absence of profits casts a shadow on nomadic Wi-Fi: The model looks good on

paper, but from what little evidence is available — as few hotspot providers have

released their usage or revenue numbers — it mostly failed from the revenue and

profit perspective. Low usage is the main reason for the model’s downfall. Both the

average number of users and the usage per hotspot have been too low. Not all

hotspots are created equal; some generate profit as promised, while others never

would. Yet an extensive network needs to be in place to provide near-ubiquitous

coverage. As a result, the networks of many hotspot providers, especially in emerging

markets, are limited to a handful of prime locations.

More importantly, the nomadic WLAN model fails to satisfy some of the most critical

carrier objectives along all three of the above-mentioned parameters of revenue

generation, customer retention and network control:

• The value of nomadic access is low for most customers, who are

consequently unwilling to pay much for Wi-Fi: Using WLAN for as little as 10

hours per month will set back an average user US$30-$50/month — 1.5 to 2

times higher than the cost of broadband at home. At the same time, lower

prices make the provision of service unattractive for service providers. Some

hotspot owners, especially in the US, “torpedoed” the case by offering free

Wi-Fi just to attract customers.

• Not enough traction with customers. One-off hotspot access does not

generate repeat business, especially among business travelers. As any loyalty

program will show, the retailer’s power lies in the accumulation of a small

number of points. Moreover, nothing currently differentiates mobile carriers’

nomadic Wi-Fi access from that of a fixed provider or a WISP, while the

proliferation of laptops with built-in Wi-Fi chips makes accessing WLAN on

any hotspot too easy.

Business travelers are (rightly so) weary of using open access WLAN to access

their business information, even with installed VPNs for intranet access. The

shared nature of WLAN also means that it is often impossible to get fast speeds

in some of the busiest WLAN zones, as many evening users in the business

hotels surely know.

• Lack of network access control: Carriers have no control over the spend of a

user on other providers’ WLAN networks, and carriers with the largest number

of hotspots capture most of the traffic. This means that incentives need to be



created to tie a customer to a specific provider, expanding the WLAN hotspot

network through roaming agreements.

With small revenue potential and a complete lack of network and customer control,

what, then, is the attraction of nomadic WLAN? The answer is speed and low cost, as

well as the hope to attract more users with time. WLAN is currently the best

technology that fits the bill of nomadic broadband access, with cellular technologies

lagging far behind. Such exclusivity will be challenged when faster-speed mobile

networks such as EV-DO, WiBRO and WiMAX step up mobility throughput rates, but

for now it holds:

• WLAN throughput is equal to the speed of a broadband fixed connection on

top of which an access point sits, with an upper limit of 54Mbps on 802.11g

networks. As average DSL and cable modem broadband speeds are climbing

up from the current 512Kbps in the emerging markets and 1-2Mbps in the

developed markets to as high as 25-50Mbps on VDSL connections — so will

those of WLAN.

• No other technology provides road warriors with fast broadband access at

WLAN cost. Additionally, mobile data roaming is not yet widely accepted,

held back by differences in mobile standards and high cost.

2.3.4 New Models for Nomadic WLAN: From Wi-Fi to WIMESH

We have certainly not seen the end of nomadic Wi-Fi access. New models come to

light promising to attract new types of users and new sources of revenue for hotspot

providers. We expect that for road warriors, the roadmap for nomadic WLAN access

will follow the same path as mobile services in general: Prepaid access will remain an

option, but the majority of business subscribers will be registered with a single service

provider, roaming on other provider hotspot networks.

Yet, demand for ad hoc Internet access is sure to remain. Moreover, as existing Wi-Fi

providers are predominantly targeting business travelers, a large layer of the total

population (i.e., the majority of consumers) remains beyond Wi-Fi reach. For many of

them, especially lower-income segments and students, Internet access at home

remains unaffordable. Internet cafés connected via Wi-Fi could mimic the previous

fixed-line Internet café model. But more ambitious plans are made by municipalities

— see the case study below — and gaming providers.



Case Study: The Big Unknown of City-Wide Hotspots

Commissioning of city-wide hotspots took the US market by storm. In early October 2005, the city of Philadelphia selected EarthLink Inc. as the primary vendor to set up the US’s biggest municipal wireless broadband network. EarthLink, the Atlanta-based integrated service provider (ISP), is planning to invest an estimated US$10m-$15m with the intention to offer broadband Internet service for as low as US$10 a month in low-income homes. Similar deployments are being mirrored elsewhere in the US; in San Francisco and Mountain View, search-engine leader Google Inc. became a wireless high-speed Internet provider, offering free service for the two cities. All involved parties are interested in creating new business opportunities using wireless broadband. Municipalities believe that widespread availability of wireless broadband will attract new businesses, educate residents and ultimately bring down unemployment. In Philadelphia, Verizon Communications Inc. offers broadband service at US$14.95 a month for 768 Kbps; EarthLink proposes 1 Mbps for US$10 a month for low-income families and US$20 for the remainder of the residents. Municipalities are also interested in the use of wireless broadband in public service to become more effective and efficient. What’s in it for Earthlink? ISPs are looking at these projects for additional revenue generation. EarthLink will be able to venture into the broadband business in Philadelphia without having to rent lines from broadband companies. However, there are technological, political and operational challenges. On the technological front, standardization of the technologies, complex topology for mesh networks, and spectrum interference pose significant problems. On the political front, telcos and cable companies are aggressively lobbying against these municipal WiFi initiatives on the grounds that they constitute unfair competition. Finally, the operation of such projects will inevitably have some cost implications for city governments and contractors alike; network security, customer call centers and other operational factors will have to be addressed. The impact on established broadband players will only play out over the longer term, as consumers realize the trade-offs with a “free” Internet service. We expect that municipal WiFi networks will not match other offerings’ unique content, security features and reliability. Still, broadband incumbents may have to deploy their own competitive WiFi network offerings and offer mobility as a differentiation tool. What about Google’s planned “free” model? Can it work? Depending on what exactly the company is up to, Google’s deep pockets could also resolve some of the outstanding issues above and produce a network that provides acceptable quality. The company could ultimately look into reaching agreements with traditional broadband players and WISPs (which admittedly would be reluctant), share network investments and cut the cost of deployment. Both, however, may figure that teaming up with the likes of Google could help them penetrate untapped market segments such as small businesses and lower-income consumers while increasing overall revenue.



A recent agreement between Nintendo and a host of Wi-Fi providers, such as BT

Openzone and the Cloud in the UK and Wayport in the US, brought another model to

light. Owners of Nintendo’s Wi-Fi-enabled DS game are allowed to play online

without paying for Wi-Fi access (the gamers are able to play against each other and

have no access to the Internet). According to the recent numbers from Nintendo,

about 200,000 subscribers are using the service worldwide (one month since

launching in Europe and the US in November 2005). The partnership promises to

bring additional revenue stream to hotspot providers and become a marketing coup

for Nintendo. Sony is widely expected to follow in Nintendo’s steps, and Kodak may

follow with free Wi-Fi photo downloads, having already brought a Wi-Fi-enabled

camera to the market (see Exhibit 18).

Exhibit 18: Nomadic WLAN Roadmap and Universe of Service Providers

StandaloneWLAN hot spots

2002 2006

Standalone hotspots with different levels of service,

city-wide hot zones, WIMESH networks

•Service Providers

• Independent WISPs• Mobile and fixed carriers

•Hotels, cafes, airport authorities, etc• Municipalities (e.g. City of San

Francisco)• Applications and device

manufacturers (e.g. Nintendo) • Portals (e.g. Google)

Service Providers

• Independent WISPs (e.g. Boingo, Cloud)

• Mobile and fixed carriers (e.g. NTT, T-Mobile)

•Hotels, cafes, airport authorities, etc.

StandaloneWLAN hot spots

2002 2006

Standalone hotspots with different levels of service,

city-wide hot zones, WIMESH networks

•Service Providers

• Independent WISPs• Mobile and fixed carriers

•Hotels, cafes, airport authorities, etc• Municipalities (e.g. City of San

Francisco)• Applications and device

manufacturers (e.g. Nintendo) • Portals (e.g. Google)

Service Providers

• Independent WISPs (e.g. Boingo, Cloud)

• Mobile and fixed carriers (e.g. NTT, T-Mobile)

•Hotels, cafes, airport authorities, etc.


For mobile carriers, however, interest in the nomadic WLAN business model will be

limited to those with extensive existing WLAN networks — either their own or shared

with parent fixed-line providers — e.g., T-Mobile, Orange, Telstra and KT.

2.4 Bundled WLAN-Cellular: A Necessary Marriage of Technology and Convenience

Offering WLAN on a subscription basis, as part of the overall portfolio of data

services, is the next step in the development of WLAN. Bundled WLAN-cellular will

become the main business model for mobile carriers. Launched by several major

mobile carriers, such as Orange, T-Mobile, Telstra, NTT DoCoMo and KT, WLAN is an



important piece of supporting infrastructure to cellular and fixed networks in

delivering broadband connectivity to many enterprise road warriors. The revenue

impact of adding WLAN might be small, but it cannot be overestimated — after all,

bundled services target the most valuable segment of corporate customers. A number

of new projects also look into expanding the universe of WLAN-enabled devices and

services to reach out to the broader group of mobile workers — not only on the road

but also in the office. For many carriers, such integration of WLAN into the portfolio

of bundled mobile data services will be the final frontier in WLAN exposure, but a few

are already thinking about moving beyond bundles to FMC.

2.4.1 Positioning: From Prepaid Wi-Fi to Bundles Extending WLAN services beyond prepaid access addresses a number of problematic

issues with nomadic Wi-Fi:

• Carriers can capture revenue from the subscriber’s remote network access.

• The uncertainty around customer churn is minimized, and mobile carriers

gain insight into the subscriber’s data usage.

• For end-users, the value of subscribing to Wi-Fi roaming is delivered through

the installed software: The user experience is simplified through the use of

one username, password and billing account, allowing to skip the walled

garden page at the hotspot provider. An aggregator conducts all the billing

and payment work.

• Integrating WLAN into the portfolio of mobile data services moves mobile

carriers into the convergent services space.

The main requirements for providing WLAN access on a subscription basis are:

• A large number of hotspots.

• End-user interest to buy the service on an ongoing basis, which stems from

ease of payment and accessing the hotspots.

• Attractive prices to maintain WLAN’s affordability.

2.4.2 Extending the Hotspot Network: The Roaming Challenge WLAN started its lifecycle as a standalone service, quite similar to cellular

technologies, and just like cellular it has now arrived at the roaming stage. The

standardized nature of WLAN networks and devices makes it ideal for roaming —

most laptops now come equipped with either 802.11g or dual b/g chips, enabling

access to all commercial hotspots. Eventually, WLAN roaming may use the same

GRX-type infrastructure as currently used for GPRS and CDMA 1x roaming. For now,



it works mostly as a resale model (see Exhibit 19).

Exhibit 19: Wi-Fi Roaming: Payment Structure

User

AggregatorWLAN

ser vice provider

Connection

Flat-fee daily payment, time-based or other payment

Monthly remit, calculated from total connects

Month

ly Payment

Hot spot provider

User

AggregatorWLAN

ser vice provider

Connection

Connection

Flat-fee daily payment, time-based or other payment

Monthly remit, calculated from total connects

Month

ly Payment

Month

ly Payment

Hot spot providerHot spot provider

Source: Boingo, Pyramid Research.

The first roaming agreements were signed in 2002, and the Wireless Broadband

Alliance (WBA) has since provided the platform for connecting WLAN providers via

roaming agreements. The WBA partnership, which expected to reach 70,000 of

hotspots by the end of 2005, includes UK’s BT; Maxis (Malaysia); NTT

Communications (Japan); Orange France (France); Portugal Telecom (Portugal);

StarHub (Singapore); Swisscom Mobile (Switzerland); Telecom Italia (Italy); Telstra

(Australia); T-Mobile International in Austria, the Czech Republic, Germany and the

Netherlands; and T-Mobile USA.



Exhibit 20: The Largest WLAN Providers and Roaming Partners

Carrier Number of Hotspots in Major Markets

Number of Hotspots with Roaming

Roaming Partners

KT Korea 13,000 23,000 Domestic: n/a International: iPass, NTT Communications and other WBA partners

Orange France 7,500+ 22,000 domestic 12,000 international

Domestic: SNCF/Cegetel, SFR, Hub Télécom and Bouygues Télécom International: WBA partners

Boingo USA 7,367

27,000 Fiberlink, EarthLink, Sprint Nextel, MCI, BT

T-Mobile USA 7,160 International: 19,000

Domestic: iPass International: T-Mobile Europe, BT (UK), Telecom Italia (Italy), Maxis (Malaysia), NTT Com (Japan), StarHub (Singapore), Telstra (Australia)

NTT Group companies, Japan

NTT DoCoMo (about 600), NTT Com, East & West (11,000)

n/a International: TeliaSonera, iPass, Singtel, KT and other WBA partners In-flight: Boeing

Orange France 8,000+ Domestic: 22,000 International: 12,000

Domestic: SNCF/Cegetel, SFR, Hub Télécom and Bouygues Télécom

BT UK 1,594 30,000 International: WBA partners Domestic: The Cloud, T-Mobile, Broadreach Networks

Telia HomeRun 3,478 11,000 International: NTT DoCoMo, Swisscom Eurospot, Metronet (Austria), Orange (France), BT (Ireland, UK), PT Wi-Fi (Portugal)


2.4.3 Convenience of Bundled Pricing: Many Networks — One Bill Right pricing is half of the equation to make bundled services attractive to end-users.

Similar to other mobile data services, carriers continue testing different payment

methods for WLAN access. Some, like Orange in France, offer several payment options

— volume-based, time-based and flat-fee. Others, like NTT DoCoMo in Japan, only

offer WLAN on a contract basis, charging for daily or monthly usage. (See Exhibit 21

for selected service details.)



Exhibit 21: Selected Examples of Subscription and Bundled WLAN Plans

Carrier, Country Service Service Plan Details T-Mobile, USA Hot Spot US$39.99 for add-on WLAN monthly access. Cingular US Wi-Fi Connect Currently Wi-Fi connect is offered only as a add-on to the cellular data

plans: Priced at US$39.99 with cellular bundles of 5Mb-20Mb that are charged separately at US$19.99-$39.99 Priced at US$29.99 with cellular bundles of 50Mb that are charged separately at US$49.99 Priced at US$39.99 with unlimited cellular downloads that are charged separately at US$79.99

Orange France Orange Wi-Fi — Business Everywhere

In October 2005, Orange introduced a single charge for unlimited data access on any of WLAN/EDGE/WCDMA networks. Promotional charge is US$36.8 (30 euro)/month, to be increased to US$86 (70 euro) from the beginning of 2006.

O2 Germany Surf@home Integrated 3G/WLAN card, which in combination with O2’s Genion voice service, becomes a substitution for a fixed connection.

Eurotel, Czech Republic

Jet Wi-Fi Eurotel offers two types of subscriptions: Wi-Fi Jet Basic at US$7.4/month with 10 hrs. included Wi-Fi Jet Nonstop unlimited access at US$45/month

NTT DoCoMo, Japan

M-Zone US$22/month for DoCoMo’s subscribers.

KT, South Korea Nespot KT’s xDSL (Megapass) subscribers pay an extra US$8.40 (10,000 W) per month for unlimited NESPOT usage at home and from any of the country’s hotspots. Similarly, Nespot Swing service supports roaming between WLAN and CDMA EV-DO networks.

Source: Operators, Pyramid Research.

The challenge of high price, however, remains. Most carriers currently charge for

WLAN as an add-on to the already expensive mobile data packages, which can be

attractive only to a small number of desperate business customers that value WLAN

access in the absence of other alternatives. The introduction of a single fee for a

bundle of WLAN and mobile data has two important advantages:

• It simplifies the pricing structure.

• It prevents cannibalization of mobile data by WLAN.

2.4.4 WLAN Bundles: Uptake and Revenue Potential

To assess the prospects of WLAN subscription service, it is worth looking at the

adoption of the subscription Nespot service in South Korea. KT is the owner of the

largest hotspot network in the world, while Korea boasts the highest uptake of

broadband globally. KT offers WLAN on a subscription basis as a bundle with CDMA

EV-DO data access, and at YE2004, Nespot users accounted for 7% of KT Freetel’s

mobile subscribers. This number is certainly low, especially compared with usage of

the EV-DO service (93% of all KT’s subscribers). Nevertheless, it translates into

additional average revenue per subscription (ARPS) of US$8.4 per month for the

operator.



Exhibit 22: KT: WLAN Subscribers in South Korea

050

100150200250300350400450

Q1 2003

Q2 2003

Q3 2003

YE2003

Q1'04

Q2'04

Q3'04

Q4'04

WLA

N S

ub

scri

ber

s (0

00

)

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

Sh

are

of

tota

l bro

adb

and

su

bs,

%

Total WLAN Share of total broadband

Source: KT, Pyramid Research.

Case Study: KT WLAN Portfolio of Services

KT’s broadband service is noteworthy because it is the largest broadband provider in the most highly advanced broadband market in the world. Its Internet access services are DSL-based (“Megapass”), fiber-optic cable-based (“Ntopia”), and WLAN-based (“Nespot”) services. KT is focusing its growth on developing its various broadband technologies. This is to be expected, as the former state monopoly remains the technological leader in the market. For KT, Korea’s incumbent operator and second-largest mobile carrier, WLAN is one of several technologies deployed on the path to 4G services. KT’s attention recently switched to WiBRO, and it stopped adding new hotspots. However, it has not given up on WLAN, which is on the roadmap for converged home solutions (currently, an equivalent of UMA solution OnePhone is offered via Bluetooth) and for WiBRO portable Internet services. Has It Worked for KT? In terms of key performance indicators (KPIs), KT saw moderate success with WLAN bundles. The above-mentioned 7% of the subscribers with US$8.4 in ARPS is a drop of water in the bucket of KT’s mobile data revenue. Moreover, the service is reportedly used mostly by students on campus, which means that the service left cold most of KT’s enterprise customers. In response, the carrier is considering taking further steps in the enterprise market. As the market moves towards more converged services and high-speed connectivity with competitors Hanaro and Dacom (which are both testing VoWLAN technologies) close on KT’s heels, KT is considering fixed-mobile convergent solutions that would preempt a PBX replacement cycle. Pyramid Research estimates that a PBX replacement spend cuts the cost of a typical small-to-medium enterprise by around 50% and brings down the customer’s total cost of ownership (TCO) by 35%.



2.4.5 The Next Step in Bundling: Toward Ubiquitous Networks Wi-Fi bundling fits perfectly into the access-agnostic approach to the delivery of

mobile data services, with the biggest move taking place following the launch of IMS

systems by both fixed and mobile carriers. WLAN falls in line with the move to all-IP

infrastructure and will be easy to integrate with the future IMS-enabled networks,

promising to support a variety of IP services, such as voice and video. Yet again,

WLAN’s role will fall under the supporting category, providing a LAN extension to the

cellular technologies.

Exhibit 23: Many Services — One Network

Mobile Voice Fixed VoiceBroadband

Internet

Bill Bill Bill

IP Platform (supporting QoS)

All-IP Backbone

Mobile Data

Bill

Pay TV

Bill

Mobile Voice Fixed VoiceBroadband

Internet

Bill Bill Bill

IP Platform (supporting QoS)

All-IP Backbone

Mobile Data

Bill

Pay TV

Bill


France’s mobile incumbent Orange — one of a half-dozen fixed and mobile carriers

that moved further along the convergence path — provides an example. Its successful

mobile data service, Business Everywhere, has been built to take advantage of a variety

of mobile and WLAN technologies (see Exhibit 24).



Exhibit 24: Orange France Mobile Broadband Launch

Source: Orange France, May 2005.

Case Study: Orange and Business Everywhere

Together with parent company France Telecom (FT), Orange embraced WLAN technology as part of a portfolio of mobile data services in 2003. Among the major attractions of the service are: - Flat-fee, unlimited data access launched in November 2004. - A single contract and bill, as well as a single customer support desk for Orange’s and FT’s

service managers and users — a clear convenience of a convergent service. - Expanded national and international coverage for mobile data users: WLAN complements

EDGE and WCDMA as Orange expands the coverage of both mobile networks. Its WCDMA network is currently available to 45% of France’s population, and EDGE network extends to 85 % of total population and 90% of enterprises in France. Orange supports its Business Everywhere users on more than 7,500 hotspots nationally and 10,000 hot spots internationally through roaming agreements in 23 countries.

Has Wi-Fi Worked for Orange? The bundled approach seems to have worked well for Orange so far. In mid-2005, it expected to have more than a half-million users of its Business Everywhere service — 2.3% of its estimated total number of mobile subscribers and 18.5% of its total business subscribers. This number also represents a quarter of all Wi-Fi laptops in France, as estimated by Orange, and the addressable market will grow as the number of Wi-Fi-enabled PDAs and handsets start selling in 2006. In mid-2005, Orange hotspots carried more than 1m sessions per week, with an average session length of 43 minutes (as compared with a similar usage of 1 hour reported by T-Mobile). Last but not least, Orange shares its network of WLAN hotspots with parent FT, which also



sells Orange’s Business Everywhere service. FT also has an additional use for WLAN, offering Pack Surf Wi-Fi broadband access service to areas not covered by ADSL. The service allows small towns, businesses and individuals in a given area to connect via a shared local broadband network. Will It Work for Others? - The majority of incumbent providers in Europe, the US and Asia have fixed and mobile

arms. Replicating the experience of Orange and FT will allow them to create synergies between two arms through combined sales efforts, customer service and infrastructure. Recent acquisitions of mobile arms by a number of fixed incumbents will facilitate sharing of resources.

- Orange’s flat-fee charge is worth a special mention, as business customers generally

perceive it as a good value for the money. - An important additional consideration for any operator emulating Orange’s experience is

the first-mover advantage, which delivers the best results to bundled service providers.

2.4.6 Technology Alternatives: WLAN vs. Mobile 3G Networks Despite WLAN’s fine fit with the all-IP network plans, the launch of WCDMA and

EV-DO networks in Europe, Asia and the US brought mobile networks up a notch in

terms of speeds, raising the question about WLAN’s relevance under new conditions.

Two carriers in the US — Verizon and T-Mobile — have come forward with radically

different plans for Wi-Fi. While T-Mobile made WLAN an integral part of its data

portfolio, Verizon announced its intention to drop WLAN from its mobile data

portfolio in favor of CDMA EV-DO. Which model makes more sense going forward?

WLAN Pros:

• Not all subscribers will move to 3G. For such subscribers, Wi-Fi will remain the

main medium for accessing hi-speed wireless Internet.

• Wi-Fi is a means of limiting congestion on 3G networks in certain high-traffic

areas.

• The major decisive argument is the existence of a legacy WLAN network: Low

overheads and the substantial presence in a variety of prime real estate

locations (e.g., airport terminals and hotel chains) make for a strong case to

continue with WLAN. For carriers without it, purchase of a WISP or

co-branding is a possibility if reliance on roaming is not desirable.



WLAN Cons:

• Due to its unlicensed nature, WLAN remains a suspect technology for mobile

carriers. Only when QoS features are fully enabled, will it become more

attractive to cellcos. But when that happens, will Wi-Fi still possess its main

advantage: technology that is cheap and accessible for many?

• While WLAN hardly presents competition to 3G network services, it can

nevertheless siphon a fair share of mobile data traffic to a cheaper network —

a threat if a mobile carrier does not control WLAN.

Both the Verizon and the T-Mobile models will exist going forward. Ultimately, the

existing assets for each provider — coverage and capacity of 3G and WLAN networks

— will determine the final decision. We expect that most will choose in favor of

keeping WLAN, which will continue doing what it does best: provide WLAN coverage

at high speeds. But WLAN’s coverage will never match that of cellular networks, and

the two can therefore peacefully co-exist.

Exhibit 25: WLAN vs. 3G Technologies

WLAN 3G Cost Fraction of 3G cost, unlicensed

spectrum.

Higher cost, very expensive spectrum. This also means that carriers would like to focus on recouping 3G investment.

Infrastructure Coverage: better indoors. No mobility at this time, but enabling cellular-WLAN roaming will change that. Early support for VoIP.

Coverage: better geographic. Mobility.

Revenue Potential Plain vanilla local area connectivity. VoIP.

Plain vanilla wide area connectivity. Multimedia, video, TV services.

Customer Lacks in terms of service differentiation, but this can be overcome as WLAN becomes part of mobile data and voice bundles.

3G service positioning is not quite up to scratch yet.


2.4.7 The Business Case for Bundled WLAN: From Add-on to Integration

There are only a few examples of Wi-Fi bundles. However, those that exist show that

their impact on operator revenue and subscriber base can be very positive. The

model offers a clear value proposition of improving the mobile data experience and

fits into mobile carriers’ 3G network deployment path. As a recent innovation, it will

doubtlessly be adopted by many more mobile carriers and convergent service



providers. Similar to nomadic WLAN access, bundling Wi-Fi works equally for mobile

and fixed carriers: Fixed telcos benefit from adding WLAN’s portability to the home or

office broadband access, while cellcos complement mobile data offers with

higher-speed WLAN access at a fraction of 3G cost. Will this model be enough to fend

off competition in mobile data? The answer might be yes, but a new threat to voice

now comes from the addition of VoIP capability to WLAN.

2.5 Transformational WLAN: Delivering the Unavoidable VoWLAN

As part of the fixed-mobile convergent solutions, WLAN will feature two types of

service:

• The first of supporting mobile data will be an extension of the above

discussed bundled model.

• The second will introduce VoIP to WLAN, a looming threat for the existing

business model of delivering paid mobile voice services. In our view, the

destruction of the traditional mobile voice model is not at all certain, but the

impact of adding voice to WLAN is likely to be very similar to the disruptive

addition of VoIP on fixed networks.

Our previous study on fixed-wireless convergence raised some of the issues around

FMC, coming to the conclusion that fixed carriers and convergent service providers

are set to benefit the most from embracing fixed-mobile services. The main questions

of this section are the role of WLAN in delivering convergent data solutions and VoIP,

as well as its attraction to mobile carriers. Is the addition of voice capabilities

inevitable for Wi-Fi? And what are the implications of such an addition for the mobile

voice industry?

To answer these questions, we will consider two main cases for VoWLAN — UMA and

SIP-based VoWLAN for enterprise customers. As the technologies are too new and

their trials do not go beyond a small handful of cases, a discussion of several

hypothetical scenarios is most relevant.

2.5.1 FMC Value Proposition: Clear for Mobile Data, Not So Much for Mobile Voice

Unlike nomadic and bundled WLAN access, which was equally driven by fixed and

mobile providers, the interest in new converged solutions, especially when it comes

to voice, emanates first and foremost from the fixed providers’ camp. For wireline

providers, which have suffered from fixed-mobile substitution in the last three to four



years, a range of FMC technologies, including VoWLAN and WiMAX, extend network

reach and enable mobility of voice services. For cable operators, FMC technologies

present an opportunity to expand into new segments, such as small and medium

enterprises (SMEs) with data as well as voice services.

For mobile operators, on the other hand, the major attraction of new FMC

technologies is similar to that of three years ago: building overlay IP networks for

carrying more IP data traffic. VoIP, provision of which is still a challenge on mobile

networks, does not feature strongly in most mobile providers’ considerations, and it is

clear why.

2.5.2 VoWLAN: More Threat than an Opportunity for Mobile Carriers, But Is It Avoidable?

VoWLAN threatens mobile carriers, but they will be forced to take defensive

actions:

• From the revenue perspective, mobile providers have much to lose from

falling voice prices — after all, mobile voice currently accounts for 80% of

total mobile revenue and is already a victim of commoditization. It is easy to

understand why mobile providers are much more interested in mobile data

services.

• From the infrastructure perspective, mobile providers are open to

incorporating new solutions for data, but VoIP with its existing quality

issues is still of no interest. With all bells and whistles of QoS and security

added to WLAN in two to three years time, it might become more interesting

to mobile carriers, but it is unlikely to be as cheap as it is now.

• Finally, from the customer retention perspective, the new ability of fixed

carriers to offer mobile voice through WLAN might become a direct threat

to mobile carriers’ core business.

With these considerations in mind, mobile carriers would be happy to keep VoWLAN

under covers. Yet, the cat is out of the bag — the pressure on fixed carriers is mounting

as fixed-mobile substitution tightens its grip, and VoWLAN presents a unique

opportunity to get back some of the mobile carriers’ business. A few providers already

plan to launch UMA — one of the main technologies to route VoWLAN at home.

UMA, of course, requires involvement of a mobile provider, and a handful of mobile

carriers have already decided they are interested in participating. Vodafone in the UK,

for example, partnered with BT to launch its UMA Fusion service; others, like

T-Mobile and Orange do not have much choice but to join in home services planned

by parent companies France Telecom and Deutsche Telekom. The rest of the cellcos,



therefore, need to also consider their options, taking into consideration the following:

• VoWLAN is inevitable, and the best strategy to beat the threat is to join in.

• Termination of calls originated on WLAN networks will remain a source of

revenue for mobile carriers, in addition to offering wholesale traffic to

fixed-carrier MVNOs.

• Technologically, QoS issues for WLAN voice will be resolved in 2006, which is

also expected to increase the cost of new WLAN systems. Yet, they are still

likely to beat mobile IP networks on cost.

• Commoditization of mobile voice is already underway. WLAN networks will

enable offloading of cheap voice for low-income segments, including students.

Moreover, such services — which can be delivered with lower QoS — can be

priced at flat rates, which for all intents and purposes is the next step in the

pricing evolution.

The main question left to be answered, then, is what impact the addition of VoWLAN

will have on carrier KPIs.

2.5.3 Impact of WLAN as Part of a UMA Consumer Solution UMA and technology combinations that are similar to UMA in principle are the most

widely considered in the market today. In our opinion, although UMA threatens to

steal some of the mobile carrier’s traffic, it also hands cellcos an opportunity to

expand their wholesale business and improve customer retention through bundling.

• UMA solutions that are currently in place — e.g., BT’s Fusion, KT OnePhone

— currently use Bluetooth connectivity to deliver the home connectivity.

WLAN will complement Bluetooth and eventually replace it, after a sufficient

number of Wi-Fi handsets are available starting in 2006.

• Both fixed and mobile carriers must be involved in delivering UMA, as it

builds on the existing broadband and mobile infrastructure. However, if

mobile carriers replace the last-mile DSL/cable with a mobile connection (e.g.,

as is done in Germany by O2 and Vodafone), UMA or UMA-type solutions can

become an attractive retail proposition for cellcos.

• Last but not least, UMA is only the beginning of using WLAN for connecting

media and communications devices in the digital home.



UMA Network Components (from Motorola’s White Paper Motorola UMA — A

Residential Seamless Mobility Solution, published February 21, 2005)

The UMA solution makes use of a number of existing technologies and capabilities: - Existing IP connectivity, WLAN and broadband. - Existing cellular core network and interfaces. The new components integrated into an existing cellular core network are: - Dual-mode (GSM/WLAN) UMA-compliant handsets - UMA Network Controller (UNC) - Service Provisioning System - Element Management System Each of these elements is carrier-class and integrates into the core mobile network using existing interface definitions.

2.5.4 UMA Business Models

• Wholesale business model for a mobile carrier, whereby a fixed carrier resells

mobile subscriptions (e.g., BT offering UMA as an MVNO on Vodafone’s

network). We expect that majority of European operators will be using this

model.

• Wholesale business model for a fixed carrier, whereby a mobile carrier sells

UMA service to end-users, while a fixed carrier sets up a wholesale UMA

solution. Possibly the model to be adopted in the US, where Cingular and

T-Mobile are considering the solution.

UMA Business Case: Strongest Case for Converged Providers

The mobile carrier’s strongest case in favor of UMA is in partnership with a parent

fixed carrier. The duo can deliver a complete bundle of home communications and

entertainment services, of which UMA is only the beginning. Reviewing a business

case shows that mobile carriers do stand to lose retail mobile subscribers and traffic if

the fixed carrier delivers the service to the end-users. At the same time, a UMA

provider stands to potentially gain the market share from mobile competition (see

Exhibit 26). Important conclusions from reviewing the UMA case:



Exhibit 26: A Case for Converged and Mobile Carriers: Subscriber Gains

Market share gain of 1.7%

1.5mFixed arm’s gain

(0.688m)Mobile arm’s loss

(0.285m)(0.527m)0.688m1.5mUMA customers (5% of total)

5.7m10.53m13.76m29.99mContract

2.6m6.27m8.24m17.11mPrepaid

8.3m16.8m22m47.1mTotal subscribers

Competitor BCompetitor AUMA Foxed-Mobile

Provider

TOTAL

Market share gain of 1.7%

1.5mFixed arm’s gain

(0.688m)Mobile arm’s loss

(0.285m)(0.527m)0.688m1.5mUMA customers (5% of total)

5.7m10.53m13.76m29.99mContract

2.6m6.27m8.24m17.11mPrepaid

8.3m16.8m22m47.1mTotal subscribers

Competitor BCompetitor AUMA Foxed-Mobile

Provider

TOTAL


• Broadband and mobile subscriber retention and potential market share

gains are main advantages to a UMA provider. Currently, broadband churn

rates in the developed markets are above 20% on an annualized basis. UMA

can be bundled with broadband to improve broadband retention. Similarly,

churn rates for mobile contract subscribers can be reduced.

• A UMA provider acquires more than one household line — it also acquires

(or retains) more than one mobile subscriber. BT Fusion has about 1.4

mobile users per household, and we expect this ratio to grow overtime.

• In mobile carrier’s wholesale business model, the price levels for retail and

wholesale voice determine whether the revenue for a mobile provider

would be a net positive or a net negative. However, for a converged provider,

the net revenue is most likely a positive one due to the lower levels of churn.

• A mobile provider indeed loses part of the traffic originated at home —

between 30% and 50% as estimated by carriers. In reality, this loss may not

be as high as majority of consumers tend to use fixed lines for home calls. But

this loss may not happen at all if a UMA-type of solution is deployed with

mobile technology in the last mile (e.g., 3G).

• Instead of transmitting a phone call originated at home over PSTN, UMA

carries a VoIP call over a broadband network. The pricing — at least as

offered by BT — can be the same as on a PSTN network, but the cost of

providing VoIP is cheaper. Hence, pricing can be changed to a flat-rate VoIP



fee in line with the ongoing trend of providing unlimited voice buckets.

Exhibit 27: UMA Revenue Calculations for a Converged Provider and a Mobile Operator

Total MOU at home: 108 Minutes/month gain

Total Contract MOU: 270 minutes/month

Total MOU at home: 108 Minutes/month loss

Impact on MOU (assume 40% of all mobile calls are made from home)

Mobile spend: US$36.84

Fixed Spend: US$30

Total: US$66.84 (22% savings)

Mobile spend: US$56

Fixed Spend: US$30

Total: US$86

End-user’s gain/loss

(1.5mx12x36.84 = US$663mn

US$663m-US$462m

=US$201m (Net Gain)

(0.688m)x12x56 =(US$462mn)

Mobile/fixed arm’s loss/gain

US$30/monthFixed ARPS

ARPS at home: US$3.24

ARPS out of home: US$33.6

Total Mobile ARPS: US$36.84



Total Mobile ARPS: US$56

Impact on ARPS (average revenue per subscription)

Price Per minute: US$0.03Contract ARPS:

US$56

Price Per minute: US$0.21

Prices

1.5m(0.688m)Subscriber Gain/(Loss)

UMA ProviderMobile Provider

Total MOU at home: 108 Minutes/month gain

Total Contract MOU: 270 minutes/month

Total MOU at home: 108 Minutes/month loss

Impact on MOU (assume 40% of all mobile calls are made from home)

Mobile spend: US$36.84

Fixed Spend: US$30

Total: US$66.84 (22% savings)

Mobile spend: US$56

Fixed Spend: US$30

Total: US$86

End-user’s gain/loss

(1.5mx12x36.84 = US$663mn

US$663m-US$462m

=US$201m (Net Gain)

(0.688m)x12x56 =(US$462mn)

Mobile/fixed arm’s loss/gain

US$30/monthFixed ARPS



Total Mobile ARPS: US$36.84



Total Mobile ARPS: US$56

Impact on ARPS (average revenue per subscription)

Price Per minute: US$0.03Contract ARPS:

US$56

Price Per minute: US$0.21

Prices

1.5m(0.688m)Subscriber Gain/(Loss)

UMA ProviderMobile Provider


Due to its novelty, the UMA case is still largely unproven in reality, but it is worth

examining the first lessons of BT’s UMA service Fusion, which was launched in the

summer 2005 — see the case study below.



Case Study: BT Puts Wi-Fi at the Heart of Its Digital Home Vision

Wi-Fi, which holds a key place in the BT vision of the home of the future, is designed to connect multiple communications and entertainment devices and support a variety of applications from voice to video. BT’s approach to Wi-Fi is unquestionably aggressive; as a fixed carrier, we believe they have few options but to go for it. • Wi-Fi voice will become reality in the second half of 2006: Today, WLAN technology is slotted for pure broadband connectivity in UK homes. Early sales of such new consumer devices as Wi-Fi-enabled gaming consoles and Wi-Fi cameras are starting to change that, but it is the new BT’s portfolio of services that will bring a watershed of Wi-Fi devices to the average consumer. Initially, Wi-Fi will be used to support VoIP for BT’s UMA service Fusion, which currently provides in-home connectivity over Bluetooth. Wi-Fi handsets will be introduced by BT after summer 2006, with about 25 Wi-Fi mass market-priced handsets, equipped with the security features BT deems necessary for its service, expected to be available commercially at that time. Moving forward, BT also plans to provide a suite of 3G services on Fusion handsets, including video calling between Fusion and other 3G mobile customers, which will be enabled through BT’s 3G gateway. • Wi-Fi will become an underlying technology at the center of the digital home. Fusion is not the only service that will rely on Wi-Fi. The technology is also built into the BT Hub, which will be available commercially from spring 2006 and ready to host six different services: voice, video calling, broadband connectivity, TV, monitoring and control and gaming. In just one example, BT prepares to connect TV and the hub wirelessly about 18 months after the initial product launch in spring 2006. In 2007-2008, the appearance of devices in 802.11n standard will make WLAN capable of supporting not only VoIP, but also high-quality video signal.

Europe Will Drive UMA Trials

Most of the ongoing trials are taking place in Europe, where most incumbent

providers have fixed as well as mobile assets. An important factor is that several

incumbents bought their mobile arms in the last two to three years to get a better grip

on mobile revenue and profits, which will allow them closer synergies in providing

UMA services. In the US, on the other hand, most of the interest in UMA comes from

mobile operators looking to improve indoor coverage and cable providers looking to

strengthen their case against telcos.

2.5.5 Alternative Solutions: Versions of UMA Solutions similar to UMA have been developed in several markets worldwide. In Korea,

KT launched a UMA look-alike OnePhone service in late 2004, using Bluetooth for

home area connectivity, just like BT with its Fusion service. Japan’s NTT is also



reportedly trialing a home solution that uses WLAN for home voice delivery.

Home Zone Mobile Solutions

In Europe, mobile carriers in Germany have been the most aggressive in using mobile

technology to provide home zone voice (O2’s Genion) and broadband services (O2’s

Surf@home and Vodafone’s ZuHause). For voice, O2’s Genion customers are charged

rates similar to land-line tariffs for calls made via their mobile phones when they are

within 500m of their home (see Exhibit 28). Vodafone’s current version of Zuhause

works on the same principle. For US$24.5 (20 euro) a month, Zuhause subscribers

receive 1,000 minutes of talk time for calls to fixed lines. The US$0.024/min (0.02

euro). rate is available only when the user is within a certain area around his or her

home.

Exhibit 28: O2 Genion and Surf@home solution

Voice: fixed network

price

BB: DSL-equivalent

price

Voice: fixed network

price

BB: DSL-equivalent

price


The solution, the concept of which is very similar to that of UMA, is certainly

attractive to mobile providers, as using a mobile cell technology keeps them true to

the cellular nature. But similar to UMA, the market for this solution needs to be

developed: O2 spent several years growing its Genion subscriber base in Germany. Its

attractiveness will also depend on the 3G network speeds (a better deal with HSDPA’s

14Mbps speeds) and broadband price.



Exhibit 29: UMA vs Home Zone Solutions

Included Services UMA/VoWLAN Home Solutions Home Zone Solutions

Infrastructure Addition of UNC Reuse of existing cellular infrastructure — 3G as a last-mile solution

Devices New UMA handset + Bluetooth/WLAN-enabled access point

Reuse of home zone device for voice; new WLAN/3G home hub for data connectivity

Speeds Limited to broadband DSL/cable modem speeds at home

Limited to 3G speeds (max 384Kbps)

Voice service discounts

Yes, expected to be at 10-30% of total mobile + fixed voice and data

Yes for home zone usage

Pros for mobile carriers In partnership with a fixed parent company, retain mobile subscriber on a wholesale basis

Retain full control over a mobile subscriber


2.5.6 A New Type of MVNO: Wi-Fi for Youth Voice over Wi-Fi is inevitable in the area of home converged solutions. However, it is

not as much of a threat to a mobile carrier’s traffic and revenue as a wholesale

opportunity. VoWLAN on public and city-wide networks is also unavoidable: Where

there’s a will, there’s a way. However, as the quality issues remain, such VoWLAN

services will be confined to such population segments as youth and teenagers — the

most price-sensitive and the least demanding toward the quality. Emergence of

lifestyle MVNOs using WLAN as part of their network will attest to the existence of

such demand. Several MVNOs in the US plan to launch services in 2006 using WLAN

as part of the network in the areas of the highest traffic to lighten the cost (see the

case study below).



Case Study: Helio and SK Earthlink: A New Breed of MVNO

Helio is a soon-to-be launched MVNO combining the CDMA experience of SK Telecom with the US IP presence of Earthlink. Official launch dates are unconfirmed, but likely to be 2Q06. The target demographic is 18- to 32-year-olds with an annual income in excess of US$40K. No information has been released yet on pricing for Helio, but pricing structures for services are going to be simple. The analogy provided by Helio is the “In and Out” hamburger chain, offering great user-friendly service and excellent content, but few choices. Helio will be a lifestyle brand such as Nike or Apple. There are likely to be a number of product spin-offs, such as clothing and merchandise, as well as a strong push towards a Helio community leveraging the always-on, always-present characteristics of the handset. Helio brings unique devices and unique back-end architecture, designed specifically around 3G data-centric handsets. Wi-Fi is alleged to be an integral part of building the Helio community, and there are plans to allow not just communication between handsets and Wi-Fi access points, but also between handset and handset to facilitate interactivity between Helio subscribers. Will Wi-Fi MVNOs succeed? As with any lifestyle products, there is no easy way to predict their success or failure. If not Helio, however, then another fashionable brand is likely to get a foothold in the large and underpenetrated US market. Importantly, however, Wi-Fi will allow such MVNOs to cut costs — and possibly prices — focusing instead on marketing, developing new applications and customer service.

Low-Power GSM: New Power to MVNOs

Lower-power GSM technology will support the proposition similar to that of MVNOs

integrating WLANs in their network. Licensing of low-power GSM is currently

planned by Ofcom in the UK; the technology is also being considered in Sweden. The

technology used by MVNOs to reduce cost of wholesale voice access is likely to be

similar to that of WLAN where spectrum is available.

• Unlike UMA, which targets customers at home, low-power GSM services will

be offered in the areas with the highest traffic density — quite similar to

current WLAN hotspots.

• Low-power GSM services will be offered in the licensed spectrum, and mobile

operators are likely to join MVNO bidders.

• Similar to UMA, low-power GSM will require handset/SIM upgrades, and its

adoption will therefore be slower.



2.5.7 Enterprise VoWLAN: Predominantly Niche Use in the Short Term Supporting delivery of mobile data solutions to enterprise is a clear value proposition

for WLAN, especially as security of Wi-Fi services improves with the implementation

of 802.11i standard. Launch of GPRS networks allowed mobile carriers to grab a piece

of the enterprise data pie, although it remains small compared to fixed-line and

consumer non-messaging mobile data revenue (see Exhibit 30).

Exhibit 30: Enterprise Data Revenue: Private Circuit and Mobile Remote Access

-

20

40

60

80

100

20012002

20032004

20052006

20072008

20092010

Rev

enu

e, U

S$

mn

Private Circuit DataConsumer Non-Messaging Mobile DataRemote Mobile Data Access

Source: Pyramid Research Fixed Communications and Mobile Data forecasts, 4Q05.

The growing number of Wi-Fi-enabled devices will lead to even higher usage of the

technology and the addition of desktop functionality to a range of Wi-Fi mobile

devices — first and foremost PDAs.



Exhibit 31: Smartphone and PDA Forecast, 2004-2010

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2004 2005 2006 2007 2008 2009 2010

Dev

ice

Sal

es (m

n)

Total Smartphones with WiFi Total PDAs with WiFi


Unlike UMA, however, VoWLAN on enterprise is unlikely to be initiated by mobile

carriers. Mobile voice is the bread and butter of mobile carriers’ enterprise business,

and large accounts are strictly guarded and retained via premium customer service

and price discounts.

But demand for cheap voice does exist, as examples of trials and service rollouts prove.

Hotels, hospitals, large retailers and campuses make up most of the list of current

VoWLAN users, and their reasons for the adoption are as follows:

• The main advantage of VoWLAN systems is their lower cost compared to

traditional PBX solutions, as well as integration of Internet and voice in one

system. If the quality of voice is acceptable, then the demand among other

types of enterprises is certain to emerge. Similar to VoIP, new installations and

full systems replacements will be the first to buy into the cost-effectiveness of

VoWLAN.

• New WLAN systems combine public and private use through different profiles

and allow infrastructure reuse: e.g., in addition to broadband access for

customers, hotels can use the same systems for internal communications.

We expect that VoWLAN will be introduced by a number of enterprise verticals and

remain in these niche segments in the short to medium term. But slow

implementation of security solutions and the need to improve quality of voice service

will hold back a rollout of wide-scale VoWLAN enterprise services in the next one to



two years. If cost of QoS-enabled WLAN switches remains cheaper than cost of mobile

PBXs and quality is similar, there is no doubt the business case for enterprise VoWLAN

will be there.

The technology therefore needs to be revisited and re-examined in a year’s time. In

the meantime, VoWLAN providers have about three years to sort out their solutions:

Enterprise customers are nearing the end of the PBX replacement cycle (seven to 10

years), after previous replacements in the late ‘90s to avert the impact of Y2K. The

replacement market holds substantial promise, although the migration will be

gradual over the next three to five years. The main attraction for large and

medium-sized companies lies in cutting spend on PBX replacement by an estimated

50% and reducing their TCO by 35%. The reduction is possible by consolidating the

customer premises equipment (CPEs), cutting out PBX support cost, and moving

cellular traffic to their WLAN network. Digital Enhanced Cordless

Telecommunications (DECT) is another technology that offers similar benefits for

enterprise customers, and the majority of businesses will be choosing between these

two – see Exhibit 32 for technology comparison.

Exhibit 32: VoWLAN vs. DECT for Enterprise Customers

VoWLAN Solutions DECT VoIP Office Solutions

Services Large number of PBX functions, such as short number calling; access to information on different devices

Limited number of PBX functions, includes short number calling

Infrastructure Reuse of WLAN infrastructure + WLAN network controller Requires thorough RF Planning for good in-building coverage

IP PBX Good indoor coverage

Devices WLAN handsets; small number of PDAs/ smartphones with Wi-Fi Short battery life is still a problem

Wide variety of enterprise IP soft-phones — easily programmable Typically better battery life

Pros Good SME solutions for Wi-Fi voice and data

Good voice-only VoIP solution for any size of business

Cons Some voice QoS and security issues remain unresolved

Cheaper to install but not as future-proof as VoWLAN. WE expect it to be chosen by enterprises that need voice-only solution


WLAN and WiMAX: Driving Adoption of VoIP

A long list of pre-WiMAX contracts shows a lot of pent-up demand for the technology

that can deliver an alternative to a copper last-mile solution. Fixed and mobile

WiMAX/WiBRO technologies will be supporting VoIP, which means that inevitably

VoIP will make it to homes and SMEs. Wi-Fi will be the most logical and natural



extension of WiMAX, and is likely to take root at home and in small business offices.

Quality of voice calls and cost of this combination of technologies, as well as quick

availability of integrated chipsets, will determine the demand for the services. Initial

requests for WiMAX come from the enterprises that are lacking other means for

broadband connectivity, but if adding voice will be simple, it is inevitably going to be

introduced.

We expect Europe to take the lead in VoWLAN implementation. Why Europe? First

of all, the region is leading in FMC, of which VoWLAN is an integral part. Second,

European wireline carriers are under pressure to offer new solutions. Attempts to

penetrate the last mile via local loop unbundling were met with much resistance;

WLAN provides another avenue to the end-user. The first European trials are ongoing

at hotels (e.g., Park Plaza in Cardiff, UK), train carriers in Sweden and the UK, as well

as the French subway, where in addition to voice, WLAN systems will handle video

surveillance.

2.6 Carrier Strategy: Choosing the Right Path

We expect that several WLAN strategies will emerge in response to the above

considerations (see Exhibit 33):

• WISPs are most likely to remain midway between nomadic and

subscription-based services.

• Network operators with existing networks of WLAN hotspots will split into

two camps:

o The majority of independent mobile providers will explore the bundled

mobile data models.

o Mobile carriers that are closely integrated with their fixed arms — as well

as the smallest mobile carriers that are looking for ways to differentiate

their services and capture new audiences — are the most likely to move

into UMA.



Exhibit 33: Carrier WLAN Strategies

Nomadic prepaid WLAN Bundled WLAN/mobile FMC

BU

SIN

ES

SC

ON

SU

ME

RNTT, KT Nespot

Orange, O2,

T-Mobile, Telia Sonera,

Cingular

BT Fusion

KT OnePhone

WISPs: Boingo, Wayport, Cloud

BT Openzone, France Telecom,

TeliaSonera, Cegetel, other fixed/mobile

and alternative carriers

France Telecom

HomeZone

Nomadic prepaid WLAN Bundled WLAN/mobile FMC

BU

SIN

ES

SC

ON

SU

ME

RNTT, KT Nespot

Orange, O2,

T-Mobile, Telia Sonera,

Cingular

BT Fusion

KT OnePhone

WISPs: Boingo, Wayport, Cloud

BT Openzone, France Telecom,

TeliaSonera, Cegetel, other fixed/mobile

and alternative carriers

France Telecom

HomeZone




Section 3: Impact of Cellular-WLAN Convergence

SUMMARY

This section answers a key question:

• What will be the impact of WLAN-cellular convergence — data and voice —

on revenue, adoption and traffic?

3.1 Impact of Cellular-WLAN Convergence: Market Perspective

WLAN is certain to retain its role as a supporting technology in delivering fast-speed

mobile and fixed data services. We assess the implications of cellular-WLAN

convergence in the mobile market, forecasting WLAN service and broadband

adoption, WLAN’s impact on revenue, traffic and industry structure.

3.1.1 WLAN Mobile Data Adoption and Revenue Implications: Small Contribution

• High usage, low share of paid subscribers: WLAN usage has been slowly

growing, but it is hardly a serious money-making service at this time. Things

are likely to change, but in its traditional role of support technology, WLAN is

unlikely to become a big revenue generator. Thirty percent of all Internet users

are forecast to use WLAN in 2010. This will add up to more than 400m users

worldwide — 3.5 times more than in 2005. The majority of these users,

however, will remain unpaid, as adoption of paid WLAN services will be

limited to such segments as business subscribers and student campus users.

• It is the bundling of WLAN and cellular that will improve its

revenue-generating potential: From about 155m remote data access

subscribers forecast for 2010, 50% (or 78m) will access mobile data through

WLAN. While uptake of WLAN services can have significant impact on

incremental subscriber ARPU, its overall contribution toward total mobile

data revenue will hardly be large. An estimated US$4.2bn will be generated

globally from mobile data remote access services in 2005, and this revenue

will grow to US$12.2bn in 2010. At least half of this total is likely to be



attributed to WLAN — about US$6bn in total, a mere 3.2% share of US$187bn

in total mobile data revenue at that time.

Exhibit 34: Paid WLAN Subscriber Forecast, 2004-2010

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008 2009 2010

Mil

lio

n s

ub

scri

ber

s (m

n)

WLAN paid subs Remote data access users


• Similarly, using WLAN as the last-mile technology will have a small,

incremental, positive impact on broadband penetration. At this time, the

number of households using WLAN technology for high-speed Internet access

is limited to several hundred thousand users in selected markets, including

the US, Russia and the Czech Republic. Plans to offer WiMAX and WiMESH

services will certainly change that, as WLAN will become a natural extension

of WiMAX delivering broadband connectivity for SMEs and consumers.

• The attraction of last mile WLAN/WiMAX services initially will be limited to

areas not covered by ADSL or cable. It means that the most significant

impact will be seen in emerging markets. By 2008, we project 2.2m WiMAX

subscribers globally — representing 55% of FWB users. In 2010, WiMAX is

expected to account for 84% of the FWB subscriber base with 5.3m users, 1.3%

of global broadband lines (see Exhibit 35 for 802.16d WiMAX forecast). Some

of these subscribers will be served by mobile carriers. These forecasts do not

account for WiMESH network connections, which are envisioned to connect

low-income urban population segments. There is, of course, an important

caveat to this scenario: Namely, mass-market WLAN-enabled equipment

availability needs to be resolved.



Exhibit 35: Fixed WiMAX (802.16d) Adoption Forecast, 2005-2010

-

1.0

2.0

3.0

4.0

5.0

6.0

2005 2006 2007 2008 2009 2010

To

tal l

ines

(mn

)

WiMAX (802.16d) lines


3.1.2 UMA Revenue Potential and Churn Implications

• As announcements of UMA and consumer VoWLAN trials keep coming in, we

have revised upward our previous forecasts for the adoption of these

technologies.

• We base our forecasts of UMA households on the assumption that between 6

percent and 15 percent of all broadband households will be using UMA or

other type of UMA-compatible technology by 2010 – the total of 40.5 million

homes globally (see Exhibit 36). Europe will show the highest adoption levels

of 15 percent by 2010, AME and LA will have the lowest adoption levels of 6

percent and 7 percent respectively. Ten percent of Asia and North American

households will be using UMA in 5 years’ time. This assumption is based on

the announced adoption plans of several providers (e.g. Deutsche Telekom,

which plans to have 3 million dual-phone users by 2010, about 15% of total

broadband households forecast for Germany at that time), as well as plans of

such large providers as NTT, France Telecom and China Netcom to offer the

service.

• We assume that there will be on average 2.9 subscribers per household, with

the total of 121.6m UMA subscribers forecast for 2010. We assume that average

fixed spend per household will remain the same, while average mobile spend

per household will decline by 30%. The annual consumer revenue potential

from the technology will stand as high as US$26.6bn in 2010 — part of it to be

captured by mobile carriers (see Exhibit 37). Unlike mobile data, however,

some of this revenue will simply replace circuit-switched mobile voice revenue.



With this in mind, WLAN must offer more to a carrier to present a convincing

business case. Lower churn, an important consideration in adding WLAN to

the portfolio of mobile data services, changes the business case for a mobile

provider.

Exhibit 36: UMA: Global Household Subscribers, by region, 2005-2010

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2005 2006 2007 2008 2009 2010

Ho

use

ho

lds

(mn

)

Europe NA Asia AME LA


Exhibit 37: UMA: Global Consumer Revenue by region, 2005-2010, US$bn

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2005 2006 2007 2008 2009 2010

To

tal R

even

ue

(US

$m

n)

Europe NA Asia AME LA




• Churn implications: significant, no matter how small: Adding VoWLAN can

be an attractive option when churn is taken into consideration. Most of

WLAN’s benefits will come in the form of improved customer loyalty and QoS

(see Exhibit 38).

Exhibit 38: Mobile VoWLAN: Churn Implications (US$)

No VoWLANVoWLAN

Assumptions

MOU

Indoor MOU

Outdoor MOU

ARPS/min

OPEX/min

Other costs/mo

Total margin

SACChurn/year

100

30%

70%

$0.10

$0.015

$6.00

25%

$52

30%

121

45%

55%

$0.07

$0.009

$6.00

17%

$42

20%

MOU

Indoor MOU

Outdoor MOU

ARPS/min

OPEX/min

Other costs/mo

Total margin

SACChurn/year

$16

$17

$27

$30

1

$14

$17

$25

$30

2

$13

$17

$23

$30

3

$23

-$42

($42)

$23

-$52

($52)

0

$12

$17

$7

$10

4

12%

Time

Discounted FCF

Discount rate

NPV

$11Discounted FCF

$17Average Subscriber, VoWLAN

NPV

Average Subscriber, No VoWLAN

5

No VoWLANVoWLAN

Assumptions

MOU

Indoor MOU

Outdoor MOU

ARPS/min

OPEX/min

Other costs/mo

Total margin

SACChurn/year

100

30%

70%

$0.10

$0.015

$6.00

25%

$52

30%

121

45%

55%

$0.07

$0.009

$6.00

17%

$42

20%

MOU

Indoor MOU

Outdoor MOU

ARPS/min

OPEX/min

Other costs/mo

Total margin

SACChurn/year

$16

$17

$27

$30

1

$14

$17

$25

$30

2

$13

$17

$23

$30

3

$23

-$42

($42)

$23

-$52

($52)

0

$12

$17

$7

$10

4

12%

Time

Discounted FCF

Discount rate

NPV

$11Discounted FCF

$17Average Subscriber, VoWLAN

NPV

Average Subscriber, No VoWLAN

5


3.1.3 WLAN and VoWLAN Implications for Mobile Traffic

Impact on Mobile Data Usage: WLAN vs. EV-DO

As noted by Verizon, some cannibalization of mobile data usage by WLAN is

inevitable, but its extent needn’t be large, and it will be decided by the following

factors:

• Carrier pricing strategies: Higher access prices for new 3G mobile data services

are certain to siphon some traffic to WLAN networks, especially for road

warriors. For large hotspot carriers, introduction of technology-independent

price bundles is one way to avoid such cannibalization.

• Growing coverage and availability of EV-DO/HSDPA networks.

• Ubiquity of WLAN networks and roaming agreements.



Impact on Mobile Voice: Not All Will Be Lost by Mobile

• UMA: Most traffic generated at home is not currently carried on mobile

networks. Mobile carrier losses will be balanced out by gains of competitor

market shares.

• In the densely populated urban areas, migration of voice to the fixed networks

would in fact be a blessing for cellcos, freeing some cellular network capacity.

This would allow mobile providers to offer cheap voice prices, or flat-rate

unlimited mobile voice usage, similar to fixed VoIP.

• “Free” voice will be possible. However, due to the QoS issues, it will be

interesting only to small pockets of population (e.g., students, who are

currently among major users of Skype, Yahoo Communicator and

GoogleTalk).

• VoWLAN for enterprise: Traffic lost by mobile networks is currently carried on

the office PBX systems.

3.2 Cellular-WLAN Convergence: Competitive Perspective

More competition from a new breed of service providers: Use of WLAN is most

interesting in the case of virtual service providers. Not all MVNOs will be using WLAN

to cut the cost of mobile services, but those that do will become more cost-efficient

than MVNOs today. By 2010, 15% of all North American mobile subscribers will be

served by MVNOs, with low-cost lifestyle MVNOs among major driving forces of the

adoption (see Exhibit 39).

Exhibit 39: MVNO Subscriber Share, NA and Europe

0%

2%

4%

6%

8%

10%

12%

14%

16%

2005 2006 2007 2008 2009 2010

Sh

are

of

tota

l su

bsc

rib

ers,

%

Europe North America




3.3 Integration of WLAN Technology by Tier 1 Vendors

Success of VoIP enterprise services set the stage for adding wireless functionality to the

office LAN systems — and to enterprise vendor portfolios. The first shoots of the

demand for WLAN and VoWLAN were developed by small vendors, but following

wider acceptance of WLAN at enterprise, tier 1 vendors started adding WLAN to their

portfolio of products. At the same time, Tier 1 vendors are the main suppliers of UMA

solutions, with Motorola and Ericsson among the earliest entrants and most active

players in this space (all UMA providers have partnerships with Kineto Wireless) (see

Exhibit 40).

Exhibit 40: Vendors and Their Strategic Approach to WLAN and WiMAX

WLAN/ WiMAX UMA Cisco Cisco made several forays into the WLAN

space by acquiring Linksys and Airespace. None announced

Motorola Motorola will develop its own WiMAX equipment as part of its Canapy portfolio of products.

Motorola announced trials of its UMA solution with 7 European operators and is one of the most aggressive players in UMA and seamless mobility space.

Alcatel Alcatel views WLAN as part of the convergence. In early 2004, Alcatel and Nortel signed OEM deals with WLAN access point provider Airespace and wireless handset maker SpectraLink. However, the acquisition of both by Cisco sent them looking for partnerships elsewhere and finding it in Aruba. Its portfolio includes the OmniAccess Wireless LAN product family to its range of LAN switches and IP PBXs. It also offers Mobile IP Touch wireless phones, which use 802.11b standard to operate as client devices on wireless LANs. Alcatel has an OEM arrangement with Alvarion for its 802.16d equipment and is developing its own solution for 802.16e.

Alcatel launched its UMA solution in mid-2005 and currently offers combined Mobile NGN-UMA solution.

Ericsson Ericsson joined the WiMAX Forum in 2005. Through the acquisition of Marconi, it has an OEM agreement with Airspan.

Several European telcos, e.g. TeliaSonera are trialing Ericsson’s UMA solutions. In 2005, Ericsson also signed an agreement with France Telecom to supply it with the IMS Telephony solution.

Siemens Siemens entered the WLAN space through the acquisition of Chantry. In September 2005, it also launched a WLAN IP phone. Siemens has also focused on the development of 802.16d WiMAX products.

None announced

Lucent Lucent is the main supplier of WLAN data cards. In 2002, Lucent partnered with Agere Systems, HP, iPass and Sierra Wireless to sell secure WLAN/3G solutions to enterprise. The vendor tested WLAN/3G seamless handover with T-Mobile USA .

None announced



Nokia Nokia has integrated WLAN into some of the high-end handset models and in the next year will significantly expand its Wi-Fi device portfolio. In mid-2005, Nokia partnered with Intel to develop mobile WiMAX solutions.

Nokia recently completed UMA voice and data call trials at its USA Solutions Experience Center.

Nortel In early 2004, Nortel and Alcatel signed OEM deals with WLAN access point provider Airespace and wireless handset maker SpectraLink. However, the acquisition of both by Cisco sent them looking for partnerships elsewhere and finding it in Trapeze. Nortel is working with LG to develop WiMAX equipment based on the 802.16e standard.

None announced

Avaya Integrates WLAN to add mobility to the IP platform. WLAN is used to deliver desktop functionality to mobile devices.

None announced




Section 4: Regional Analysis

4.1. WLAN in North America The US is the largest hotspot market in the world: There are more than 31,000 paid

public hotspots in the US, and hundreds of thousands more that go untracked from

home networks, office WLANs and small retailers offering free wireless Internet access

to boost foot traffic to their establishments. Business would still appear to be booming,

with wireless Internet providers typically seeing over 100% year-on-year growth in

the number of hotspots they operate.

WLAN is cheap in North America: The proliferation of cheap, even free, Internet

access has eroded the business case for some stakeholders in North America. Unless

mobile network operators (MNOs) intend to offer a nationwide Wi-Fi service with a

single point of payment, there is little means for competing with local free access.

Additionally, for network operators that have deployed 3G networks, a national

WLAN network would be in direct competition with their cellular data offerings.

In North America, the future of WLAN will revolve around indoor coverage,

multiple devices and WiMESH networks:

• North America is the world’s leading VoIP market, a position that creates

opportunities for VoWLAN. Verizon — while steadfast in its doubts about

traditional WLAN business models — sees indoor coverage as the next great

challenge for mobile carriers. In that context, the ability to integrate UMA and

offer VoIP will be critical, if only to protect traffic market share. Mobile

operators are aware that VoIP services such as Skype running on handsets over

WLANs could undermine already commoditized voice revenues. In addition,

although not a serious threat at this time, WiMESH and WiMAX delivering

metropolitan area Wi-Fi coverage are looming on the horizon. It is therefore

up to MNOs to preempt market incursion by providing devices that will hand

off voice calls from Wi-Fi to 3G, thus retaining their control over the

demarcation between the two networks.

UMA will fulfill this role, although the standard has been developed only for

GSM networks at this time.*

• The Wi-Fi case is moving beyond the laptop: With 3G providing an

*There are no major technical obstacles to developing a CDMA equivalent, but GSM was chosen to build around due to the larger global market.



alternative for the nomadic businessperson, WLAN operators have been

reassessing their business case and their addressable market. Wi-Fi chipsets are

cropping up in a whole range of consumer devices, including mobile phones,

digital cameras, portable music players and portable gaming consoles. With

this slight shift away from pure business usage, there are opportunities for a

second wave of public Wi-Fi activity. Nintendo, for example, recently

announced it had registered more than 200,000 unique accounts for its Wi-Fi

gaming service within three weeks after launch. Whether this is the start of a

new phase in the evolution of Wi-Fi or a short-lived fad remains to be seen.

• North America is leading the way with municipal networks: Commissioning

of city-wide hotspots took the US market by storm. Today, more than 35 states

have ongoing municipal wireless projects, and nearly all remaining ones are

planning to join in. Among the largest cities that commissioned Wi-Fi are

Philadelphia and San Francisco, while projects in New York, Chicago and

Boston are under consideration. EarthLink Inc and Google’s wins in

Philadelphia and San Francisco in 2005 became the most widely publicized

projects, planning to offer broadband Internet service from free to as low as

US$10 a month to low-income homes.

The approach to WLAN varies according to type of service provider (unlike other

regions, US fixed players are barely involved, accounting for 15% of the total hot

spots), and even within service provider category: In the cellular market, the

approach to Wi-Fi is split along technology lines. CDMA operators such as Sprint

Nextel and Verizon Wireless were the first to provide 3G telephony over their

CDMA2000 1XEV-DO networks, and they have been dismissive of WLAN as a mobile

broadband solution. For GSM mobile operators, the route to 3G is more complex, as

they are planning the move to HSDPA. Cingular announced the launch of its HSDPA

network in December 2005 in 16 US markets. T-Mobile is not expected to launch its

HSDPA network until late 2006 or early 2007. As both operators are in a period of

transition, they continue to offer hotspot access to their subscribers.

The WISP market is ripe for consolidation: There are a handful of Pan-American

hotspot providers with thousands of hotspots; most own just a couple hundred or less.

It is anticipated that the market will consolidate over the next couple of years, with

smaller WISPs going out of business due to cheaper or free wireless hotspots springing

up in their vicinities, or as a result of being absorbed by larger WISPs looking to

provide a more continuous footprint. For the time being, WISPs are enjoying a golden

age, with the number of paid hotspots growing by nearly 40% in 2005. Barriers to

entry remain low and with as many as 2m untapped premises offering the potential to

become Wi-Fi-enabled, there is plenty of opportunity for continued growth. There is,



however, some awareness that business models based purely around paid hotspots are

not sustainable long term and that expansion into tangential business activities are a

safety net worth having. Some WISPs such as Wayport are broadening their portfolio

of services to facilitate a whole host of connectivity solutions for clients that they

wirelessly enable. Others such as Boingo have formed strategic alliances with VoIP

players — in this case, collaborative product development with Skype.

Exhibit 41: Number of Paid Wi-Fi Hotspots, North America

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004 2005

Ho

t S

po

tsUSA Canada


Exhibit 42: North American Top Paid Hotspot Providers 2005

Boingo, 7,367, 23%

Wayport, 7,060, 22%

Other, 10,314, 33%

T-Mobile, 7,159, 22%




MVNOs are emerging as potential WLAN players: MVNOs have thus far been absent

from WLAN activity. This is likely to change in 2006, when it is expected that a

number of MVNOs including Virgin Wireless and Amp’d will be offering handsets

with Wi-Fi functionality to their subscribers. Forthcoming MVNO Helio will be using

Wi-Fi more centrally as a complement to 3G telephony. Although it will not have

products leveraging Wi-Fi and 3G convergence until late 2006, Helio plans to use

Wi-Fi to further enhance the “community” of Helio subscribers, with both

handset-to-Wi-Fi base station and P2P connectivity.

4.1.1 Cingular Wireless

Service Positioning: A Complementary, Legacy Business

Cingular Wireless is, with the recent acquisition of AT&T’s mobile business, the

largest wireless company in the US with more than 50m subscribers. Cingular is a

joint venture between BellSouth and SBC, with ownership split 40% and 60%

respectively. Annual revenues in 2004 were over US$32bn. Cingular Wireless

inherited its Wi-Fi hotspot business through the 2004 acquisition of AT&T Wireless.

The service launched in 2003 using Wayport, Concourse and other smaller WISP

partners. The network has around 4,600 hotspots throughout the US.

Exhibit 43: Cingular Data Plans

Monthly Charge Cellular Data Allowance Wi-Fi Connect

US$19.99 5Mb US$29.99 10Mb US$39.99 20Mb

US$39.99

US$49.99 50Mb US$29.99 US$79.99 Unlimited US$19.99

Source: Cingular.

Currently Cingular offers Wi-Fi only as an add-on service to “Data Connect,” its

business-oriented EDGE data service.

Cingular sees Wi-Fi as a means of limiting congestion on 3G networks in certain

high-traffic areas. Its hotspot network is a legacy business that has relatively low

overheads and substantial presence in a variety of prime real estate locations, such as

airport terminals and hotel chains. For the time being, these continue to be profitable

and relatively low-maintenance complements to Cingular’s wireless product set.

Cingular sees an ongoing case for Wi-Fi, since not all users are likely to switch to 3G

networks. The company is aware of the more diverse range of consumer devices



shipping with Wi-Fi chips embedded. Future WLAN product development is likely to

be in renting WISPs hotspots and re-branding these with the Cingular name, offering

additional advertising benefits at certain key locations.

Within the next six months, Cingular is likely to offer converged fixed-mobile

handsets. The company also is known to be actively engaged in IMS product

development along with parents SBC and BellSouth, primarily for FMC products for

use in the home. Cingular foresees problems initially with low voice quality due to

interference from other Wi-Fi connections and the lack of prioritization given to voice

packets over an IP network. Both of these issues are likely to be ironed out in the near

future with further developments of the 802.11e specification.

Cingular expects WLAN to continue to exist in high-traffic pockets, but end-users are

likely to see the benefit of paying a small premium to do away with broadband at

home and using Wi-Fi hotspot access fees to be able to use their laptop and/or handset

anywhere. Even with a monthly cost of around US$80 for 3G data access, this still

could compare favorably for an individual who is able to drop his or her home phone,

broadband Internet access and numerous ad-hoc roaming Wi-Fi fees.

4.1.2 T-Mobile

Wi-Fi Positioning: A Key Cog of the Strategy

T-Mobile USA is the North American mobile subsidiary of Deutsche Telecom AG.

T-Mobile USA currently operates two wireless communications systems; a GSM

cellular network and a wireless broadband network with 7,000+ hotspots. T-Mobile

USA had 20m subscribers as of 3Q05.

T-Mobile Hotspot was launched in 2002 with an initial rollout of 4,000 locations. This

followed the acquisition of MobileStar Network Corp., which provided the majority

of the hotspots, including exclusive rights to Wi-Fi connections in Starbucks

coffeehouses. T-Mobile has approximately a third of the market share of the pan-US

hotspot market, a figure closely matched by the two other large WISPs, Boingo and

Wayport. In certain US airports, T-Mobile also partners with Cingular Wireless to

provide WLAN access points to subscribers. Hotspots are offered in a variety of

locations, including Starbucks coffeehouses, Borders bookstores, FedEx Kinko’s Office

and Print Centers, Hyatt Hotels and in the airline club lounges of American, Delta,

United and US Airways.



Exhibit 44: Wi-Fi Bundling Strategy

Plan Rate/Price Roaming Contract Commitment Early Termination Fee

Unlimited National – Annual

US$29.99 per month Domestic and international

12 month minimum US$200

Unlimited National – Month to month

US$39.99 per month Domestic and international

Monthly, automatically renewed unless subscriber calls to cancel

None

Daypass US$9.99 n/a None None Pay As You Go US$6.00 for the first 6

minutes, then $0.10 for each additional minute

n/a None None

Wi-Fi Camera Only US$4.99 per month n/a Monthly, automatically renewed unless subscriber calls to cancel

None

Source: T-Mobile USA.

Pricing has been described by T-Mobile as “evolutionary,” moving from a business

where most users would access hotspots on a pay-as-you-go basis to a

subscription-based model that is prevalent today. Over 50% of users currently are

subscribers to a T-Mobile annual or monthly subscription plan.

Metrics published in October 2005 state that 450,000 unique paying customers used

T-Mobile hotspots globally between July and October 2005 and that over 40% of these

were existing T-Mobile subscribers. Average user visits increased from 45 minutes in

2004 to 64 minutes in 2005. Traffic volume also increased; monthly traffic grew from

10TB in December 2004 to 1.7TB in May 2005, attributable partly to increased

subscriber downloads of digital content.

Strategy: Wi-Fi for the Mass Market

With some business users likely to migrate to cellular data services over the next

couple of years, T-Mobile sees opportunities in the broader use of Wi-Fi for the

consumers. T-Mobile has become aware of a change in hotspot usage. Although it is

still predominantly business travelers who use the locations, there has been a marked

shift to a wider demographic of Wi-Fi users, reflecting a greater proliferation of

Wi-Fi-enabled laptops among all ranks of the population, as well as a larger number of

devices with Wi-Fi functionality. T-Mobile is clearly attempting to focus on the

positive aspects of being the last major US network operator to be without a 3G

network; and its Web site promotes a variety of devices touting Wi-Fi connectivity,

including digital cameras and MP3 players. Ultimately, the T-Mobile hotspot business

is expected to be absorbed as an element of a larger wireless data solution, particularly

when its HSDPA network launches sometime in 2006/2007. As with Cingular,

T-Mobile’s WLAN business may be worth retaining in some capacity due to cheap



running costs, prime real estate and associated marketing.

4.1.3 Verizon Wireless

Until the merger of Cingular with AT&T, Verizon Wireless was the largest MNO in the

US. Currently, Verizon Wireless has 49.3m customers. Verizon Wireless was the first

US MNO to move to 3G technology with the launch of its EV-DO network in 2004.

Usage has been primarily for business travelers using data cards for wireless Internet

access, but EV-DO handsets came to market in February 2005, facilitating access to V

CAST, Verizon’s consumer multimedia service over 3G. Over half of the US population

is covered by EV-DO. Sprint Nextel, the only other mobile operator in the US that

offers EV-DO, can be considered Verizon’s closest competitor in terms of service

deliverables. However, with its recently launched HSDPA network, Cingular Wireless

can be expected to be aggressively pursuing data-hungry mobile subscribers in 2006.

Data packages are still aimed at the business traveler. Current rates for an annual

subscription plan to “BroadbandAccess” with a two-year agreement cost US$60 per

month.

Strategy: No Need for Wi-Fi

While most MNOs in the US retain varying degrees of interest in public Wi-Fi, Verizon

Wireless announced in May 2005 its intent to close down its public Wi-Fi network.

The decision initially raised eyebrows, but it is now perceived as a sensible strategy.

• The most obvious reason for Verizon Wireless moving away from providing

public Wi-Fi access is that it has a fully functioning EV-DO network offering

broadband-like data speeds throughout the US. Users are paying US$60 per

month to access data over this network. Wi-Fi provides an alternative channel

for this data to come through at greatly cheaper rates (and often free).

Nothing stops Verizon subscribers from continuing to access other Wi-Fi

networks. However, Verizon has decided to remove its own Wi-Fi business

from the competitive landscape to prevent the business from competing with

its 3G services.

• While the monthly connection cost for access to Verizon’s EV-DO network is

double that of a monthly subscription to T-Mobile’s collection of 7,000+ Wi-Fi

hotspots in the US, Verizon subscribers may well still be financially better off.

T-Mobile’s hotspots are indeed prolific, but they are not ubiquitous. Verizon’s

network very nearly will be. Business users who happen to be in locations

where T-Mobile hotspots are not immediately available are likely to hop on to



whatever the nearest equivalent is and expense the cost of this “ad-hoc”

access at around US$10 a day. Should this happen more than three times per

month, then their monthly WLAN expenses are going to be greater than what

they would have spent using Verizon’s 3G network.

• Verizon Wireless is intending to evolve its network to match user

requirements. In August 2005, Verizon performed the first live over-the-air

call using 1X EV-DO Revision A. This upgrade of EV-DO will increase

download speeds to around 1.8Mbps. The service is planned for widespread

launch in 2006/2007, around the time T-Mobile is planning to move to

HSDPA.

• Verizon Wireless has opted to move away from its public Wi-Fi business, but

has not closed the door on other business opportunities based around WLAN

technology. Verizon sees an upside for Wi-Fi/cellular convergence in the

enterprise and in the home. As with other MNOs in the US, Verizon Wireless

is expected to be offering dual-mode Wi-Fi/3G handsets in 2006. Verizon is

also anticipated to be investigating solutions that provide better in-building

coverage; WLAN technologies remain the most obvious candidate for the role.

4.1.4 Helio

Helio is a soon-to-be launched MVNO combining the CDMA experience of SK

Telecom with the US IP presence of Earthlink. Official launch dates are unconfirmed,

but likely to be 2Q06. The venture is funded with US$440m of investor capital,

US$220m of which is from SK Telecom.

Wi-Fi Strategy

Wi-Fi is expected to be an integral part of building the Helio community, and there

are plans to allow not just communication between handsets and Wi-Fi access points,

but also between handset and handset to facilitate interactivity between Helio

subscribers. Wi-Fi partners for Helio are not available at this time. Helio will be

distributing via company-owned stores, branded Helio stores, select national retail

chains, select agents and the Internet.



4.1.5 Boingo

Service Positioning: Wi-Fi at the Core

Boingo is the largest WiFi network aggregator worldwide with more than 20,000

locations under contract. In the US, Boingo operates almost 7,400 of its own

locations. Boingo describe itself as an aggregation services company that aggregates

fragmented hotspots and provides roaming client software, settlement, mediation,

clearing and support. Boingo encourages individual Wi-Fi providers and smaller

WISPs to integrate with its network and offers “WISP-in-a-box” and

“hotspot-in-a-box” products as franchises of the Boingo brand to such operators.

Revenues are generated for franchisees on a per-connection basis.

As an end-user, connecting to Boingo’s network can be done on an ad-hoc basis at

US$9.95 for a 24-hour period or by subscription for US$21.95 per month. Reduced

monthly rates are also available for businesses wanting to provide connectivity to a

number of users with discounts for groups of 10, 20 and more than 40 users joining

together. There are also “buckets” of online minutes that can be purchased for

companies that have more sporadic or varied travel. Buckets are purchased in bundles

of 70, 200 and 450 connection days in increments of US$200, US$500 and US$1,000

respectively.

Boingo supports 2.5G wireless WAN technologies (GPRS, CDMA 1XRTT, and iDEN) in

its sniffer software, allowing service providers to integrate wireless data services with

Wi-Fi access through a single user interface. The Boingo software includes network

preference and auto-connection logic that allows subscribers to designate automatic

primary and backup networks. Boingo’s telephony partners include Earthlink,

Fiberlink, BT Infonet, MCI, Telecom Italia, Sprint Nextel and Skype.

Service Differentiators: Towards VoIP

Boingo announced in July 2005 the beginning of joint business ventures with Skype.

The first of these are “SkypeZones,” providing cheap access to Boingo hotspots purely

for Skype calls. While this is a shot across the bows for mobile operators, they need

not worry yet. Skype is a P2P service and calls are free from one Skype user to another.

Users can also sign up for “Skype-Out,” where, for a prepaid flat fee, calls can be made

to landline and cellular handsets. However, no incoming calls are possible from fixed

or mobile telephones, severely restricting the capabilities of the service. Boingo is due

to announce a “significant” SIP/IMS venture in January 2006.



4.1.6 Wayport

Service Positioning: Wholesale WLAN

Wayport provides its users access to 11,000 hotspots worldwide, with 7,060 of these in

the US. While Wayport has a large number of hotspots in its name, it also provides

hotspot deployment services and management of IP connectivity for a variety of

organizations, including McDonald’s, IHOP, Marriott Hotels and Hertz Car Rental. In

these instances, Wayport facilitates connectivity, but re-brands the hotspot to its

client’s requirements, allowing the client to capitalize on marketing. A recent

development for Wayport has been the provision of free hotspots for Nintendo DS

gamers in more than 6,000 North American McDonald’s restaurants. The Nintendo

DS console can connect to other Nintendo DS consoles using an integrated Wi-Fi chip

or to multiple players through a hub (in this case, the McDonald’s restaurant). Since it

is likely that McDonald’s access points are somewhat underutilized by business

travelers, this is a smart way to reuse the network for a more appropriate clientele.

Exhibit 45: Wayport Service Pricing

Plan Price Contract Commitment

Single Access Hotel US$9.95 None Single Access Airport US$6.95 None 3 Prepaid Connections US$25.00 None 8 Prepaid Connections US$50.00 None 20 Prepaid Connections US$79.99 None Annual Subscription US$29.99 per month 1 year Month to Month Subscription US$49.99 per month None

Source: Wayport.

Service Differentiators: Managing Connectivity

In addition to hotspot services, Wayport’s additional business lies in the management

of connectivity to and from establishments and monitoring of bandwidth utilization.

Wayport’s CyberCenter Express is a turnkey public space PC solution to facilitate the

Wi-Fi enablement of locations. Wayport manages the costs and services associated

with installation, support and remote management of the system. Revenues are

generated on a per-connection basis. One area of business growth has been in the

deployment of IP-enabled point-of-sale (POS) terminals. Retailers that traditionally

have to run a separate telephone line to each POS terminal can now connect all

through a single Internet connection with considerable savings.

Going forward, Wayport sees a future for WLAN in supporting a number of new

devices coming to market with Wi-Fi connectivity. Additionally, it expects that the



affordable nature of Wi-Fi connectivity will keep WLAN networks in place, even if

revenues for airtime fall to near zero. The diversification of its business interests

indicates that Wayport is preparing for changes in the WLAN business model.

4.2 Regional Analysis: WLAN in Asia Pacific

Wi-Fi deployment in Asia Pacific is driven by several business factors: high mobile and

broadband penetration in the developed Asian markets (see Exhibit 46), high

consumer purchasing power for convergence devices, financial soundness, and good

access to the operators’ capital markets. More importantly, however, WLAN

development is high on the national agendas for the governments in Japan, Korea,

Taiwan, and China (homes of major device and equipment manufacturers and

chip-set designers). The state support for WLAN will have positive growth

implications for WLAN services, but will also help Asian manufacturers establish a

stronger presence in the future WLAN infrastructure development, similar to that of

mobile device manufacturers.

Exhibit 46: Developed Asia Pacific Markets: Broadband and Mobile Data Penetration in 2005

0%10%20%30%40%50%60%70%80%90%

100%

Korea

Hong Kong

Taiwan

Japan

Singapore

Australia

New Z

ealandB

road

ban

d a

nd

Mo

bil

e D

ata

Pen

etra

tio

n, %

po

p

Broadband Connections Mobile Data Users

Source: Pyramid Research Fixed Communications forecasts, 4Q05.

• Asia Pacific accounts for the second largest number of Wi-Fi hotspots in the

world. At YE2005, these hotspots reached 34,700, thanks to Japan and Korea.

By mid-2005, the Japanese and Korean markets had 19,400 hotspots between

them. In Japan, public WLAN is undergoing a period of growth, in Korea, it

has stagnated as operators’ focus has switched to WiBro and mobile



broadcasting. The share of Asian hotspots in the global total will decline to

about 26 percent by 2009, as WLAN rollouts in Europe and Latin America pick

up speed.

• Asia’s Wi-Fi market development is split along the economic development

lines. High mobile data and broadband penetration have been conducive to

WLAN adoption in such markets as Japan, Korea, Singapore, and Australia,

where ownership of laptops and PDAs is also high (20% households in Japan

and over 50% households in Taiwan have laptops). On the other hand, in

developing Asian countries such as India, Indonesia, Malaysia, Thailand, and

the Philippines, public Wi-Fi hotspots will be limited to high-end hotels,

hospitals, conference centers, and campuses. However, operators and

vendors in these markets will utilize WLAN and WiMAX as a cost-effective

“last-mile” solution for suburban and rural areas.

• Governmental support of local vendors and technologies will play a key

role in Wi-Fi development. Governments play a key role in the development

of various technologies in such markets as Japan, Korea, Taiwan, and China,

which encourages the adoption of new technologies. This allows their

domestic manufacturers, chipset designers, and application developers to

establish competence, test ideas, and eventually ship their products and

services overseas. Similarly, government’s agenda drives the rollout of WLAN

networks and services (e.g., Taiwan’s M-Taiwan Plan, which aims to turn

Taipei--its capital city--into the world’s largest public Wi-Fi-network covered

city).

• Mobile-centric AP internet access will lead to Wi-Fi use on handheld devices.

Unlike the PC-centric United States, internet access in the key AP

markets--Japan and Korea--is mobile-centric: 57% of all mobile subscribers in

Japan, for example, check their email on mobile phones. This has important

implications for Wi-Fi usage, which we expect to pick up when a large number

of Wi-Fi-enabled devices are available on the market. In both Japan and Korea,

WLAN-enabled handsets have been launched by NTT and KT, but the

mass-market production is likely to originate in China, where the Broadband

Wireless Industry Alliance was launched in August 2005. Including

UTStarcom, CEC Cellon Wireless and Marvell, the alliance aims to develop

and provide a full portfolio of broadband wireless products, and might

become an important step toward producing mass Wi-Fi devices.



• Wi-Fi Access remains expensive in Australia and New Zealand, but prices

have come down in other markets: Asia’s prepaid Wi-Fi prices are some of the

lowest in the world, with hourly charges between US$1.4 and US$3 in China,

Taiwan and South Korea (see Exhibit 47).

Exhibit 47: Selected Asia Pacific Wi-Fi Prices

Carrier Country Cost of 1 hour of access Cost of 24-hour access

NTT DoCoMo M-Zone

Japan Not offered US$5.52 — DoCoMo offers daily subscription plans to its mobile users, billed on a monthly basis

KT Netspot South Korea US$2.9 (3,000 won)/hr. US$11.7 (13,200 won)

Chunghwa Telecom

Taiwan US$1.8/hr. n/a

China Mobile China US$1.4/hr. n/a Telstra Australia US$9.16/hr. n/a Telecom New Zealand

New Zealand US$10.5/hr. n/a

Source: Service Providers, Pyramid Research.

• VoIP growth is strong in some AP markets, which makes the future of

VoWLAN uncertain. Not all AP markets have fully explored VoIP

opportunities. In China, for example, China Telecom has been clamping up

on smaller IP providers. On the flipside, Japan, Taiwan, and Korea will become

major VoIP markets: In 2004, 10 percent of all Japanese households already

used VoIP.

• Voice over WLAN for businesses has been introduced in Japan, launch of

consumer Wi-Fi – cellular services is next. Both Japan’s NTT and Korea’s KT

place introduction of home WLAN-cellular services next on their services

roadmap. Both have developed in house solutions that allow seamless

mobility in the effort to protect their subscriber and traffic losses to mobile

competition. At the same, China Netcom also announced plans to offer

dual-mode handsets for voice. We forecast that over 18 million households

will be using Wi-Fi for voice in 2010, 10% of all broadband households at that

time.



4.2.1. Telstra Australia: The Fastest-growing Wi-Fi Provider in 2005

Incumbent operator Telstra is Australia’s leading wireless hotspot operator by a big

margin, with over 1,000 hotspots at this time. At YE2002, Telstra bought the assets of

SkyNetGlobal (a pioneer public WLAN operator in Australia) , and since then has been

aggressive in deploying hotspots. In the first three quarters of 2005, its number of

hotspots more than doubled, exceeding 1,000. Telstra has installed Wi-Fi at Starbucks,

McDonalds, and Qantas lounges all across Australia.

Wi-Fi Strategy: Supporting Networks and Services Convergence

Telstra’s Wi-Fi strategy serves two purposes: Wi-Fi is used to reduce CAPEX as Telstra

undergoes the integration of its GSM and CDMA cellular networks, and at the same

time, Wi-Fi–cellular and Wi-Fi-DSL bundles augment its cellular and broadband

revenue. This is part of Telstra’s efforts to achieve its “One Factory” vision, which aims

to set up an IP platform for rapid and ubiquitous delivery of integrated applications

and services, offer consistent customer experience across multiple devices and

networks, reduce the number of platforms by 65 percent in five years time, and bring

down the unit cost.

Service Positioning: Outdoor Wi-Fi and business bundles

• WLAN-Cellular bundles for business users. In addition to the nomadic

WLAN access, in 2004, Telstra launched a bundled WLAN/CDMA 1x/EV-DO

Mobile Broadband service for business users, which allows customers to

connect to any of the networks, with both time- and volume-based tariff

plans (see Exhibit 48 for additional pricing information). Heavy mobile data

users in Sydney and Melbourne have been the main target of the service, and

Telstra Mobile Broadband gained about 7,000 customers in the first 3 months

since the launch, with reported monthly subscriber growth rates at 50

percent.

• Payphones and outdoor Wi-Fi in the central business districts are Telstra’s

next moves. In line with Telstra’s group-wide initiatives to avoid duplication

of investments, it aims to extend its WLAN service to provide street-level

outdoor Wi-Fi services across the central business districts in Sydney and

Melbourne. Telstra is leveraging its existing GSM infrastructure to provide

low- cost blanket Wi-Fi coverage to supplement its EvDO network. The rollout

follows on the heels of a six-month trial involving delivery of wireless

broadband services via the pay telephone network.



Exhibit 48: Telstra Wi-Fi Pricing

Service Pricing Telstra Wireless Hotspot 1 hour: US$10.13 BigPond broadband service Subscribers care charged a minimum of US$3.62 per session, which

includes the first 15 minutes of use. After the first 15 minutes, a charge of US$0.14 per minute applies.

Telstra Mobile Broadband Telstra offers three packages: - Pay as You Go: For infrequent users. - Data Packs with per-Kb charging: For occasional users. Add-on Wi-Fi charges apply to Data Pack subscribers. Pricing plans start at US$4 per month for 1MB of included data, up to US$108 for 1GB of included data. - PC Packs with time-based charging: For heavy users. PC Pack subscribers are entitled to a specified number of hours at hotspots, depending on their tariff packages. Pricing starts at US$21 per month for 10 hours of access, up to US$108 for 100 hours of access.

Source: Telstra, Pyramid Research.

Telstra’s competition takes on WiMAX, with WLAN extension

Currently, Telstra is the main investor in WLAN business in Australia. As nomadic

Wi-Fi showed little revenue upside, over the past two years, two other large hotspot

providers--mobile carrier Optus and WISP Azure Wireless--suspended investments

into their networks. Going forward, WLAN is likely to receive a boost from bundling

with WiMAX and other broadband wireless technologies. While Telstra itself remains

a WiMAX-sceptic, a host of other providers, including Unwired and Austar, are

moving ahead with WiMAX plans. These two providers reached a deal in July 2005 to

share the WiMax spectrum and expect to have their networks up and running until

sometime in 2006. In Australia, there are also a number of portable broadband

wireless access systems which have gone live in 1H2005 from companies such as

ArrayComm, Navini, and IPWireless. For all of them, WLAN might become a local

area extension of fixed broadband wireless connections.

4.2.2. China: Low Broadband and Wi-Fi Device Numbers Inhibit Growth

Despite the strong ambitions exhibited by the Chinese government in its march into

4G along with Japan and Korea, the Wi-Fi story in China carries a very different twist

for the following reasons:

• No WLAN plans from the government keeps WLAN in the private sector.

There is a tremendous disparity between urban and rural areas in the degree of

telecoms service development, and rural areas are greatly missing access to

telecom infrastructure. While this could potentially lead to the WLAN rollout

for local access purposes (as for example, is planned in India), at this time



WLAN is not part of the Chinese government’s plan. Instead, its mobile

broadband strategy is focused on developing 3G and TD-SCDMA services.

Therefore, all of the WLAN growth has taken place in the private sector.

• Internet development might follow the mobile handset-centric route of

Japan, but only a few Wi-Fi devices are currently available. It is still unclear

whether the internet in China is going to follow the computer-centric route,

such as in the United States and Europe; mobile-centric route like in Japan; or

a hybrid, as in Korea. For now, the penetration of laptops in China is very low,

and we see some signs that the internet culture may be developing similar to

that of Japan. According to Pyramid Research’s mobile data survey conducted

in Beijing, Shanghai, and Guangzhou, 60 percent of mobile subscribers in

China use their cell phones for functions other than making voice calls and

31 percent of subscribers get the latest news on their handset. However,

although China has witnessed strong growth in the mobile penetration, most

of it was triggered by the popularity of low-end handsets, and the

development of low-end Wi-Fi portable devices is not yet in sight, which does

not bode well for short-term WLAN growth.

• Establishment of Broadband Wireless Industry Alliance might lead to the

breakthrough in Wi-Fi device availability. In August 2005, China Netcom

took the initiative to establish Broadband Wireless Industry Alliance, which

brought together leading domestic and foreign equipment manufacturers,

terminal vendors, service integrators, and content providers. The aim of the

Alliance, which currently includes such vendors as UTStarcom, CEC Cellon

Wireless, and Marvell, is to develop a full portfolio of broadband wireless

products, first and foremost WLAN.

• China Mobile takes the lead on bundled Wi-Fi, but usage is low. China

Mobile is the largest provider, with 1,800 hotspots around the country,

offering WLAN access in the prime hotspots of hotels, conference centers, and

cafes. However, as the demand for high-speed grows, China Mobile responded

by offering a bundled GPRS/WLAN service. So far, the price for the service is

extremely high, and according to a report issued by China Mobile in early

2005, 90 percent of the usage on its Wi-Fi hotspots was generated by its own

employees. China Netcom also has plans for Wi-Fi: using Atheros-enabled

wireless access points and routers, China Unicom plans to support VoWLAN

applications via dual-mode and single-mode Wi-Fi phones.



Exhibit 49: WLAN services in China

China Telecom China Netcom China Mobile Service name Tian Yi Tong Wireless Companion 17201

Launch year 2002 2002 2001

Number of hotspots

+1,000 200 1,800 (as of mid-2005)

Number of users

33,000 N/A N/A

WLAN + ADSL n/a WLAN & GPRS

Tariff n/a n/a US$1.46 per hour US$0.02 per minute

WLAN n/a n/a For bundled WLAN/GPRS service, end-users prepay US$220, which can then be used in increments of US$18.3 for 500Mb of GPRS data and 10 hours of WLAN.

Source: Operators, Pyramid Research.

4.2.3. India: WLAN for Rural Broadband

Main factors determining the development of WLAN in India are: The Indian

government’s timetable for the releases of Wi-Fi spectrum, low penetration of fixed

and mobile networks, and growth in the purchasing power of enterprises and

consumers.

• Hotspot carrier Influx will result in hotspot growth. The number of WLAN

hotspots increased tremendously in India in 2005, as such providers as Bharti,

Tata Telservices, Dishnet, Sify, MTNL, and BSNL started showing active

interest and participation in Wi-Fi. By mid-2005, there were about 500 public

hotspots in India, of which around 250-300 are estimated to be public

hotspots. About 80 percent of these were in Bangalore, the IT center of India.

Earlier in 2005, Dishnet announced plans for rolling out a 6,000 hotspot

network, with 2,000 in place by the end of 2005, but these plans have not

been achieved, to the best of our knowledge. Wi-Fi tariffs in the country,

which earlier on were among the highest in the world, fell 100 percent over

the past 12 months. For instance, Microsense's prepaid 100-hour card now

costs as little as US$22.7 (Rs 990).

• Cities drive Wi-Fi hotspot rollout today, but rural Wi-Fi will take the lead in

the future. With the booming of its offshore businesses, India may see a rapid

increase of Wi-Fi hotspots in certain cities such as Bangalore and Mumbai. At

the same time, although largest cities will see a big jump in the number of

hotspots in the next 12-18 months, we believe that it is the rural areas (which

have low teledensity) where WLAN/WiMAX will take root and increase the

internet penetration. Operators like Tata, Reliance, Bharti, MTNL, and BSNL



have begun testing over Motorola’s Canopy-based WiMax platform.

• Low PC penetration will slow down the Wi-Fi internet growth. According to

Pyramid Research’s mobile data survey conducted in India, 22.3 percent of

mobile subscribers have either a broadband or DSL connection while 22

percent still use dial-up. However, 46 percent of these subscribers had no

home internet connectivity at all--and, most importantly, the mobile

penetration in India is also as low as 6.7 percent. Even where connectivity

issues will be resolved, the addressable market will be limited by low

household penetration of PCs, laptops, and PDAs: The same survey found that

only 18.4 percent of the surveyed households have PCs, 3.4 percent have

laptops, and 1.8 percent have PDAs.

• The biggest “wild card” in India’s WLAN development is its regulatory body,

the Telecom Regulatory Authority of India. Government spectrum policy

hindered Wi-Fi growth in India due to the late deregulation of spectrum for

802.11g standard. In August 2004, the Wireless Planning and Coordination

Wing of India’s Department of Telecommunications opened the 2.40-2.48

GHz band for commercial use, permitting 802.11g to be used for certain

applications. Since then, companies no longer need to obtain a license for the

indoor use of compliant equipment. However, the vendors are still unhappy

about the low permitted power levels of Wi-Fi equipment. The unlicensed 2.4

GHz devices are restricted to 100 mn watts of radiated power output (26 dBm)

and Wi-Fi equipped organizations must deploy tools to restrict signals from

leaking beyond their buildings or premises. Also, hotspots in public areas still

need licenses from the Wireless Planning and Coordination Wing.

4.2.4. Japan: MVNOs and 3G Entrants to Drive Future Wi-Fi Rollouts

Japan is the second biggest WLAN market in Asia. Nomadic WLAN has had limited

success in Japan until now, but demand is now ripe for low-cost voice connectivity,

i.e., VoIP on WLAN. On the supply side, the Japanese market is set to go through a

period of mergers. As all largest fixed and mobile carriers have now entered WLAN

business, little room remains for standalone network aggregators, and several smaller

networks--among which are M Flet's, Wireless LAN Club, Mobile Point, Freespot, JCI,

Miako Net, BizPortal, and numerous others--are the likely targets for acquisitions.

Meanwhile, the disruptive effects of WLAN will give innovative MVNOs sufficient

space to survive and thrive, while incumbents will aim to use Wi-Fi bundles in their

fixed-mobile network as a defensive measure and a means to embellish corporate

mobile data offers.



• Japan is a mobile device-centric and postpaid market, which has influenced

WLAN carriers to move sooner than later towards Wi-Fi bundling. Laptops

penetration if high in Japan, but its internet culture has developed toward

heavy use of e-mail and portal services on mobile devices. Just as importantly,

the Japanese mobile market is 97 percent postpaid. So while in the United

States the hotspot rollout has been primarily to serve laptop-toting corporate

road warriors with a higher propensity to pay for on-the-go connectivity, in

Japan, prepaid Wi-Fi usage has been quite low. Those who require mobile data

connectivity have been well serviced by PHS, PDC, cdma1X, and WCDMA

networks. The nomadic WLAN business model quickly evolved to bundled

services. The real take-up of Wi-Fi usage in Japan will surely happen when the

Wi-Fi-enabled and Wi-Fi-embedded mobile handsets become popular.

• MVNOs and 3G new entrants will be driving Wi-Fi adoption for

access-agnostic network connectivity in Japan. The disruptive effects of

WLAN, combined with an expected influx of 3G capacity from Vodafone and

new entrants, will create a niche space for innovative MVNOs in the mobile

data service segments in Japan, which are able to “mix and match” excess

mobile capacity on existing and emerging technologies, including PHS,

WLAN, WCDMA, and TD-CDMA. Japan Communications Inc., a leading

MVNO, is already thriving by leveraging the existing PHS network and its

own WLAN network at hotspots. 3G new entrants in Japan, particularly

eAccess and IP Mobile, see wholesale MVNO offerings as a key element in

their business plan, which would allow them to maximize the usage of their

network capacity and compete against incumbents NTT DoCoMo and KDDI.

eAccess and IP Mobile however, plan to focus only on mobile data. Softbank is

also reportedly interested in an MVNO model and is likely to integrate WLAN

and DSL networks to provide VoIP services.

• VoWi-Fi is the emerging application in Japan. Although internet access will

remain an important application, we expect to see the growing importance of

VoIP on WLAN in Japan, as Japan ranks number one in terms of VoIP

popularity and usage. So far, MVNOs and new mobile entrants have expressed

little or no interest in providing voice services, but as VoWLAN technology

matures, we expect that VoIP will be the battlefield between fixed and mobile

providers.

• Both the enterprise market (the defending ground for cellular incumbents)

and the consumer market (the attacking ground for cellular greenfield

operators) will be the targeted with bundled VoIP service over Wi-Fi. The

economics of VoIP show that the service will not be as affordable as WLAN



data connectivity: VoIP providers will likely be obliged to pay access fees for

using the broadband network, interconnection fees, USO charges, and

provide E911 services similar to a fixed line operator. Given these additional

costs, VoWLAN service is likely to be most competitive when bundled with

broadband access, and we expect that VoWLAN will gain ground in a similar

fashion as VoIP-over- broadband. This means an initial offering of the service

to young and urban professionals as well as business users. As soon as VoIP

over Wi-Fi gains enough subscribers and scale to make VoIP peering possible,

the market will take off.

NTT DoCoMo: WLAN as part of the path to 4G

NTT DoCoMo launched its Mzone WLAN service in July 2002, and had about 500 hot

spots in the end of 2005. The Mzone service caters to business users and is currently

laptop-based. The operator’s WLAN strategy is part of its 4G master plan, envisioning

multiple networks to form the “Interconnected World.” As with many other services

and technologies, DoCoMo follows its own path in developing future solutions, going

after full-mobility based on a hybrid OFDM solution. NTT DoCoMo is believed to be

looking into licensing its 4G system for Release 6 of UMTS and compete directly with

802.16e, which is the mobile WiMAX standard.

Strategy: Protect cellular revenue and lock in voice usage

• NTT DoCoMo uses WLAN services first and foremost to protect its cellular

revenues, which have come under increasing pressure from KDDI and a host

of new mobile data entrants. The carrier, whose average ARPS continues

declining as voice ARPS decrease is outweighing the growth of mobile data (in

2005, average ARPS dropped to US$65.6 from US$69.75 a year earlier), is

looking to complement and enhance its cellular services, as it is still reluctant

to introduce flat-rate tariff packages. The two ways to achieve these goals are

by controlling the specifications of subsidized handsets so that a subscriber

cannot bypass its cellular network and by adopting voice tariff strategies that

would reduce its subscribers’ interest in competitive Wi-Fi services. DoCoMo

seems to be more keen on the former option, since the ubiquity of the Wi-Fi

networks has yet to reach maturity.

WLAN service positioning: WLAN--cellular bundle for enterprise

• Most progress has been made offering WLAN for enterprise: NTT DoCoMo

is currently focusing on the enterprise market for its Wi-Fi/Cellular solutions

in order to lock in revenue from business users, largely because it is easier to



implement the controls over handsets and systems as well as to establish

campus or workplace networks. In November 2004, NTT DoCoMo launched

the world’s first dual 3G/WLAN handset--the N900iL--which runs on both

FOMA and WLAN networks.

• The N900iL, made by NEC, was specifically designed to support the new

PASSAGE DUPLE™ system that was developed by DoCoMo to integrate the

two-network operation. Under the PASSAGE DUPLE system, the N900iL may

be used as a standard FOMA handset, as well as an on-site VoIP phone with SIP

(session initiation protocol) control connecting to an enterprise's internal

WLAN network. The N900iL handsets enable free calls and instant messaging

over 802.11b WLANs as part of corporate intranets, and standard cellular calls

(at regular rates) on DoCoMo's WCDMA network. The handset is sold as a

packaged service which includes servers and related equipment and is

designed for corporate use with a hefty price tag of about US$460-550

(¥50,000-¥60,000). These handsets are only able to connect to the dedicated

systems set up by DoCoMo, but the carrier is looking into the possibility of

developing dual WLAN/W-CDMA mobile phones that could connect to

public hotspots. Recently, Motorola launched its FOMA M1000 Wi-Fi

integrated WCDMA and GSM/GPRS dual-mode smartphone, developed

jointly with NTT DoCoMo. The device, which the vendor claims is a world’s

first, delivers full internet browsing capabilities, as well as voice and video

communications.

• The recent success stories in NTT DoCoMo’s efforts in the enterprise market

are Osaka Gas and Itoki (an office and furniture supply company). In both

cases, NTT DoCoMo’s cellular/Wi-Fi solutions support converged voice and

data services over WLAN and FOMA in multiple locations throughout Japan.

Their employees can have one-number access, with voice calls running over

the corporate wireless LAN indoors, and handing off to NTT DoCoMo's

cellular service when roaming outdoors. When used in FOMA mode, the

phone can tunnel through firewalls to access enterprise applications using

VPN (virtual private network) technology.

• Until the threat from Softbank and other new entrants becomes imminent,

NTT DoCoMo is likely to hold off offering dual mode WLAN/WCDMA

services to consumers, but it is already preparing for that day to come and is

trialing VoWLAN consumer solutions. The best way for NTT DoCoMo tackle

the CAPEX difference between cellular voice tariffs and VoIP is to offer the

VoIP service without the guarantee of quality of service.



NTT: Integrating the largest WLAN hotspot networks in Japan

Three major NTT entities are involved in WLAN rollouts: NTT FLETS Spot (1,600

hotspots in mid-2005), NTT East (200 hotspots in mid-2005), and NTT Comms (800

hotspots in mid-2005). The three companies have so far followed different paths for

WLAN services, but in October 2005, they started creating a single Wi-Fi

infrastructure from a previously disconnected network of Wi-Fi hotspots. They have

now integrated 1,000 sites and plan to jointly build a total of 10,000 sites.

NTT is keen to offer VoIP on hotspots together with DoCoMo, but the restrictions on

fixed and mobile service bundling hold both carriers back and keep them on separate

paths to convergence. No seamless mobility is available right now, although one

device is used for both mobile and Wi-Fi. Last year, Singapore’s Intertouch was

acquired by NTT, and now NTT is using Inter-touch’s position in the hospitality

industry to reach more clients.

• NTT Communications: Integrating Wi-Fi with Wireline. NTT

Communications uses WLAN to enhance its services in the fixed line markets,

and it has been the most aggressive WLAN hotspot installer in Japan. It had

nearly 1,600 hotspots at end of 2Q2005, planning to move into the

metropolitan WLAN arena next, after it signed a deal in March with the US

equipment supplier Tropos Networks. NTT Communications focuses on an

integrated strategy that bundles hotspot access with DSL.

• NTT Broadband: Rolling WLAN on the trains. In a partnership with Intel,

NTT Broadband’s most recent project involves trial deployment of WLAN on

the Tsukuba Express Train, owned by the Metropolitan Intercity Railway.

Softbank and Japan Telecom: Plans for WLAN-Cellular bundling and voice

Softbank currently owns over 1,200 hotspots in Japan, and is the third- largest WLAN

real estate owner after NTT West and Comms. In addition to integrating its WLAN

networks with that of Japan Telecom (which Softbank acquired in 2004), Yahoo! BB is

stepping up the pace of hotspot installation in the same types of locations it has

favored so far-- McDonalds, Starbucks, and other similar fast food restaurant and

coffee shop chains.

• From nomadic WLAN to 3G bundling. In the short term, Yahoo! BB- branded

hotspots will become part of its ongoing marketing campaign to attract young,

urban customers who spend considerable leisure time in public places.

However, in the long run, Yahoo! BB-branded WLAN hotspots will be



integrated with Softbank’s WCDMA network to provide bundled 3G-WLAN

packages. When that happens, we expect Softbank to become the biggest

threat to the cellular revenues of mobile carriers.

• VoWLAN is the next logical step. We expect Softbank to be the first in the

market with VoIP-on-WLAN solutions by bundling them into its current

broadband and/or future cellular offerings. In contrast to NTT DoCoMo,

whose current WLAN focus is on the enterprise market, Softbank is expected

to go after the consumer segment.

Japan Communications, Inc. (JCI): WLAN with access to independent mobile data

services

JCI, founded in 1996, is Japan's first and leading MVNO (mobile virtual network

operator), providing wireless data and voice services to corporations, and wireless data

services to consumers. JCI attracts corporate clients with tailor-made solutions and

consumers with prepaid low-priced offers.

Launched in December 2001, the service, called b-mobile, has become one of JCI's

most popular products. The service comes with a high-speed Honda Electron data

card, capable of doing 128k downloads, and annual unlimited access service for

US$716 (US$60/month). The b-mobile service is a data communication package

combining the nationwide coverage offered by the PHS (Personal Handyphone

System) network with the WLAN at hotspots. JCI is currently the largest wireless LAN

hotspot service provider in Japan, as its hotspot case totaled 6,200 in the end of

November 2005.



4.2.5. KT: WLAN Lull after Initial Strong Growth

For Korea’s incumbent operator and second largest mobile carrier KT, WLAN is one of

several technologies deployed on the path to 4G services.

After the initial aggressive rollout of WLAN hotspots, their number is expected to

reach about 14,000 by YE2005. In early 2004, when the carrier had just over 12,000

hotspots, it planned to double this number in one year’s time, but KT’s attention

switched to WiBRO and it froze WLAN expansion. Nevertheless, KT’s hot spots

currently account for 12 percent of the global total, and it remains the biggest hotspot

provider in the world.

Moreover, KT is the most aggressive telco in Asia Pacific as far as pushing Wi-Fi as it is

actively seeking new revenue streams to buck the trends of declining voice revenues.

Wi-Fi is currently on the roadmap for converged home solutions (KT’s equivalent of

UMA solution OnePhone is offered via Bluetooth) and for WiBRO Portable internet

services.

Korea Telecom: The Largest Hot Spot Provider in the World

• KPI-wise, KT saw moderate success with WLAN bundles. The company

launched commercial Wi-Fi services in June 2002 to household users,

corporate customers, and college students. In the end of May 2005 KT claimed

to serve more than 430,700 subscribers nationwide, 7 percent of total

subscribers. These subscribers generate US$8.4 in incremental monthly ARPS,

but are only a drop in the bucket of KT’s mobile data revenue. Moreover, the

service is reportedly mostly used by students on college campuses.

• In response, the carrier is currently considering taking further steps in the

enterprise market: As the market moves towards more converged services and

high-speed connectivity with competitors Hanaro and Dacom (which are

both testing voice- over-wireless LAN technologies), KT is considering

fixed-mobile convergent solutions which would preempt a PBX replacement

cycle. For additional information, please see Section 2.4.4. of this Report.

• WiBRO launch will become a new driver of WLAN growth. KT Corp. and SK

Telecom are preparing to launch the WiBro service in 2006, both having spent

approximately US$116mn on spectrum licenses. After Hanaro dropped out of

the WiBro competition, due to uncertain demand for the WiBRO services,

Korea Telecom remains the most active advocate of the technology, viewing it

as a door into convergent services space and a bandwidth booster to its



cellular network, especially in high-density areas.

4.2.6. Taiwan: Using Wi-Fi to Achieve a Ubiquitously Wired Society

M-Taiwan Government Plan

The Taiwanese government has drawn a strong connection between universal

connectivity and business prosperity, and its plan to achieve ubiquitous internet

access hinges on WLAN. The result of the government’s thinking is the M-Taiwan

Plan, which aims to make Taipei-- Taiwan’s capital--the world’s largest public Wi-Fi

network-covered city. At YE2005, 20 percent of the total population in Taiwan already

used broadband access and 67 percent used messaging and wireless internet access

services. The M-Taiwan’s coverage of WLAN is already at 50% of the population

(2.65mn people) in central Taipei, and is planned to reach 90 percent of the

population by June 2006, with 10,000 access points in service planned to be in place.

Support for local manufacturers and ubiquitous internet access are two major drivers

behind the project.

• Support for local manufacturers is a key driver for WLAN rollout. The

project will allow Taiwan’s domestic manufacturers, chipset designers, and

application developers to establish competence, test ideas, and eventually

ship their products and services overseas. In August 2004, Taiwan’s Q-Ware

won the first nine-year exclusive deal to build out the Taipei City

infrastructure (Q-Ware plans to invest over US$90m in the project), provide

wireless access, and provide various types of VAS. In return, it would annually

pay 1-3 percent of its revenue to the Taipei city government for exclusive

rights to the service. Pending the government’s approval, Q-Ware will be

charging its WLAN users a subscription fee of US$12.8/month, or prepaid

rates of US$16/month and US$3.20 a day. There were 60,000 active users of

Wi-Fi during the trial period, and Q-Ware did not rule out the possibility of

lowering the fees if the initial paid services uptake is poor.

• “Use internet More and Roads Less” is one of the government’s slogans for

achieving wireless internet access wherever, whenever, and via any device.

The aim is to kill two birds with one stone--improve connectivity while

lowering congestion levels.

Taiwan’s Private WLAN Business

• A nomadic WLAN business model is currently in place. Five WISPs offer

private WLAN access services in Taiwan, among which CHT is the largest



provider with 953 WLAN hotspots -- this includes 346 McDonald’s restaurant

hotspots, which were launched on January 1, 2006. Other CHT hotspots

include Starbucks, KFC, as well as airports, 3C retail stores, and large

commercial buildings. The WLAN access is offered on a prepaid basis,

targeting business tourists and consumers: CHT charges US$1.80 per hour,

which its mobile subscribers can add to a monthly mobile bill.

• What is next for private WLAN in Taiwan? Government contracts will drive

some new WLAN projects, as private providers will be complementing

city-wide Wi-Fi coverage with their own hot spots and provide WLAN access

outside of Taipei. However, we also see another option--the provision of “free”

connectivity for projects similar to Nintendo’s in Japan, which would make

use of CHT’s fast food hotspot real estate. Last but not least, CHT plans to

launch a new Data Packages service in March 2006 bundling 3G, ADSL and

Wi-Fi.

4.3 Wi-Fi and Cellular in Europe In 2004, as the adoption of Wi-Fi services in Europe took off in earnest, Europe

became the largest WLAN hotspot region in the world, taking over the title from Asia

Pacific. In 2005, the estimated total of Western and Eastern European hotspots

reached 42,750 (35 percent of the global total).

• Six top providers lead the WLAN deployments in Europe. The industry

growth will trigger the appearance of new players and consolidation will

follow soon after. Similar to what took place in the mobile sector, several

major pan-European WLAN providers emerged in the past two years. The top

six WLAN players--Orange, The Cloud, T-Mobile, TeliaSonera, BT, and

Swisscom Eurosport--hold 54 percent of all Wi-Fi locations in Europe.



Exhibit 50: Major Pan-European Wi-Fi Hotspot Provider Market Share

The Cloud14%

T-Mobile8%

Other 44%

Orange18%

TeliaSonera HomeRun

8%

BT4%

Vodafone2%

Swisscom Eurosport

2% Source: Pyramid Research.

• European locations are dominated by WISPs; mobile carriers hold 29

percent of the total. WISP-owned hotspots account for 44 percent of the total

in Western Europe. By far the biggest of them, UK’s The Cloud, currently has

over 6,000 hotspots and plans to add at least 10,000 more in partnership with

Vodafone in Germany. Mobile carrier managed hotspots account for 29

percent of the total (almost 12,500 locations), 60 percent of these belong to

Orange in France and Switzerland (7,500), followed by T-Mobile with 28

percent of the total.

• Germany holds the top WLAN spot in Europe. As of YE2005, Germany stands

to be Europe’s largest Wi-Fi market with about 8,750 hotspots, closely

followed by the UK with 8,380 hotspots. In addition to commercial WLAN

rollouts, the first announcement of the construction of city-wide hotspots

came out on January 3, 2006 from The Cloud, which plans to initially cover 9

cities in the UK--a total of more than 4 million people. Carriers in Germany

and the UK, as well as Nordic markets, are also leading the European

development of Wi-Fi services, including WLAN-cellular bundling, UMA, and

VoWLAN.

• WLAN-Cellular bundling dominates mobile carriers’ agenda. Mobile data is

the top priority for all European cellcos, accounting for 17.1 percent of total

mobile revenue in Western Europe and 14 percent in Central Europe. In

Western Europe, Wi-Fi has now become an accepted medium to deliver high

speed-low addition to GPRS/EDGE/UMTS networks, and it is gradually



gaining speed in CEE countries, where Estonia, Poland and the Czech

Republic are the most advanced Wi-Fi markets. As 3G network coverage

remains low, averaging 35-50 percent of the population, few mobile carriers

come close to the Verizon’s “No-Wi-Fi” conclusion. On the contrary,

pioneered by TeliaSonera, Orange, and T-Mobile, WLAN-cellular bundles are

now considered by a growing number of European mobile carriers. Wi-Fi

access is already automatically added to the mobile bills of most European

mobile carriers, although in most cases it is still charged on top of the mobile

data fees and bundles:

o Integrated billing, but with Wi-Fi fees added to the mobile data

charges, is offered by such providers as KPN, O2, Vodafone companies

accept Vodafone D2.

o Flat-rate Wi-Fi plans have now been launched by a handful of mobile

carriers, e.g. TeliaSonera, Orange, Vodafone D2, T-Mobile, and Eurotel.

Not all carriers will be able to offer the flat rate Wi-Fi/mobile data

options--network capacity and WLAN hotspot ownership will

determine their ability to do so, and the majority will do so over the

next 1-2 years.

• UMA and home VoWLAN solutions are trialed by fixed-mobile providers.

UK, France, Finland, Sweden, Germany and Denmark are the first markets

which chose to trial WLAN-based home services. TeliaSonera, France Telecom

and Deutsche Telekom are the incumbent fixed-mobile carriers testing the

technology; other service trials and launches are split between fixed

carrier-MVNOs (BT and Saunalahti) and alternative provider-MNOs

(TeliaSonera Denmark and Cegetel-SFR in France).

• European WLAN prices have declined, but still remain high. While mobile

data prices have come down considerably in the past 2 years, public WLAN

access remains among the most expensive in the world, with the rates as high

as US$10 per hour and 24- hour access charged at US$30-US$40, compared

with US$10-US$15 daily charges in North America and Asia Pacific. The main

reason for the high charges is that carriers target primarily business and

high-end residential users, and the prices are certain to come down in the

next year as Wi-Fi access becomes more competitive and is offered to the

consumer segments.

We profiled several providers who will be determining the Wi-Fi climate in Europe in

the next 2-3 years, including Orange, T-Mobile, TeliaSonera, British Telecom (BT) (see

the Case Study in Section 2.5.4), and The Cloud. In addition to the largest providers,



which also happen to be most aggressive in rolling out advanced Wi-Fi offerings, we

analyzed the case of KPN--a small European fixed and mobile provider, which has

been actively rolling out WLAN service but has only gone halfway to offer unlimited

data bundles.

4.3.1. Orange: WLAN for Ubiquitous Wireless

Wi-Fi Strategy: Seamless Mobility and Access Anywhere Anytime

Orange is the largest provider of hotspots in Europe, thanks to the network of 7,500

hotspots in France and 1,000 hotspots in Switzerland. In February 2003, it was the

first operator in France to unveil WLAN services targeted at nomadic business

professionals. Orange offers a series of WLAN solutions dubbed “Orange Wi-Fi” with

the help of FT group units such as Wanadoo for home networking and

Oleane/Transpac and Equant for enterprise services.

Seamless mobility and ubiquitous internet access--first and foremost for enterprise

customers--is the name of the game for Orange and Wi-Fi helps Orange to reach its

goal. In addition to prepaid and postpaid WLAN access targeting the needs of

nomadic mobile business professionals, Orange offers the Business Everywhere

service which bundles GPRS/EDGE/UMTS and WLAN network access. Business

Everywhere was introduced in France in 2004, and will also be launched in the UK in

January 2006. Similarly, Orange Switzerland offers bundled WLAN/GPRS access as

part of its Mobile Office service launched in December 2004. So far, Orange has been

passive in rolling out WLAN in three other European markets where it owns majority

mobile stakes--the Netherlands, Slovakia, and Romania.

Service Positioning: Bundled Wi-Fi for Business Customers

In France and the UK, WLAN complements EDGE and WCDMA technologies as

Orange is expanding the coverage of its 3G mobile networks. The main driver is the

size of the opportunity: There are 14.7 million mobile workers in both countries, and

Orange has a combined market share of 42 percent (see Exhibit 51). Orange’s interest

lies first and foremost in protecting the existing market segments, where it is

particularly strong (e.g., in large and corporate segments in France, and SME segments

in the UK) as well attacking its competitors, such as Vodafone/SFR and O2.



Exhibit 51: France and UK: Orange Holds a Significant Share of Mobile Workers

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

UK FR NL

Bu

sin

ess

SIM

s (m

n)

Orange business SIMs Other carriers


Orange France

• WLAN substitutes the mobile data network coverage. WCDMA is currently

available to 45 percent of France’s population, and EDGE to 85 percent of total

population and 90 percent of enterprises in France. Orange supports these

users on more than 8,000 Wi-Fi hotspots nationally and 10,000 hotspots in 23

countries globally through roaming agreements.

• Business Anywhere holds a number of attractions for end-users, among

which are:

o The main attraction of the service is the pricing structure, which offers

flat-fee unlimited data access (launched in November 2004) and the

same price for domestic use and international roaming.

o A single contract and bill, a single customer support desk for Orange’s

and France Telecom’s service managers and users, the convenience of

a convergent service, and cost reduction for both carriers.

• WLAN-Cellular VoIP services at home are next on the services road map: In

2006, Orange will join parent France Telecom in offering Homezone services

on a dual-mode cellular-Wi-Fi device. France Telecom’s WLAN Smartphone,

developed in partnership with Microsoft, will be using a LiveBox Wi-Fi

enabled gateway, with the infrastructure provided by Ericsson.



Orange UK

• Lack of Wi-Fi network delayed WLAN service launch. Unlike France, Orange

does not have a WLAN network in the UK, and Wi-Fi services have just been

introduced by the carrier. Orange Wi-Fi Access became available on December

19, 2005 through a partnership with Orange France, BT Openzone, and

WeRoam, available on 1,700 UK hotspots. The same fee--US$10.6 (£6) per

hour--will be billed for domestic and international access and charged directly

to a customer’s mobile phone bill.

• In January 2006, Orange will also launch Business Everywhere in the UK.

Similar to France, the UK end-users will be charged flat fees for accessing

GPRS/3G/WLAN networks. Although not as attractive in terms of revenue and

margins as service offered on its own network, the new service will allow

Orange to complement its 3G offering and capture a larger share of the UK’s

US$200m remote mobile data access market.

Orange Switzerland: Aggressive Market Follower

Orange is the third largest carrier in Switzerland (1.2 million subscribers), closely

trailing the second largest provider, TDC, with 18 percent of the market share. The

carrier launched its bundled Mobile Office Card GPRS/WLAN service in December

2004. The service is available on 1,000 domestic hotspots, as well as more than 10,000

international WLAN partner locations. Tariff plans start at US$20 for 60 WLAN

minutes and 10Mb of GPRS data and go as high as US$81 for 300 WLAN minutes and

80Mb of GPRS data.

4.3.2. T-Mobile: WLAN in the Center of Seamless Data Services

T-Mobile Deutschland launched public WLAN internet access services in autumn

2002 under the “T-Mobile HotSpot” brand across several German cities and is now the

biggest WLAN provider in Germany and third biggest provider in Europe with WLAN

hotspots in airports, hotels, and other public areas. Germany, where T-Mobile has

over 1,280 hotspots, in addition to Deutsche Telekom’s fixed arm T-Com’s 4,400, is

the biggest WLAN market for T-Mobile, but it has also made substantial investment in

Wi-Fi in other countries (see Exhibit 52).



Exhibit 52: T-Mobile European Hotspots

Germany34%

Austria10%

UK33%

Netherlands18%

Hungary2%

Czech Republic3%


In addition to public Wi-Fi services, WLAN is the main supporting technology to

deliver T-Mobile and parent Deutsche Telekom’s vision of seamless mobile services.

Their strategy involves launch of dual phones in 2006, with plans to have half a

million dual phones in service by 2007 and 3 million by 2010.

Last but not least, T-Mobile is the most committed of all European operators (along

with Orange and TeliaSonera) to offer seamless data services over its GPRS/UMTS and

WLAN networks. Similar to Orange, T-Mobile uses WLAN services to improve its

mobile network coverage.

WLAN Strategy: Push Fixed-Mobile Substitution in Competitive Markets, Lead in

Mobile Broadband at Home

• T-Mobile and T-Com: Looking for synergies and protecting T-Com’s fixed

business. Together T-Mobile and T-Com account for 65 percent of all hotspots

in Germany. T-Mobile’s public Wi-Fi usage is priced at hefty US$9.8 (€8) per

hour for pay-as-you-go customers, and starting at US$12.3 (€9.99) for 3 hours

for T-Mobile customers (with a per-minute charge thereafter). Similar to

France Telecom, Deutsche Telekom plans to bring out the synergies between

its fixed and mobile arms in the domestic market. A new fixed-mobile service

is scheduled for launch in Q2 2006; for now, the joint home zone tariff plan

aims to protect T-Mobile and T-Com’s voice traffic against O2’s Genion and

Vodafone’s Zuhause offers.



• T-Mobile has not gone as far as Orange to offer flat-rate billing for mobile

data, however it does offer bundled WLAN-cellular services in most markets.

In Germany, it launched nine time- and volume-based GPRS/UMTS/WLAN

pricing plans, which it promoted with the phrase, “Three networks--one

price.” See Exhibit 53 for pricing details.

Exhibit 53: T-Mobile Bundled Wi-Fi Pricing

Service T-Mobile DE T-Mobile UK

T-Mobile NL T-Mobile CZ T-Mobile HU

Number of hotspots

1,283

1,207 637 95 55

WLAN Bundled? Yes No, only monthly subscription to WLAN is available.

Yes, with GPRS/UMTS

Yes No, prepaid access only. US$10/hour.

Which service plan? Volume and time-based plans

N/A Internet volume 10,25,50 or 100 plans; or time-based internet Tijd plans

Can be bundled with T-Mobile EDGE, GPRS and 4G services

N/A

Unlimited Data access?

No No Yes, in internet Total plan: US$61/month

Yes, in internet 4G Premium tariff plan: US$42/month.

No

Source: T-Mobile, BT, Pyramid Research.

4.3.3. KPN HotSpot: Flat Data Access, but No Wi-Fi Bundling Yet KPN started its Wi-Fi operation with the acquisition of the Netherlands’ WISP

HubHop with 35 hotspots in 2003 and restructured the acquired company into KPN

Hotspots, a 100 percent-owned subsidiary. Over the past 18 months, KPN doubled the

number of hotspots in the Netherlands from 250 in mid-2004 to 485 at YE2005, in

addition to offering roaming on 450 hotspots with WinQ and Wjoy.

Wi-Fi Strategy: Cost-efficient Complement to 3G

WLAN is an important component of KPN’s broadband strategy and part of the

carrier’s move to all-IP network scheduled for 2010. It is one of the access choices next

to its existing and planned copper/xDSL, fiber, MiMAX, GPRS, and UMTS networks.

Service Positioning: Wireless broadband for business anywhere, anytime

• KPN’s aggressive rollout aims to capture the revenue of heavy mobile data

users, mainly in the business segment, and to extend its UMTS network

coverage in the areas of highest demand. When KPN introduced its UMTS



network in the summer of 2004, the network covered 30 percent of the

population in approximately 50 cities, mostly in the Randstad (the highly

urbanized western part of the Netherlands).

• KPN was the first operator in the Netherlands to offer a flat fee for mobile

data communication, but not Wi-Fi. KPN Mobile Connect Card customers

can be online as long as they want for a fixed price of US$92 ( 75) per month.

The Mobile Data Dashboard is a single software interface for all networks,

including Wi-Fi, which allows end-users to monitor their mobile data usage.

Wi-Fi charges, however, are not included into the bundled fee: GPRS and

UMTS access are billed by volume and Wi-Fi connections are billed per

minute.

Exhibit 54: KPN Hotspot Pricing

Service KPN Hotspot 50 minutes €5.95

1 day €15.95 1 week €24.95 1 month €44.95

Source: KPN, Pyramid Research.

What is next for KPN?

KPN is the largest carrier in the Netherlands with 6.5 million subscribers and 37

percent market share at YE2005, but Vodafone, T-Mobile, and Telfort are close on its

heels. T-Mobile already offers Wi-Fi bundles in the Netherlands, including an

unlimited access option, and it is hard to imagine that KPN will be able to hold off

following the same route for long, being the second largest hotspot provider in the

country after T-Mobile.

4.3.4 Vodafone: Wi-Fi Skeptic? Vodafone has been a long-time skeptic about bundling unlicensed Wi-Fi technology

with licensed mobile networks, however its final choices have been dictated by

market conditions in each operating country. Vodafone currently runs WLAN hotspot

networks in four European markets: Germany, Ireland, Greece, and Portugal. In

Germany, Vodafone joined O2 and T-Mobile by launching Wi-Fi in 2003, and now

runs the second largest mobile network of hotspots after T-Mobile with 700 locations,

planning to expand coverage to 1,000 hotspots in 4 years time. In Ireland, it runs the

largest hotspot network, with 117 locations. At YE2004 in Greece, Vodafone-Panafon

launched the WLAN network in a handful of hotels, and its network in Portugal

consists of 100 hotspots.



WLAN Strategy: WLAN for Broadband Mobile Data, but focus remains on mobile

In the last 3 years, Vodafone directed all its energy into making the 3G services work,

after spending billions of euro in spectrum license fees. Unlike other carriers, WLAN

does not hold a prominent place on Vodafone’s mobile data service map. However, in

the four above-mentioned markets, WLAN was deployed prior to large-scale 3G

rollouts to capture a share of business demand for mobile data. In addition to public

WLAN services, in the spring 2005 all of Vodafone group European companies

launched 2.5G/3G/Wi-Fi data card services for nomadic business subscribers. However,

only Vodafone Germany has moved further to offer 3G/WLAN tariff bundle.

Service Positioning: Broadband Business Mobile Data

• WLAN for mobile businesses is top priority. In addition to nomadic Wi-Fi

business access, at YE2005, Vodafone partnered with Cisco and Lynksys to add

a 3G/Wi-Fi router product for groups of up to 5 mobile workers. The router

allows the end-users to set up a shared small business Wi-Fi network on top of

a 3G connection. The product was initially launched in Spain and Portugal,

and is planned for other Vodafone European markets.

• Vodafone D2 is most active in WLAN. Vodafone D2 offers WLAN services as

part of the strategy to accelerate fixed-mobile substitution in Germany and

protect its business market share. Bundling WLAN with GPRS was, to large

extent, a defensive measure, since Wi-Fi was also aggressively promoted by

T-Mobile and O2. Although nomadic WLAN services are offered by all

Vodafone companies, Vodafone D2 is currently the only company from the

Vodafone group that offers WLAN-inclusive data bundles to the subscribers of

Vodafone-Time tariff plans (see Exhibit 55).



Exhibit 55: Selective Vodafone Wi-Fi Pricing

Service Vodafone D2 Vodafone UK

Vodafone Portugal

Vodafone Greece

Vodafone Ireland

Vodafone Italy

Network owner

Own+The Cloud

BT Openzone

Own Own and roaming with OteNET

Own Total of 1,200 hotspots through partners Telecom Italia, tin.it, and Linkem.

1 hour US$4.85 (3.95 euro)

US$10 (£6.00)

US$6.1 US$10.3/hour (4.2 euro per 30 minutes)

US$12.2 (10 euro)

US$7.4/hour (€3 per 30 minutes)

24 Hours US$36.5 (24.95 euro)

N/A US$24.5 YS$44.1 (36 euro)

US$24.5 (20 euro)

N/A

WLAN Bundled?

Yes, as part of Vodafone-Time L, XL, XXL tariff plan.

No No No No No

Source: Vodafone, Pyramid Research.

• The Cloud takes over the Wi-Fi deployment. Unwillingness to commit large

resources to public Wi-Fi rollout remains. In July 2005, Vodafone D2 signed

an agreement to partner with The Cloud of UK, gaining access to The Cloud’s

newly acquired 1,000 hotspots in Germany and planning to jointly roll out

10,000 hotspots in Germany over the next 4 years. The deal will allow both

Vodafone and The Cloud to catch up with T-Mobile, which runs a network of

3,500+ hotspots.

• WLAN is an FMS attacker technology in Germany. In early 2005, Vodafone

D2 followed O2’s Surf@Home service with its own offering (branded Zuhause),

whereby 3G is used as a replacement of DSL broadband connections. As part

of the service roadmap, Vodafone also plans to integrate WLAN into a

consumer central box, which will link all home voice and internet devices.

• Will Vodafone shy away from WLAN? As commercial HSDPA network rollout

is still a couple of years away, WLAN is unlikely to disappear from Vodafone’s

portfolio of services. Whether HSDPA will push Vodafone on the path of

Verizon in the United States remains to be seen. For now, WLAN-cellular

bundling is the most likely next step for the markets, in which Vodafone owns

Wi-Fi hotspots.



4.3.5 The Cloud: New Business Models for WISPs

The Cloud is the largest European WISP and WLAN solutions provider, running the

second largest network of hotspot locations in Western Europe. Launched in

mid-2003 with the investment from 3i and Accel Partners, it runs a network of 6,000

WLAN locations in the UK. In early 2005, the Cloud also entered German and

Swedish markets, acquiring Germany’s third largest WISP Airnyx with 500 hotspots in

April 2005, and equipping Swedish rail stations with a network of hotspots.

The Cloud’s size favors its long-term survival, as WISP business is coming under

increasing pressure due to network carriers’ growing investment into WLAN and

gradual maturing of the Public WLAN market. Further growth for large WISPs like The

Cloud is likely to come from acquisitions and regional expansion, but The Cloud has

been more forward-looking, launching a number of projects and partnerships during

2005 that seek new business models and sources of revenue.

• City-wide hotspots: a new better model. On January 3, 2006, The Cloud

announced plans to roll out nine Wi-Fi city-wide hotspots in the UK, covering

the total population of more than 4 million. The main departure from the US

municipality-driven model that is expected to rely largely on advertising as

the main revenue source is that The Cloud’s project will be driven by the

private sector. The end-users will be paying a monthly access fee to a selected

ISP, with the revenue split three ways between the ISP, The Cloud, and the

municipalities. The result will be cheaper fees, higher internet penetration

and guaranteed revenue for all involved parties.

• Consumer Wi-Fi boost with free Nintendo gaming. In November 2005, The

Cloud, along with the BT Openzone, started offering free hotspot access to the

Nintendo DS gamers. The service is only the first of expected many others to

follow the proliferation of Wi-Fi consumer devices.

• SkypeZone’s Voice-over-WLAN beta service. In July 2005, The Cloud allowed

its Wi-Fi users to make Skype calls in all UK and Sweden locations. The

SkypeZones users are automatically connected to Skype after logging in at the

Cloud’s hotspot, paying The Cloud US$2.95 (€2.50) for 2 hours and US$7.95

(€6.50) for monthly access, and receiving free 1-hour access if they use VoIP

only (without browsing internet or e-mail). The offering is not the first in the

market: UK’s WISP Broadreach Networks, owner of 375 hotspots, signed a

similar deal with Skype in March 2005, and US WISP Boingo launched such a

deal shortly before The Cloud, with a monthly fee of US$8/month. What



made this deal important is the large hotspot ownership of The Cloud, as well

as the growing number of Wi-Fi handsets that will make the service accessible

to a larger numbers of users.

4.3.6. TeliaSonera HomeRun: WLAN for Convergent Fixed-Mobile Services

TeliaSonera is one of the largest pan-European hotspot providers, offering WLAN

access on nearly 3,500 Homerun hotspots in Europe and about 11,000 roaming

partner hotspots worldwide. In mid-2005, TeliaSonera also signed an agreement with

Connexion by Boeing to provide WLAN onboard SAS and Lufthansa flights.

In 2005, TeliaSonera outlined its strategy for the Focused Service Portfolio, which has

the “always best connected” approach as its base. The carrier stated that it does not

view WLAN as a threat or substitute to 3G, and has committed to rolling out

Wi-Fi-based service to support broadband and voice delivery for its fixed and mobile

operations across the 4 Nordic markets of Sweden, Finland, Norway, and Denmark.

Until now, the carrier’s focus has been on WLAN service delivery to businesses, but

the shift to the consumer focus is next.

Exhibit 56: TeliaSonera Sweden and Finland: Capitalizing on Market Leadership in All Areas

BroadbandIP-VPN

FixedVoice Mobile

Managed Solutions

Fixed/Mobile convergence

Mobile InternetMobile VPNaccess

Triple PlayBroadband

IP-VPN

FixedVoice Mobile

Managed Solutions

Fixed/Mobile convergence

Mobile InternetMobile VPNaccess

Triple Play

Source: TeliaSonera.



• WLAN-Cellular: Bundling and flat-rate for all Nordic countries. TeliaSonera

offers 3 monthly WLAN subscriptions: Base, FlatRate, and 24 Hours, for the

subscribers of its own and other mobile networks. In November 2004,

TeliaSonera launched the Connect Pro package with a single interface and a

fixed monthly price for all wireless networks, including GPRS, HSCSD, EDGE,

UMTS, and WLAN (unlimited use of HomeRun services). The service, initially

launched in Finland, Sweden, and Norway, was later made available in

Denmark. TeliaSonera’s rates apply to all of its Nordic mobile operations,

which heralds an eventual similar move for Orange and T-Mobile.

Exhibit 57: Selective TeliaSonera Wi-Fi Pricing

Service TeliaSonera Sweden TeliaSonera Finland

TeliaSonera Denmark

24 Hours US$14.5 available for customers in Sweden, Norway, and Denmark.

US$14.5, available for customers in Sweden, Norway, and Denmark.

Monthly Subscriptions

FlatRate: US$120 per month for unlimited WLAN access on any HomeRun networks. Base: US$4.95 for monthly access to HomeRun hotspots plus usage charges of YS$0.3/minute.

WLAN Bundled?

Yes, Telia Connect 3G package, includes 3Gb of traffic on GPRS/3G and unlimited WLAN access for US$90/month.

Source: Vodafone, Pyramid Research.

• UMA trials in Sweden and Denmark for lower cost, customer retention and

synergies. At YE2005, TeliaSonera announced trials of UMA with Motorola in

Denmark and Ericsson in Sweden. UMA’s major attraction to TeliaSonera in

both markets (where it owns fixed and mobile operations), lies in the reduced

cost of routing calls through broadband and fixed-mobile synergies (thus

improving profitability and margins), enhanced service, and lower churn.

Commercial launch of the service in Denmark is scheduled for 2006.

• Looking out for city-wide Wi-Fi projects. TeliaSonera keeps an eye out for

new consumer service opportunities, such as municipal Wi-Fi projects. The

city of Helsinki is reported to be interested in rolling out a city-wide hotspot.



4.4 WiFi and Cellular in Latin America When referring to Latin America, it is somewhat premature to discuss the issues raised

by the convergence of 3G and WiFi, since the region has yet to develop a widespread

need for either WiFi or 3G services. PC penetration remains low and portable

electronic devices, such as PDAs and laptops, is even lower. Moreover, the disparity

between wealthy and impoverished means that public usage of electronic devices is

an invitation for theft. Consequently, to-date WiFi deployments have tended to be in

secure environments such as airports, hotels, conference centers, and boutique coffee

shops such as the Italia Coffee chain in Mexico. Until either the socioeconomic

environment changes or laptops, PDAs, and WiFi-enabled handsets drop in price so

much as to become commonplace, WiFi is likely to remain a high-end commodity

available predominantly for the affluent and the business traveler.

Exhibit 58: Latin American Hotspots

Brazil, 1166, 42%

Mexico, 559, 20%

Chile, 543, 19%

Argentina, 407, 15%

Others, 116, 4%


Demand for Mobile Data services is growing, but 3G will rule the mass market as

WLAN takes off in the corporate segment. Pyramid Research’s recent Mobile Data

survey results from Brazil’s online users indicate a high propensity for mobile data

usage among cellular subscribers in the region. Not just use of SMS, but of richer

content such as music, video clips, and MMS. Subscribers expressed significant

interest in almost all data services and demonstrated a willingness to pay a premium

for them. For example, the majority of subscribers were prepared to pay more than

US$5 per month for wireless internet access.

However, penetration of laptops and other WiFi devices remains small. The same

survey investigated the level of penetration of electronic devices among mobile



subscribers in Brazil. While desktop PC penetration was high (94 percent) among

interviewees, mobile devices such as laptops and PDAs had much lower levels of

penetration per household--21 percent and 39 percent, respectively. Brazil is

considered one of the most technologically advanced countries in the region;

penetration of wireless computing devices can be expected to be lower elsewhere.

Please note that our interviews were conducted online (13% is currently using

Internet in Brazil), so it is likely that most subscribers also owned a personal

computer.

WiFi-WiMAX might give WLAN a boost but under certain conditions. 3G services are

likely to remain expensive for end users, since network operators have to recoup the

cost of spectrum and network build-out. Unlicensed spectrum remains attractive as

long as there are sufficient devices in widespread use to merit deployment of networks.

Mobile phones are more commonplace and less of a target for theft, and there are

pockets of 3G telephony in the region demonstrating market demand. Unless there is

a quick market saturation of WiFi-enabled handsets at rock-bottom prices, it would

seem unlikely that WLAN deployments are going to outpace cellular wireless data

rollouts. Even if WiMAX is implemented, the public usage of high-value electronics is

still going to remain problematic.

WLAN is offered predominantly by fixed operators. The vast majority of players in

Latin America’s WiFi space are offering it as a VAS for their high-speed internet access

clients, often via DSL or cable modem. At the same time, public hotspots, while far

from ubiquitous, are growing rapidly, especially within urban centers. Prolonged free

trial periods have been used after launch to generate interest and familiarity.

Meanwhile, for the most part mobile operators have not engaged in promoting WiFi

services, instead leaving that task to their wireline counterparts. There are no

commercial deployments of an integrated mobile/WLAN offering from which to

gauge success, and the fact that Latin American mobile operators do not have

seamless mobility high on their radar screens also factors into the equation.

Pricing. Latin American WiFi is priced lower than offerings in North America and

Europe, but would not qualify as “cheap” by local income standards. This has much

to do with the type of user that WiFi attracts; they are either one of a small and elite

group of individuals with wireless devices, or a business traveler used to paying a

premium for WiFi access. Exhibit 59 details prices for a variety of Latin American WiFi

providers, as well as a North American benchmark.



Exhibit 59: Selected Latin American WiFi Pricing

Brazil Telecom T-Mobile USA Telefonica

CTC Chile Telmex, Mexico

Type of Carrier

Integrated (Fixed/Mobile)

Mobile Operator Fixed Operator

Fixed Operator

Cost of One Hour of Usage

N/A US$6.00 US$3.54 (in 30-minute increments)

US$2.83

Cost of ]24-hour usage

US$4.32 US$9.99 N/A N/A

Cost of one-month subscription

US$28.36

US$39.99 N/A From US$18, depending on existing bundles

Bundled Services Available

Monthly WiFi access is offered at a reduced rate to fixed line subscribers. The discount is calculated by subtracting the value of the subscriber’s fixed plan from the monthly WiFi subscription fee.

None Only available with ADSL and WLL services.

Subscribers to DSL and unlimited dial-up from Telmex are given free access to hotspots. Regular dial-up users are given a 50 percent discount.


4.4.1 Brazil: Major LA Market for Enterprise Mobility The Brazilian public WiFi market is dominated by two players--Telefónica and Vex.

Telefónica pushes its WiFi offering as a value add to its broadband internet offering in

Brazil, while Vex serves as the public hotspot integrator for all other operators. Until

now, WiFi services have for the most part been left in the hands of the fixed operators

and ISPs, although mobile providers are slowly entering the space. As of YE2005,

there were approximately 1,170 public hotspots in Brazil. The vast majority of these

hotspots are concentrated in and around major urban centers such as Rio de Janeiro

and São Paulo.

• Brazil is the most attractive market for Enterprise WLAN. Pyramid Research

believes that Brazil is the most advanced market in the region when it comes

to the commercialization of WiFi for both public consumption and enterprise

use. We came to this conclusion because many large Brazilian companies

have installed WLANs. The size of the Brazilian market (in terms of the

number of corporate mobile subscribers--over 5.5 million at YE2005), as well

as the now-commonplace deployment of WLAN in the enterprise segment

bodes well for future demand for dual-use handsets in the Brazilian corporate

market. Furthermore, unlike in markets such as Argentina and Chile, the scale



issue of having at least 100 users is less of a hurdle in Brazil due to the number

of larger companies.

• Mobile carriers shy away from investing in WiFi, instead choosing to partner

with Vex. Telefonica alone has been among operators using WiFi as a

differentiator within its broadband offering and thus is trying to enhance

loyalty among its current customer base. Mobile carriers have been quite

passive in WiFi investments, instead focusing on the rollouts of

GPRS/EDGE/3G networks. Growing interest in WiFi and its spread among

home and enterprise users became a catalyst for cellcos to consider their

options, but none chose to invest in their own WiFi networks (as most prime

hotspots are already taken). Instead, they decided to partner with aggregator

Vex. In July 2005, mobile operator Claro, a unit of Mexico's America Movil,

signed an agreement with Vex to extend WiFi services to 500 locations.

Telemar, which partnered with Vex to launch WiFi services in public hotspots

in early 2004, also seeks to leverage the position of its sister company Oi by

allowing billing to be performed through either Oi or Telemar.

• No seamless mobility so far… Although we see Brazil as the market with the

greatest potential for integrated seamless mobility solutions between the

corporate WLAN and traditional mobile networks, operators have not

committed to a strategy. It appears that those mobile operators who have

established relationships with a fixed operator might be more inclined to

embrace the solution because there are two roads of entry for customers to

express their needs. We expect mobile operators to closely follow

deployments in the United States before making any decisions. Indeed, some

mobile operators in Brazil as well as other markets believe they can avoid

these issues altogether by simply offering heavily discounted minutes to

corporate clients for use when “on the campus.” This effectively

accomplishes the same goal in terms of encouraging the use of one device, but

allows the operators to retain traffic while customers are in the office.

Assuming successful uptake of this solution in the United States, we could

perhaps see Brazilian operators begin to offer this solution in late 2006.

• …But there is a promising market for UMA, already trialed by Brazil Telecom.

Pyramid Research believes that a solution such as UMA would be of high

interest to both fixed and mobile operators as a means to increase share in the

competitive Brazilian corporate market. Brazil Telecom’s Pula Pula service

demonstrates some of the advantages of a converged telephony offering,

namely upsell opportunities for new services and reduced churn, and the

carrier is also reported to trial the UMA service.



• Although Vivo is Brazil’s leader in providing mobile services to the enterprise

market with approximately a 38 percent share, we expect that Oi and Brazil

Telecom will be the operators first drawn to the opportunity of providing an

integrated seamless mobility solution. Both Oi and Brazil Telecom have fixed

line parents with deep relationships in the corporate sector. Furthermore,

both are smaller players in the overall mobile space and even smaller players

in the enterprise segment.

4.4.2 Mexico: WiFi as Broadband VAS Differentiator

WiFi internet access was launched in Mexico in 2003 with fixed incumbent Telmex

and private networking company Hotspots International leading the pack in terms of

coverage. So far, there are about 560 hotspots in the country, an insignificant increase

from just under 500 hotspots in mid-2004. For the most part, these hotspots are

located in hotels, restaurants, airports, and convention centers. For residential

end-users, WiFi is marketed as a VAS for fixed high-speed internet access subscribers

with leading broadband providers Telmex and Megacable using it to set themselves

apart from the competition. Mobile operators in Mexico are not active in WiFi.

• Lack of devices is the main inhibitor for WiFi. WiFi usage has yet to

significantly take off in Mexico. With less than 2m laptops and PDAs

currently operational in the country (according to Pyramid Research

estimates), the addressable market for mobile internet access remains limited.

• The most aggressive proponents of WiFi in Mexico have been wireline

operators. However, WiFi is not perceived as an important avenue of

alternative revenues but rather as a service differentiator for their broadband

internet offering. For instance, WiFi access is offered for free to Telmex’s DSL

subscribers under the brand ProdigyMovil. Telmex hotspots are located in

restaurants, hospitals, airports, and hotels across the country. Recently,

Telmex introduced a prepaid version of its WiFi offering; Telmex is using its

multi-purpose prepaid card Multifon for WiFi services. The incumbent also

spiced up its WiFi offering by introducing international roaming in July 2004

in a partnership with US SBC’s FreedomLink network, which includes more

than 2,000 hotspots.

• Mobile operators have stayed away from the WiFi frenzy and have instead

concentrated on the deployment of GSM/GPRS/EDGE networks. Demand

for mobile data in Mexico has proven to be weak, keeping mobile carriers out

of WLAN. Overall, cellcos appear uncertain as to whether a more widespread

WiFi offering will result in an opportunity or a threat for them in the future.



In the meantime, given that the provision of voice services requires specific

licenses and that the use of spectrum is subject to auctions, in the short term

we do not anticipate an important number of new WiFi service providers

entering the market.

4.4.3 Chile: No Mobile Carrier Presence So Far

WiFi services were launched in Chile in 2H2003, and a number of both large and

small players have deployed public hotspots as well as offerings for their business and

residential clients. While there are over 540 hotspots throughout the country, the

bulk of these are concentrated in and around Santiago. As in most markets, WiFi is

not being marketed as a standalone revenue generator, but instead as a VAS that

broadband operators can offer to clients in order to enhance their usage experience.

Mobile operators have not pushed WiFi services, instead leaving that to the fixed

operators.

• Chile’s WiFi market is lead by CTC, which has 525 public hotspots for its

Speedy WiFi access, up from 60 locations at YE2003. Although the hotspots

are virtually nationwide, the majority can be found in and around the

Santiago area. CTC has targeted a number of popular establishments

(including Esso gas stations and McDonald’s) to integrate into its hotspot

footprint. Users now can either purchase prepaid services at the hotspots

themselves or, for a monthly fee, Speedy clients can add WiFi access to their

current accounts. Other WiFi providers include cable operator VTR, which

announced the deployment of clustered business hotspots in the Santiago

area; Telsur, a telecom operator whose footprint is concentrated in the

southern region of the country and provides voice as well as DSL services;

ENTEL, which offers WiFi services to both its residential and business clients;

and Manquehue Net, whose offering was deployed by the WiFi hotspot

aggregator BroadBand Telecom.

• Who will go for bundling WiFi in Chile? While Chile has seen a number of

operators dive into the WiFi space in the past 18 months, there aren’t any

short-term plans for implementation of bundled offers or WLAN-cellular

voice products for the enterprise class. Pyramid Research believes that the

most likely operator to first embrace a seamless mobility solution for the

corporate segment in Chile will be ENTEL PCS, as it has generally proven to be

a product and service innovator not only within Chile, but also for the entire

region. However, having said this, Telefónica Móvil, which was sold by CTC

to Telefónica Móviles in 2004, has been increasingly aggressive in seeking to

improve its position in the corporate segment, having been the first to launch



EDGE services in Latin America as well as creating more business- friendly

services such as the ability to control corporate spending on mobile services

via a web interface.

4.4.4 Argentina: 2006 to Become a Year of WLAN-Cellular Bundling

WiFi services are only recently beginning to be seen in Argentina, with commercial

pushes by such important players as Telecom, Telefónica, and Millicom all taking

place in 1Q2004. No mobile operators have launched WiFi services. While over 400

hotspots can be found across the country, unsurprisingly the concentration of them is

in Buenos Aires. At present, the public is still being educated about the benefits of

WiFi through a number of free access services. All operators are looking to offer

residential and business WiFi as an extension of their various internet service

offerings. On the corporate side, while WLAN is gaining traction within the

enterprise segment, VoIP is not yet something that has established a foothold in

Argentina.

• 2006 should bring bundled cellular-WLAN. Operators as well as vendors

generally agree that we are likely to see the commercialization of integrated

WLAN/mobile solutions in mid- to late 2006. Until now, mobile operators in

Argentina were spending most of their attention deploying their new GSM

networks as well as pushing services such as SMS and MMS. However,

growing demand for mobile data services creates need for enhanced end-user

experiences, which can be served by WLAN.

• Who will go for bundles? While Movicom has historically been a fairly

innovative operator in Argentina, Unifón has been more conservative, thus

Pyramid Research believes that they will not be leading the charge to deploy

such services in the market. In our view, the operators most likely to first

embrace the concept of an integrated WLAN/VoIP-mobile solution will be CTI

and Telecom. CTI has been seeking opportunities to expand its presence

within the more profitable corporate segment, and participating in such a

service offering would certainly achieve that goal. Personal has also sought to

push the envelope when it comes to new services for its client base, and will

likely consider the solution as an opportunity to improve its position in the

corporate market.


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