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Carriers Buy The LTE Spectrum, But Customers Are The Ones Paying For It

September 7, 2014 - Written By David Steele

I have a confession to make: I bought my first 4G-capable device early in 2014, which was the 2013 Nexus 7. I didn’t use a 4G-capable handset April 2014. I have three excuses for this. First, I live in York, the United Kingdom and 4G coverage has been somewhere from nonexistent to indifferent until recently. Whereas the North Americas have about half of the world’s LTE customers, we British only received our 4G LTE networks very recently. Secondly, I was using the Nexus 4 as my primary handset until April and this device didn’t support European 4G LTE networks. And third, I’m Scottish so I don’t like paying for something if I can avoid it and my carrier was still trying to charge extra for 4G service until around and about April this year. It’s that third point that I’m going to write about; how carriers are finding it increasingly difficult to get customers to pay extra for 4G LTE coverage.

It can be difficult to feel sympathetic for the carriers, especially if you are using a device that has plenty of their bloat valued-added applications pre-installed or if you’ve been waiting months for a software update that was released to the unlocked device ages ago. But let’s try for a moment and I’m going to use the UK market here, as it’s the one I’m closest to. In early 2014, the UK Government announced an auction to sell off the 4G spectrum to the UK carriers. In total, five carriers paid £2.34 billion (about $3.8 billion) to the Government. After the announcement was made, the carriers had just over a week to stump up the cash! As part of the deal, one carrier (O2 via Telefonica) bought the coverage obligation spectrum, whereby the business promised to provide indoor mobile broadband service for 98% of the UK population (and 99% outdoors) by the end of 2017. If you’re interested in the small print of this deal, it doesn’t specify a network technology but a sustained download speed and confidence (2 Mbps, 90% of the time, lightly loaded network). Coverage obligations are a common aspect of wide scale tenders; it’s a means of providing a service in an area where it might not be profitable. Another great example of a coverage obligation is for a bus operator to provide a frequent service in rural areas or at less than social times of the day and night.

Getting back on topic, O2 paid the Government for their spectrum and promised to roll out a high coverage LTE network in a little over three years. This is why O2 have not just tacked on 4G masts to their network but have instead revised their entire infrastructure and rolled out DC-HSPA+ (dual channel, evolved high speed packet access, a late 3G technology that allows for a theoretical 42 Mbps download speed) together with LTE equipment. Of course, somebody has to pay for this holistic approach to the network and seeing as O2 are a business, that means the customers will stump up the bill. And here’s the problem: how does a carrier charge customers more money for something they’ve never used and, apart from a minority, don’t see the benefit? Asking the customer if they are happy with their network speed is a no-go area, because unhappy customers have a habit of switching networks. Happy customers don’t see the advantage of a quicker connection! The answer, according to research firm Strategy Analytics, is that they may only be able to use the higher performance network charge for a short period of time. Global mobile service revenue is expected to grow in 2014, stagnate in 2015 and fall from 2016. In many markets, there’s no extra charge for 4G coverage and carriers just market a data allowance and leave it up to the customer as to what network he or she uses to access the data. Instead, carriers are going to have to diversify their business or look to consolidate with competitors.

This means that we’re not going to see an end to carrier preloaded apps on our devices encouraging us to use their other pay-for services. The news is rife with rumours of carrier consolidation, which is a sign that businesses are cuddling together to keep warm from frosty customers not wanting to pay more for their service! We may see carriers dropping handset subsidies or perhaps even stopping the sale of devices altogether, as the repair and service centres are a significant cost to a business (it’s around two months average monthly subscription to return a handset to O2 UK’s repair agent). Or we might see an increase in carriers trying to break down the Internet into different compartments and monetarising this, such as offering mobile access to media outside of your data bundle.

Going forward, I expect things to get easier for the carriers. Once you’re used to a quicker Internet connection, it’s extremely difficult to go back to a slower connection. I would write, “impossible” because using a modern smartphone on a EDGE network is an incredibly frustrating (and first world) problem. Customers will want more data as they discover new things that their smartphone can do, and carriers love nothing more than selling you a bigger data allowance. I believe the next couple of years will be difficult and those carriers that emerge will be stronger for it.