Is there room for WiMAX in the UK?

The UK broadband market is crowded and highly competitive, but the WiMAX players remain undaunted.

The UK broadband market, at first glance, seems a hostile place for WiMAX. At the end of 2007, according to figures from Informa Telecoms & Media, the number of broadband subscriptions in the UK exceeded 15 million. Of that sum, DSL accounted for around three quarters of the market and cable the remainder. Only 25,000 broadband subscribers in the UK, at the end of 2007, were connected by either wireless, WiMAX or satellite technology.

The outlook for WiMAX in the UK, in terms of subscriber market share, is not promising either. Total broadband connections are projected by Informa Telecoms & Media to rise to nearly 22 million by the end of 2012, which translates into a household penetration of 76.5 percent. DSL is expected to capture the lion’s share of those broadband households (59 percent) followed by cable (17 percent).

Fibre and wireless technologies, on the other hand, are only expected to account for 0.2 percent each of all the UK broadband households by the end of 2012.

The market for 3G data cards is also heating up. Each of the mobile network operators?’3′, Vodafone, T-Mobile, Orange and O2?has launched HSDPA, which, the operators claim, allows average downlink speeds of between 1Mbps and 2Mbps.

At the end of 2007, 3G penetration in the UK had risen to 21 percent, with T-Mobile, Vodafone and O2 more than doubling their 3G subscriber bases compared to the end of 2006.

The sale of USB dongles, which are 3G and HSPA compatible, is also booming. Introduced into the UK in September 2007, the easy installation process and ever-decreasing unit prices from Chinese vendors Huawei and ZTE (as volumes ramp up) have combined to make the 3G USB dongle a runaway success story.

According to Ofcom, the UK telecom regulator, more than 55,000 HSPA compatible dongles were sold in January 2008 alone. (HSPA is an umbrella term covering high-speed downlink packet access, HSDPA, and high-speed uplink packet access, HSUPA.)

Although the flat-rate mobile data packages offered by the UK’s mobile operators have been high (typically ranging between £20 and £25 ($40 to $50), competition should bring these tariffs down. In May 2008, Vodafone UK announced it would be integrating Web access with all of its standard post-pay tariffs. It means that contract customers will no longer need to buy an additional Internet bundle from Vodafone for £7.50 ($15) per month.

“In the UK and other Western markets where DSL and HSPSA is widely deployed, we feel that WiMAX is a niche market,” says Julien Grivolas, a principal analyst at Ovum.

But niche does not necessarily mean unprofitable, as Grivolas readily acknowledges. The two main WiMAX players in the UK? Urban WiMAX and Freedom4?are each basing their business plans on achieving penetration rates of only around 5 percent in their respective addressable business markets.

UK Broadband, which is trialling mobile WiMAX in the 3.GHz band, goes further and says that WiMAX could indeed be a mass market proposition, even if there is lot of DSL, cable and 3G to compete against. “WiMAX has a role to play in delivering high-capacity mobile and nomadic broadband,” says a company spokesperson. “Analysis shows that HSPA cannot meet the capacity required to serve the mass market. WiMAX does have the capacity and has a timing advantage over the so-called evolution of HSPA networks to LTE. LTE is still some way to becoming a reality and will require significant capex for spectrum acquisition and network equipment.”

Finding a profitable niche
The broadband landscape in the UK has not been off-putting for Intel. In February 2008, the US chipmaker giant (through Intel Capital) made a ‘significant investment’ in Freedom4 to take its equity stake in the company to 48 percent (the remainder is held by Freedom4 Communications, formerly known as Pipex, a UK ISP).

There is no intention on Intel’s part, however, of going into a head-to-head battle with DSL. “I don’t think anybody would, should or even could compete on the basis of being a DSL substitute,” says Ash Patel, managing director of Intel Capital (EMEA). “I don’t think that’s what WiMAX is about. It’s a mis-positioning of the WiMAX value proposition to talk about DSL as being threatened.”

Freedom4’s WiMAX positioning to date is one of wholesaler, offering ‘affordable’ symmetrical data products for the SME market.

Using 802.16d kit from Airspan, which operates across Freedom4’s 84MHz slice of spectrum in the 3-6GHz-3-8GHz frequency band, the Intel-backed operator started commercial WiMAX in Manchester and two towns (Milton Keynes and Warwick) in early 2008.

“We don’t need a high subscriber take-up to make the business work,” says Brendan O’Rourke, COO at Freedom4. “Typically, at the retail level, we need 85 end-users to one base station to start breaking even at an operational level.”  In Manchester, Freedom4 has 6 base stations in operation, which it will increase to 9 by this summer.

Freedom4 offers what O’Rourke says is “high quality symmetrical broadband” (1Mbps, 2Mbps, 4Mbps) for small businesses (5-50 employees). The company has yet to fully work out its product pricing model but O’Rourke feels there is plenty of scope to undercut current symmetrical DSL (SDSL) prices?around £200 per month for a 2Mbps product?and still make attractive margins due to the “low-cost structure of WiMAX technology”.

With WiMAX coverage currently extending to 50,000 premises, Freedom4 aims to increase that number to 500,000 premises by the end of 2008; this could include rollout in other major UK cities, says O’Rourke.

“Our market share target [for UK SMEs] is 5 percent,” adds O’Rourke, “which we feel is very achievable.”

Privately-held Urban WiMAX, which operates a 802.16e mobile WiMAX network (25 base stations) in London in the unlicensed bands of 5.4GHz and 5.8GHz, has a similar market positioning: exploit a gap in the SME market for affordable symmetrical data services. Offering symmetrical products that range from 2Mps to 10Mbps (in 2Mbps increments) Urban WiMAX is luring its ‘sweet spot’ business customer (between 10 and 250 employees) with a combination of high speeds, quick install time, as well as lower prices and better customer service. “We typically charge our customers 30 percent less than other symmetrical data products,” says Sasha Williamson, CEO and founder of Urban WiMAX. “Our installation times are also much shorter. We take ten days but our competition can take between 90 and 120 days.”

Williamson says Urban WiMAX has several hundred customers and has an addressable market in London of around 100,000.  And like Freedom4, Urban WiMAX claims it doesn’t need a large share of its addressable market to generate a profit. “We think a 4-5 percent market share of the segment is reasonable target,” says Williamson. “It maybe niche but it can be a rich niche with the right business model, which we have created and are proving.”

One of Williamson’s financial targets is a customer payback time of between 5-6 months, but the payback period is currently averaging out at 18 months. The lower costs that come from higher volumes should make the 5-6 month target achievable, says Williamson.

Urban WiMAX has a ROI on every base station within 10 months. “We have to do that otherwise we wouldn’t be able to efficiently execute the business model,” says Williamson. “We have said that it would take around 2 years from billing services to net profit and we look set to achieve that target [in Spring 2009].”

Mobile WiMAX nationwide?
Ahead of the UK’s 2.6GHz spectrum auction, UK Broadband, which is fully owned by Hong Kong incumbent PCCW, is best placed to offer mobile WiMAX.

In November 2007, Ofcom extended the conditions of its
3.5GHz licence (40MHz) to allow UK Broadband to offer nomadic and mobile services.  Although UK Broadband is trialling the technology it has yet to give any firm commitment on when it will commercially launch a mobile WiMAX service.

In the meantime, UK Broadband continues to provide fixed wireless broadband using equipment from IPWireless (UMTS in TDD mode) and UT Starcom (proprietary).

The PCCW subsidiary does not disclose subscriber numbers but markets its service as ‘no phone line broadband’, which the company says is especially suited to those who do not have access to a fixed line telephone but yet still want broadband.

Freedom4, which is awaiting clearance from Ofcom to offer nomadic and mobile services, is undertaking 802.16e trials using Airspan equipment. “All the 802.16d equipment we have from Airspan is software-upgradeable to 802.16e,” says O’Rourke. “We are also trialling USB WiMAX-enabled dongles from Airspan.”

The popularity of HSPA dongles in the UK has, for O’Rourke, validated there is a market for nomadic broadband services, which enhances the WiMAX opportunity. “We can compete with HSPA by offering a better broadband experience,” he says. “My feeling is there will be some performance issues with HSPA dongles over the next 12 months as some of the cells get more congested.”

UK Broadband and Freedom4 do not say whether or not they will get involved in the UK’s 2.6GHz spectrum auction (2.5Hhz to 2.69GHz), which is expected to start in September 2008. Funding issues are clearly important considerations (spectrum costs and network capex), but so is market positioning. “How important is true mobility to making the [WiMAX] business work?” asks Intel Capital’s Patel. “We don’t yet have a clear answer to that.”

Both UK Broadband and Freedom4 say that, for urban environments, there are no significant signal propagation benefits at 2.6GHz compared with 3.5GHz. That being the case, there would be no need for them to bid for 2.6GHz spectrum to deliver nationwide mobile voice and data services (over 802.16e) if they decide their focus should remain on delivering fixed and nomadic data services in towns and cities.

Urban WiMAX, as part of the Mobile WiMAX Acceleration Group (M-WAG), a collaboration of companies (including Nortel and Alvarion) exploring the mobile WiMAX business case, has also been evaluating the performance of 802.16e at 2.5GHz through trials conducted in Maidstone, Kent. Williamson is cautious, however, on the business case merits for true mobility services based on 802.16e.

“We’re beginning to become satisfied with the technical performance but that doesn’t necessarily mean that a new entrant will be successful [with 802.16e],” he says. “You need a disruptive marketing position. This could be offering voice for free and having a superior broadband connection, but it’s too early to say. We need to understand more what people will buy”

There has been speculation that the UK’s mobile network operators will bid for 2.6GHz spectrum with a view to hoarding it and so block out potential competitors. “This would be the worst-case auction scenario for WiMAX supporters,” says Ovum’s Grivolas.

Perhaps the best-case scenario would be for deep-pocketed BT to secure 2.6Ghz spectrum and use WiMAX to regain entry into the UK mobile market. The UK incumbent, however, remains tight-lipped about its WiMAX intentions.