WiMAX Business Models: Will New Networks Ever Become Profitable?

Abstract

In reviewing the economics and profitability of WiMAX operations in different environments, the report uncovers WiMAX business models that have more in common with traditional broadband operations, which in the residential market are experiencing increasing commoditization and declining margins. There is a push, led by Sprint Nextel' s Xohm project, toward turning the traditional model on its head, from a predominantly subscription-based story to an open-access model that relies on the development of a strong ecosystem of consumer electronics manufacturers, content providers and third-party service providers. On close examination, we find some parts of the WiMAX value proposition fairly compelling, and others not entirely convincing.

• WiMAX is just a data pipe and will offer the same services that competing technologies will enable: what will ultimately matter to the end user is the experience. Portability and mobility promise to be key differentiators for WiMAX services. The primary driver for end users to adopt WiMAX will be the availability and interoperability of enabling devices and services. Ultimately, WiMAX has to be more about services than it is about technology. The more services an operator is able to layer on its network, the more valuable the network. A WiMAX operator' s commitment to expanding and marketing its network will go a long way toward generating the momentum among equipment and device vendors as well as content providers.
• Price competitiveness will be a key catalyst for WiMAX adoption, so CPE subsidies will be necessary for the consumer segment, and the most powerful pricing proposition is service bundling. The argument that consumers will pay a premium for portability or mobility is not convincing and will hinder subscriber adoption.
• WiMAX business models will differ, depending on the market and the target segment. Urban markets are more competitive, but offer larger opportunities for WiMAX. The WiMAX operators will not have much competition in rural markets, but these markets have limited demand and cannot support many providers. The business market, particularly the small and midsize enterprise (SME) segment, is more attractive for WiMAX operators, at least initially due to the expensive CPE pricing. In our view, the business case for a residential-only WiMAX service is not convincing in the medium term.
• We don' t expect WiMAX operators to introduce services that are unique to the WiMAX network, at least initially. The commercial operations and the plans of prospective WiMAX operators suggest that services will consist of both broadband Internet connectivity and VoIP. In the medium term, traditional broadband subscriptions will be the primary revenue driver. That said, WiMAX cannot be just about Internet access; VoIP is necessary to drive uptake, particularly in emerging markets.
• A wholesale business can essentially help WiMAX operators maximize their network utilization. Wholesale partners can also steer the WiMAX network operator into new, non-core markets at minimal cost to the network operator and with limited threat of cannibalization of the network operator' s user base. The development of wholesale channels on WiMAX networks will, however, take time, its adoption being a function of quality of service, network coverage and device availability.
• The upside to WiMAX adoption can be the realization of the WiMAX community' s vision to expand broadband connectivity to a range of devices that have so far been outside the scope of broadband. This will certainly not happen overnight, and the vision is not limited to the WiMAX community. Indeed, WiMAX will face significant competition from 3G players in getting the attention of consumer electronics manufacturers and others exploring a mobile play.
• As with any new venture, the WiMAX operators will lose money for at least 3-4 years before they reach profitability, and shareholders need to ensure that they are ready to support those initial losses. Any drop in commitment levels, particularly in the case of the service provider, could have a domino effect on the entire value chain, leading to the disintegration of the entire ecosystem. By 2012, we expect Sprint' s EBITDA margin to reach 16% and Max Telecom' s to 9%, to name to WiMAX operators. Enterprise WiMAX operations will enjoy higher margins as a result of higher ARPU and focused business models that optimize costs.

• What kind of business models, strategies and revenue streams will be offered in mature and emerging markets?
• What are the economic realities of launching a new WiMAX business?
• How will open-access models change the scope of mobile broadband business models?
• What is the profitability potential of different WiMAX business models?
• What are the key drivers of profitability (or lack thereof)?

Operators

Quantify the long-term revenue potential of the different WiMAX business models to determine whether to adopt WiMAX as a complement to existing networks or as a substitute for other broadband options.

Vendors

Assess the opportunity for WiMAX infrastructure, devices and services in different market environments.

Financial institutions

Assess the viability of WiMAX business models to support decisions on investment opportunities in new and existing WiMAX ventures.