Mobile Backhaul: What is the Ethernet Opportunity for Wholesale Carriers?

| Jul 14, 2008 | Wholesale Telecom Services | Advisory Report

| Analyst: Cindy Whelan

Cindy Whelan Principal Analyst, Business & Wholesale Services

Summary

Since the start of 2008, “donglemania,” the use of wireless broadband PCMCIA devices, has contributed to an explosion in mobile data traffic, with some wireless operators suggesting that laptops are responsible for generating more than 90% of such traffic. At the same time, demand for mobile access to Internet services is growing, fuelled by mold-breaking handsets like the iPhone. In some countries, mobile Internet demand is already outstripping the rapidly increasing sales of operator-owned, media-rich 3G services.

A raft of new phones running Windows Mobile and offering similarly sophisticated access to the Internet are beginning to hit the market and further mobile operating system developments, such as Google’s Android and LiMo, will continue to drive the mobile internet trend. Then there are emerging mobile video-based initiatives such as Qualcomm’s MediaFLO mobile TV network which has AT&T and Verizon as resale customers, and 3 Hong Kong’s video-to-mobile handset download service. These services, along with the new ‘all-you-can-eat’ mobile data service plans are also contributing to the exponential growth in mobile backhaul bandwidth requirements that operators are currently experiencing.

The problems associated with backhauling a rising tide of mobile data traffic were identified by Current Analysis in 2007 (see “The Runaway Train of Mobile Backhaul – Opportunity or Threat for Wholesale Carriers?,” March 30, 2007) and are now becoming acute. Operators have been tire-kicking possible solutions over the past year, feeling safe in the assumption that LTE and WiMAX, with their 10 Mbps-100 Mbps backhaul connectivity requirements, were some way off.

However, they have suddenly woken up to the fact that they must act quickly to increase capacity in their backhaul networks or risk subscriber frustration over performance bottlenecks and the wrath of shareholders in a weakening market as operational costs soar. Wireless operators are now actively looking at ways of overhauling their mobile backhaul strategies to meet demand and reduce costs. Although the IP RAN self-build option that looked so promising last year is still under consideration, fixed carriers have a large opportunity opening up with managed Ethernet services if they can offer the right package.

Current Perspective

There is now a gold rush opportunity to build out next generation access networks to cell towers around the world as demand for mobile data services ramps up more quickly than wireless operators expected. Currently, relatively few cell sites are generating most of the demand – Vodafone, for example, says that half of its mobile data traffic comes from just 10% of its cell sites. Where demand is high, however, operators can need from 10 Mbps-40 Mbps of bandwidth per cell tower today, and adding E1/T1 connections beyond 8 Mbps-16 Mbps is proving uneconomic. To put such capacity demand in perspective, Sprint’s Clearwire WiMAX venture is planning a native Ethernet backhaul network with a minimum connectivity of 10 Mbps per cell site, but with the capability of growing beyond 50 Mbps.

Mobile operators have historically relied on leased-based radio access network solutions, but the prohibitive operational cost of using E1/T1s to backhaul mobile data traffic has been forcing many to consider building their own IP-based backhaul infrastructures. The disadvantages to self-build are becoming more prominent, however. They include the speed with which mobile operators need to deploy additional capacity in their backhaul networks, the unpredictability of mobile data demand in different geographies over the next few years and potential problems implementing the most promising, but relatively immature, carrier Ethernet technology.

Mobile operators are now looking for carrier partners prepared to take on the risk of deploying new Ethernet-based access networks, while reaping the rewards of leveraging such networks for multiple customers. Sprint Nextel, for example, has an annual access spend of $2 billion, split between cell site backhaul and access for enterprise customers. It is partnering with at least one other mobile operator and, in future, with Clearwire, on joint market planning. Together, the partners expect their aggregate market demand to persuade alternative access vendors to build out to their cell towers the fibre-based Ethernet connectivity they all need. Today, Sprint spends more of its access budget with CLECs, but over the past year, it has been working with cable operators on last mile builds to cell sites. Sprint has indicated that it believes cable operators have superior coverage, modern fibre-based networks and highly attractive cost points compared to a Tier 1 local exchange carrier (LEC), and that MSOs could become even more compelling backhaul players if they can deliver an Ethernet over hybrid fibre coax (HFC) solution with the required performance and quality of service.

Fixed carriers that can offer Ethernet connectivity to key cell site locations today, or who can work with wireless operators on Ethernet-based connectivity roadmaps, have a large opportunity in this environment to win new business and potentially to lock mobile operators into their services for the foreseeable future.

There remain stumbling blocks to the deployment of Ethernet-only backhaul networks, including performance concerns, given the immaturity of implementations of the IEEE 1588 version 2 timing standard for Ethernet synchronisation. Though mobile operators do not see this as an insurmountable issue, they are likely to continue with hybrid E1/T1/Ethernet or emulated E1/T1 connectivity to support voice services until they are satisfied that native Ethernet can deliver the performance and quality of service they are used to over TDM networks.

Cisco’s managed IP RAN service, which offers IP SLAs and security across Ethernet/MPLS networks, is an attractive option for wholesale providers moving into the mobile backhaul market, and which want to ensure they can efficiently manage their customers’ performance requirements. Ongoing education is needed to help mobile operators understand that Ethernet-based backhaul solutions can provide more cost-effective performance and finer-grained classes of service than are possible with TDM solutions given Ethernet’s support for traffic shaping.

Carriers can also help mobile operators squeeze considerable operational cost advantages out of Ethernet through on-demand provisioning, especially in light of unpredictable spikes in mobile data demand. Both traffic engineering and on-demand provisioning are also possible with DSL, seen as an alternative and cheaper solution to implementing Ethernet interfaces, especially by FMC operators with their own broadband networks. However, as mobile broadband speeds begin to catch up with DSL, and potentially overtake it with LTE/WiMAX, Ethernet is clearly becoming the strategic technology for mobile backhaul long-term.

Vodafone endorsed Ethernet as the end game for mobile backhaul when it signed a five-year mobile backhaul contract with BT Wholesale in April 2008. During the course of the contract, BT will be responsible for migrating Vodafone’s base stations from TDM-based to high speed Ethernet connectivity using the BT 21C network. The cost of the technology refresh is built into the contract, which gives Vodafone a stable price for backhaul over five years, regardless of whether backhaul traffic is carried as TDM or Ethernet. BT has factored into its pricing the speed with which it expects to replace high cost TDM services with lower cost, higher speed Ethernet services. During the transition from TDM to Ethernet for mobile backhaul, which BT expects to take at least five years, mobile operators will face the challenge of managing increasingly complex, hybrid networks, so the ability to outsource backhaul network management, as Vodafone has in the UK, is likely to be highly attractive. While mobile operators have IP experts in their core network organisation, the RAN is typically run by a different group, which currently lacks the necessary expertise. As mobile operators roll out IP across the RAN, they will face organisational barriers which again, a third party can help to dismantle. Other incumbent or CLEC carriers with plans to support Ethernet in the access network and no competing mobile arm could follow BT’s lead, although such partnerships may be more difficult for FMC carriers to broker.

Recommended User Actions

• Mobile operators should look at carrying out soft joint-planning with one another to aggregate demand and create pooled investment funds for potential cooperative self-build projects. Progress here will go a long way to persuade current suppliers to lower mobile backhaul prices and to make meaningful NGN investments. Wholesale fixed-line players do not want mobile operators to build fixed-line networks for obvious reasons, and mobile operators should exploit this for achieving lower OpEx.

• Given the large investments many fixed line carriers are making in Ethernet access networks, mobile operators should first explore whether there are potential solutions available in this area before deciding to self-build. Mobile operators should consider self-building if potential suppliers are unwilling to discuss their NGN plans to provide a future-proof, scalable and high performance backhaul platform, such as a platform based on a modern MEF-certified Carrier Ethernet solution, or to negotiate sensible pricing based on the fact that a NGN platform will be operationally more efficient and cheaper for the fixed line carrier.

• Mobile operators should assess the partnership model for migration to all-IP RANs. Partnership with a wholesale carrier along the lines of Vodafone’s partnership with BT can reduce the risks associated with moving to a next generation solution and lower the current high costs of transporting mobile data, especially while the mobile data business model is so new. Partnering with a carrier that already has a well-defined NGN migration path is likely to enable a mobile operator to put in place an IP RAN much more quickly than self-building a solution at this stage of the market.

• Mobile operators should keep up the pressure on existing suppliers and their prices by looking for alternative providers of backhaul solutions. Mobile operators should investigate alternative access vendors, such as cable operators and metro players that will be eager to become part of such a rapidly growing solution.

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Recommended Vendor Actions

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