Wireless Industry Analyst

• There are many more vendors in the LTE space. Ericsson demoed an LTE solution earlier this year. Other infrastructure vendors are already working towards this. Even QualComm(QCOM) is actively working on LTE prototypes and products. The competition is expected to keep the average selling price (ASP) on either end lower than in UMB which is dominated by QualComm on the handset side and a few players on the infrastructure side.
• Licensing and royalties will be lower in LTE due to the diffused nature of the IP. Compare this against a proprietary UMB that will have QualComm alone laughing all the way to the coffers. This again will have an impact on the ASP.
  
• With Sprint-Nextel already putting its weight behind WiMax, the demand for UMB will be much lower resulting in higher costs again.
  

• LTE is not a GSM technology, it is rather an evolution of the GSM standard
• WCDMA/HSDPA that serve as the link between GSM and LTE is based on CDMA physical layer. In other words, the core over-the-air interface is similar in flavor to CDMA2000
• UMB is not CDMA-based, but is rather an evolution of the CDMA2000 standard. In fact UMB and LTE are based on the same underlying Orthogonal Frequency Division Multiple Access (OFDMA) technology.
  
• This may be bad for UMB, but not entirely for QualComm.
  

• Irrespective of whether UMB or LTE, or for that matter, WiMax wins, at the end of the day, CDMA as a technology is on its way out and even QualComm knows this.
• Since the migration to UMB or LTE will have involved similar infra-structure overhauling, it makes sense for Verizon to go with LTE (I will elaborate on this in a subsequent article)

While the world awaits June 29th to see if iPhone can live up to all the hype and expectations around it, there is another question that looms large: What next for iPhone?

Apple apparently has set a goal to obtain 1% of the US hand-set market share and analyst reports suggest that it may well be a reality. On the other hand, in order to extract maximum value from the wireless industry and also establish pervasive presence, Apple will have to
- expand presence in the U.S.
- enter other markets

Expansion of U.S. presence: iPhone is entering the U.S. market with GSM, a standard that Cingular A.T.&T supports. Cingular also has an exclusive iPhone license for a couple of years. Thus in the U.S., Apple's market share increase depends, to a large extent, on its charm influencing customers to migrate from other carriers to Cingular. While the iPhone perhaps has that attractiveness, it is a very costly proposition to do so. Apart from the high-price of the phone, the cost of breaking existing phone contracts is a likely deterrent to any major migration. The lowest someone is looking at to switch is $650, an amount the average phone-user is unlikely to pay up. The initial sales are likely to come from the business population (that too only for people who look at a highly integrated device) and the gadget-crazy youngster for whom owning an iPhone may be a 'cool thing'. This said, unless the phone performs or if Apple comes up with improved future versions, the 1% figure for sales can stagnate.

Performance implies good voice quality and reasonable data speeds apart from all the innovative features in the phone. These in turn depend on a) the base-band chip-set currently in use and b) the data rates supported by the standard itself. The Infineon GSM chip-sets in the iPhone probably have a good and cheap design, something imperative to keep the overall cost as low as possible. On the other hand, GSM is limited in its data-speeds. And that is also the reason why 3G has gained prominence. HSPA systems can offer higher nominal rates. But the point is, in the U.S., among the non-CDMA providers, only GSM is prevalent. WCDMA networks are being built only now and that too in major cities alone. As I have mentioned in a previous article, the economics of the iPhone would be prohibitive if 3G support were provided because the chip-set will have to be dual-mode: one that supports GSM and WCDMA. This also has an impact on the power management side. Secondly, the data-using population is miniscule. To optimize the phone for a small fraction of the population which is data-savvy may not have been a good strategy for the first version. Granted that this very segment of population also has the highest probability of owning an iPhone but there needs to be a balance. To provide for the needs of that cross-section however, iPhone has Wi-Fi capabilities coming from the Marvell chip-set. To me, it is a great move since Wi-Fi speeds are way higher than the cellular speeds. Besides, it is important in the context of all cellular manufacturers migrating towards an integrated Wi-Fi/cellular chip-set. In other words, while the cellular chip-set companies are slowly recognizing the importance of Wi-Fi integration with cell-phones, Apple is already one-up on them with Wi-Fi being touted as the answer to high-speed data despite the limited coverage options. The notion at Apple is that for their current market penetration strategy and their pricing, 3G is unattractive. Also, if the phone does live up to the hype and more people feel at home parting with around $600, then Cingular would gain a lot of customers and Apple does not have to worry as much about expanding their US presence to other service providers.

Now when would the market call iPhone a failure? I would not doubt the user-interface or the iPod aspects of the new gadget.My doubts would be on one or more of the following-
-the base-band modem features have multiple issues with voice-call processing, interoperability etc.
-user-data experience in the GSM network is below expectations both with respect to speed of connection and services
-interoperability of multiple features like data, voice and music is not as good as anticipated.
The bottom-line: people could get the feeling that they are not getting their money's worth and if that happens, then all the talk of iPhone changing the way people think of cell-phones may not hold water.

If the first version does fail, then Apple will have to scamper for the next revision. It appears that with further advances on the power management side and more integrated features, Apple might be able to meet the demand for higher data-speeds with 3G for the same costs easily. That apart, Apple will have to strike a balance between a)getting more pervasive through other service providers and b) maintaining an aura of exclusivity and snob value. It looks like 3G may hold the key for the next version, more so in case of failed expectations.

Expansion into other markets: The primary target for the iPhone expansion would be Europe where high-end phones are more likely to be sold. Apple would love to get into a market like India, but there is a basic lack of synergy between the Indian model and the Apple strategy, at least by the looks of it. India pretty much thrives on low and medium-end phones and the profits and operating margins are fairly low. With its prohibitive costs, the iPhone is unlikely to cause a huge frenzy in India and the likes. Europe thus becomes a natural next step. With UMTS networks widely deployed by Vodafone, Orange and 3, it is obvious that the iPhone in Europe will invariably have to be 3G ready. If a European iPhone were to come out in the next few months, it is likely to be costlier than its American version given the economics of having the dual-mode phone. The business population of the rest of the world however may have to make do with the GSM version if and when Apple decides to look beyond Europe.

In summary, even for iPhone to survive into the future, leave alone dominate it, Apple will need to go 3G. Many in the industry understand this and are positioning themselves to win the big prize: a place in the iPhone. In fact, it seems that the survival of some of the chip-set vendors may in turn depend on an Apple acceptance. In the sequel, we will examine the various options Apple has in front of it and the factors it may have to consider before it picks chip-sets and vendors.

ABI research Mobile wireless industry analyst, Mr.Shailendra Pandey had a very interesting article on the operators eyeing the handset market seriously. The article can be found at the following URL though you have to register with the ABI web-site to have complete access to it.

http://www.abiresearch.com/products/insight/Handset_Vendors_to_Face_Increasing_Competition_from_Mobile_Operators

The author highlights the most important point I have been making about the wireless market. IT IS A RACE FOR CONTROL. I would, on the other hand, cautiously disagree with Mr.Pandey about the operators trying to poach into the handset market.

There are a few valid outward signs that may have led to that conclusion. A deeper look however suggests a long way to go before the operators can achieve their objective, if that's their intent. Firstly, I see the Reliance move as an isolated case. As I mentioned in my previous article, Reliance is good in identifying the pulse of the average Indian and this is yet another example. For Reliance, it is more an exercise to populate their network (though the phones are sim-card based). They have extablished a good network and as mentioned in Mr.Pandey's article, an unparalleled brand-name with the Indian consumer. Selling their phones would immediately start providing them returns on their infra-structure investment. The hand-set market is more a by-product of the move than the main intent itself.

Of course, it is definitely a cause of worry for Nokia or Motorola. They have failed to capitalize on their brand-names by exploiting the ultra-low cost phone market in India. On the other hand, with the paltry margins per phone in this segment, they may not have much to gain anyways even if they ship volumes of phones to these markets. That has again played well into Reliance's hands. Their margin does not only come from the phones but on the service provided as well. Let us attempt some crude mathematics. If 5 million handsets are sold at Rs100 profit and if 50% of these buyers opted for Reliance service at an average talktime for Rs.100 per month. This would cost Rs.250 for the user. Let us say that Reliance makes Rs.100 as profit per handset after accounting for maintenance and administration expenses. This, then amounts to an annual revenue of Rs.6000 million(around $150 million). Compare this to the profit they may be making out of selling handsets, say around Rs.100 that would give Rs.500 million. So even if the churn is once in 3 years, It is still an extra 3-4% extra revenue annually. Reliance would definitely welcome this but it is immediately apparent where their real sights are on. Infact, I am postulating that they would now be happy if Nokia, Motorola or anybody else also enters the ultra-low cost handset market in India. They would have succeeded in their ultimate objective: Lower the cost of the handset to make it accessible to the bulk of India thereby increasing subscription to their services. Their coffers would then over-flow even further.

As far as Vodafone goes, they would definitely like to assert themselves as the end-provider to the paying customer. But we should remind ourselves that they share an excellent rapport with the handset vendors like Motorola. Besides, as I have mentioned earlier, if they really plan to impact the handset market, they should insert themselves more actively into the standardization and even the R&D efforts. Though they have certain desirables, they are not all too assertive at the standard body meetings to impact the evolution of the standard and also the equipment specifications. With lack of expertise in handset manufacturing, one is left to think how good their phones will be performing when compared to all the original players. So even in their case, it appears to be more of posturing to pressurize the handset vendors. They perhaps have the luxury of capacity available to play the game. They have an expansive GSM/WCDMA network built out to have a relatively fewer poor-performance phones out there.

NTT Docomo of course, has traditionally been a different player exercising complete control in its space and is more of an exception currently. It would be difficult for other operators to get to that status.

As a wireless insider, I would like to see the prices of phones go down while performing better and better. Of course, added to this is the availability of multiple features. If we can get this along with cheap service, then the world will shrink even further. It is going to take time to get there, especially with the wierd industry dynamics. Also, with respect to the main premise of this article, I would personally like to see more trends especially from the U.S. and European operators to see a semblance of them taking control of the handset market. Mr.Pandey's insights are very valuable but I would not like to generalize a few isolated trends.