As consumers enthusiastically embrace smartphones and tablets, the demands on wireless data networks are escalating dramatically.
Smartphone adoption in the United States rose to 27 percent in 2010, up from 16.8 percent the previous year, according to Comscore. Meanwhile, tablets are becoming a larger part of the wireless carriers’ product mix, from Apple’s iPad to Research in Motion’s upcoming BlackBerry PlayBook.
Samsung, which released the Galaxy Tab last year, plans to introduce a new tablet at the CTIA Wireless convention this week. Gartner expects tablets to be so popular that it recently cut its PC unit forecast for 2011 and 2012, noting that it expects tablets to “dramatically slow home mobile PC sales.”
All of this means a lot of Web surfing will migrate from home broadband connections to cellular networks. Just as iPhone users congested AT&T’s data network, a new wave of always-on, always-connected mobile devices promises to put stress on all the carriers’ cellular data networks.
“Data is the growing part of wireless, and wireless is the growing part of telecom,” says Joe Bonner, media and telecom analyst at Argus Research.
The major carriers have already spent billions of dollars increasing capacity and upgrading their networks. Analysts say the carriers will have to find ways to offset those costs while implementing new technologies to meet the increasing demand.
After competing on price with unlimited voice and data packages, some carriers are beginning to exert more pricing power. Verizon plans to introduce usage-based data plans this summer, while AT&T is switched to tiered data plans last June. Analysts believe tiered pricing is here to stay, as it improves average revenue per user.
“The capped and tiered pricing allows them to better monetize that traffic,” says Steve Clement, senior research analyst at Pacific Crest Securities.
Verizon’s fourth quarter 2010 wireless data revenue accounted for 37.1 percent of total wireless service revenue, up from 31.8 percent in the fourth quarter of 2009. AT&T’s fourth-quarter wireless data revenue accounted for 35.5 percent of service revenue, compared with 31 percent in the year-ago period.
But data caps are only part of the solution. Clement notes that carriers will likely offload more data traffic to Wi-Fi networks when available to free up capacity (T-Mobile even offloads voice traffic to Wi-Fi on select phones).
Meanwhile, new network technologies such as 4G LTE (Long-Term Evolution) promise to deliver 10 times the speed of 3G networks while providing better efficiency of network resources. Verizon launched its 4G LTE network last year and introduced its first LTE phone, the HTC Thunderbolt, last week. AT&T plans to deploy its LTE network later this year.
And as LTE adoption spreads, the distinction between data and voice traffic will be completely erased if carriers adopt Voice over LTE (VoLTE) as the means for transmitting voice traffic. Like VoIP technology, VoLTE treats voice as another data packet. VoLTE will allow users to talk and use mobile Internet applications simultaneously, and it will purportedly deliver better sound quality than landline and current mobile phones.
Verizon demonstrated VoLTE at the Mobile World Congress show in Barcelona last month and plans to launch the service next year, while AT&T has its VoLTE sights set on 2013.
Analysts note that voice traffic has already reached commodity status. If VoLTE becomes the standard, carriers will be able to move to an all-data revenue model whereby customers will be billed for the amount data they consume.
“Over time it’s going to be all data,” Clement says. “The LTE networks are data only. As voice transfers from the legacy networks to LTE, it becomes a data application on the network.”
What’s the Frequency?
The wireless data explosion also highlights the need for additional spectrum. When the FCC auctioned off the 700 MHz band of spectrum in 2008, Verizon and AT&T purchased the bulk of it, enabling them to build out their 4G LTE networks. Sprint Nextel and T-Mobile USA, a subsidiary of Germany’s Deutsche Telekom AG , did not submit bids.
Instead, Sprint bet its wireless broadband future on WiMax, a 4G network that operates in the 2.5 GHz frequency. But Patrick Comack, senior equity analyst at Zachary Investment Research, notes that WiMax’s coverage degrades significantly indoors.
“The higher frequencies are really the problem,” Comack says. “The guys that have the 700 MHz frequency are going to be the winners until there’s more spectrum delivery.”
Sprint’s planned retirement of its Nextel service will provide it with additional spectrum, and the company is reportedly considering rolling out an LTE network. But analysts say both Sprint and T-Mobile are especially vulnerable.
“T-Mobile is probably in the worst position,” Bonner says. “With Sprint, it’s unclear what they’re position is. They were gung-ho about WiMax, now they’re talking about LTE.”
Bonner and Comack note that pressure is increasing on the government to free up the 120 MHz band of broadcast spectrum that’s now largely unused after the digital TV transition. The FCC needs approval from Congress to do so, and broadcasters are pushing back.
“If they don’t get low-band spectrum and they have to use high-band, they’re literally going to have to put mini cell sites everywhere,” Comack says. “In order to use this crappy spectrum, they’re going to have to turn cities into microwave ovens. Wireless Internet is intuitively something that’s going to scale forever. There’s nothing anybody can do about this phenomenon other than light up more spectrum.”
Watch CNBC's coverage of the 2011 CTIA Wireless convention on Tuesday, March 22 and Wednesday, March 23 from Orlando, Fla. Technology correspondent Jon Fortt will report live from the convention floor, Jim Cramer will host a special edition of "Mad Money" on Tuesday at 6pm ET, and Michelle Caruso-Cabrera will co-anchor "Power Lunch" from the event on Wednesday at 1pm ET.