Is LTE a Revenue Driver or a Cost of Doing Business?

Will Long Term Evolution 4G be a business repeat of 3G in Europe? In other words, will European mobile service providers be able to make money from new services and features enabled by 4G, or discover that, at least in the near term, 4G creates few new revenue sources, and drives up costs?

For an industry already facing sliding revenues and profit margins, that would be a crisis. Mobile revenue in Europe fell 12 percent between 2008 and 2012 to $215.8 billion (€162 billion in 2010 to €151 billion), and it is expected to drop another 3.8 percent in 2013, according to the GSM Association.

The problem is not new. In past decades, for example, U.S. fixed network operators have debated whether fiber to a neighborhood or fiber to the home is the better near-term strategy, in part for reasons of capital investment requirements, in part for revenue expectations about new services enabled by those investments.

And for other reasons, namely overpaying for 3G spectrum, many European mobile operators faced bankruptcy when introducing 3G, which was expected to enable many new services. But 3G did not do so.

In some ways, European mobile service providers now appear to face challenges U.S. fixed network service providers have faced as well, namely the business case for upgrading their networks.

The basic conundrum fixed network telcos have faced is that voice services that drove the business would not benefit much, if at all, from the new investments. And at least initially, it wasn’t so clear higher-speed access services would contribute outsized revenue gains, either, since lower-speed digital subscriber line services also could be delivered (if unevenly) on the copper access networks.

In fact, the one clear new service was video entertainment, a saturated business. In most cases, a telco faces a market-leading cable TV provider and two satellite providers. In some markets, there are other fixed network providers as well. And all that was before the growth of online services.

One thing seems clear: whether Long Term Evolution networks allow mobile service providers in Europe to grow revenues or not, LTE is coming.

But if new revenues are not forthcoming, mobile service providers are going to face excruciating pressures on their cash flow and profit margins. "Of course many are struggling to see the business case," said Joachim Horn, the chief technology officer at Sweden's Tele2, which is building an all-4G network in the Netherlands.

In some ways, LTE is less a clear-cut revenue opportunity and more a threat to profits, even as mobile operators know they have to upgrade. Observers will point to higher levels of competition, market fragmentation and regulatory rules as the reasons U.S. experience with 4G and European expectations differ.

Generally speaking, U.S. operators have been able to charge a premium for use of the faster LTE networks. Though the speed gains might not be so noticeable for mobile data operations, the differences are highly visible for users who tether their smart phones to connect other devices such as notebooks or tablets.

Some seem to believe 4G is simply needed to support growing user data demand, but might not actually help on the revenue front. In that sense, 4G is not a direct revenue driver, only a cost of doing business.

Sometimes that is a decision that must be made, though. Many fixed telco executives pondering the decision to upgrade their access networks likely have come to much the same conclusion: a network with higher ability to deliver bandwidth is mostly a cost of staying in business, not a direct driver of significant net new revenues.

To be sure, video entertainment has emerged as a key new source of revenue, if not so much profit margin. But as one executive once put it, “we need to build fiber to the home to trade market share with the cable operator.”

In other words, investment in fiber to the home was a necessary cost of continuing to stay in business in a competitive market, allowing the telco to add video subscribers it takes from the cable company as the cable company takes voice customers from the telco.

Oddly enough, at the time, fiber to the home was not viewed as much of anything other than a way to keep pace with cable high speed access services, which it was assumed would be a market mostly split between the cable and telco operator in each market.