Mexico to Consider Wholesale-Only LTE Model

In markets where there is separation between physical networks and retail sales of communications services, the “dumb pipe” issue is germane.

Where there is structural separation of the network function and all retail and branding operations, what is access but an essentially commodity-like pipe function, equally available to all contestants?

In such scenarios, the value of the product is determined not by the features of the wholesale network, since every contestant gets the use of that resource, at the same wholesale price.

In that case, differentiation on wholesale-provided features is not possible, and pricing differentiation will be limited.

Uniqueness therefore has to be added using elements not sourced from the wholesale network infrastructure provider.

That is not to say the network-based services are actually “dumb,” only that network-derived features will be tough to differentiate. But that’s essentially the business problem illustrated by the phrase “dumb pipe.”

In a number of world markets, service providers are going to have to learn how to manage that issue, as a number of countries are taking a “wholesale-only” approach. Some, as in Australia, are doing so to support fixed network services.

Others are doing so to expedite availability of Long Term Evolution fourth generation networks. As a result, new thinking about sources of value is likely to happen, since retail service providers will not be able to differentiate on the extent of coverage or features of the mobile network.

There might be some ability to differentiate on price or packaging, but that will be limited. Other features and values not related to the physical network and its features will be necessary.

In a way, that makes wholesale-driven markets more susceptible to “dumb pipe” commoditization, even if functional structural separation also means retail contestants avoid the capital investment that otherwise would have been required.

In a way, that means less concern about raising capital, but much more thinking about how to create uniqueness and value. And that might happen in a growing number of markets.

In a number of cases, entire new networks, owned by the government, either are proposed or underway. Australia’s National Broadband Network provides an example in the fixed network segment of the business.

But a group of potential investors also now has submitted a bid to the government of Mexico  to finance the construction of a new wholesale-only mobile network.

That is similar to the situation in Rwanda, where 4G spectrum was donated--not auctioned--to a an entity charged with building a national LTE network. In Rwanda, KT Corp. was selected by the Rwandan government to build a national LTE network, known as olleh Rwanda Networks, (oRn).

The new infrastructure company oRn will operate exclusively in a wholesale capacity, providing services to retail service providers. And it appears that as many as nine other African nations are considering doing something similar.

Nigeria also appears to have taken the wholesale-only LTE approach.

Kenya also is interested in a wholesale-only LTE network approach. Existing mobile service providers, to nobody’s surprise, have not been entirely sure they want to operate under such a structure.

The larger mobile service providers, including Safaricom, would much prefer to own their own spectrum. So it still is not clear whether the wholesale approach will win.

Safaricom serves over 66 percent of mobile users in Kenya, so its participation in any wholesale LTE plan is likely crucial. And Safaricom might well continue to hold out for getting its own spectrum.

Safaricom’s reluctance again focuses attention on the strategic value of spectrum assets, at least where multiple licenses are granted.  

In markets where a single wholesale entity controls all LTE 4G spectrum, the access network itself arguably does not confer competitive advantage.

It’s another example of how “dumb pipe” remains a crucial issue for telecom service providers.

In Mexico, it is unclear whether the new proposal will succeed. The investing group still has not secured all the capital required. The government hasn’t yet agreed to donate spectrum.

But if Mexican regulators agree, the new wholesale company will have exclusive use of 90 MHz of spectrum freed up in the transition from analog to digital broadcasting.

"Without a shared network ... it will be impossible to have sufficient telecoms service coverage, keeping our country behind," Communications and Transport Secretary Gerardo Ruiz Esparza said earlier this year.

That Mexico’s mobile market is in need of competition is hard to contest. Mexicans pay the highest prices for the slowest median broadband speeds in the 34-nation Organisation for Economic Co-operation and Development and mobile penetration is among the lowest in Latin America.

Up to this point, America Movil has had 69 percent share of the mobile market. Number-two provider Movistar, owned by Telefonica, has had 19 percent market share.

Whether Mexico will go the wholesale-only route remains to be seen.
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