A big bet on future of broadband

 In the 1989 movie “Field of Dreams,” a farmer builds a baseball park in an Iowa cornfield, believing that “if you build it, he will come.” In a way, the global mobile industry is making the same leap of faith with Long Term Evolution, the technology behind the superfast wireless broadband networks now being switched on around the world.

In October, mobile operators are building 174 LTE networks in 64 countries, according to the Global Mobile Suppliers Association, an industry group of network equipment makers based in Zurich. With its faster speed and greater capacity to handle the explosive growth in mobile data traffic, operators are wagering that LTE will be critical to future profitability.

This year, operators are spending $3 billion to install LTE base stations and related
equipment, according to ABI Research, an industry analyst in Scottsdale, Arizona. By 2016, ABI forecasts annual LTE spending will be $16.5 billion.

It is a big wager – and one largely made on speculation. Much of this initial investment is being made before the release of a single LTE-capable cellphone, the first of which are not supposed to reach consumers in bulk until next year.

LTE has theoretical download speeds of 300 megabits a second, many times as fast as what most consumers experience with landline broadband.

A quick look at the experience in Germany, one of the first European countries to deploy LTE, suggests that in the short term, and perhaps for even a bit longer, profit may prove as elusive as Archibald Graham, a ghostly figure nicknamed Moonlight in Kevin Costner’s baseball film and the W.P. Kinsella novel, “Shoeless Joe,” on which the film was based.

The big problem for LTE, at least initially, is how much it costs. In Germany, Vodafone is selling a premium package, LTE 50000, that includes download speeds of 50 megabits a second and free landline calls, for 70 euros a month, or $96. The service works with a USB-stick LTE modem on laptops and desktop PCs.

“The average consumer is not going to pay 80 euros a month for LTE,” said Philip Kendall, an analyst at Strategy Analytics in Milton Keynes, England.

“Most European operators are taking a rather cautious approach to LTE pricing. Prices will come down when they choose to push LTE as a mass-market proposition.”

Dirk Ellenbeck, a spokesman for Vodafone Germany, said consumers were gravitating to LTE wireless broadband, which he said drastically cut the split-second wait between keystroke and execution of a Web command. Vodafone started selling a range of LTE data plans last December and is completing its nationwide network this year.

“With LTE, customers are seeing the value of mobile broadband and we are working hard to make it available nationwide,” said Ellenbeck, who is based in Dusseldorf. Vodafone paid 1.4 billion euros in May 2010 to the German government to deliver LTE over 800 megahertz and 2.6 gigahertz frequency bands.

Vodafone, based in Newbury, England, will not say what it is paying to build its German LTE network, although Oracle, a maker of database software, estimates that a midsize operator would spend $200 million to $500 million to install LTE technology.

Germany is the only country so far in which Vodafone, with 358 million customers globally, is selling LTE. By building its own wireless LTE broadband network, Vodafone has said, it will save the 500 million euros a year that it now pays to Deutsche Telekom to lease its national fixed-line network.

Customers who sign up for its high-speed wireless Internet are also saving the approximately 30 euros a month they now pay to purchase broadband service from Deutsche Telekom.

But apart from the initial savings, it is difficult to gauge whether Vodafone and its competitors are going to profit. Vodafone, with 36 million customers in Germany, has about 30,000 LTE users there, said Kendall at Strategy Analytics, and several thousand sign up each month.

But like its competitors, T-Mobile; O2, a unit of Telefonica of Spain; and E-Plus, a unit of the Dutch operator KPN, Vodafone would not disclose how many people actually use LTE service. That is because compared with its total number of customers, there are not many using LTE, and the reason is the price, said Arkadi Panitch, the chief executive and founder of Effortel, a company in Brussels that operates virtual mobile networks for the French retailer Carrefour.

Retailers like Carrefour and Tesco in Britain hire companies like Effortel to lease bulk space on an operator’s network and sell a branded mobile service with low calling, messaging and Internet prices.

Effortel runs Carrefour’s mobile service in Belgium, Poland, Italy and Taiwan. Panitch described the typical user as “a bread and butter customer who uses short text messages for most of their needs.”

The bulk of consumers will not buy LTE, Panitch said, until the price of service comes down to what most people are now paying for third-generation, or 3G, services.

But there is a silver lining for operators. They will probably end up benefiting from the faster networks, Panitch said, because LTE uses the broadcast spectrum much more efficiently than do 3G networks, and can handle much more data traffic.

So LTE may not deliver higher prices for broadband service, he said, just many, many more customers for each operator. “Operators will not get more revenues per customer, but they will end up getting more customers,” Panitch said.