The Delta Insight

November 2012

LTE Asia article series

Authors: Mar Pages - Principal - mp@deltapartnersgroup.com James Ong - Manager - jo@deltapartnersgroup.com Amit Arora - Manager - ami@deltapartnersgroup.com Anna Arlorio - Senior Associate - aar@deltapartnersgroup.com

Part One: Considerations on timing, benefits and learning from early VoLTE adopters

Introduction
With the advent of Long-Term Evolution (LTE) technology, mobile operators across emerging and advanced markets are riding a wave of change. Together with providers in the United States, Asian players are leading what will likely become a new era of data connectivity and technological advances. As a leading player in the telecommunications advisory field, Delta Partners has its finger on the pulse of the industry through client engagement, leadership events and industry conference participation. This article, the first in a series of four discussing in greater depth some of our views on key LTE issues, covers the developments in VoLTE. The choice of topics presented is not intended to be exhaustive, but represents our view on what factors could have the most significant impact on the wireless industry in the short to medium term. The four topics we cover in this series are: 1. VoLTE: Are we ready, technically and strategically, for a new era of IP communications? Voice over LTE has been commercially launched by Metro PCS, a regional operator in the United States, and also in South Korea, where all operators now offer the service. However, some other players like Docomo, are intentionally delaying the launch since they have historically led the rest of the world in mobile technology advances, their rationale for giving the lead to Korea is rather interesting. 2. Changes in pricing paradigms: Although LTE is still in its infancy, some pricing trends can already be observed. We discuss regional differences and offer guidance on optimal pricing based on strategic intent and the constituencies of each operator. 3. Korea awakening: Related to the first article, South Korea has emerged as the leader in LTE, overtaking Japan from the standpoints of both consumer sophistication and technological advancement. Is this lead sustainable? We discuss the drivers behind this rapid social and technological shift. 4. Samsungs entry into the LTE equipment race: From our discussions with operators and vendors, it has become clear that Samsung has decided to enter the LTE equipment race with some substantial bets. How likely are they to succeed? What is the thinking behind this move and what pitfalls might they encounter? Given the stated ambitions of this electronics giant, we attempt to gauge the feasibility of their aggressive targets.

Does VoLTE mark a turning point for mobile voice?

Telcos operating in developed and emerging markets alike have bemoaned the steady decline in mobile voice revenue as markets become saturated and subscribers show greater interest in over-the-top (OTT) services such as Skype and Viber. Some estimates have projected a potential compound annual growth rate of negative 2-3 percent in voice revenue between 2012 and 2020.1 In rolling out LTE networks to meet a burgeoning data tsunami, mobile operators have found themselves facing another conundrum subscribers have taken for granted seamless voice handovers on 2G and 3G networks and are demanding the same from LTE 4G networks. In lieu of deploying fully enabled VoLTE networks, mobile operators have to date deployed interim measures such as dual-mode operation and circuit-switched fallback (CSFB) solutions. These are more easily implemented over existing legacy networks, but are not without shortcomings. Dual-mode operation results in much poorer handset battery life and radio interference, while CSFB entails longer call setup times and truncated data sessions during handover. One major development, however, is that the industry has generally agreed to converge towards VoLTE, forgoing alternatives such as voice over LTE via generic access (VoLGA). This will help accelerate standardisation, which in turn will facilitate deployment. Exhibit 1: Options for providing voice in an LTE world
Active dual-mode operation LTE voice options (Dual Radio; SV-LTE)
Data only LTE CDMA2000

Circuit Switched Fall Back (CSFB)

Data only

Voice over LTE via Generic Access (VoLGA) Voice

Voice

Voice over LTE with Single Radio Voice Call Continuity (VoLTE with SRVCC) VoLTE Data 2G/3G voice

Voice

LTE 3G/GSM

VANC LTE

Data 2G/3G voice

LTE

3G/GSM

3G/GSM

Deployments Description New network equipment Legacy network upgrades Strengths Weaknesses 3GPP compliance

Verizon, Sprint AT&T, 3 For CDMA2000 operators to Voice completely onto the
connect concurrently to both networks 3G/GSM network with LTE only for data

None (abandoned) Dedicated hardware to

interwork GSM/3G and LTE networks Controller (VANC) server

SK Telecom, LG Uplus Full VoLTE functionality

with handover to 2G/3G and concurrent voice/data

None

None

VoLGA Access Network Security gateway / AAA

IMS core IP Short Message Gateway None Excellent voice quality Concurrent voice & data Needs IMS Yes (Pushed by GSMA)

None Good voice quality Concurrent voice & data Poor battery life Radio interference Yes

All MSCs in LTE coverage Less impact on network Supported by LTE phones Some delay in call set up Truncated data session Yes

None Excellent voice quality Concurrent voice & data No longer supported No

Source: Alcatel Lucent, Qualcomm white papers, Rohde & Schwarz

Mobile operators are asking three key questions about LTE voice 1. When is the right time to deploy VoLTE? 2. Will VoLTE offer any benefits versus 3G voice and OTT voice applications? 3. What key lessons can be drawn from early VoLTE adopters?

Telecom Asia The Future of Voice

1. When is the right time to deploy VoLTE

Operators that have launched LTE have largely reported smooth migrations, with customers generally still satisfied with the CSFB LTE voice solution. This has resulted in a general mindset that VoLTE is not an immediate priority, and issues such as offloading and small cells should take precedence because of their higher potential for disruption. According to a recent survey2, a majority of mobile operators see VoLTE as an initiative that is still about two years away. Exhibit 2: Operator timeframes for VoLTE
Sources of disruption for mobile operators in APAC over next three years
(%)

When will VoLTE happen?

(%)

56% 100 100 100 89 74 63 22% 22%

Wi-Fi Small cells FDD/TDD offload LTE

New LTE mobile Advanced devices

VoLTE Already happening Within 1 year Within 2 years > 3 years Never

Source: Radisys survey

In our view, it will be some time before we see large-scale VoLTE deployment, with operators delaying rollouts until a tipping point is reached to ensure it is effective and efficient. Four factors will be key to this decision: a. b. A minimum level of LTE coverage to reduce the amount of CSFB support required. The need for IP multimedia subsystem (IMS) specifications to be better defined to make them as comprehensive as those for 3G circuit-switched voice (e.g. traditional CS services such as SMS and USSD). c. d. A critical mass of VoLTE-enabled handsets and hence a limited number of remaining 2G/3G subscribers. Deployment of a fully enabled IMS core network.

In some developed markets such as South Korea however, operators are choosing to lead on VoLTE deployment precisely because LTE has reached nationwide coverage, and LTE competition has evolved beyond network coverage to the delivery of enhanced services. VoLTE services are seen as tools for differentiation and SK Telecom and LG U+ have both launched HD VoLTE ahead of KT Corp. Additionally, as we will discuss in the next section, Koreans are very high data users and spectrum optimisation is a key concern for all operators.

Radisys

On this note, one key driver encouraging deployment is that VoLTE is viewed as a technology that improves the efficiency of radio spectrum usage. Japans NTT DoCoMo claims that VoLTE is three times more spectrally efficient than 3G voice3 and hence can potentially result in freed up spectrum that can be assigned to other uses, such as LTE data or wideband voice. In addition, a full migration to VoLTE enables the potential for legacy 2G (or even 3G) networks to be switched off. This happened sooner than expected in South Korea, where 2G networks were deactivated earlier this year.

2. Will VoLTE offer any benefits versus 3G voice and OTT voice applications?
OTT voice providers currently offer services for free or very cheaply, but with the potential for poorer audio quality compared with 3G switched voice, less handover stability and longer call setup times as they rely on the integrity of data connections. OTT voice services also generally fare poorly in not providing full support for ancillary voice services such as emergency calls, caller identification and voice mail. VoLTE looks set to maintain or even extend these competitive advantages. For example, SK Telecom claims that its HD voice has a call setup time up to twenty times shorter than that of 3G voice.4 The operator is also able, through QoS Class Identifiers (QCI), to prioritise voice traffic over OTT voice for a superior user experience. Under LTE QCI standardisation, voice has the top QCI of Level 1, whereas other TCP-based traffic, where OTT will belong, falls under QCI Level 6. LG U+ claims its HD voice reaches a Mean Opinion Score of 4.72, 23 percent higher than that of CDMA2000 EVRC voice.5 It should be noted that HD voice is not new or for that matter, limited to LTE networks. HD voice is estimated to have been launched in 45 networks across 35 countries over GSM, UMTS and LTE networks.6 For consumers, however, HD voice benefits such as increased clarity are a much more digestible idea than the rather abstract VoLTE, and so Korean operators have chosen to cleverly couple the two concepts. It is likely, though, that VoLTE/HD voice is simply viewed as one of the many plates of armour that mobile operators are deploying in defence against OTT providers. For now, however, the ability of such value-added services to incrementally monetise VoLTE investments remains uncertain SK Telecom offers HD voice at the same rate of KRW1.8 per second as its 3G voice service.7 We explore this topic further in our second article in this series on LTE pricing. Nonetheless, VoLTE is merely a forerunner for a suite of IP services loosely grouped under the Rich Communication Suite (RCS) umbrella dubbed joyn. RCS is being mooted to provide new features such as real-time multimedia sharing, enriched messaging and presenceenhanced services that are likely to be easier to monetise beyond voice services. The key touted benefits of RCS include inter-operator QoS control (e.g. removing the dependency Skype has on end-to-end Internet connection quality) and native operator support (e.g. removing the need for user accounts and passwords).

3 4 5 6 7

NTT - LTE Voice Roadmap presented at the LTE Asia conference SK Telecom - SK Telecom LTE 2.0 Innovation LGU+ - Go To Market Strategy Global mobile Supplier Association Telecom Paper

LG U+, for example, is looking to cloud-based games, real-time screen sharing and in-car infotainment services to augment its stable of IP services. Some of these, for example concurrent voice and data such as sharing a photo during a call, would not have been possible on an interim CSFB-based network. New to mobile operators? Perhaps, but certainly not to OTT providers. The jury is still out on whether delivering such services, albeit with QoS controls, is sufficient to counter the extremely compelling proposition of free. Exhibit 3: Comparison of operator versus OTT mobile voice
Voice performance and service availability comparison
(%)

3G voice Performance Quality Handover performance Call set-up Billing / security Services E.164 (normal) numbering Emergency calls Caller identification Priority calls Voice mails

VoLTE

OTT VoIP

Note: Assuming fairly ubiquitous VoLTE network with little dependency on CSFB Source: NTT Docomo, Delta Partners analysis

3. What key lessons can be drawn from early VoLTE adopters?

a. Device availability is key: In August 2012, SK Telecom, LG U+ and MetroPCS Communications raced to be the first to launch VoLTE. While the initial response to the superior quality has been positive, take-up is likely constrained by device availability. True VoLTE handsets are currently limited to the Samsung Galaxy Note 2 HD and some Optimus LG handsets, although NTT DoCoMo, which does not yet offer VoLTE, has a suite of exclusive devices for its LTE service that serves as an example for other large operators to follow. b. Spectrum fragmentation matters: During LTE rollout, LG U+ experienced the implications of spectrum fragmentation. In using the less popular 850MHz band for LTE together with SK Telecom, it faced the uphill task of developing an entire ecosystem in terms of network and devices. Nonetheless, with Samsungs foray into the LTE equipment space, Korean operators have the benefit of being able to leverage Samsungs ability to deliver across the entire value chain. This synergistic partnership enables operators to close ecosystem gaps in

terms of devices and equipment while Samsung benefits from showcasing the success of early adopters. In rolling out its LTE service, KT Corp learned the hard way about the ramifications of shutting down its 2G CDMA network in order to re-farm the 1800MHz spectrum. Although it finally prevailed in the High Court against the objections of 160,000 CDMA users, the nine-month delay for a court decision coupled with the negative public relations fallout has likely cost KT Corp dearly. KT Corp is now in third place in the LTE race, having been overtaken by LG U+ and SK Telecom in terms of subscriber numbers. Exhibit 4: Mobile subscribers and market share in South Korea
Mobile subscribers in South Korea (Aug 2012)
(million) LTE Non-LTE LTE as % of total subscribers

Mobile market shares in South Korea (Aug 2012)

(million) Non-LTE market share LTE market share

18% 26.8

50% 11% 17.4

48%

35% 33%

21.9

32%

15.4

10.0 6.7

20% 15%

4.9 SK Telecom

2.0 KT

3.3 LGU+ SK Telecom KT LGU+

Source: Korean Communications Commission, Delta Partners analysis

c.

Value extraction may be delayed: In South Korea, VoLTE also appears to be a defensive measure. Given that HD Voice is charged at the same price as 3G voice, the objective with HD voice is to maintain or stem the decline in voice ARPU rather than stimulate growth. The same situation is likely to be seen in other markets as mass-market subscribers are unlikely to see the value in paying more for HD voice. Once operators launch a fuller suite of IP services, however, value extraction may become more feasible. Despite these challenges, the Korean market has seen tremendous success in LTE uptake, and some of this traction is likely to spill over onto VoLTE.

In conclusion
VoLTE does promise benefits for most operators in terms of technical superiority and reducing dependence on legacy networks, but it is only likely to be deployed as part of a more holistic LTE/RCS strategy in the next one to two years. Early adopters have had to struggle with evolving technology standardisation, device availability and spectrum fragmentation, but these hurdles will diminish with more deployments. Operators encouraged by the success of LTE in South Korea would do well to note the unique circumstances of that market and gauge the ability of their own markets to perform in a similar fashion.

Delta Partners is the leading TMT advisory and investment firm in emerging markets. With more than 160 professionals, the firm operates across 50 markets in the Middle East, Africa, Central & Eastern Europe, Emerging Asia and Latin America. Delta Partners provides three synergistic services: management advisory, corporate finance and investments from its offices in the UAE, South Africa, Spain, Singapore and Colombia.

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Delta Partners delivers tangible results to its clients and investors through its exclusive sector focus on telecom, media and technology, and a unique approach to services, combining strategic advice and a hands-on pragmatic approach.

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