How Far Does WiMAX's Claim of Providing Value for Money Go in Emerging Markets?

By: Ozgur Aytar, Pyramid Research
(Business News & Technology News, 7 Jul 2008)

In emerging markets, WiMAX operators generally charge higher monthly fees for Internet access than do DSL providers, but they argue that their customers get value for the money. Not only is WiMAX capable of offering competitive throughput, particularly for uplinks, but WiMAX operators also promise improvements in broadband coverage, speed and ease of connectivity, quality of service, security and customer care.

Pyramid Research's new report, "WiMAX in Emerging Markets: Operator Lessons in Strategy and Technology", looks into just how meaningful such value creation is in the context of emerging markets. Some customer segments will undoubtedly pay extra for better service in any market, but with WiMAX at times more than twice as expensive as a DSL connection, we don't believe there is a specific customer segment large enough for a sustainable business case in emerging markets. In emerging economies, price competitiveness is a key catalyst for WiMAX adoption, and WiMAX networks must serve multiple end-user segments to be relevant.

WiMAX operators have been playing the value-for-money card so far. Prices for WiMAX-based service are generally higher than for DSL service at similar or equal download speeds, but WiMAX boasts higher uplink throughput and download limits. Take Bulgarian WiMAX provider Max Telecom: compared with incumbent BTC's DSL service, Max's WiMAX connectivity offers almost four times higher uplink throughput, but its monthly fee under a 12-month contract is nearly twice as high (Exhibit 1). Likewise, Iranian WiMAX operator Pars Online plans to charge $90 to $100 per month for a 256kbps residential connection, about three times the going price of an equivalent DSL connection, $35. The main reason for such price differences has been the CPE costs; ParsOnline says its investment per CPE is in the $150 to $200 range. In contrast, DSL modem prices can go as low as $40 to $50.





With such cost considerations, WiMAX operators have had to limit their addressable markets to small and midsize businesses that are outside DSL coverage. A singular focus on this market segment may not be the best bet operators could make. True, businesses are less sensitive to pricing than residential users and place a greater emphasis on the reliability of the Internet connection, but they will switch to more cost-effective options as they become available. ParsOnline provides a DSL service as well—unbundled off the incumbent's network. It says it rolls out WiMAX only where the incumbent doesn't have coverage because DSL is not only more economical for its business and residential customers, but also more cost-effective for the operator itself.

That said, DSL is not cheap in emerging markets, either. We took DSL's average revenue per subscriber (ARPS) and calculated it as a percentage of GDP per capita, and then compared the results in a number of emerging countries with two developed countries, the UK and the US (Exhibit 2). The results show that in relative terms, DSL users in emerging markets spend substantially more money on Internet connectivity. While DSL users in the US spend only 0.5 percent of their annual income on access, that figure is above 3.6 percent in Egypt.





Affordability has been a key factor inhibiting adoption of Internet access in emerging markets to date. Price competitiveness will therefore be a catalyst for WiMAX adoption across these markets. Operators can charge higher rates in areas where they don't have direct competition, but in urban markets, where WiMAX players in most cases are late entrants, it is important that their pricing is on par with other access options, if not lower.

It is for this reason that WiMAX business models in emerging markets are as much about innovative cost management as they are about driving revenue. Successful low-cost strategies are primarily a game of scale and volume—scale and volume to drive cost savings, put pressure on suppliers and bring down average per-unit levels. This is critical considering that unit prices have to decline. The value is produced by building scale and generating profits from large volumes of traffic, even if the margin is relatively low.

As shown in the case studies included in Pyramid Research's report, some operators have already rolled out innovative service offerings and pricing schemes that could build on their scale. To lower capital and operating costs and drive adoption in the residential market, Russian WiMAX operator Enforta has devised a model for multiunit buildings whereby multiple customers can share a CPE for a lower monthly fee of $20. Besides traditional contract subscriptions, some WiMAX operators have also introduced monthly and pay-as-you-go models to attract residential users. The bottom line is that the network must serve multiple end-user segments. On the revenue side, the operator has to make access to the network as easy as possible. The more subscribers on the network, the better: low- and high-end residential users, SMEs, larger corporations.

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