The train wreck is beginning.
Joe Madden of Mobile Experts believes that there is a major disconnect between what the major network equipment suppliers are seeing (a drop off of shipments, layoffs) and an upcoming strong demand for data capacity. The question is, will that be delivered through more of today's macrocell basestations or through a new breed of small cells. He believes we'll see a major disruption across the industry as we adapt to deployment of large numbers of small cells.
At industry conferences, almost every presentation starts with the "tsunami" chart, showing mobile demand growing by roughly double each year. The strong consumer appetite for data is fantastic, because that means that customers want the mobile services that our industry can provide.
But there is a disconnect here. All of the recent announcements from Ericsson, Huawei, Nokia Siemens, Alcatel-Lucent, and ZTE indicate that base station shipments and radio shipments have dropped for the last 18 months. In fact, Mobile Experts has collected shipment data from multiple suppliers in the base station market, indicating that 2012 will see 12% lower RF transceiver shipments than 2011. What's going on here?
Over the past 20 years, investment in base stations has followed a model that is often called the "two hump camel". The first hump reflects the demand for initial system coverage. Generally, this means a deployment on towers that are spaced widely, and which are underutilized from a capacity point of view. About four years later, those initial systems are upgraded with additional radio capacity and additional towers, and the second "hump" begins. The nearby chart illustrates this phenomenon for typical GSM deployment during the 1992-2002 timeframe. The 2G example illustrates the dynamics more clearly than recent shipment data, because in the 1990's the operators deployed networks simultaneously on the same spectrum. Nowadays, the mix of multimode 2G/3G/LTE base stations (and more frequency bands) makes the 2G/3G capacity shipments blend together with the LTE coverage shipments.
Mobile Experts views the current infrastructure market as a combination of capacity deployment in 2G and 3G, plus new coverage deployment for LTE. Currently, it seems that we have passed the peak in our 3G capacity deployment. In other words, we have outfitted many 3G base stations with wideband transceivers or with a full complement of narrowband transceivers, and 3G sales have diminished. While the industry is looking to LTE for ongoing growth, the initial LTE launch is not driving enough volume to keep the industry growing steadily.
It's a case of macroeconomics and political uncertainty putting the brakes on a generally healthy ecosystem. The demand is strong, but global economic uncertainty is causing a delay in capital investment, either in the form of additional 3G base stations or new LTE base stations.
Enter the small cell. Mobile Experts believes that during the 2014-2015 timeframe, consumers will notice a lack of capacity in widespread locations, and the complaints will begin. Mobile operators will be forced to play defense....and will turn to small cells in 3G and LTE, to add capacity throughout wide urban and some suburban markets. In our recent Small Cells forecast, we predict growth to more than 9 million carrier-grade capacity small cells during 2017.
As time goes by, we become increasingly convinced that the mobile operators will have no choice. Look at the alternatives:
- Operators like Softbank in Japan have tested the limits of dense Wi-Fi deployment, and based on their inputs, it's clear that less than 25% of mobile data traffic can be offloaded to Wi-Fi in the long term.
- Most major operators have choked off their deployment of macro base stations, Radio shipments by the top 5 OEMs are dropping by 12% this year. This trend is incompatible with the data growth our industry's customers are asking for. Further, the slow timing and legal issues involved with tower acquisition make it unlikely that we will double our industry investment in macro networks anytime soon.
- New spectrum will come, but governments are moving very slowly. As LTE spectrum becomes available, we expect new growth in the macro base station market and some relief. But it won't happen fast enough to keep up with data demand that doubles annually.
- Consumer femtocells are useful, but they're not a solution to the capacity crunch. Since 2009, Mobile Experts has been predicting weak growth for consumer femtocells and stronger growth in carrier-grade small cells which can tackle the data tsunami. Our June 2009 forecast called for 1.9 million femtocells in 2011....and the actual figure came in at 2.0 million. Consumer femtocells handle coverage problems, not capacity problems.
- The best solution for operators involves carrier-grade small cells. Mobile Experts expects innovation to happen fast in this area, with advanced HetNet features and highly coordinated networks coming together to boost capacity dramatically.
In short, mobile operators are slowing down their investments right now, but their customers are driving huge demand growth at the same time. The train wreck is coming, and in fact it's already happening in some dense urban locations. When the operators start to feel pressure from the end users in the form of complaints and churn, the supply chain needs to be ready with small cell products that can be deployed quickly. Hold on to your hat.