knowledge centre

Are some operators in danger of over-spending on their radio access networks?

The combination of increasing traffic and declining revenue is squeezing mobile operators’ profit margins and underlines the importance of cost reduction.

The demand for wireless data is growing, but not at the rates that some commentators suggest. Believing the hype could lead mobile operators – particularly those in developed markets, such as Europe – to try to over engineer their networks at great cost to their businesses.

It is well known that the demand for wireless traffic is growing. The proliferation of new devices (such as smartphones and tablet PCs) in developed regions and the increasing number of connections in emerging markets is driving this growth. In the past year, several industry commentators have predicted that traffic will grow at annual rates greater than 100% – that is, more than doubling each year. Analysys Mason agrees with the trend, but not the rate of growth.

Our view is far more conservative. Predictions of a hundredfold growth in mobile network traffic over the next five years fail to take crucial market constraints into account. The main factors that will constrict traffic growth on the macro [outdoor] networks are:

  • The increasing amounts of Wi-Fi offload: In markets that have a good fixed infrastructure, other networks such as Wi-Fi and femtocells will carry an increasing proportion of mobile traffic. Wi-Fi’s lack of full mobility is often not a major drawback because end users away from home will typically consume data-hungry services in quasi-static environments. Operator announcements about the roll-out of some small-cell solution are almost becoming a daily occurrence. This is not surprising because they are a cost-effective way of increasing capacity without compromising the quality of service delivered to customers.
  • Dilution of the subscriber base: Traffic growth is being driven by existing and new subscribers consuming data (as well as voice services). In the first instance, new data subscribers tend to be affluent, early adopters who are data hungry. Followers tend to demand far less data. As the subscriber base grows to include ‘followers’, the effect is to reduce the average traffic per user and so the rate of traffic growth slows.
  • Limits to operators’ capital: Traffic forecasts should in our view always take into account whether operators can afford to build the network capacity needed to meet the growth in traffic. Forecasts that fail to do so are potentially dangerous.

According to our latest forecast, wireless network traffic will grow by 42% per year worldwide (see Figure 1). This is a more conservative figure, but even this represents substantial growth that will affect all operators – particularly when the decline in revenue per gigabyte is taken into account (see Figure 2).

Figure 1: Average wireless network traffic per connection, worldwide, 2011–2016 [Source: Analysys Mason, 2011]

Figure 1: Average wireless network traffic per connection, worldwide, 2011–2016 [Source: Analysys Mason, 2011]


Figure 2: Revenue per gigabyte of mobile broadband traffic, worldwide, 2011–2016 [Source: Analysys Mason, 2011]

Figure 2: Revenue per gigabyte of mobile broadband traffic, worldwide, 2011–2016 [Source: Analysys Mason, 2011]

The combination of increasing traffic and declining revenue is squeezing mobile operators’ profit margins and underlines the importance of cost reduction. Operators must explore cost reduction measures, such as increasing the scale of their operations, merging the fixed and mobile arms of combined (fixed/mobile) operators, outsourcing, and sharing procurement and operations. To reduce costs without compromising quality of service, operators need to forecast traffic growth accurately. Capital intensity is an essential input to any forecast of data growth and without it demand forecasts are academic.