Northern Sky Research

A Steady Market for Wireless Backhaul via Satellite in Asia

Jul 8th, 2011

Jose Del Rosario
Senior Analyst & Regional Director
NSR

Introduction

Asia boasts the highest population base as well as the highest number of wireless users in the globe. The market is led mainly by the two giants, China and India. The International Telecommunications Union (ITU) reported in October 2008 that China and India combined account for more than 900 million mobile phone subscribers, which is close to a quarter of the globe’s total users.

However, October 2008 was quite an inauspicious month as the global economy took a major turn for the worse. What then were the effects on the Asia Pacific region in general and on wireless usage in particular? In January 2009, India gained a record 15.41 million new mobile subscribers, taking the country’s total number of wireless subs to 362.3 million. The figure is the highest monthly growth, which indicates that the Indian mobile market continues to thrive under severe economic conditions.

China likewise posted impressive gains. In January 2009, China Mobile added some 6.67 million new mobile phone subscribers to reach 463.9 million subs. China Unicom ended January with 134.2 million GSM subscribers, which were up by 839,000. China Telecom had 28.9 million mobile subscribers by the end of January and added over 1 million new subscribers for the month.

The ITU projects that the Asia-Pacific region’s share of the global mobile market is expected to surpass 50% from the current 42% level within the next two years. Mobile penetration currently stands at 40% and average annual wireless growth over the last 5 years has been nearly 30%. Over time, wireless penetration levels for the Asia Pacific is likely to follow historical growth levels given the market acceptance and penetration of the cell phone.

How then can this growth be sustained and accomplished from a backhaul perspective? In a region which covers a large geographic footprint, satellite communications services, specifically for wireless backhaul, will have to be part of the network implementation in order to achieve and sustain historical levels of wireless usage in the next few years and within the next decade.

Rural Demographics in Asia

Asia’s large population is still growing. Should population trends continue, the total rural population base in the region should grow from the current 2.43 billion to 2.68 billion by the end of 2017. Urbanization in many key countries is on the rise, but the rate of population growth is also tempering the population loss in rural areas, which should have a net rural population percentage decline of just 1% from 2007 to 2017. In absolute numbers, this actually represents a net gain of 250 million rural dwellers over a 10-year period.

Apart from the large markets (India and China), demand for wireless service by smaller countries like the Philippines is growing as well. Filipinos send on average a staggering 650 text messages per user per month, which is the highest in the globe. The Philippines is nicknamed the ‘SMS capital of the world’ and the country has more than 54 million cell phone subscribers out of a population of some 97 million, representing a penetration level of 56%. Not bad for a country with a GDP per capital level of just over $3,000.<br>

Rural implementations will be the next step in the wireless industry's target market in the next decade. Indeed, given the increased competitiveness of metropolitan areas as well as the potential of rural markets, technology developments to address nontraditional market territories are becoming more important for incumbent as well as new service providers that are looking to sustain historical subscriber and revenue growth.

And here, satellite backhaul due to coverage and instant infrastructure advantages becomes highly valuable in being part of the mobile ecosystem in many of the globe's Greenfield and emerging markets.

The Future Asian Play for Satellite

Backhaul

Middle, upper-middle and high-income subscribers currently account for the vast majority of wireless subscribers in the region. Future growth for wireless carriers will thus have to come from lower income groups. Non-voice applications via mobile phones, in particular text messaging or SMS, are increasing rapidly and currently account for more than one quarter of mobile revenues for the region’s wireless carriers. In the future, the application suite for rural usage of lower income groups will likely be in the form of text messaging and SMS.

This trend has been recognized and the lowerincome segment is beginning to be tapped. In India, Spice Mobile unveiled in early 2008, the $20 mobile handset called the “people’s phone,” which has no smart features, not even a screen and instead, integrated an audio program that announces the digits dialed by the user. The company believes it can sell 10 million through 2009 in a country where over half the population does not own a cell phone as of yet.

This vast market has gained interest from other phone makers as well, including Nokia. The company is setting its sights on the Asian market where the company is reportedly looking to capture the Indian rural market as a core strategy. The Indian government is targeting 500 million mobile subscribers by 2010 in a country where penetration is as low as 2% in thousands of villages.

In the equipment side of the business, a $20 phone for 500 million subscribers translates to $billions in revenues. In the service side, India may be the world’s fastest growing mobile market but the ARPU level is around US$7, which is one of the lowest in the world. But gaining 500 million subscribers with a $7 ARPU likewise translates to $billions in overall revenues.

The Asian market can certainly be considered a potential goldmine for satellite backhaul services and equipment given the impetus to seriously tap thousands of rural villages representing hundreds of millions of wireless users. Growth is expected to be driven by demand from the largest and most populous countries that include China, India, Indonesia and Australia, while niche opportunities exist for countries such as the Philippines, Cambodia and others.

Market signals are being dictated both by pure market forces as well as government initiatives that bode well for core wireless market players. These developments likewise favor satellite players that develop satellite-based BTS solutions as well as provide space segment assets via C-band and Ku-band transponders.

Steady…Not Explosive Growth

A note of caution is essential in examining market opportunities in Asia for satellite-based backhaul solutions. The addressable market is certainly large and operators and equipment manufacturers are eager to tap the rural user.

However, tapping rural markets despite high subscriber numbers needing satellite backhaul services will not lead to high levels of transponder capacity given that the application suite will be text messaging and SMS. For one, this relatively narrowband traffic despite the volume of messages generated per subscriber such as that of the Philippines can support a large number of concurrent users per transponder.

More importantly, given the potentially lucrative prospects presented by many Asian rural markets, terrestrial wireless solutions are likewise improving their technologies in order to tap into the market potential. And here, satellite, which has been the last option compared to other terrestrial solutions due to cost considerations in urban areas, will likely fall prey to terrestrial technology competition in rural markets once rural opportunities begin to be fully realized.

In order to maintain its value proposition in rural markets, satellite offerings need to improve on cost parameters both in the CAPEX and OPEX categories. But if or when satellite solutions begin to be at par with their terrestrial counterparts, the advantages of reach, ubiquity and instant infrastructure may lead satellite platforms to become one of the first options in enabling wireless backhaul services in the region over the long term. Nevertheless, the application suite in rural areas that is narrowband by nature should lead to steady levels of growth and not robust levels.

The Broadband Wildcard

Steady growth for transponder capacity is drastically changed when usage patterns change as well. Should traffic move from narrowband to broadband in rural areas, the equivalent transponder capacity requirements for backhaul purposes are multiplied exponentially. An illustration could be that a relatively low income rural user who is running text messaging and SMS migrates to higher level application suites such as downloading rich media such as video clips or going to FaceBook.

Is this scenario possible given that the rural user can afford a $20 cell phone unit and only afford an ARPU level of $7? In Third world countries like the Philippines, smart phones from urban users that are highly functional and support broadband applications make their way to rural markets via the secondary or second-hand market. The rate of phone change in Metro-Manila is on average 18 months before the middle-to-high income urban user changes to the latest model. The 18-month or 24-month old phone unit that is still functional and easily repaired make their way to rural markets for about $20 per unit and all that is required is a SIM card that costs $2 to $5. The pre-paid model has also worked quite well and as 2.5G and 3G technologies make their way, the cost of bandwidth in rural markets becomes cheaper over time.

In the satellite backhaul market, Ericsson announced that it had deployed a rural, solar-powered site with satellite transmission for Cambodia’s Star-Cell to expand its network coverage in remote areas. The company claims the satellite transmission feature provides affordable mobile-network coverage in remote areas where other transmission solutions are unavailable. Star-Cell is using Ericsson's solution to expand network coverage and introduce EDGEbased applications to enable mobile health and educational services for rural communities.

The Ericsson implementation is based on current and next-generation technologies such as EDGE in rural areas where in some cases, such as Cambodia, 80 percent of the population lives. Moreover, the application suites targeted in the Cambodian contract are not basic narrowband services such as text messaging or simple voice (though these services are included as inherent features of any wireless service) but for advanced mobile health and educational services that aid the underserved and impoverished population base of the country. This means that bandwidth requirements per subscriber, per base station and for transponder assets should increase due to bandwidth-hungry applications that EDGE and other advanced wireless platforms present over the long term.

For the rural base where electrification is also just beginning to take hold, solar-powered BTS sites are vital for bridging the communications and digital divide. It is NSR's view that should contracts similar to Star-Cell that target broadband application suites in rural areas using solar power BTS be replicated in many other countries of the region, the transponder requirements will change dramatically.

More importantly, apart from BTS sites, other form factors in the wireless ecosystem will have to be developed as well or urban smart phones make their way to rural markets via the secondary market. The overall result is that over time, the number of BTS sites should increase and commensurably, the number of satellite transponders used to support BTS sites and subscriber traffic should increase as well.

But key questions remain, including:

Will mobile operators bet on broadband use in rural markets or will they stick to text messaging and SMS? It would appear that operators and equipment manufacturers are targeting narrowband applications for the moment.

In light of this, will countries or governments then implement Digital Divide programs to enable broadband usage in rural areas? The ITU argues that broadband technologies can help overcome many of the basic development challenges faced by poor countries and broadband connectivity has acted as a catalyst for development. But the ITU itself recognizes that governments must formulate concrete broadband policies and targets, while providing incentives for achieving them.

Given government’s role and the current impetus of the market, NSR is of the opinion that rural broadband usage will remain a wildcard such that wireless backhaul for satellite will remain a steady and not explosive market. But as history has shown, the wireless market can change very quickly.