FUNDAO INSTITUTO DE PESQUISAS ECONMICAS - FIPE MBA IN PROJECT MANAGEMENT AND TECHNOLOGICAL INNOVATION

WiMAX Business Plan

Sergio Cruzes

So Paulo 2009

Table of Contents

1. 1. 2.

INTRODUCTION ...........................................................................................3 CONTEXT......................................................................................................5 DEMAND ANALYSIS.....................................................................................6 3.1 Fixed Broadband .........................................................................................6 3.2 Wireless Broadband ....................................................................................9 3. BROADBAND REVENUE............................................................................11 4. BROADBAND BARRIERS...........................................................................11 5. END USERS................................................................................................12 6. BROADBAND OFFERINGS ........................................................................15 7. WiMAX CONSIDERATIONS........................................................................16 8. MACRO ENVIRONMENT ............................................................................17

1. INTRODUCTION
Brazil launched this year, 2010, its National Broadband Plan. The aim is to grow broadband at home from 12 million to 40 million by the end of 2014. This means to provide broadband coverage to 72% of total households of the country. Governments expectation is to reduce the broadband cost from around 5% average household income to around 0.2% for the most popular plan (speed up to 512 kbps and download limitation) and to around 0.45% for the plan with speed between 512 kbps and 784 kbps. The different ways to access the internet are changing the peoples behavior. It can be in the business environment , at home or at any other place. Statistics show that the number of internet users in Brazil increased at a rate greater than 40% a year between 2000 and 2008 (source: Barmetro Cisco 2009). As per Ibope Nielsen (Source: Meio & Mensagem, 22/June/2009), the number of internet users reached 62.3 million people in Brazil in the first quarter of 2009. However the number of internet accounts is only 15.05 millions (10.4 million for fixed internet and 4.62 million for wireless broadband internet) At the same time, Telcos revenue from circuit switching telephone systems are decreasing due to mobile systems users growth and the emergence of VoIP systems. The need to offer broadband services are introducing great access technological innovations such as VDSL, FTTH, 3G HSPA , WiMAX and LTE. WiMAX is a wireless broadband access technology for the last mile based on 802.16 standard from the Institute of Electrical and Electronic Engineering (IEEE). WiMAX means Worldwide Interoperability for Microwave Access. This name was introduced by the WiMAX Forum which is an organization with a goal to promote, standardize and define the strategy of WiMAX.

The aim of this work is to capture the most important items that influence the WiMAX business case at 2,5 GHz band and provide insights to minimize risks and uncertainties that occur in the deployment of a WiMAX network. It is shown an example of deployment in So Paulo city, Brazil, containing numbers of base stations, subscribers, payback period and internal rate of return. The study begins with the analysis of the micro-environment providing a summary containing subscribers forecast for the next years. It is also described the macro-environment analysis. On the technological environment should be noted the delay in the availability of WiMAX-embedded devices while on the 3G side there are more than 800 hundred devices available worldwide. It is also commented about the LTE technology which is being developed by most of the greater telecommunications vendors. On the legalpolitical environment, it should be noted the delays on the spectrum auctions and the power of cellular operators which influence the rules for WIMAX such as mobility and spectrum usage restriction. It is also emphasized the importance of the project planning, scope characterization and definition, work breakdown structure definition containing the decomposition of the work to be executed up to the package level, the activities sequencing, costs involved, risks and response plans, schedule and critical path.

Keywords: Broadband Business Plan WiMAX LTE Project Management

1. CONTEXT
The service growing rate of circuit switching telephone systems is starting to decrease in Brazil and Latin America. So, Telcos are investing in fixed broadband access technologies which are showing high growing rates. Also, Cellular operators are also noticing a decreasing on their growing rates for voice services. At the same it is very difficult to provide differentiated voice services. The price competition is one main drivers of the voice revenue stagnation. The exhibit 2.1 shows the ARPU for cellular operators in Brazil

Cellular Operators ARPU

32 30 28 R$ 26
24.8 29.3 29.4 29.6 30.1 27.5

27.3

27.1

27.2

ARPU

24 22 20 1H07 2H07 3H07 4H07 1H08 2H08 3H08 4H08 1H09

Exhibit 2.1 Cellular Operators ARPU For most cellular operators in the world, the mobile data revenue has reached more than 20% of the service revenues. The exhibit 2.2 shows the mobile data revenue participation in the total revenue of the Cellular operators in Brazil.

% of data revenue in the total revenue

Vivo
11.30%
14.00%

Tim

Oi/BrT
10.90% 9.70% 6.40%

Brasil
13.10% 11.20% 10.90% 10.80%

10.30%

9.80%

9.50%

10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

8.40% 6.30%

8.70%

9.40%

12.00%

6.80%

9.90%

1H08

2H08

3H08

4H08

1H09

Exhibit 2.2 - % of data revenue in the total cellular operator revenue

Based on the above chart there is still a big room to increase the availability of data services.

2. DEMAND ANALYSIS
3.1 Fixed Broadband
The fixed broadband penetration in Brazil per 100 inhabitants reached 5.16% at the end of 2008 (source: Barmetro Cisco) and 5.47% at the first quarter of 2009. In 2009, the penetration reached 5.93%. These numbers show that the broadband penetration in Brazil is still very low and it is below the world average (See Exhibit 3.1)

5.60%

6%

11.30%

Broadband penetration: Brazil versus World (per 100 inhab.)

7 6 5 4 3 2 2006 2007 2008 4.3 3 5.1 4.1 6.1 5.3 Brazil World

Exhibit 3.1 Broadband Penetration: Brazil versus World average: (Source: Teleco, Barmetro Cisco, Pyramid Research) 2008 As per site Teleco (www.teleco.com.br), Brazil is in 67 position regarding broadband penetration in 2008, behind Mexico (7.1%) and Argentina (8.0 %). The Brazilian average Broadband residential penetration is 15.94%. This number shows that there is enough room for a very sustainable growth. In terms of internet users and internet accounts, there is a big gap showing a potential demand for internet services. Exhibit 3.2 shows this scenario.

53.9 60 50 40 30 20 10 0 1 10.43 Internet users Fixed broadband access

Exhibit 3.2 Internet users versus number of Internet accounts (in million users 2008)

In terms of technology, the ADSL is the leader one followed by the Cable Modem. Exhibit 3.3 depicts the percentage market share of each technology (69.55% for ADSL, 26.42% for Cable Modem and 4.02% for other technologies)
Broadband connections (in thousand)
12000 10000 8000 6000 4000 2000 0 ADSL Cable Modem Other (Radio) Total 2757 420 7258 Broadband connections 10435

Exhibit 3.3 Broadband connections per technology In 2009, the number of ADSL connections increased 10.55% compared to 2008, reaching 7,705 thousand connections. The growth of Cable connections was 20.97% reaching 3,132 thousand connections. Globally the ADSL is also the market leader penetration for fixed broadband access with 290 million lines representing 68%, followed by the Cable modem with 21% and FTTx with 9% (source: Pyramid Research 2008). The exhibit 3.4 details the fixed technologies participation in the world.

World broadband connections

70% 60% 50% 40% 30% 20% 10% 0% ADSL Cable Modem FTTx Others World broadband connections

Exhibit 3.4 World Broadband Connections (source: Pyramid Research 2008) It is expected that the FTTx technology will be the leader on the growth rate on the next years when compared with other technologies.

3.2 Wireless Broadband

The wireless broadband access service is offered by all cellular operators in Brazil. In the first half of 2009, there were 3,022 thousand 3G mobile devices. At the end of 2009, there were 6,990 thousand 3G mobile devices. In the state of So Paulo there were 1,188 thousand wireless broadband connections, 3G HSPA and CDMA 1xEV-DO (source: Anatel) Based on Yankee Group and Ercisson research (2009), in 2012 there will be 46 million 3G subscribers. Pyramid Research (2008) forecasts that WiMAX will capture 2% of the total 3G subscribers. So, there will be 920 thousand WiMAX subscribers by 2012. Assuming that So Paulo state will have the same subscribers growth rate of Brazil, it is expected that by 2012 there will be 206 thousand WiMAX subscribers in the state.

According to Infonetics Research (2009), Brazil is a great potential market for WiMAX. It is expected that the number of WiMAX subscribers in the country move from 184,000 to 8 million in 2013.
Wireless Broadband - Brazil (in thousand connections)
50000 40000 30000 20000 10000 0 5300 184 184 Maio 2009 8000 920 2012/2013* 3G WiMAX (Pyramid) WiMAX (Infonetics)* 46000

Exhibit 3.5 Wireless broadband forecast based on Pyramid Research and Infonetics

The exhibit 3.6 depicts the estimated number of WiMAX users for the Stated of So Paulo based on Brazils estimate numbers.

Banda Larga Mvel - Estado de So Paulo (mil conexes)

12.000 10.000 8.000 6.000 4.000 2.000 0 Maio 2009 2012/2013* 1.188 47 47 206 2.057 3G WiMAX (Pyramid) WiMAX (Infonetics)* 10.308

Exhit 3.6 Wireless broadband forecast for So Paulo state

3. BROADBAND REVENUE
The wireless broadband will be main driver of mobile operator revenues in Latin America in accordance to the Pyramid Research analysis (source: Teletime magazine, 29/June/2009). This also applies to the wireline operators. The main drivers are: Common platforms based on IP protocol WiMAX technology will force traditional operators to invest heavily on 3G and LTE in order to maintain their competitiveness and increase revenue Telefonica in Brazil has its fixed broadband access called Speedy. This service represented in 2008 to 30% of the company revenue.

4. BROADBAND BARRIERS
The broadband access price in Brazil is the main barrier for the popularization of internet. One study done by the United Nations in 154 countries appointed Brazil as one of the countries with the most expensive broadband access. In USA, the broadband access represents in average 0.4% of the population average salary while in Brazil it represents 9.6% of the population average salary. In accordance to the research done by the Technology Information Usage in Brazil in 2008, 25% of the households in the South and Southeast has a microcomputer while 71% of these households has internet access. In North and Northeast regions, only 7% of the households has internet access.

The internet and computer usage penetration is very dependent to the population salary range and education level. The internet usage penetration for a group of population which has university degree is 83% and for the population which did not conclude the basic education level is only 7%. Regarding the internet usage, the main barriers are associated to the lack of ability to deal with the computer or internet (pointed by 61%), lack of interest (44%) and price (23%). Government launched this year the Broadband National Plan whose idea is to provide to the population access to the internet at reasonable prices. In terms of technology, the plan will consist in the construction of an optical backbone connecting the main cities of the country. This will probably drive the construction of access networks based on different technologies. WiMAX may be one of these technologies. Regarding new entrants operators, the main barrier is the need of a huge amount of capital to build a network and cost to interwork with the internet (in order to provide internet access to its end users). The price in Brazil is very expensive compared to the USA prices.

5. END USERS
For the end-user media consumer, the open TV main content provider in Brazil. However it is beginning a trend to search for different forms to access content , entertainment or information, at devices such as PCs and mobiles. The group of users that is constantly searching for information on different channels other than TV, is composed of persons under 35-year old (Accenture study published at Converge Magazine in 13/April/2009). A study done by Yankee Group and Ericsson shows that the 3G user in Brazil is predominantly young (Teletime news, 29/July/2009).

It is estimated that in the state of So Paulo the population between 20 and 30-years old is around 7,250 thousand (source: IBGE and growth estimations) corresponding to 18.2 % of the total state population. In accordance to the study done by Pesquisa de Condies de Vida 2006, 65% of young population from So Paulo state has high school completed. Assuming that the conclusion of high school as a key factor for acquiring an internet broadband subscription, it can be derived that 4,712 thousand people are potential consumers of broadband internet. By extrapolating the result for the total state population (72% of internet users are young people between 20 and 30-years old, 28% is the remaining part of the population that uses internet), it is estimated that there are 6,545 thousand potential internet users in the state based on the education level criteria. The social classes in Brazil are distributed as per Exhibit 6.1 (source: Associao Brasileira de Pesquisas, 2009)
Renda Familiar Mdia por Ms (em reais)
14.400 15.000

10.000

8.100 4.600 renda 2.300 1.400

5.000 950 620 D 440

0 A1 A2 B1 B2 C1 C2 E

Exhibit 6.1 Social classes in Brazil and family income per month Based on a report of the Exame magazine (08/April/2009) about the consumption of the brazilian families and IBGE information, it can be derived that the social classes in Brazil are distributed as per Exhibit 6.2.

30,00%
25,40%

25,00%
20,70%

21,80%

20,00%
15,70%

15,00% 10,00%
4,10% 8,90%

Percentagem Brasil

5,00%
0,90%

2,60%

0,00% A1 A2 B1 B2 C1 C2 D E

Exhibit 6.2 Social classes percentage in Brazil

In order to better estimate the total potential users based on income salary, the table 6.1 simplifies the number of classes. The total potential users in Brazil is 15,789 thousand. This number can be derived for the state of So Paulo based on the Wireless broadband rate between Brazil and So State. So, the potential wireless broadband internet users in So Paulo state is 3,946 thousand subscribers.

Classes AeB C DeE

Percentagem da populao brasileira 29,60% 42,50% 28,00%

Total de jovens - 20 a Internet mvel 30 anos (mil) (consumo) 11.248 16.150 10.640 85% 30% 13%

Potenciais usurios 9.561 4.845 1.383

Table 6.1 Potential internet users in Brazil based on the income salary

Based on the study of Informa Telecom & Media (2008), WiMAX will capture 6% of 3G users until 2014. So: It is expected 920 thousand WiMAX subscribers in Brazil until 2014 It is expected 237 thousand WiMAX subscribers in the state of So Paulo until 2014

The exhibit 6.3 depicts the estimated growth rate of the WiMAX subscribers between 2008 and 2014 in Brazil and in the state do So Paulo. It is expected a CAGR of 30.8%.
WiMAX Subscribers Growth
920

1000 800 600 400 184 200 0 2008 47

Brasil 237 So Paulo*

2014

Exhibit 3.6 Estimated WiMAX subscribers growth 30.8% CAGR

6. BROADBAND OFFERINGS
The cable modem access reaches only 184 cities representing 74 million people, or 40% of brazilian population which represents 53% of total brazilian comsuption in accordance to the IPC/Target.

While the broadband competitiveness is so tough, the end user has few choices. The leader subscription service is called Speedy (from Telefonica and it is present only on the state of So Paulo). The exhibit 3.7 depicts the main fixed broadband offerings in 2009.

Fixed Broadband Operators (in thousand subscribers)

2500 2000 1500 1000 500 0
Telefonica NET Oi Brasil Telecom CTBC

2460 2120 1920 1762 1320

402 80
GVT TVA

Exhibit 3.7 Fixed Broadband Operators in 2009 An analysis done by IDC in July 2008 (published at

www.puccamp.br/servicos em 06/07/2009), provides the broadband access prices in Brazil. The average price of minimum throughput (128 Kbps) was US$ 30. In Argentina, 512Kbps was US$ 27.05.

7. WiMAX CONSIDERATIONS
The WiMAX community is doing a great effort to expand the possibilities and alternatives of devices and data applications from laptops and PCs, PDAs and other devices. WiMAX Operators around the world point the following key factors of this technology:

Broadband access where it is not possible to reach with xDSL technology. The facility to focus the service at regions where there is demand allows a better return on investments

New player who intent to provide broadband services in a very short deadline

Unblunding restrictions done by traditional operators Differentiation in comparison with xDSL. WiMAX may be positioned as a fixed network, portable, mobile within the same network.

IP architecture Lower spectrum cost compared to 3G

8. MACRO ENVIRONMENT
As per KOTLER (1995, p. 49), the macro environment consists of the powers that affect the whole micro environment: demographic, economic, technological, natural, political and cultural