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The wireless broadband technology is expected to help mobile-phone companies slash billions in expenses for sending calls
When Sprint Nextel Chief Executive Gary Forsee unveiled plans in August to build a nationwide communications network using the latest wireless broadband technology, he boasted that the network will deliver calls and video to consumers at lightning speeds. That new network may bring another consequence: cost savings amounting to billions of dollars a year.
Each year, Sprint (S) pays other companies a bundle to connect cell-phone calls over parts of the network that it doesn't control. In industry parlance, the process is known as "backhaul" and it pertains to a short but expensive stretch of the network controlled by big phone companies including AT&T (T) and Verizon (VZ).
Here's how it works. Say Sprint needs to connect a wireless call from Portland to New York. A call from a cell phone connects to the nearest cell tower. From there it's conveyed to the carrier's switching center, where it's zipped across the country, typically over a fast and cheap fiber-optic cable. But to get from the cell tower to the switching station, it's conveyed over a so-called T-1 backhaul line.
That's where Sprint's new network, based on WiMAX technology, could play a key role. By using WiMAX over that crucial leg, Sprint Nextel could cut network operating costs by two-thirds, figures Andrei Jezierski, partner at venture consultancy i2 Partners in New York.
The few miles that a call travels from the cell tower to the switching center are "the single most expensive network operating cost" for wireless carriers, says Jezierski. Backhaul accounts for more than 30% of wireless network operating costs, which themselves account for about one-third of total operating expenses, he estimates. At Sprint, wireless operating costs added up to $20.1 billion last year.
Cost saving is key as subscriber growth slows and competition gathers steam (see BusinessWeek.com, 12/20/06, "WiMAX IPOs Are on the Way"). Carriers need ways to cut costs fast or watch their financial performance crumble. Sprint Nextel plans to roll out its WiMAX network in a few markets in late 2007.
Sprint Nextel isn't the only company interested in bypassing backhaul costs (see BusinessWeek.com, 8/8/06, "Sprint's Boundless Ambitions"). Cable companies also are testing an alternative fiber-optic technology in hopes of cutting costs associated with the wireless services they are rolling out. A slew of companies like Nextlink, a subsidiary of XO Holdings, have emerged in the past year to offer yet another type of wireless backhaul. Today, Nextlink offers its services in 12 markets.
For these small third-party vendors, the wireless backhaul market could be the ticket to big growth. On Dec. 20, investment bank Jefferies & Co. initiated coverage of Nextlink's rival, FiberTower (FTWR), with a buy rating. In its latest quarter, FiberTower reported revenue growth of 135% over a year earlier. FiberTower's customers include Cingular, Deutsche Telekom's (DT) T-Mobile, and Verizon Wireless.
As alternative backhaul operators spring up, the traditional wireless backhaul business could come under increasing price pressure. At stake is part of the estimated $3.3 billion in backhaul revenue generated by North America's telecommunications companies in 2005, says Michael Howard, an analyst with consultancy Infonetics Research. At Verizon, wireless backhaul services add up to about $1.8 billion in annual revenues, or 2% of total sales. The T-1 business offers among the highest profit margins of all telecom services.
Indeed, wireless backhaul is exploding as cellular service providers start running more bandwidth-thirsty data, such as video and music, over networks. While today an average cell site requires three or four T-1 lines for backhaul, in a couple of years the number might rise to 15, figures Bob Beran, CEO of Nextlink. Worldwide wireless backhaul revenues are expected to double by 2009. In North America, they will grow by 33%, to $4.4 billion by 2009, says Howard. Chances are, these numbers would have been higher if carriers like Sprint Nextel weren't so intent on circumventing their traditional backhaul suppliers' networks.
More Telecom-Cable Competition
As wireless service providers build out their own backhaul infrastructure, they could also grab some of the traditional telcos' corporate backhaul customers. Once wireless service providers deploy technologies such as WiMAX, they could use those fat bandwidth pipes to offer T-1 alternatives to small and large businesses. The wireless companies could deal telcos and other rivals yet another blow by competing with satellite TV, cable TV, and telco TV providers to deliver video channels to neighborhoods and to individual homes.
Meanwhile, cable companies could use their wireless backhaul systems to provide cool new services that would differentiate their offerings from others. An example: By running residential phone and wireless services through the same fiber network, a cable operator might allow a user to have only one phone number, which may ring on a mobile or residential home phone, says Mike Arden, an analyst with consultancy ABI Research. By 2011, 10% of all wireless backhaul traffic will go through cable companies' networks, up from nearly zero today, he estimates.
So, what are traditional backhaul providers to do? Slash prices, upgrade backhaul lines, and offer cool new services like bandwidth on demand. Tom Maguire, senior vice-president of Verizon Partner Solutions, says that his company's wireless backhaul business remains healthy and is growing. And though he doesn't spell out exactly what the measures are, he says the company is "taking whatever measures we have to keep customers on our network."