4G Backhaul--Operational Innovation Enables Business Model Success

Notwithstanding the difficulties, it is possible to transform 4G backhaul from a business-model-breaker into a source a competitive advantage through considered application of operational innovation--business model and technical changes that ease investment requirements, deployment time, and ongoing operational costs.

Backhaul Options

Three types of backhaul are commonly used to link cell sites to the core network: traditional copper-twisted pair lines (T1/E1), fiber, and microwave. Each type offers its own set of advantages and disadvantages relative to five key 4G business drivers: capital investment, operational expense, deployment speed, customer experience, and business-model flexibility.

Copper-Twisted Pair Lines (T1/E1)
Copper is the dominant technology in North America, where nearly 90 percent of cell sites employ T1 lines for backhaul. These lines are typically leased from the local exchange carrier, and therefore, have minimal up-front capital investment but high operating expenses. Deployment speed is reasonably fast, as long as the metro-area network does not require too much augmentation, or there is no excessive need to build out circuits to new sites. Support for the customer experience is good, provided enough bandwidth is initially deployed, although lead times must be considered when subsequently scaling capacity. Since the lines are leased, a carrier has limited flexibility in shaping its business model; for example, it is typically not possible to wholesale excess capacity.

Fiber
Fiber has been increasing its cell-site backhaul share, and now accounts for nearly 25% of worldwide connections. Carriers typically lease fiber lines from cable television and data service operators and other companies that own fiber networks. As Figure 1 shows, fiber backhaul has similar characteristics to those of copper T1/E1 in regard to the five 4G business-model drivers. The main difference is better operational expenses at 4G data rates.

Microwave
Microwave is the leading technology outside of North America, with more than 60 percent of cell sites in Europe, the Middle East, and Africa using microwave backhaul. As an owned asset, microwave requires substantial capital up front, but it has much lower operating expenses than leased lines at 4G data rates. Microwave can have deployment speed challenges due to lengthy timelines to secure required leasing and zoning approvals--particularly for hub sites. The technology supports the customer experience very well, with capacity changes easily managed via radio upgrades. It also provides excellent business-model flexibility, with no restrictions on the use of the capacity.

Backhaul Economics

4G capacity models predict the need for backhaul capacity significantly beyond the handful of T1/E1s that typically serve today's 2G/3G networks. Looking at required data rates for typical services, usage profiles, penetration rates, and multiplexing gains, backhaul capacity on the order of 40-100 Mbps per cell site is likely to be required to support 4G services over the next few years.

When comparing the economics across backhaul options, the key metric is cost per Mbps per month, where cost includes both amortized capital investment and operational expense. Actual costs may vary considerably depending on the region and the operator's purchasing power.

Across the range of interest, copper T1/E1 tariffs simply can't compete. Microwave and fiber are competitive--with microwave offering a slight advantage at higher data rates (at which its fixed costs can be amortized over a broader traffic volume). Once a microwave link is established, the incremental cost to carry additional volume is very small indeed.   

Obviously, these are aggregate conclusions. Any deployed network will use multiple backhaul technologies depending on the characteristics of a particular cell site, such as line-of-site issues and proximity to a fiber loop. Nonetheless, microwave offers compelling economics in many situations.

Overcoming Microwave Challenges

To realize the potential benefits of microwave backhaul, its key disadvantages--capital investment and deployment speed--must be overcome. 

As an owned asset, a microwave network (particularly the hub sites) can be financed. By involving third-party investors, an operator can strike the desired balance between capital investment and operational expenditure. With options ranging from co-investment to lease-back, capital requirements do not need to be a gating factor. Similarly, a number of options exist to address the timeline and resource requirements in deploying a microwave network. Multiple vendors now have capabilities ranging from design and deployment support to turn-key build/operate managed services. In short, by leveraging the existing ecosystem, the obstacles to microwave can be overcome, leaving the 4G carrier with a fully controlled asset and a chance to really apply operational innovation to its business model.

Backhaul as a Competitive Advantage

Most 4G networks will be overlay networks that use a large majority of existing cell sites--sites that not only currently support legacy 2G/3G traffic, but in many cases are collocation sites serving more than one carrier. Given that the incremental cost to carry additional traffic over a microwave network is minimal, and that a 4G operator can control the use of this asset, industry leaders may soon be able to transform backhaul from a cost center to a profit center. 

Consider an example: A 4G operator incurs expenses to amortize and operate a microwave backhaul network to support 4G services. However, with little additional investment, the microwave network can bear the legacy 2G/3G traffic (now carried by leased backhaul), which results in significant cost offsets. In addition, our 4G operator can generate additional revenues by reselling excess bandwidth to collocated carriers to carry their 2G/3G traffic.  

Operational innovation thus leads to a new business model in which the microwave costs are offset through a combination of cost savings and new revenue opportunities. This model can substantially defray the initial costs associated with the excess 4G backhaul capacity available while user data volume is building. Moreover, its value proposition will grow as data volume increases: on the 4G side, since the average microwave cost/Mbps/month is decreasing and on the 2G/3G side, since leased line cost offsets increase. 

By applying operational innovation, the wireless industry leaders will overcome the challenges and transform backhaul into a competitive advantage. Successful companies are already applying innovation as a repeatable, core capability in all areas of their business. And in doing so, they are setting the stage for 4G success.

About the Author
Greg Chiasson, a director in the Communications and Media Practice of PRTM, develops and implements innovative operational strategies for telecoms industry clients. He has worked with service providers, equipment and device manufacturers, software companies, and media firms worldwide to create new businesses, increase product and service innovation, deploy new communications networks, and increase operational and organizational effectiveness. His work includes significant experience with GSM, CDMA, iDEN, and WiMAX businesses. Prior to joining PRTM, Greg worked for several Silicon Valley start-ups as well as Motorola in R&D and general management positions. He can be reached at gchiasson@prtm.com or +1 847.430.9014.