Deloitte predicts that in 2011 the deployment of next generation Long Term Evolution (LTE) wireless networks will fall short of industry expectations due to the continuing viability of the latest third generation (3G) wireless technologies, such as High Speed Packet Access (HSPA+), and the handsets that work with them.

Spectrum for LTE is currently being allocated, and 130 carriers were running LTE trials at the end of 2010. Many commentators expected widespread rollouts to have happened by now¹; however, Deloitte expects fewer than 30 LTE carriers in 6 countries will offer commercial service by the end of 2011². While a few of the world’s largest carriers will likely deploy LTE, most networks will stick with transition technologies for the next year.

Aside from the truism that ‘everything always takes longer than you think’, there are two main reasons why 4G adoption might be slower than expected. First, not all mobile providers have made full use of their existing 3G spectrum: weak economic growth, low mobile broadband usage and underutilized networks have allowed some providers to defer additional investment. Second, LTE – as it exists today – does not offer the quantum leap in speeds and features over 3G that previous generational upgrades did.

LTE is likely to be a major success in 2011 and beyond, with hundreds of millions of subscribers around the world gaining access to the benefits that LTE can provide³. But rollout will probably be slower than many people expect, especially if some mobile providers that have less congested networks -- or that operate in markets with less immediate demand for broadband -- decide the need for LTE is not as urgent as they previously thought. Providers that do have a need for LTE need it a lot, and they need it now: the big question is how large that group really is.

Although LTE networks are being marketed as fourth generation (4G) networks, it would be more precise to describe them as ‘4G ready’. In their current form they do not offer a quantum leap in performance over 3.5G, which is why some carriers have been able to postpone upgrading.

The technology behind 3.5G and LTE

There are three basic tricks that carriers can use to wring more capacity out of their existing cellular spectrum.

• Place cell towers closer together. In most big cities, however, tower density has already been pushed to the limit. Cutting-edge innovations such as femtocells and picocells could be used to shrink cell sizes further, but have yet to be widely adopted due to cost.
  
• Improve how the RF signal is encoded. Advanced modulation techniques that squeeze more information into a given frequency band are constantly evolving. However, they require complex chips to implement. The latest is called 64 Quadrature Amplitude Modulation or 64QAM (pronounced “kwam”).
• Put multiple antennas on cell towers and mobile devices. This multiple input-multiple output configuration (known as MIMO and pronounced either “me-mo” or “my-mo”) used to be found only in advanced military technology. It enables improved wireless communication that uses the spectrum more efficiently, particularly in urban areas where signals bounce off of buildings and suffer from multipath distortion.

Some aspects of the full 4G standard can be found in current LTE implementations, such as the MIMO antenna configuration, QAM encoding, and channel allocation and scheduling. However, true 4G must offer mobile speeds of 100 Mbit/second, and fixed access speeds of 1 Gbit/second. At the moment, real-world deployments of LTE are only achieving fixed download speeds of around 10Mbit/s . This is much faster than older 3G technologies, but not nearly fast enough to qualify as true 4G.

The latest versions of 3G such as HSPA and HSPA+ -- known as “3.5G” because they are a bridge between generations -- use some of the same tricks as LTE. HSPA+ release 8 uses both 2x2 MIMO and 64QAM, and promises real-world mobile data download speeds of 15-30 Mbit/s by the end of 2011.

Many carriers, especially those with weaker balance sheets or less congested networks, are asking themselves why they should move to LTE when real-world deployments of HSPA+ seems to offer comparable speeds (more than 30 HSPA+ networks around the world currently offer 21 Mbit/s downloads).

The decision between 3.5G and LTE turns out to be more complex than it seems. Although 3.5G theoretically offers competitive speeds, it is less spectrally efficient than LTE and therefore uses more radio spectrum to achieve similar data rates. In some real-world circumstances, HSPA+ uses twice as much spectrum as an equivalent LTE implementation. Also, 3.5G lacks some of the architectural efficiencies of LTE to support enhanced features and services such as video.

Carriers who invest in LTE now may enjoy an easier, less expensive transition to true 4G when it becomes available. However, in 2011, 3.5G will likely be the most commonly deployed “next generation” technology as many carriers around the world do not currently have sufficient funding or need for LTE.

Bottom Line

The global market for deploying LTE networks is expected to be roughly $10 billion by 2014, and many times higher than that in subsequent years. ⁶Most commentators agree that mobile providers will eventually invest heavily in 4G, however, a slower than expected rollout could disappoint some industry observers. Markets where 3G deployment took longer than expected saw significant erosion in equipment prices and margins; in some markets, late-built 3G networks even produced negative gross margins for the equipment vendors⁷.

Mobile providers with severe network congestion and weak ownership of spectrum have little choice at this point: only LTE’s bandwidth efficiency can solve their problems. By contrast, networks with ample spectrum to handle their current and future needs can probably defer LTE for years. In fact, some emerging markets such as rural India and China are still in the process of deploying 3G, let alone 4G.⁸

The more difficult choice will be for providers that fall between the two extremes. Although they might think they can defer LTE investment for 3-4 years, a sudden surge in wireless data devices or usage patterns could create an immediate need for LTE’s spectral efficiency and other features. As the last few years have shown, wireless demand can rise very abruptly. Carriers need to be prepared for data volume growth that is measured in the thousands of percent over three years, as past experience has shown that those rates can occur and even persist over several years.

A provider could spend hundreds of millions on HSPA+ in order to put off a multi-billion dollar investment in LTE, only to find itself facing an immediate need to upgrade to LTE and have to spend the billions anyway.

Handset vendors also face a difficult choice. Most voice traffic is expected to stay on GSM next year, and a large share of data traffic is likely to be handled through dongles, personal mobile Wi-Fi hotspots, and laptops with built-in 3G. Also, LTE networks will probably be more limited than expected in 2011; although they will tend to be available in the most affluent and data-hungry markets. Handset vendors that are thinking about not offering LTE versions of popular phones and tablets must weigh the decision carefully.

Finally, businesses selling services or applications that piggy-back on the network may have to adapt their strategies to a data world where most customers still connect through some flavor of 3G. This could mean deferring launches or finding alternate solutions until the faster networks are ready.

¹Get Ready for the Next Wave of Wireless, Computerworld, 14 March 2007: http://itreports.computerworld.com/s/article/print/287965/Fast_Furious?taxonomyName=Mobile+and+Wireless&taxonomyId=15

²The LTE (and LTE-Advanced) Guide, LTE Portal, 15 November 2010: http://lteportal.com/LTE_Business_Guide/; pp 41 and 48

³Of the population covered by LTE as at year end 2011, virtually all of them will be in Japan, South Korea and the United States. As per LTE Business Guide ibid, page 48, IDATE forecast.

⁴For more information about modulation and MIMO, see: http://www.pcmag.com/encyclopedia_term/0%2C2542%2Ct%3DMIMO&i%3D47052%2C00.asp and http://www.pcmag.com/encyclopedia_term/0,2542,t=QAM64&i=50007,00.asp

⁵First Hands-On Impressions of Verizon 4G: It’s Fast!, GigaOM, 1 December 2010: http://gigaom.com/2010/12/01/verizon-4g-review/

⁶Who’s Going to Win the LTE Race?, GigaOM, 24 November 2010: http://gigaom.com/2010/11/24/whos-going-to-win-the-lte-race/

⁷Nortel reports loss in Q3, sees pickup in Q4, Network World Newsletter, 20 December 2004: http://www.mail-archive.com/nelayan_indo@setio.net/msg07639.html

⁸Analysis: Speedier downloads on your iPhone? Not so fast in Asia, Reuters, 23 November 2010: http://www.reuters.com/article/idUSTRE6AM1OG20101123