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Wi-Fi Mobile
Expansion of Wi-Fi Critical for Data Growth & Complementary to Cellular
Telecom Services, Cable, Satellite
Philip Cusick, CFA AC
(212) 622-1444
J.P. Morgan Securities LLC
See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Asia Telecom
James Sullivan AC
+65-6882-2374
J.P. Morgan Securities Singapore Private Limited
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Global Equity Research
April 27th, 2015
Agenda
2
Phil Cusick - U.S. Telecom, Cable & Satellite
Wi-Fi Usage vs. Cellular Data Growth
The Current State of Wi-Fi Deployment
Cellular Carrier and MSO Wi-Fi Efforts
Potential for Comcast Wi-Fi First Offer and Impact on Current Carriers
Thoughts on Google Fi
Unlicensed Spectrum Overview and Potential
1
James Sullivan – Asia Telecom
Wi-Fi Emerging Business Models in Asia
Wi-Fi Offload Trends by Country
Municipal Builds Could Encourage Wi-Fi MVNOs
3
PHIL CUSICK U.S. TELECOM, CABLE & SATELLITE
4
An Introduction to Wi-Fi
What is Wi-Fi?
Wi-Fi refers to any wireless local area network (WLAN) products that adopt the IEEE’s 802.11
standards using unlicensed spectrum, specifically 2.4 GHz and 5 GHz
What is a Wi-Fi hotspot?
A hotspot as a physical location where one can obtain Internet access via Wi-Fi. It could be
public (i.e., free and open to anyone) or private (i.e., credentials are required to access the
network) but the line is blurring with the advance of multiple SSID routers
Wi-Fi relies on IEEE’s 802.11 standards for technical guidance
802.11ac became the latest standard in December 2013 – it can provide speeds close to a gigabit
per second but the only downside is that it only works on the 5 GHz band
Wi-Fi Standard Launch Year Spectrum band Spectrum detail Allocation Est. throughput Range Power
802.11a 1999 5GHz 5150-5350MHz; 5725-5850MHz 300MHz Up to 54 Mbps 20m 800mW
802.11b 2000 2.4GHz 2400-2483.5MHz 83.5MHz Up to 11 Mbps 30m 100mW
802.11g 2003 2.4GHz 2400-2483.5MHz 83.5MHz Up to 54 Mbps 30m 200mW
802.11n 2009 2.4GHz / 5GHz 2400-2483.5MHz; 5150-5350MHz; 5725-5850MHz 383.5MHz Up to 450 Mbps 50m 100mW
802.11ac "5G Wi-Fi" 2014 5GHz 5150-5350MHz; 5725-5850MHz 300MHz Up to 800Mbps 10m
802.11ad "WiGig" TBD 60GHz 60GHz TBD 6000MHz+ Up to 7Gbps
802.11af "Super Wi-Fi"* 2014 54-790MHz (VHF/UHF) 54-790MHz Whitespaces using cognitive radio TDB TDB
802.11ah* TBD <1GHz / 900MHz (ISM) 902-928MHz low power and mesh networking 26MHz Up to 40Mbps
Source: SNL Kagan, FCC, Qualcomm
IEEE 802.11 Wi-Fi Standards by Spectrum Band and Data Rates
5
Wi-Fi Usage Continues to Ramp but Cellular Data Growth
Remains Healthy on Rich-Media Consumption
Wi-Fi usage on smartphones already exceeds cellular
Cisco estimates that 57% of mobile data usage in the US today is already on Wi-Fi, or ~2.5
GB/month vs. cellular usage of ~2 GB/month, and expects the share to move up to 66% in 2019
We see Wi-Fi as a necessary complementary technology rather than a cannibalistic one, and
expect carrier profitability to remain healthy
We expect cellular data to grow at 24% CAGR in the next five years to reach 5.7 GB/month in
2019 and Wi-Fi to grow by 29% CAGR to reach 9.2 GB in 2019
1,914
2,495
3,197
4,036
4,849
5,656
2,537
3,445
4,600
6,054
7,585
9,229
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2014 2015E 2016E 2017E 2018E 2019E
Average Cellular Data Usage Average WiFi Data Usage
30.4%28.1%
26.3%
20.2%16.6%
24.3%
75.4%
35.8%33.5%
31.6%
25.3%21.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2014 2015E 2016E 2017E 2018E 2019E
Cellular Usage Growth Wi-Fi Usage Growth
Cellular and WiFi Data Usage (MB) Cellular and Wi-Fi Data Usage Y/Y Growth
Source: J.P. Morgan estimates.
6
The Current State of Wi-Fi Deployment
The US has ~50.6m public Wi-Fi hotspots with many more coming
40 million amenity public hotspots, 9.7 million ISP hotspots deployed by ISPs and ~900k pay-
per-use hotspots by commercial Wi-Fi operators such as Boingo
We expect homespots supplied by ISPs to quickly penetrate the 66% of US households that
already have a Wi-Fi router and public hotspots to grow with dual-SSID devices in businesses
ISPs, especially cable, have invested heavily in Wi-Fi
Cable focuses on residential areas and has deployed 9.7 million hotspots
Carriers depend on Wi-Fi to help with cellular offload but build Wi-Fi relatively on their own
Hotspot Type Access Count % Total
Amenity Free, non-account based at public locations 40,000 79%
ISP Public ISP subscription-based at public locations 657 1%
ISP Homespots ISP subscription-based at private locations with dual SSID 9,000 18%
ISP Community ISP subscription-based in neighborhoods and public locations 9,657
Commercial Paid access at public locations 900 2%
Total sharable hotspots 50,557 100%
Total US Wi-Fi households 78,400
Wi-Fi Hotspots by Access Type in the US (000’s)
Source: SNL Kagan, FCC, Qualcomm
6.6 13.2 23.6 33.7
44.4 51.9 56.3 66.7 70.2 74.2 78.4 82.5 86.4 89.1 91.3 93.3 95.5 97.6 100.0 101.3 102.7
6%12%
21%30%
39%45% 48%
57% 59% 63% 66% 69% 72% 73% 75% 76% 77% 78% 79% 79% 79%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
20.0
40.0
60.0
80.0
100.0
120.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Wi-Fi HHs (M) Wi-Fi HHs as % total HHs
Wi-Fi Household Penetration in the U.S.
Source: SNL Kagan,
7
Many Municipal Efforts Failed to Deliver on Grand Promises
Many city-wide municipal Wi-Fi projects announced between 2006-2008 failed
Early Wi-Fi OEM and network developers overestimated the capabilities of early Wi-Fi
technology and underestimated the density and backhaul required for a functional Wi-Fi network
Additionally many lacked a sustainable funding/revenue stream to support the network
Only “Anchor tenant” muni Wi-Fi with committed capital worked for a while
– Minneapolis decided to sign a 10-year contract for $12.5m with USI Wireless which operates
a Wi-Fi network across the city
Recently some cities have restarted Wi-Fi deployments on a much smaller scale in selected areas
For example, downtown city centers, parks with a high visitor volume, and low-income areas as
a way to provide public internet service
NYC is launching a city-wide Wi-Fi system called LinkNYC in partnership with CityBridge
LinkNYC Kiosks
Source: CityBridge
8
Wi-Fi Business Models Are Evolving
Out-of-home Wi-Fi access used to center around the pay-per-use model offered by Wi-Fi
operators and aggregators, such as Boingo and iPass
The business model has mostly shifted to an ad-supported one by businesses that want to offer
customers a wireless broadband service
Boingo can generate good revenue from advertising as the Wi-Fi network operator at locations
such as airports that want to offer Wi-Fi as an amenity for free
Retail stores like Starbucks also run advertising when customers connect to its Wi-Fi and will
likely continue, if not increase, the ad load after the network management is transitioned to
Google/Level 3 from AT&T
LinkNYC looks to advertising revenue to fund the conversion of NYC’s pay phones to Wi-Fi
hotspots
9
Cable Companies Remain Most Aggressive in Wi-Fi Deployment
Cable MSOs have collectively deployed ~9.7 million hotspots including dual SSID APs with 9m
homes spots and 670k public hotspots
We estimate Cable WiFi Alliance has 450k hotspots contributed by Comcast, Time Warner
Cable, Cablevision, Bright House and Cox
Comcast has been aggressive with its primarily in-home Wi-Fi deployment with dual-SSID routers
We estimate Comcast has 8m in customer locations, and 350k in public spaces in top markets
Cablevision has nearly ubiquitous Wi-Fi coverage on Long Island but more limited in NYC, CT, NJ
We estimate 150k are in public areas and ~1m are dual-SSID devices in customers’ homes
Time Warner Cable has taken a more focused approach to Wi-Fi
We estimate that it has 70k pubic hotspots, mainly in NYC, LA, Kansas City and Austin
Bright House ahead of peers in public Wi-Fi deployment
We highlight that BHN has 45k public Wi-Fi hotspots (~10 APs per thousand homes passed)
Cox started late but has been aggressively deploying access points and Charter plays catch-up
with cable peers after fixing its plant
Private Routers Public Hotspots Total Hotspots
CMCSA* 8,000 350 8,350
TWC* 6,000 70 70
CHTR NA 3 NA
CVC* 1,000 150 1,150
COX* NA 5 NA
Bright House* NA 45 NA
Cable WiFi Alliance 450 450
Public Hotspots by Cable Operator
Source: J.P. Morgan estimates
10
Cellular Carriers Show Varying Interest in Wi-Fi Deployment
The attitude of wireless carriers toward Wi-Fi has evolved dramatically in the past decade.
Carriers used to see Wi-Fi as a competitive technology and resisted including it on their handsets.
But as cellular technology moved to 3G and especially 4G LTE and smartphones became
widespread, carriers began to realize their networks and spectrum could not handle the explosive
growth in mobile data traffic.
AT&T actively pushes customers off to Wi-Fi networks
AT&T has >34k public hotspots including retail stores and Wi-Fi Hot Zones, and the carrier’s
handsets automatically connect to these hotspots unless handset owners proactively turn it off
Sprint is expanding Wi-Fi calling to more handsets for better call quality and partners with Boingo for
better coverage
Sprint has deployed Wi-Fi calling to 21 Android-based phones and could potentially add the
capability to every Android. Additionally We believe Sprint signed a multi-year contract with
Boingo in March 2015 to allow up to 40 million handsets to offload traffic to Boingo’s M&O
hotspots
T-Mobile has Wi-Fi calling on all handsets including the iPhone 6 to address indoor coverage
Once a customer turns on Wi-Fi on a T-Mobile handset all calls are made on Wi-Fi (where
available) by default. Additionally UnCarrier 7 introduced a Wi-Fi router offer but take rate is low
Verizon eschews Wi-Fi, preferring the small cell route
Verizon does little to proactively push customers to using Wi-Fi, instead preferring to leverage its
high-quality 4G network for data access with the help of small cell densification
11
Wi-Fi Operators/Aggregators Look for Different Niches
Boingo facilitates Wi-Fi offload and Hotspot 2.0 roaming
Boingo offers 1 million plus Wi-Fi hotspots in high-traffic locations, e.g. airports and has 70% of
data traffic going over its managed and operated (M&O) hotspots
It currently has Wi-Fi offload trials with 3 of the 4 US Tier 1 carriers and announced a contract (we
think with Sprint) to allow 40m of the carrier’s handsets to offload traffic to Boingo’s M&O hotspots
Boingo plans to launch Hotspot 2.0 at 21 airports across the US to provide an automatic log-in
experience for customers and easier roaming with operators, e.g. TWC’s Passpoint hotspots.
iPass aggregates global Wi-Fi access and resells to enterprises
It has aggregated over 18 million hotspots in 120 countries, and handles the backend settlement
and billing with numerous network operators
iPass’s main customers are enterprises that sign volume discount contracts with iPass to provide
data access to their employees traveling overseas vs. paying expensive cellular data roaming
Devicescape crowd-sources and curates Wi-Fi hotspots into a network
Devicescape has already amassed 20 million public Wi-Fi locations, primarily amenity Wi-Fi
hotspots at many recognized retail chain stores in the US and now broadening to Europe
It partners with Tier 2 or below wireless carriers in the US and abroad and turns carriers’ handsets
into “phantom” Wi-Fi AP detectors with Devisecape’s software and discovers new hotspots as the
handset owners travel around, and adds new hotspots to the virtual network.
12
In-Flight Wi-Fi Is Becoming Ubiquitous
We estimate that 57% of commercial aircraft in North America have Wi-Fi onboard, with the vast
majority of them in the US, and another 19% has been awarded but not yet installed
Gogo, Global Eagle (Row 44), Viasat/LiveTV and Panasonic install IFC in the US
Gogo makes up the vast majority of the current backlog in North America at close to 1,000
aircraft
Wi-Fi with broadband connectivity (vs. narrowband) is much less penetrated among business jets
We estimate only 17% of 18k business jets excluding turboprops have Wi-Fi with broadband
speed onboard
Gogo39%
Global Eagle10%
Thales/LiveTV5%
Panasonic3%
To be installed
19%
Unawarded24%
Gogo ATG15%
ViaSat2%
Unawarded83%
Wi-Fi on N.A. Commercial Aircraft
Source: Gogo Inc., J.P. Morgan estimates
Wi-Fi on N.A. Business Aircraft
13
Cablevision: We Expect Little Uptake on Wi-Fi-Only Freewheel,
but More Offers Are Likely to Come
Cablevision reports 1.1 million Wi-Fi hotspots in its footprint
We estimate 150k are in public areas and ~1m are dual-SSID devices in customers’ homes
Freewheel: A good start but we think the uptake on a Wi-Fi only product will be limited due to no
option for wider coverage
For Cablevision customers, numerous available free text/talk apps reduce the appeal of a paid
package
For non-customers $29.95 package runs into a very competitive market
We expect that Cablevision profitability could be substantially affected in 1Q15 by the
Freewheel marketing
We note Cablevision has a history of coming to market quickly with offers and refining over time.
We expect more products like Freewheel will come over time.
Talk Text Data Additional MB Rate Plan
Cablevision
WiFi only (existing HSD subs) Unlimited Unlimited Unlimited $0.00 $9.95
WiFi only (non-HSD subs) Unlimited Unlimited Unlimited $0.00 $29.95
Republic
WiFi only Unlimited Unlimited Unlimited $0.00 $5.00
WiFi + Cell Talk/Text Unlimited on WiFi & Cell Unlimited on WiFi & Cell Unlimited on WiFi $0.00 $10.00
WiFi + 3G Data Unlimited on WiFi & Cell Unlimited on WiFi & Cell Unlimited on WiFi & 3G $0.00 $25.00
WiFi + 4G Data Unlimited on WiFi & Cell Unlimited on WiFi & Cell Unlimited on WiFi & 4G $0.00 $40.00
FreedomPop
Basic on Cell 200 500 500 $0.025 $0.00
Unlimited Annual on Cell Unlimited Unlimited 500 $0.025 $6.67
Unlimited Monthly on Cell Unlimited Unlimited 500 $0.025 $10.99
Unlimited Everything on Cell Unlimited Unlimited Unlimited $0.00 $19.99
Wi-Fi/MVNO Pricing Comparison
Source: Company websites
Freewheel Advertising
14
Comcast: Interested but Not Rushing into a Wireless Launch
Comcast has expressed interest in a Wi-Fi-first product but we believe that a trial is possible in the
next year but that a full national launch is unlikely before mid-2016.
The core assets for Comcast’s wireless product will be its perpetual MVNO deal with Verizon and 25-
year MVNO deal with Sprint in addition to its 8.35 million, and growing, Wi-Fi hotspots
Why wireless? We think wireless seems a logical next driver for growth given its long-running interest
We think potential target audiences could be rich-content consumers, “cord nevers” or users of
data-centric devices like tablets to convince customers the value-add of a bundled service
But Comcast also needs to overcome customer wariness on poor quality of service, secure an
attractive handset line-up (the iPhone almost a must) with financing options, and expand its retail
presence over time
Cable companies will have to overcome customer wariness. Additionally Comcast may need to
expand its retail presence over time Comcast Wi-Fi Coverage with Cable WiFi Alliance
Source: Company website
15
-
5.0
10.0
15.0
20.0
25.0
30.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Carrier Smartphone WiFi Data Usage Comcast Smartphone WiFi Data Usage
Comcast Wireless Base Case Scenario
Subscribers will likely be required to have a broadband subscription to maximize Wi-Fi offload
Assuming 10% of residents in homes passed (with ~3 people per home), or ~20% of HSI
customers, take the wireless add-on, Comcast could reach 16.6m customers by Year 10
ARPU will come at some discount, but unlikely to be massive to ensure revenue and profit growth
and offset substantial cellular roaming costs
We model a $40 ARPU on an unsubsidized account and would expect Comcast to offer a range
of options between high-usage levels at $50 or higher and some lower-use plans at $20-30
Total usage expected to be higher than carrier smartphones given a potential value proposition
with large buckets and a mobile video-seeking audience
Incremental Wi-Fi offload potential is somewhat limited but still attractive. We model offload to
grow from 59% in 2016 to 70% at Comcast Wireless (vs. 65% for carrier) in 2025
We expect a CMCSA wireless subscriber’s total data to grow from 8.6 GB to 16.1 GB, including
cellular usage growing from 3.5 GB/month in the base year of 2016 to 5.6 GB/month in 2019
Cellular Usage Growth – Carrier vs. Comcast
Source: J.P. Morgan estimates
-
2.0
4.0
6.0
8.0
10.0
12.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Carrier Smartphone Cellular Data Usage Comcast Smartphone Cellular Data Usage
Wi-Fi Usage Growth – Carrier vs. Comcast
16
Comcast Wireless Base Case Scenario
Network costs are primarily
for cellular offload and we
estimate $10/GB
Capex should be limited as
we don’t expect Comcast to
build a CVC-like dense Wi-
Fi network
We assume a $50-100
handset subsidy which
could be low and CPGA
of $450 vs. $200 at
prepaid carrier and $600-
1,000 at Big 4
Wireless EBITDA margins
expected to reach 35%
10bps decrease in cable
churn from bundling could
save $400m/year or
150bps cable margin
Our base case doesn’t
model in potential
wholesale Wi-Fi revenue
Comcast wireless rollout Start Year
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Year 0 1 2 3 4 5 6 7 8 9 10 Annual growth
Homes pops ('000) 55,220 55,772 56,330 56,893 57,462 58,036 58,617 59,203 59,795 60,393 60,997 1.0%
Passed pops ('000) 149,950 151,450 152,964 154,494 156,039 157,599 159,175 160,767 162,375 163,998 165,638 1.0%
Covered pops ('000) 104,965 121,160 152,964 154,494 156,039 157,599 159,175 160,767 162,375 163,998 165,638 Terminal % coverage
% coverage 70% 80% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Incremental covered pops ('000) 104,965 16,195 31,804 1,530 1,545 1,560 1,576 1,592 1,608 1,624 1,640
Terminal penetration
% of terminal penetration 0.00% 10.00% 20.00% 20.00% 15.00% 10.00% 7.00% 4.50% 4.50% 4.50% 4.50% 10.0%
Incremental penetration 0.00% 1.00% 2.00% 2.00% 1.50% 1.00% 0.70% 0.45% 0.45% 0.45% 0.45%
Penetration 0.0% 1.0% 3.0% 5.0% 6.5% 7.5% 8.2% 8.7% 9.1% 9.6% 10.0%
Subscribers ('000) - 1,212 4,589 7,725 10,143 11,820 13,052 13,906 14,776 15,662 16,564
Net additions ('000) - 1,212 3,377 3,136 2,418 1,677 1,232 854 870 886 902
Average subscribers ('000) 606 2,900 6,157 8,934 10,981 12,436 13,479 14,341 15,219 16,113
Churn 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Gross additions - 1,357 4,073 4,613 4,562 4,313 4,217 4,089 4,312 4,538 4,769
Annual ARPU Growth
ARPU $40.00 $40.20 $40.40 $40.60 $40.81 $41.01 $41.22 $41.42 $41.63 $41.84 $42.05 0.5%
Service revenue ($m) - 292 1,406 3,000 4,375 5,404 6,151 6,700 7,164 7,640 8,130
% growth y-y 381% 113% 46% 24% 14% 9% 7% 7% 6%
Post-2020 Annual growth
Cable unaffected revenue 48,836 51,293 53,634 55,805 57,747 59,191 60,671 62,187 63,742 65,336 2.5%
Wireless % of unaffected cable revenue 1% 3% 6% 8% 9% 10% 11% 12% 12% 12%
Wireless accretion to cable revenue growth (b.p.) 227 302 243 171 118 84 69 69 69
Total company unaffected revenue 76,511 78,566 81,562 84,349 86,928 89,102 91,329 93,612 95,953 98,351 2.5%
Wireless % of unaffected total company revenue 0% 2% 4% 5% 6% 7% 7% 8% 8% 8%
Wireless accretion to total company revenue growth (b.p.) 145 199 163 116 81 58 47 47 47
Annual $/GB Growth
Per-GB cellular MVNO Costs $10.00 $8.00 $6.88 $5.92 $5.09 $4.38 $3.76 $3.24 $2.78 $2.39 $2.06 -14.0%
.
Monthly data use per customer (GB) 6.6 8.6 10.7 13.4 16.1 18.5 21.3 24.5 28.1 31.5 34.7
% growth y-y 30% 25% 25% 20% 15% 15% 15% 15% 12% 10%
Monthly WiFi per customer (GB) 3.8 5.1 6.5 8.4 10.5 12.2 14.3 16.6 19.4 22.1 24.3
% of total 57% 59% 61% 63% 65% 66% 67% 68% 69% 70% 70%
Monthly cellular use per customer (GB) 2.8 3.5 4.2 5.0 5.6 6.3 7.0 7.8 8.7 9.5 10.4
% of total 43.0% 41.0% 39.0% 37.0% 35.0% 34.0% 33.0% 32.0% 31.0% 30.0% 30.0%
CCPU* of cellular roaming expenses $28.38 $28.14 $28.78 $29.35 $28.65 $27.53 $26.42 $25.34 $24.28 $22.63 $21.41
% of ARPU 71% 70% 71% 72% 70% 67% 64% 61% 58% 54% 51% Annual Growth
Other CCPU (incr. billing, custom svc, etc) excl WiFi $3.00 $2.85 $2.71 $2.57 $2.44 $2.32 $2.21 $2.10 $1.99 $1.89 $1.80 -5.0%
CCPU including upgrades $31.38 $30.99 $31.48 $31.92 $31.09 $29.85 $28.63 $27.44 $26.27 $24.52 $23.20
Pre-marketing expenses - 225 1,096 2,358 3,333 3,933 4,272 4,438 4,521 4,478 4,487
Pre-marketing cash flow - 67 310 641 1,041 1,471 1,878 2,262 2,643 3,162 3,643
Pre-marketing margin 22% 23% 22% 21% 24% 27% 31% 34% 37% 41% 45%
CPGA** (assumes no subsidy or upgrade expense) $200 $198 $196 $194 $192 $190 $188 $186 $185 $183 $181 CPGA Decline Rate
Sales & Marketing expenses - 269 798 895 876 820 794 762 796 829 863 1%
Marketing start-up costs 105 16 32 2 2 2 2 2 2 2 2 Rollout Opex/pop
EBITDA (105) (218) (520) (255) 163 649 1,083 1,498 1,846 2,331 2,779 $1
% growth y-y 139% -51% -164% 298% 67% 38% 23% 26% 19%
EBITDA margin -74.6% -37.0% -8.5% 3.7% 12.0% 17.6% 22.4% 25.8% 30.5% 34.2%
Post-2020 Annual growth
Cable unaffected EBITDA 20,023 21,030 21,990 22,880 23,676 24,268 24,875 25,497 26,134 26,788 2.5%
EBITDA % 41% 41% 41% 41% 41% 41% 41% 41% 41% 41%
Wireless % of unaffected company cable EBITDA -1% -2% -1% 1% 3% 4% 6% 7% 9% 10%
Wireless accretion to cable EBITDA growth (b.p.) (152) 129 193 211 178 164 132 178 157
Total company unaffected EBITDA 25,966 26,960 28,148 29,231 30,200 30,955 31,729 32,522 33,335 34,169 2.5%
EBITDA % 34% 34% 35% 35% 35% 35% 35% 35% 35% 35%
Wireless % of unaffected company total EBITDA -1% -2% -1% 1% 2% 3% 5% 6% 7% 8%
Wireless accretion to consolidated EBITDA growth (b.p.) (117) 100 150 165 141 130 105 141 125
Cable EBITDA with wireless 19,805 20,510 21,734 23,043 24,325 25,351 26,373 27,343 28,466 29,566
EBITDA % 40% 39% 38% 38% 39% 39% 39% 39% 40% 40%
Total company EBITDA with wireless 25,748 26,440 27,892 29,395 30,849 32,038 33,227 34,368 35,667 36,947
EBITDA % 34% 33% 33% 33% 33% 34% 34% 34% 34% 35%
Source: J.P. Morgan estimate, company data
17
Cable Quad-Plays’ Impact on Existing Wireless Carriers Likely Limited
We do expect some disruption as alternative carriers, e.g., Comcast and Google, enter the mobile
space emphasizing Wi-Fi offload, but the need for cellular backup is likely to keep input prices
relatively high and minimize price disruption.
High-margin wholesale revenue could partially offset the impact of increased competition
A single MVNO deal is the best scenario for the carrier partner but we expect the disruptor to
move to multiple MVNO relationships over time, which would be more negative for carriers
Comcast Wireless could help justify a merger of Sprint and T-Mobile
The DoJ stated clearly that it wants to have 4 facilities-based wireless competitors in April 2014.
Comcast could be considered as a facilities-based wireless provider if it reached scale
Carrier impact model (single wholesale partner - Verizon as example) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
% of subscribers contributed 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
% of MVNO subscribers on network 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Retail ARPU of customers lost $52.51 $51.39 $50.62 $50.37 $50.37 $50.87 $51.38 $51.90 $52.41 $52.94
Retail revenue lost ($m) 134 626 1,309 1,890 2,323 2,657 2,909 3,126 3,350 3,583
EBITDA margin of retail customers 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
EBITDA lost 67 313 655 945 1,162 1,329 1,454 1,563 1,675 1,791
Wholesale ARPU of MVNO customers $28.14 $28.78 $29.35 $28.65 $27.53 $26.42 $25.34 $24.28 $22.63 $21.41
MVNO revenue gained 205 1,002 2,168 3,071 3,627 3,943 4,099 4,178 4,133 4,139
EBITDA margin of MVNO revenue 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
EBITDA from MVNO customers 143 701 1,518 2,150 2,539 2,760 2,869 2,925 2,893 2,898
Net EBITDA impact 76 388 863 1,205 1,378 1,432 1,415 1,362 1,218 1,106
Carrier impact model (multiple wholesale partners - Verizon as example) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
% of subscribers contributed 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
% of MVNO subscribers on network 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Retail ARPU of customers lost $52.51 $51.39 $50.62 $50.37 $50.37 $50.87 $51.38 $51.90 $52.41 $52.94
Retail revenue lost ($m) 134 626 1,309 1,890 2,323 2,657 2,909 3,126 3,350 3,583
EBITDA margin of retail customers 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
EBITDA lost 67 313 655 945 1,162 1,329 1,454 1,563 1,675 1,791
Wholesale ARPU of MVNO customers $28.14 $28.78 $29.35 $28.65 $27.53 $26.42 $25.34 $24.28 $22.63 $21.41
MVNO revenue gained 51 250 542 768 907 986 1,025 1,045 1,033 1,035
EBITDA margin of MVNO revenue 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
EBITDA from MVNO customers 36 175 379 538 635 690 717 731 723 724
Net EBITDA impact (31) (138) (275) (407) (527) (639) (737) (832) (952) (1,067)
Source: J.P. Morgan estimates
Carrier impact model - single wholesale partner vs. multiple partners
18
Overview of Existing Wi-Fi-First MVNOs
We believe Wi-Fi-First offerings need to have cellular back-up to be attractive as even low-price
subscribers still want to have peace of mind about being able to make emergency calls anywhere
Additionally, Wi-Fi-First MVNOs are challenged to increase incremental Wi-Fi offload than
subscribers normally would to keep network cost in check for profitability and to maintain healthy
MVNO relationships with their mobile operator partners.
Republic Wireless differentiates itself with proprietary handoff technology on Motorola handsets
It has close to 1m subscribers on Sprint’s network; sells four brand new handsets by Motorola
Republic works with Motorola to add its proprietary handoff technology on the OS level
Tight data management helps keep network cost in check and maintain harmonious relationship
with Sprint
FreedomPop relies on online handset resale for profit and follows a “Fremium” service model
FreedomPop is more like an online refurbished phone distributor with sizable profit margin from
handset sales, so Wi-Fi First becomes a secondary source of profitability
It adds Wi-Fi first on the application layer and the functionality can be added to any Android
phones with a software update. It has tried to maximize Wi-Fi usage by entering into wholesale
agreements – we estimate it has access to ~10m hotspots
19
Potential Technical Issues for Wi-Fi-First Offer
Hand-off remains tricky but cellular-Wi-Fi hand-off has come a long way
Active Wi-Fi AP scanning could create battery drain
Vo-WiFi needs consistent signal quality for real-time transmission and may require packet
prioritization vs. Wi-Fi’s best-effort delivery
Interference could be an issue, especially in 2.4 GHz
Hotspot 2.0 hopes to automate the process of connection and authentication to make the cellular-
Wi-Fi handoff seamless
The secret sauce for automation lies in the pre-connection credential exchange between a
handset and an access point behind the scene
Hotspot 2.0 also offers higher security level with WPA 2 encryption and facilitates better
roaming between Wi-Fi partners, e.g. TWC and Boingo
20
Google’s Project Fi Offers Network Flexibility at Lower Prices for
Lower-Usage Customers
Google launched Fi wireless offer which combines Sprint and T-Mobile (including roaming 120
countries that T-Mobile offers) plus automated access to open Wi-Fi networks
Price of $20/month + $10/GB is slightly cheaper for the average or lower usage user than
T-Mobile and Sprint (closer with prepaid), but generally more expensive above the ~5GB level
Service only available on Nexus 6 which costs $649 for the 32GB version or $27.04/mo over
24 months; Google Fi SIM cards are free for existing Nexus 6 owners
We believe it will appeal to a relatively small group of customers who 1) are not iPhone devotees,
2) lower than average users, 3) not benefiting from a family plan discount, and 4) willing to trade
down from T/VZ service quality.
We view Google Fi as a neutral event for Sprint and T-Mobile, and a very small negative for T and
VZ
The network coverage is the best of Sprint and TMUS, which could be impressive, but the
combination will still be an inferior experience vs. AT&T or Verizon, in our view.
21
Wi-Fi Spectrum Critical for Data Offload But Large Deployment
Only Feasible in Dense Urban Areas
Wi-Fi relies on public unlicensed spectrum in 2.4 GHz and 5 GHz
526MHz of non-overlapping channels vs. 721 MHz spectrum allocated for cellular usage
The FCC is looking into adding another 195 MHz in the 5.35-5.47 and 5.85-5.925 range for
unlicensed use and is considering allowing unlicensed use on 3.55-3.70 GHz
Additionally Globalstar’s spectrum could become a private Wi-Fi band and it could be attractive to
carriers that already have a local cellular or fiber network, e.g. a major wireless or cable player, but
others would be unlikely to have much interest
We believe a large-scale Wi-Fi deployment is only feasible in densely populated areas, so the
potential for using Wi-Fi to provide mobile coverage in a suburban area is fairly low
Wi-Fi uses very high frequency and is allowed at far lower permitted emission limits than private
cellular bands (e.g., max 1W for 5 GHz vs. 1kW for 700 MHz)
A Wi-Fi access point covers a radius of ~150 feet indoors and 300 feet outdoors vs. 30-40km by
a 700 MHz cell site
Many more APs need to be installed in order to cover the same area as a cell site, and this
would be costly
Unlicensed Spectrum Available for Wi-Fi Non-Overlapping Channels for 2.4 GHz WLAN
802.11b (DSSS) channel width 22 MHz
Channel 1 Channel 6 Channel 11 Channel 14
2412 MHz 2437 MHz 2462 MHz 2484 MHz2.4 G
Hz
2.4835GH
z
2.5 GH
z
Source: FCC
22
LTE in Unlicensed Spectrum Is Gaining Traction
Carriers and equipment vendors have recently started talking more about deploying LTE over
unlicensed spectrum (LTE-U)
Historically mobile operators were not able to deploy mobile technologies in the unlicensed
bands out of concern for spectral efficiency and reliable user experience
The potential advantages of LTE-U over Wi-Fi
Superior coverage and spectral efficiency due to carrier aggregation
Smoother data flow across licensed and unlicensed spectrum as both would be deployed on the
same small cells in a single core network
Verizon and T-Mobile both intend to deploy LTE-U for supplemental downlink
Potential LTE-U deployment would focus first on 5 GHz and later on 3.5 GHz, but likely avoid
2.4 GHz due to interference
Verizon plans to start pre-standard work in 2015 and trials in 2016 driven by Qualcomm and
Ericsson
T-Mobile US has talked substantially about LTE-U (on FD) for supplemental downlink as well
and pointed to 2016 for a launch
23
JAMES SULLIVAN ASIA TELECOM EQUITY ANALYST
• Wi-Fi emerging business models: Traditional wireless
networks cannot scale to meet eventual data demand, forcing
carriers to run multi-standard networks. The resultant impact
of Wi-Fi across Asia will be varied.
• Wi-Fi will ultimately to be a complementary network
technology
• Integrated carriers should have a competitive edge in
densely populated DM such as Hong Kong, where it helps
to mitigate capex and opex risk
• Over-reliance on Wi-Fi could harm data monetization in
markets with poor network quality. This was historically an
issue for CM, and could now be the case in Thailand and
Indonesia.
• Municipal builds could encourage Wi-Fi MVNOs in
markets such as Singapore and Taiwan
Source: J.P. Morgan estimates.
Wi-Fi in Asia: Why, When, and Where Exploring the emerging impact of Wi-Fi on the core telecom business model
US cellular and Wi-Fi data usage (MB)
Source: OpenSignal, J.P. Morgan.
Wi-Fi vs cellular speed by market
Source: OpenSignal.
Confidence bounds of Wi-Fi download speeds
1,914
2,495
3,197
4,036
4,849
5,656
2,537
3,445
4,600
6,054
7,585
9,229
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2014 2015E 2016E 2017E 2018E 2019E
Average Cellular Data Usage Average WiFi Data Usage
• Falling Offload - cause for potential concern:
• Korea:
- Korean Wi-Fi + Wibro offload was as high as 20%+ of
overall traffic in 2012 - advent of LTE in that year and the
faster speeds available led to a significant compression in
Wi-Fi and Wibro traffic volumes
• China:
- CM aggressively leveraged Wi-Fi offloading in their TDS-
CDMA era.
- Significant drop in Wi-Fi activity since the launch of TD-
LTE services in 2H14
• Taiwan: Wireless broadband coverage is very good and
there is low incentive for users to search Wi-Fi signal to
access the internet when users are on the move.
Source: MSIP, J.P. Morgan
Wi-Fi in Asia: Why, When, and Where
Korean wireless traffic by technology standard
Source: OpenSignal, J.P. Morgan.
Korea Wi-Fi vs. 4G speeds
Source: Company data and J.P. Morgan.
China Wi-Fi vs. mobile data traffic
8.1 7.4 7.4
18.5
20.6
18.5
-
5.0
10.0
15.0
20.0
25.0
KT SKT LGU+
Wifi
4G
0
20,000
40,000
60,000
80,000
100,000
120,000
0%
5%
10%
15%
20%
25%
3G 4G WiBro WiFi* WiFi as % WiFi + Wibro as % 2G
267
482
669
816 822
405
122 168
223 304
427
706
0
100
200
300
400
500
600
700
800
900
1H12 2H12 1H13 2H13 1H14 2H14
WLAN data traffic (billion MB) Mobile internet access data traffic (billion MB)
4.6 4.5 5.2
4.5 5.3
20.2
17.8
10.8
-
5.0
10.0
15.0
20.0
25.0
iTaiwan Chunghwa TWM FET
Wifi
3G
4G
Source: OpenSignal, J.P. Morgan
Taiwan Wi-Fi vs. 3/4G speed comparison
• ‘‘No choice’’ offload - very weak networks no choice
but to rely on Wi-Fi:
• Thailand:
- Wi-Fi download speeds are still 2-3x faster than available
download speeds on traditional wireless networks
• Indonesia:
- LTE offers significantly higher download speeds than Wi-
Fi, but coverage remains extremely limited
• Rising offload - smaller, developed, high population
density markets:
• Hong Kong:
- Integrated operators will mirror the US, as Wi-Fi serves
to mitigate capex and opex risks and provides an
advantage over wireless-only carriers
• Singapore:
- Operators in Singapore are leveraging the government-
funded Wi-Fi rollout project Wireless@SG
Source: OpenSignal, J.P. Morgan.
Wi-Fi in Asia: Why, When, and Where
Thailand Wi-Fi vs. 3G speeds
Source: OpenSignal, J.P. Morgan.
Indonesia Wi-Fi vs. 3G/4G speeds
Source: OpenSignal, J.P. Morgan.
4G network coverage, Greater Jakarta
• Municipal builds could encourage Wi-Fi MVNOs
• Singapore:
- 2mn subs as of Mar-14 for Wireless@SG and usage
hours were 32 hours per user per month
- IDA plans to double number of hotspots to 10,000 by
2015
• Korea:
- MSIP spent W4.7bn on building 4,000 additional public
Wi-Fi networks in major public areas in 2014, and
- Plans to increase by 2,500 in 2015
• Taiwan:
- As part of iTaiwan, more than 5,000 Wi-Fi hotspots set
up in indoor government offices, tourist attractions, and
public transportation stations
Common access Wi-Fi reduces integrated carriers’ asset
advantage making wireless carriers more competitive
Source: Infocomm Development Authority, J.P. Morgan
Wi-Fi in Asia: Why, When, and Where
Wireless@SG hotspots - Nationwide
Source: iTaiwan, J.P. Morgan
iTaiwan hotspots - Nationwide
Disclosures
Companies Discussed in This Report (all prices in this report as of market close on 24 April 2015)
AT&T (T/$34.01/Neutral)
Cablevision (CVC/$20.15/Underweight)
Charter Communications (CHTR/$185.75/Neutral)
Comcast (CMCSA/$59.64/Overweight)
Gogo (GOGO/$21.65/Overweight)
Google (GOOG/$565.06/Overweight/JPM analyst Doug Anmuth)
Level 3 Communications (LVLT/$54.67/Overweight)
Sprint Corp (S/$5.27/Neutral)
T-Mobile US Inc. (TMUS/$34.31/Overweight)
Time Warner Cable (TWC/$155.26/Overweight)
US Cellular (USM/$37.93/Overweight)
Verizon Communications (VZ/$50.03/Overweight)
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account.
29
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