GSM Switch-Off From 2012?

The idea that the first cellular operators will start dismantling their GSM networks altogether as early as 2012 runs counter to conventional wisdom. In Europe, more than 70 percent of subscribers are still using plain old GSM phones. It's going to take more than another four years – and a lot of subsidies, in some cases – for most operators to convert 90 percent of their users to W-CDMA terminals.

No matter how good an operator's W-CDMA coverage is four years from now, they're still not likely to want to ditch the redundancy value of a GSM network to fall back on while a competitor keeps its own GSM network going. There are other non-trivial issues – like the fact that battery life is still a lot better on GSM than on W-CDMA phones. And what about the highly profitable revenue from inbound GSM roaming? Switch off your GSM network, and all of that goes to competitors.

There is a strong case in favor, though, and it will become a compelling one more quickly than many people think. It revolves around operational expenditure: The cost of maintaining a GSM network in mature markets is going to weigh increasingly heavily on the minds of CEOs as the proportion of subscribers they shift onto W-CDMA gradually creeps up, quarter after quarter.

Take markets like Denmark, Hong Kong, Singapore, or Switzerland: They are geographically small, their small populations are relatively affluent, and they have anywhere up to five competing operators running GSM and W-CDMA networks. As local customers use the GSM network less and less, it will stop looking like an asset and start to look like a liability. This is one of the scenarios raised in my latest Heavy Reading report, "3G Squeeze: GSM, LTE & the Future of Wideband CDMA."

How to benefit from shutting down the GSM network without conceding competitive advantage? Clearly, no operator is going to unilaterally shut its GSM network down in the 2012 timeframe. But what some leading operators might well do is shut it down multi-laterally, by means of what is more commonly known as "network sharing." While it has grabbed a lot of headlines, we are still in the early days of network sharing. There is plenty of cell-site sharing today among cellular operators involving passive elements, but when it comes to active equipment sharing, it's still too sensitive an issue.

It's likely to be a very different story within a few short years. The GSM network that operators are running today is their core business, their cash cow. In four years, however, a model whereby four GSM/W-CDMA operators agree to shut down two or three of their GSM networks and share the remaining GSM network assets for another five or ten years will look increasingly attractive.

A lot will depend on the regulatory and commercial dynamics of spectrum refarming. No operator will want to shut down a 900 MHz GSM network if the only option available is to then return the spectrum to the regulator. And finding an equitable business model for a wholly shared network will inevitably be challenging. But in the final analysis, by 2012 operators in mature markets will be sitting on competing GSM network assets on which they are effectively no longer really competing. The CFOs in these markets are going to start asking the question before long, if they haven't already – and their voices are only going to get louder. For the first operators to take the plunge and shut down their GSM networks, 2012 may not be that far-fetched.

— Patrick Donegan, Senior Analyst, Heavy Reading

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