Commentary | The Next Growth Phase in Cellular Backhaul
The cellular backhaul market has been a vibrant vertical segment for the satellite sector in the second part of the last decade, with strong growth observed in all emerging regions. While sub-Saharan Africa has been the largest historical market for cellular backhaul, accelerated growth has been observed in recent years in a variety of countries such as India, Brazil and Indonesia.
The overall growth in mobile services, the maturity of satellite solutions and the push of government to provide universal access to communications all contributed to market growth. Government involvement is instrumental in many countries for market development, with obligations and contracts awarded to mobile operators to cover remote areas. As a recent example, Turkcell was awarded a contract early this year to provide mobile network coverage and operation to 1,799 rural areas with a population of less than 500 inhabitants over the next three years. Consequently, the number of sites using satellite backhaul more than tripled between 2007 and 2012 to reach close to 16,000 sites for a satellite capacity use of around 15.6 gigahertz (equivalent to 433 transponders). Brazil, Russia, India and China are the largest national markets for cellular backhaul with 800 to 1,500 sites installed and are still considered to have significant growth potential. Following them are countries like the Democratic Republic of Congo and Peru with about 600 sites. However, the vast majority of countries surveyed have no more than a few dozen sites installed, with traffic per site usually standing at 1 to 2 megabits per second (Mbps).
Satellite solutions are usually used as a last option when terrestrial solutions (fiber and microwave) are not available. The main challenge for mobile operators is to conduct profitable operations in areas where their revenue per subscriber usually stands at $5 to $10 per month and even closer to $2 or $3 in certain countries, such as India and Pakistan. In that context, the cost of satellite transmission, which can represent 70-80 percent of the total cost of ownership of a mobile base station, is particularly sensitive.
The vast majority of satellite capacity used for cellular backhaul is currently carried on classical large beams in C-band and Ku-band, with the use of high-throughput satellite capacity being essentially concentrated in Asia. However, this is anticipated to change with the recent and planned launch of different high-throughput satellite systems.
The market structure presents strong regional disparities. Although several equipment suppliers are present in all world regions, the activity of satellite operators and the volume of traffic carried vary greatly., the leading operator in terms of estimated volume of traffic carried, has a leading position in Africa, while regional operators carry the largest part of the traffic in many other regional markets. While mobile operators directly procure most of the satellite capacity they need in Latin America, specialized satellite service providers represent an essential component of the value chain in Africa.
Following robust growth in the past decade, several factors — including increasing mobile penetration, an extension of terrestrial networks, higher spectrum efficiency for the carriage of voice traffic and political instability in certain countries — have resulted in a relative slowdown of market growth in 2011-2012 (5 percent growth in 2012 versus about 10-20 percent growth in previous years).
The strategic opportunity for satellite players corresponds to the move toward data-dominated traffic that should result from the extension of 3G coverage to rural areas in the coming years, and of 4G coverage in the longer term. In mobile markets where low average revenue per user will remain the rule, the condition to seize the growth opportunity will be to offer cost-effective satellite solutions for the carriage of larger volumes of traffic. This can only result from the combination of multiple innovations involving satellite infrastructure, the ground segment and transmission optimization.
We estimate that spectrum efficiency will have to reach 3-4 Mbps by the end of the decade (up from 1.7 Mbps today) to allow a significant decrease in the transmission cost per Mbps for mobile operators. This should be achieved through the optimization of solutions already available (such as carrier in carrier) or under development (DVB-S2 extension). As well, we anticipate that a larger use of high-throughput satellite capacity proposing a lower cost per Mbps in a given beam compared with classical satellite capacity should be required to drive traffic growth.
We anticipate that the improvement in the competitiveness of satellite solutions, combined with the increasing carriage of 3G traffic in the second part of the decade, should result in a 16 percent compound annual growth rate in the next 10 years in terms of traffic carried for cellular backhaul in fast-growing economies to reach up to 130 gigabits per second. This would translate into a 9 percent compound annual growth rate for the use of satellite bandwidth with close to 40 gigahertz used by 2023.
Temporary decreases in traffic could still be observed in certain markets, especially when fiber networks reach new cities previously served by satellite. This could be the case in Indonesia where the Palapa Ring may reach the eastern part of Indonesia, an area using the largest capacity volume, in 2015-2017.
Pacôme Révillon is CEO and managing director of Euroconsult. For more information on the report “Prospects for Cellular Backhaul in Fast Growing Economies,” visit www.euroconsult-ec.com.