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Merrill Lynch Outlines Growth Scenarios For British Telecom – Highlights Small Cell Options

|Includes:BT Group plc (BT), T

In a December 3 report, entitled "Could BT use spectrum to offer extra services for fixed subs?," Merrill Lynch Analysts outlined a series of potential growth scenarios for British Telecom (NYSE:BT). One scenario that featured prominently in this analysis was small cell technology According to the report, "[t]here is a large push in the mobile industry toward "small-cell technology" -in English, using lots of lower-power base stations with smaller footprints than traditional "macro" base stations. Critically, LTE (and LTE-Advanced) have been designed to use a mixed network architecture (sometimes called Heterogeneous Networks, or HetNets), comprising macro-, micro-, pico- and femto-cells."

The report went on to note that this development is potentially very positive for BT, due to the fact that "BT has deployed hundreds of thousands of stand-alone BT Wi-Fi hotspots (outside of its customer base), so these can be changed to dual Wi-Fi / mobile connections." Further, |BT can use its existing infrastructure, including thousands of street cabinets and telegraph poles with small-cell picocell antennas (not much larger than a WiFi router at home) attached to them.

The report went on to describe various endeavors by other major operators to small cell technology, including AT&T's Project Velocity IP (NYSE:VIP) in which AT&T announced a large project called Velocity IP (VIP) to expand its LTE network to 300m population coverage by the end of 2014 that will include. 10,000 new "macro cells" (i.e., base stations), 40,000 small cells providing 4G LTE, Wi-Fi and 3G, and 1,000 Distributed Antenna Systems (DAS) for entertainment venues/ stadia etc.

Another small cell endeavor mentioned in the report was Virgin Media's (NASDAQ:VMED) development of small cell technology for backhaul through "conducting trials in Newcastle and Bristol using equipment strung up from lampposts and its cabinets." However, the report continued, "VMED's primary interest in this technology is for backhaul of mobile data. Since it has an extensive core network, it would be able to generate incremental revenue by installing these devices to help off-load mobile traffic from the air onto a fixed network. We understand VMED would only offer this as an enterprise solution to mobile operators (using their spectrum) rather than as a consumer product. As such, this would help drive Virgin Media's Business division revenues (a main objective highlighted by management)."

Finally, the report continues, "SoftBank has already soft-launched its TD-LTE mobile broadband network, using a dense network of microcells….[and that] Softbank says 99% of Japan's 127 million people will be within range the world's largest commercial deployment of small cells."

Finally, with respect to a monetization strategy, the report notes that "[a]s Virgin Media has already shown with its trial of small-cell technology, the economics are compelling, as the capex for a small cell is small and the cell plugs straight into the core network, meaning off-load fees can be earned at a very high margin."

Stocks: BT, T