Indoor telephony is under renewed attack. Emerging coverage enhancement solutions such as femtocells threaten to further erode the already declining market for fixed-line phones. But with adversity has come opportunity. Femtocells mitigate many of the historical challenges that lead to the failure of MVNO's set up to offer converged services and provide another opportunity for wireless and fixed line operators to work together.
The significance of having high quality voice telephony inside the house cannot be denied. According to the Bureau of Labor Statistics 76 percent of an average person's "awake hours" resides indoors. Of that time, 61 percent is spent in the home vs. a separate building.
Indoor telephony has traditionally been the stronghold of wireline and cable (fixed line) carriers. However, in the last few years cord-cutting has emerged as the primary threat for fixed line carriers. Declining mobile price is the key driver for this trend. According to CTIA, around 15.8 percent of U.S. households were wireless-only in 2007.
But there are limitations to using the cell phone inside the house. Bad indoor wireless coverage is one of the key barriers to cord-cutting. According to a Harris Interactive survey, 62 percent of cell phone owners have done something special to improve signal reception in an attempt to make or receive a cell phone call at home. 30 percent said they used their fixed-line phone.
Today the question that is top of mind for all fixed line operators is how best to deal with femtocells. The situation is grimmer for operators such as British Telecom, Embarq, and Qwest that don't own wireless assets. Their past attempts to reduce cord cutting by offering wireline-wireless bundles and converged services through wireless wholesale (MVNO) deals have failed.
But there is a glimmer of hope. Femtocells require a broadband connection to operate. Fixed line carriers can leverage this dependence of femtocells on DSL and cable in two ways--obstructive or constructive. The obstructive approach revolves around non-cooperation with wireless carriers and FUD (fear, uncertainty and doubt) marketing. Such tactics are not sustainable in the long term. The constructive approach is difficult, but if implemented correctly can reap long term benefits. This approach involves setting up mutually beneficial partnerships with wireless carriers to revive the convergence play.
Naysayer's will immediately shoot down this idea on the basis that it has been attempted in the past and did not work. But, before we jump to any conclusions lets investigate the two key reasons for failure and understand how femtocells will mitigate historical challenges.
- Unfavorable wholesale rates (supply side)
- Limited customer adoption (buy side)
Unfavorable wholesale rates
This has been one of the key reasons of failure for MVNO's in general. The negotiating power has traditionally been skewed in favor of wireless carriers. This resulted in high wholesale rates. The thin spread between revenue and cost-per-wireless-minute was not enough to cover operational costs. But, with advent of femtocells this situation will change.
First, wireless carriers depend on cable/DSL connections to deploy femtocells and this gives some negotiation power to fixed line operators. Second, deployment of femtocells will result in substantial backhaul savings for wireless operators. Yankee estimates that 32 percent of wireless usage occurs within the home -i.e. 320 minutes per month, if we assume the average monthly wireless minutes per subscriber to be 1000. This results in approximate backhaul savings of $2.14 per subscriber per month. Moreover, in-home usage will increase as voice quality improves resulting in greater backhaul savings. Also, wireless operators will realize substantial savings with data offloading. Thus, there is an opportunity for fixed-line carriers to negotiate lower wholesale rates for in-home minutes and in-turn guarantee quality of service. An innovative financial arrangement can eliminate one of the key reasons for failure of MVNO's.
Limited Customer Adoption
Customer adoption of advanced converged services has been low. British Telecom (BT) mustered only 45,000 subscribers for its Fusion service by end of 2007. In the past, converged services have revolved around Wi-Fi - wireless convergence. This meant consumers required dual mode devices to avail these services. Dual-mode devices are expensive and limited in choice and form factor thus hindering adoption. With femtocells this barrier is eliminated as consumers can use their existing devices.
Other factors that limited adoption of converged services were unfavourable price plans; quality of services offered and market readiness. With femtocells customers will not only get improved indoor coverage, but they can also be offered discounted pricing within the home. Better quality advance wireless services can also be offered at a lower price or as part of the home package. Plus, recent surveys from In-Stat and KPMG have indicated that consumer willingness to adopt converged services has increased.
There is a strong case for fixed line carriers to set up femtocell-based ventures with wireless carriers. But to be successful, it is important to learn from past mistakes. Recent outcomes have shown that equity participation forms the basis for most successful relationships. Hence, forming JV's with wireless carriers may be a good option to structure future agreements. Wireless carriers such as T-Mobile and Sprint are ideal partners as they don't own any fixed line assets. The agreement between Sprint-Clearwire and cable companies is a good example. Another option is to adopt a managed service model where the fixed line carrier is responsible for installing and maintaining femtocells. Vodafone and BT recently signed a five-year wireless backhaul and managed service agreement. Such agreements could expand to include femtocells. Preferred partnerships can also be formed where wireless carriers guarantee QOS only if consumers subscribe to a particular broadband provider.
Some fixed line carriers have taken steps to evaluate the feasibility of femtocells. BT has joined the Femto Forum and Comcast has set aside 5 MHz of spectrum for WiMAX femtocells as part of its deal with Sprint/Clearwire. Other fixed line carriers should follow suit. Now is the right time for fixed line carriers to embrace femtocells and convert this threat into an opportunity. As they say, if you can't beat them join them.
Sangit Rawlley is a senior manager and practice lead with inCode Telecom (www.incodewireless.com), a global consulting firm focused on providing wireless strategy, business planning, strategic sourcing, engineering and integration services to companies across the communications value chain.