Mining the femto motherlode

The recent launch of femtocells by AT&T in the US follows the early entry of Vodafone in the UK into the femtocell market. In Asia, Softbank in Japan and StarHub in Singapore have both launched, while DoCoMo and others are going to launch shortly. 

Discussion of femtocells can sometimes be complicated by the fact that femtocells solve a variety of problems for a variety of operators, and are going to drive the mobile industry in the foreseeable future. As mobiles increasingly replace landlines in customers' minds as their main phone, it is no surprise that both operators and customers welcome femtocells as a simple means of improving voice coverage as well as network capacity and enable new services.

Most of the discussion has focused on the opportunities for incumbent operators and straightforward benefits, but as the femtocell services are rolled out, we begin to see hints of more novel business models. One example is HSL, a UK-based provider of direct-to-consumer 2G femtocells; another is Wi-Fi community operator FON, which has announced a deal with femtocell company Ubiquisys. It looks likely that a number of interesting models will emerge as players appreciate the variety of ways femtocells create value and deliver unique capabilities. To explore those we should consider the four areas for benefit from a femtocell.

Coverage and capacity concerns

First is voice coverage. Well documented as a significant problem in the developed markets of the West, and surprisingly so in several parts of Asia, it's nevertheless often overlooked. If one carrier has good coverage in a village then residents switch to that player and forget the other failed carriers - which of course means lost revenue for those failures.  If you cannot serve a customer, you'll lose their business.

So in different parts of Asia we can expect to see voice-coverage femtocells - either free or fee-based, depending on factors such as value of customer, seasonality and so on - to form a baseline part of any operator's femtocell offering.  

The second area of revenue is data coverage. In the last decade, carriers have spent billions of dollars on 3G licenses and networks. That investment is predicated on selling data services to consumers. With the explosion of wireless data in Asia, femtocells are the heaven-sent opportunity for operators to provide good data coverage indoors. So there is a clear business case for femtocells from data. This is especially true in China, where 3G has only become recently available. It is likely that enterprise femtocells, which look set to emerge soon, will tap into the desire for better data coverage within an office space or campus.

A third area of revenue from femtocells is data capacity. This has been an issue in Asia for awhile. Quite simply, cells are getting full up. Even before the iPhone came along, users in Asia have been using mobiles for data access, but the iPhone has helped place unprecedented strains on 3G networks. Portio Research forecasts that there will be 5.8 billion mobile subscribers worldwide in 2013, of which almost 44% will be in Asia-Pacific. In many of these countries people already use handsets as data access devices and that is only going to accelerate.

Moreover, while the amount of data is doubling every year, base station capacity is almost stagnant (See chart). Increases like HSPA+ are important but not sufficient. The only real way to increase capacity is to add more base stations, but it is impractical, if not impossible, to add more macrocells. So it is no surprise that operators are turning to femtocells.

Apps and services

The most exciting revenue area is applications, based on the uniqueness and personalization of a phone and the trusted billing relationship that exists with the individual subscriber. While resisting the temptation to jump on the 'Connected Appliance' bandwagon, there will be new businesses using a technology that "knows" when people are home - home delivery services, healthcare, "fridge magnet" family reminders, and so on. These could be from incumbent operators, or new entrants using femtocells to cost-effectively offer consumers a compelling package of voice and data as well as a series of femto apps, without the high entry costs of traditional infrastructure equipment, base station real estate or rental, power and other utilities.

As with many areas of technology it is probably impossible to predict what will capture customers' imagination or exactly what the business models will be. Nonetheless, it is hard to doubt that the combination of personalization, context-sensitivity and always-on, always-available high-speed connection to your individual phone will lead to attractive new services.

One good example is enterprise applications. Corporate focused carriers are starting to offer enterprise femtocells as a cost-effective alternative to DAS or microcells, with additional services such as PBX integration. Another example: "metro femtos" that can be quickly and cheaply deployed to address specific black spots or capacity crunches in shopping malls, airports, hotels, subways or the like - anywhere there are lots of users and poor service.

The reverse can also make sense: instead of aiming for the dense urban market, some carriers are planning on rural femtos. These are deployed on a case-by-case basis to put spot coverage just where it is needed, to cover an isolated village or railway station more cheaply than installing an expensive base station to cover a whole sparsely populated region. Significantly, all of these systems are cheap (low capex and opex), benefiting from the economies of scale that the mass-market residential devices enable and leveraging the same core network investment.

More business models exist that could bring a variety of new players into the field. A wireline broadband company, for instance, could deliver femtocells to its subscribers and sell connectivity and backhaul to mobile network operators as a "white label" or wholesale supplier in a kind of reverse-MVNO approach.  Or someone may enter with an application focused product for the home, perhaps analogous to Amazon's Kindle which emphasizes the service to such an extent most users don't care there's a cell phone inside. As already mentioned, there are opportunities for new entrants like FON or UK01.

In short, there is no single strategy for femtocells. They offer providers - whether operators or new entrants - so much flexibility that depending on the targeted customer segment, and the features that the operator wishes to make available, the field remains wide open. It will be in the interests of the customer and the market as a whole if a variety of completely new business models make their appearance and the best succeeds.  What is clear that the variety of different facets (voice, data, capacity, service) combine to deliver an extremely powerful business case that carriers ignore at their peril.

Rupert Baines is marketing VP for picoChip