Femtocells Face Uncertain Future in US

The U.S. femtocell market is a "crapshoot," according to the latest Unstrung Insider report, because operators have yet to figure out how the tiny home base stations will work in their networks and how they can make money from them.

Major femtocell deployments are unlikely until 2009 or even 2010 in North America as operators conduct limited trials this year, according to the report, Femtocells: U.S. Market Prospects. (See Femtocells: The Wireline Killer? and Femtocells Brace for Big 2008.)

The issues that operators and vendors have to deal with this year are technical and strategic. While operators and vendors toil with challenges like interference with the macro cellular network and integration with OSS/BSS systems, operators also strive to build a business case for the home base stations. (See Femto Firms Counter Interference Flak.)

But the main barrier to early deployments this year is cost. General consensus among vendors and operators is that femtocells need to retail for less than $100 to be a viable mass market product. (See Femto Chips Too Costly and Vodafone CEO Seeks Cheap Femtos.)

"Whether that price point is achieved by vendors wringing out costs, through deep operator subsidies, or both is yet another issue that the industry will spend 2008 trying to figure out," writes Tim Kridel, contributing analyst, in the report.

"Component costs will obviously decline over time, but how much and how quickly are anyone's guess," he adds. "What's clear is that well into 2009, there will big gaps between what carriers say they're willing to pay, what vendors say they can provide without going into the red, and what most consumers are willing to pay."

A case in point is Sprint Corp. (NYSE: S)'s Airave femtocell from Samsung Corp. , which is the only commercial femtocell service available right now. The report finds that Sprint subsidizes the Airave femtocell to the tune of about $250 per unit. The femtocell costs $300, and Sprint sells it for $49.99, according to the report. But Sprint's wholesale cost could even be higher than $300 as one vendor says that Sprint's initial order was for just 10,000 to 20,000 units, which is almost "custom-built volumes," the report states.

Is Sprint's subsidy worth it? The report concludes that a deep subsidy on femtocells makes sense when it is cheaper than replacing customers and cheaper than replacing infrastructure. In other words, femtocells can potentially help operators cut subscriber acquisition and infrastructure costs.

Subscriber acquisition costs are in the range of $300 to $400. If a subscriber is threatening to leave and go to another mobile operator because of poor coverage at home, an operator can offer a femtocell for next-to-nothing in an attempt to keep that customer. That scenario can work if the femtocell subsidy is less than the cost of gaining a new customer, according to the report.

So while there is potential for new revenue generation, the report finds that cost reduction will also be an impetus for deploying femtocells. This is the business driver behind Vodafone Group plc (NYSE: VOD)'s femtocell project in Europe. (See Vodafone Eyes Femto Service This Year.)

In the longer term, the report finds that the potential for big savings on backhaul costs in the macro network is another key driver for femtocells.

While operators and vendors tackle those crucial technical and business issues, femtocells are still a very hot issue. And the femtocell news is flowing abundantly at the CTIA Wireless show in Las Vegas this week. (See CTIA & the Future of 4G.)

Here's a sampling of femto news from Vegas:

— Michelle Donegan, European Editor, Unstrung

The report, Femtocells: U.S. Market Prospects, is available as part of an annual subscription (12 monthly issues) to Unstrung Insider, priced at $1,595. Individual reports are available for $900. For more information, or to subscribe, please visit:Unstrung Insider.