Small cells

Femtocells: The Wireline Killer?

Femtocells — those goofy little boxes that are now being installed in homes and offices around the world to improve wireless phone service indoors — may not have any obvious relevance to wire-bound telcos and cable MSOs. But if femtocells become a true mainstream offering, wireline network operators could see some serious revenue erosion — and not just from continuing displacement of wireline voice services.

The latest edition of Unstrung Insider assesses the potential impact of femtocells on the U.S. telecom market. A big part of that impact will be in wireline voice service displacement; based on Federal Communications Commission (FCC) data, the percentage of U.S. adults who live in wireless-only households is now more than 15 percent. Femtocells will only accelerate that trend.

But wait — there is a silver lining to that cloud. Femtocells require a broadband connection from the customer premises, and until true broadband wireless becomes ubiquitous, that broadband connection will be wireline. So femtocell users will be on the hook for at least a DSL or cable modem connection, which means wireline operators aren't shut out of the picture altogether.

Unfortunately, there may be yet another dark cloud to obscure that silver lining: By piggybacking mobile voice service onto end-user broadband connections, mobile network operators will be reducing their need for backhaul capacity from their conventional base stations. That means, at least potentially, that demand for backhaul bandwidth may be ratcheted back. Several femtocell suppliers, including Motorola Inc. (NYSE: MOT), Samsung Corp. , and 2Wire Inc. , are touting backhaul savings to get mobile network operators on board with femtocells.

It's hard to imagine a scenario in which femtocells would be deployed on a wide enough scale to put a serious dent in backhaul demand. But even a slight hiccup could create a fairly significant tremor for network operators that already are struggling with revenue erosion.

Wireline operators' response to the femtocell challenge will be interesting to watch, to say the least. If femtocells start to accelerate wireline voice service displacement, telcos and cable MSOs could react by trying to block femtocell backhaul connections. "I see it coming," says Tom Hussey, director of business development at Azaire Networks Inc. "I see a fixed-line-only provider saying, 'Unless you pay me a little more, I'm going to block that traffic.' "

Restrictive strategies like that haven't been wildly successful in the long run. So instead of fighting the femto force, wireline operators could opt to form partnerships with mobile operators, offering products that integrate a femtocell with devices such as broadband modems, set-top boxes, and residential gateways. At the 2008 Mobile World Congress in February, Thomson S.A. (NYSE: TMS; Euronext Paris: 18453) announced one such product. And just a few weeks earlier, Cisco Systems Inc. (Nasdaq: CSCO) invested in femtocell maker ip.access Ltd. because, in Cisco's words, "Operators plan to integrate femtocell technology within residential gateways and set-top boxes, such as those offered by Cisco's consumer products business."

The jury is still far from decided on whether femtocells will become a standard-issue appliance in homes and small offices. But one thing is certain — network operators of all shapes and sizes need to start keeping a close watch on these goofy little boxes.

— Tim Kridel, Contributing Analyst, Unstrung Insider

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. To subscribe, please visit: www.unstrung.com/insider.

FredStein 12/5/2012 | 3:44:30 PM
re: Femtocells: The Wireline Killer? The second 'dark cloud' of reduced back-haul demand
for Mobile Operators is suggested. Early results show that the iPhone has increased data demand 30 fold, so the 2nd dark cloud also has a silver lining.
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