Small cells

Femtos' Hard Cell

Wireless users will increasingly ask, "What's in it for me?" as carriers roll out femtocells, those pint-sized base stations designed to cover the inside of a home or office.

That isn't an academic question: Unless consumers and businesses see enough value in femtocells, they are unlikely to shell out $50 to $250 for the hardware, plus an additional $10 or more per month for an add-on rate plan to receive decent indoor coverage. Making the sell even tougher is the fact that wireless customers have been inundated with marketing slogans such as "Can you hear me now?" and "More bars in more places," implying that great coverage is already included with basic service.

As detailed in a new research report from Unstrung Insider, "Femtocells: Market Outlook & Reality Check," femtocells' value proposition must evolve away from doing more for the carrier than the customer to avoid languishing as a niche play. In the enterprise market, a wireless carrier could integrate its phones with the customer's IP private branch exchange (PBX) to enable applications and services, such as extension dialing and presence. This helps add value beyond cheap calls and reducing the number of wired desk phones.

A wireless carrier and its wireline partner – or sister company, in the case of some operators, such as Verizon Wireless – could use femtocells for a service that rings a customer's wireline and wireless phones simultaneously, or in a user-configurable order, to avoid phone tag. This type of service has good potential in consumer and enterprise markets, which is why it is already there in some form, such as Google Voice. Motorola Inc. (NYSE: MOT) has demoed simultaneous and sequential ringing with its edge convergence server, an example of how some vendors are planning to support such services.

The most innovated femtocell applications – and the ones with the most revenue potential – could come from third parties. Some vendors are preparing for this expanding ecosystem by designing developer-friendly equipment. For example, Airvana Inc. is creating an open application programming interface (API) so that developers can build applications for its HubBub femtocell. Meanwhile, the Femto Forum Ltd. is working to create an environment that helps developers, wireless carriers, and other companies create femtocell apps and services.

Perceived value also affects the amount that consumers are willing to pay for femtocell hardware, which affects the size of carrier subsidy and the length of time before each femtocell customer becomes profitable.

Femtocells wholesale for $150 to $200, depending on technology and order size. Vendors and carriers agree that $100 is the sweet spot in terms of triggering large orders and aggressive deployments. However, that price point is unlikely until late 2010, because it will take time before carriers start to place the large orders necessary to drive down costs.

This is why the consensus among femtocell vendors is that orders will remain small – typically 10,000 to 20,000 units per carrier – well into the second half of 2010. The 2009 industry-wide total probably will be around 500,000 units, with around 4 million in 2010, according to some of the vendors surveyed for this report. Other vendors expect the 2010 volume to be about 1 million.

For investors, that outlook probably raises more eyebrows than hopes. Although the sector has yet to see the volumes necessary to support dozens of vendors, the ecosystem has been crowded for more than two years. Considering that most carriers will not place large orders until the second half of 2010 – if then – and that investors are focusing on companies that can be profitable sooner rather than later, it is likely that some vendors will drop out or be acquired in the next 12 months. Acquisitions will also be driven by vendors – including those from outside of wireless or even outside of telecom – looking for a quick way to get into the femtocell space once the market starts to mature.

Small devices and, for now, a small market.

— Tim Kridel, Contributing Analyst, Unstrung Insider

The report, "Femtocells: Market Outlook & Reality Check," 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.

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