According to a new research report from the analyst firm Berg Insight, femtocell shipments will grow from 0.2 million units in 2009 at a compound annual growth rate (CAGR) of 127 percent to 12 million units worldwide in 2014. Femtocells are small cellular base stations using broadband connections for backhaul, intended to extend coverage and offload the mobile macro network in home and small office environments. The European, North American and advanced markets in Asia Pacific will account for the vast majority of femtocell shipments in the foreseeable future. In many other countries worldwide, the penetration of fixed broadband connections is much lower and 3G services less developed. By 2014, there will be almost six femtocells per macro base station and the number of users that connect to a femtocell on a regular basis is estimated to surpass 70 million.  

Berg Insight predicts that femtocells will mainly serve as an extension of mobile macro networks to improve indoor coverage. The scope for femtocells to expand network capacity is, however, initially rather limited because better alternatives already exist. Data traffic has surged lately, pushing many mobile networks to their capacity limit. Nevertheless, an overwhelming majority of the traffic is generated by PC and to some extent also by smartphone users who are on-the-move, or in most cases have substituted their fixed broadband connection with mobile broadband. Consequently, these users are unable to offload their data to the fixed network. “Virtually all PCs and most smartphones are already Wi-Fi enabled and are thus able to leverage the large installed base of Wi-Fi access points available in homes, offices and public buildings”, says Marcus Persson, telecom analyst, Berg Insight. For the moment, many people are not willing to install yet another box in their homes unless it can add significant value beyond what Wi-Fi already brings today.  

The femtocell concept is still at an early stage with few commercial deployments. It will take several years before shipments of femtocells become substantial. To begin with, the industry needs to prove that femtocells can be deployed without causing adverse interference. Femtocells also need to become sufficiently standardised to ensure efficient integration and low cost per unit. More importantly, “operators need to find and adjust business models that make femtocells attractive for their customers, who will ultimately buy or receive femtocells for placement at their premises”, Persson concludes.

AT&T is on track for a national femtocell launch by the end of this year, according to Gordon Mansfield, executive director with the company, speaking at the Femtocell World Summit in London yesterday. As a first step, AT&T is expanding its trials, which involve some 200 users, to coverage of key cities, after which, "We're on track for a full national launch by the end of 2009," he was quoted saying by Unstrung. This will be the first UMTS femto launch in the US.

Mansfield told Unstrung that AT&T will launch with a standalone 3G femtocell, (as opposed to a femtocell that's integrated into a residential gateway), but in the longer term, AT&T has its eye on integrated femtocells. Mansfield said, "Certainly we're looking at integrated femtocells. Some people think that integration is putting a femto into a residential gateway, and that's one aspect. We're looking at other things in the home [and asking]: 'How can I leverage all the elements in the home?' There's a lot of research and investigation in these areas and nothing definitive on what we're going to do."

 

As with Vodafone in the UK, Femto will be used as a standalone 3G cell, and not integrated in the home network.

The Vodafone Access Gateway is purely targeted at improving coverage and no attempt has been made to dress it up - there are no femtocell-specific tariffs, no bonus minutes, texts or data allowances.

This is further evidence that in early launches the femtocell business case will focus on coverage and not the ‘mobile home hubs’ that some in the industry believe. However, selling coverage that customers believe that they are already paying for comes with its own risks of a backlash if it is pushed too hard.
Vodafone puts together a better business model
Vodafone offers several options to customers wanting a Vodafone Access Gateway. This variety is the best strategy for selling femtocells to date, although we still see some major barriers limiting uptake.

For customers on tariffs of £60 per month or more the device is free, something we believe that a majority of femtocells will need to be (once costs come down) for consumers to embrace them. Currently, Vodafone UK offers just two tariffs over £60 per month, so we think that this offer will have a limited addressable market. We also assume that the seemingly arbitrary £60 figure relates to a cost-modelling exercise that indicates high hardware costs rather than strategic intent.

Vodafone has also achieved something that both Sprint and Verizon Wireless failed to do: to give customers options. For the majority of users below the threshold, there is the option to pay a monthly fee of £5, £7 or £10 on top of their post-paid plan over 24, 18 or 12 months respectively. This creates a far lower price barrier, while ensuring that subsidies don’t kill off the business model too soon. We expect the majority of uptake to come from this approach.
Finally, Vodafone has followed Verizon Wireless’ route of offering the device for a one-off £160 fee. Alongside the other options, this completes a far more rounded proposition than Verizon managed, although the high price point will be a barrier for Vodafone as much as it is for Verizon.
Impact likely to be muted in the short term

On one level this is a churn-reduction tool. Those customers with poor coverage have a means of staying with Vodafone, although the high cost plans needed for a free femtocell will be a severe test of Vodafone’s resolve not to give the devices away for free. Customers with poor coverage will demand a femtocell for free regardless of their plan and, like Sprint before it, Vodafone will be under immense pressure to give in.

The Vodafone Access Gateway is also a tool to encourage customers to churn from rivals. However, in multi-operator households, there will invariably be a lag as rival contracts are run down. Furthermore, the key determining factor is whether improved coverage is sufficiently attractive to stimulate churn from rivals, particularly when the rivals could offer more texts, minutes or data to stay. Indeed, if coverage were that great an issue the entire household would most likely already be on the operator with the best coverage. Therefore, with no femtocell-specific tariffs, there would be little incentive to switch to Vodafone.

Finally, there is the opportunity for Vodafone to increase mobile usage while at the same time offloading traffic. We have said in the past that this looks the most likely model to succeed in the long term as, with sufficient penetration, the opex savings are considerable. However, femtocells are clearly not there yet. In early deployments the priority is to prove that they work from technical and customer perspectives. Therefore, to gain sufficient penetration, and make the business case work, Vodafone will have to up the ante in the future and differentiate by more than just coverage. Until then, yesterday’s announcement is a femtocell offer that is an improvement on what has gone before, but still a relatively niche offering.