Understanding Carrier Femtocell Business Cases: Is the Current Focus on Price Warranted and Truly Valid?

Stuart Carlaw, Research Director – ABI Research

The Femtocell market is entering uncertain waters at the moment. Will there be fruitful proceeds? Questions about maneuvering into the best position for maximizing returns on investment persist. Notable carriers such as Vodafone and Sprint have issued significant RFPs, while others such as SFR and Softbank are far down the road toward a working solution. All of these companies hold different ideas about service offerings and box feature sets; however, they all have one thing in common. Based on my discussions with carriers, no matter the understanding of the technical aspects of the femtocell, each carrier is struggling to come to terms with establishing a sound business plan that can form the cornerstone of its offering.

Before establishing some key factors and items that carriers need to remember when considering business plans, it is equally important to understand the full impact that carrier business cases have on the whole femtocell ecosystem. The most fundamental aspect of understanding carriers' business cases more fully is that the process will drive the price points these carriers are trying to pressure vendors into meeting. On one hand, carriers look to exert price pressure on their suppliers in order to bring about innovation, create a positive financial environment for services and also to attain the best competitive position when it comes to consumer positioning. Whilst on the other hand, underestimating the full value of the femtocell offering and pushing too hard for aggressive price points may lead carriers to ask for price points that are so low they inhibit market development. Today, many OEMs are voicing concern that carriers are already exerting pressure on prices before they have created a strong business case for femtocells

The major results of this premature price pressure include the following:

• OEMs are forced to either operate at low margins or to view shipments into initial markets as loss leaders.
• The general lack of margin creates a situation whereby the breadth of the OEM base is far narrower than it would be if margin prospects were a little better. This can have a significant effect on innovation.
• Carriers will have to sacrifice some features in order to meet price points. This can have the drastic effect of seriously limiting usability for the consumer and the total viable market for products in the long term.
• OEMs are forced to pass on some of that cost pressure to silicon vendors that are faced with potentially low volumes, but that also have large upfront investments to produce targeted silicon.

On its own, each of these factors is not overly significant, but combined with another factor relating to the femtocell market, they become critical. This market is subject to high amounts of risk. There are no historical precedents that can be applied to it; there are no units being shipped today; and the cost of developing products can be in the range of $15 million to $25 million, depending on approach. When this is coupled with the huge potential reward, it becomes apparent that OEMs and silicon vendors are faced with a Catch 22 situation that promises the earth, but might cost it as well!

This situation can only be truly nullified by carriers coming to grips with the financial dynamics of this market. Essentially, it is a process of understanding the costs and deciding whether or not they outweigh the cumulative benefits of deploying the solution. This article is not the forum to discuss costs, as these are highly dependent on the carrier; but what is completely apparent from the start is the cumulative financial benefit from femtocells. These benefits include:

• Capacity saving: the saved investment that would have been needed to house traffic and subscribers in the macro network that is now catered for femtocells.
• Energy saving: the cost of power that would have been expended in both old and new macro base stations needed to accommodate subscribers and traffic. This is important given that carriers always want to boost data traffic in order to counteract falling voice revenues, and this has the most significant impact on energy consumption.
• Backhaul saving: the cost saved that would have been used to fund leased lines and microwave radios needed to backhaul macro network traffic that is now being backhauled via a consumer-funded IP connection.
• Service revenues: assuming a hybrid funding model, these revenues represent the monthly fee consumers will pay to have a partially subsidized femtocell service.
• Equipment revenues: the partial payment consumers will make for a femtocell using a hybrid funding model.

In looking at all of these revenue streams, it is clear that service revenues, capacity saving and energy saving are the most significant. It is important to remember that energy costs are open to fluctuation, and backhaul and energy represent two of the three major cost centers for carriers. Carriers are intently focused on cost minimization in all markets -- and anything that combines this while reducing the need for costly macro network capacity driven upgrades is worth its weight in gold.

In summary, analysis conducted by ABI Research found that these cumulative savings/earnings could rise from as little as $403 per femtocell in 2007 to $3,971 by 2012 as the true impacts of the solution are coupled with huge economy of scale advantages. This level of saving leads to the conclusion that $200 femtocells, and fully subsidized handsets for a whole family (should a carrier wish to migrate whole families onto 3G services), are eminently supportable. However, the early days will be very tight; it won't be until 2009 when the cumulative valuation gets to the $2,535 level that carriers will be in a position to capitalize on the full financial benefits of this approach.

There is one major aspect that has not been incorporated into the financial valuation of femtocells. The greatest unknown involves the impact that femtocells will have on overall data ARPUs. Carriers are openly voicing their hopes that femtocells will shape user behavior regarding data by innovative and cost-effective services pioneered in the home, which are transferred into the macro environment. This could be huge or negligible, depending on the carrier investment in this idea. But to be frank, it must be viewed as nothing but a tasty icing for what is a sizeable financial cake, underpinned by less glamorous ingredients such as energy and backhaul cost savings.