Femtocells can increase revenues and deliver cost benefits, but only if operators do their homework

By Malik Saadi

While seeking new business opportunities in today’s converging telecommunications market, operators are also looking to make best use of their capital investments and to minimise operational costs. One of the main challenges they face is to manage the explosive growth generated by emerging mobile broadband services. Will femtocells and alternative technologies have the potential to achieve this goal?

Early converts to femtocells such as NTT DoCoMo and Softbank in Japan, O2/Telefonica, T-Mobile Europe, Vodafone in Europe, Sprint, AT&T Mobility, Verizon in the USA, and Chunghwa in Taiwan are already testing the technology and some have already launched public trials.

Operators see cost savings as one of the key advantages of femtocells. By deploying femtocells in the home, operators have an efficient way of introducing additional coverage and capacity without incremental capital requirements to expand their cellular network. Operational expenses are reduced, since backhaul is essentially paid for by the consumer.

But there are additional benefits. Operators can use femtocells to gain competitive advantage, for example, by countering the threat of WiFi based technologies. The big advantage here is that standard handsets can be used rather than dual mode. Churn is also kept to a minimum as families are offered better quality of service within the home.

Femtocells also promise increased ARPU by ensuring higher data coverage and capacity and hence higher data speeds. As network upgrades come in the form of very high-speed mobile access technologies, mobile operators can potentially compete with the unlicensed spectrum technologies of Wi-Fi and WiMAX.

Finally, femtocells let carriers save on the cost and time of optimising the macro network and focus on an economical method of providing coverage where there is demand. After rolling out their 3G networks in order to meet licensing commitments, many operators are now looking for ways to increase their mobile broadband coverage and create more capacity via hotzones in residential areas.

The femtocell vendors hope that operators will increasingly divert their investments towards indoor basestations as essential components in the mobile broadband ecosystems. Vendors such as ip.access, Ubiquisys, Airvana, and Airwalk claim that the majority of the technical issues related to femtocells and alternative technologies have now been resolved and these technologies are now ready to make their way into the market.

However, a number of operators – notably T-Mobile – have expressed concerns about how slowly the standardisation of the network interfaces is progressing, and about the failure so far to fully resolve a number of technical issues including femtocell device management, radio interface issues, spectrum and interference management.

But the most important barriers that could still push the leading operators to have second thoughts about the femtocell market include the unclear business case for deploying the technology, the cost associated with CPEs or femtocell access points (FAPs), and the fragmented nature of femtocell technologies. In addition, there is the question of finding the right value proposition that will appeal to the end-user.

These issues must be addressed in the early stages of deployment for services to be rolled out smoothly.

Operators are now concerned about the high costs of implementing such an infrastructure and how they can justify these investments. Concerns are being voiced by a number of operators including the French mobile service provider SFR (of which Vodafone owns 44 per cent) which admitted this month that it is not only putting its plans to launch femtocell services on hold, but is testing an alternative technology in parallel.

Although vendors claim that femtocells could help in making significant savings in overall capital and operations investments, how this will be achieved is far from clear, and it will depend on a number of strategic factors.

For example, how mobile traffic generated in the home – including both voice and data – evolves, and how mobile access at home influences the business of the operator, are both key. Against this background, are femtocells going to create disruption?

Whether femtocells can be deployed in line with traffic growth instead of implementing macrocells for additional capacity will be important, as will the break-even price of FAPs after which the Femtocell network becomes profitable.

Other questions still to be answered are who is the real audience for femtocell services, households, mobile subscribers or both? How should femtocell services be marketed and how should they be positioned in the retail environment? What attractive value propositions should operators base their business case on?

According to a new report from Informa Telecoms and Media, Mobile Broadband Access at Home: The business Case for Femtocells, UMA and IMS/VCC Dual Mode Solutions, the percentage of mobile voice minutes of use (MoU) in the home environment will approach 42 per cent of total mobile voice traffic by the end of 2008. As the price gap between fixed and mobile calls will narrow over the years, this ratio is expected to gradually increase to reach 49 per cent by 2013.

Mobile data usage is also expected to increase over the coming years, thanks to the aggressive flat-rate data-plans pushed by mobile operators, the rollout of mobile broadband networks and most importantly the advances in the mobile terminal software particularly the user interface, leading to the proliferation of new type of smartphones and mobile internet devices.

In 2008, the home environment will be responsible for 35 per cent of total mobile data traffic but this traffic is expected to predominate with an overwhelming 60 per cent in 2013. This growth will be driven by the fact that users will increasingly initiate longer and richer data sessions, in the relaxed environment of their home, through browsing internet, watching longer and richer video clips, downloading music video applications, exchanging pictures, or using VoIP chatting on-line.

This does not mean that mobile broadband services will fully substitute fixed broadband, but users would prefer to keep some applications in the vicinity of the private and intimate zone of their mobile devices.

These findings clearly illustrate the need for mobile operators to invest to create more cellular capacity and coverage to cope with the surging traffic in residential areas and ensure better service quality in this environment. Femtocells and alternative technologies could help mobile operators to offload a large part of this traffic to the subscriber fixed line, which could potentially lead to significant savings by relaxing network capacity upgrade requirements while enabling considerable improvement of both coverage and capacity of mobile broadband access in the home environment

Informa Telecoms & Media expects the number of femtocells deployed by the end of 2013 exceed the 40 million mark. This installation base could help operators to offload up to 8 per cent of total mobile traffic to fixed networks via the end-user subscriber line. Obviously this could imply mobile operators will make significant savings by reducing the need to create additional macro-cell capacity to cope with this traffic.

However, this is not obvious and will depend on the nature of the operator case by case, the mobile access technology involved, the value proposition to the end-user, the region targeted, and the level of investments the operator has already made in upgrading its mobile network.

In theory, if one takes into account capital expenditure related radio access infrastructure, operational costs and the mobile backhaul cost required for adding new macrocells to handle a traffic capacity equivalent to this carried over the new femtocell installation base, then this cost is evaluated at US$13.8 billion in 2013. This obviously implies operators have no spare capacity in their existing networks and they have to build this capacity from scratch.

However, in practice, when operators invest in widening the coverage of their networks they systematically create capacity redundancies, probably enough to handle a big part of this traffic anyway. Assuming that 33 per cent of the required capacity is provided by the existing macrocell coverage, then infrastructure expenditure investments required could be around US$ 9billion.

By comparison Informa Telecoms & Media estimates the capital expenditure related to implementing femtocell networks – representing 22million new net additions – would cost the industry about US$3.7billion, 85 per cent of which goes to FAPs. Thus, the industry could save at least US$5.3 billion or more in the network infrastructure if femtocell solutions are properly deployed using meticulous geonetwork planning.

Savings could be higher depending on whether these devices are fully subsidised or not. Also note that while there are potentials of savings in network expenditure when deploying 3.5G, WiMAX or LTE, this saving is less obvious for GSM/GPRS networks and WCDMA to a certain extent.

However this saving could be balanced by the cost related to marketing and promoting FAPs and femtocell services. Indeed, deploying femtocells requires a good understanding of market segmentation of both mobile consumer and household markets, meticulous planning and targeted marketing campaigns, which mean operators will have to invest substantial amount of money if they want femtocell services to gain popularity.

In addition, if femtocells are sold to customers in sporadic fashion via traditional mobile operators’ channels, then this may induce a huge scattering of femtocell deployment over large areas. Not only this will make it hard to manage the physically manage FAPS and related networks but most importantly this would mean the operator will not be able to make any CAPEX or OPEX savings.

Actually, In order for femtocell networks to effectively substitute the capacity of macrocell networks, they should be deployed in clusters otherwise their implementation could add additional burdens in terms of both capital and operation investments.

So despite claims that femtocells could help operators make some savings in terms of capital and operational expenditure, this will depend considerably on the individual operator, the mobile access technology supported, and on the region and type of area targeted. This means that operators will have to find ways of increasing both revenues and ARPU from femtocell services in order to make femtocells profitable.

For more information on Mobile Broadband Access at Home: The business Case for Femtocells, UMA and IMS/VCC Dual Mode Solutions, visit www.informatm.com/access