The business case for femtocells still requires careful consideration

By Gareth Willmer

Vodafone UK’s femtocell launch in July appeared to be a significant breakthrough for the technology in Europe. The timing of the move by such a large operator took many in the industry by surprise, and some vendors have spoken of a significant rise in activity since the launch.

Once a larger player debuts a service, technology or new strategy, others often follow suit fairly quickly. And operators’ reported increase in dialog with femtocell vendors and heightened interest in trials could appear promising for the technology’s future.

However, it seems that there are still a number of sticking points to overcome before many operators consider commercially launching femtocells. Among them are technical obstacles and getting the right business model in place, suggesting that it could be some time before many more products come onto the market.

Pricing appears to be a central concern. Operators cite improved coverage as one of the principal early benefits of femtocells, but some have questioned how much they can charge for the technology when customers already expect operators to provide good coverage.

French operator SFR has said, for example, that the target cost of a femtocell should be similar to that of an ADSL gateway, at about US$50, in order to boost customer volumes. Operators will probably also want to avoid coming into the market at too low a price because this could make it harder to raise charges at a later date.

The price factor raises further questions about the early business model for femtocells, beyond capturing a limited number of early adopters in areas with weaker network coverage.

Vodafone is offering its femtocell product to customers for £160 (US$258.60) up front or an extra monthly fee on some price plans, although it is included free on some higher-end tariffs. It remains to be seen whether this price is too high for a lot of consumers, but the operator has dismissed press reports of slow femtocell sales in the first month after launch.

Other obstacles are in the areas of technology and regulation. A spokesman for Telefonica O2 says, for example, that there is a risk of nonfemtocell users losing coverage when close to a femtocell, and potential interference between the technology and cell sites.

Operators also have some questions about how long it could be before standardized devices arrive in the market, even though the industry’s 3GPP body approved the femtocell standard in April. The technology is additionally in its early stages of development, and O2 points out that other in-building options, such as Wi-Fi, are currently cost much less than femtocells.

How to market femtocells is also a challenge, and some operators plan to attribute current capex to other technologies.

Some operators say the various obstacles mean they are in no rush to launch femtocells, while the potential size of the market is still questionable. And although vendors talk about using the technology to generate extra revenues through value-added services, it could be a while before compelling services are available on a widespread basis. Even then, it is too early to say whether such services could be central to a customer’s decision to purchase a femtocell.

On the other hand, vendors do say that operator interest in femtocells has proliferated since Vodafone’s launch, and they predict more European launches in the next four to eight months.

And femtocells have benefits that operators could capitalize on, particularly in the long term. Operators could seek to bolster their competitive edge and reduce churn by running a low-price service that enhances indoor coverage and provides discounted or home-zone-style calling plans, with the promise of future value-added services.

There is, of course, no need for operators to immediately launch services on a mass-market basis and they could just target particular segments that could quickly benefit from the technology. Vodafone UK agrees, for example, that its service currently caters for only a small segment of the population.

One of the main benefits for operators could, meanwhile, lie outside the consumer proposition, with femtocells providing an option for those that are starting to run out of network capacity. The case for femtocells could also improve as operators start launching LTE, with the technology offering a supplementary option for enhancing indoor coverage on new networks.

T-Mobile Germany is currently using femtocells on a limited scale to resolve the immediate problem of “white spots” in areas where coverage remains limited, rather than as a consumer product.

Vendors have additionally referred to some robust figures on potential cost savings to support the case for femtocells, taken from a study by industry body the Femto Forum. The study found that the cost for an operator to supply a 2.5Mbps service in an area of limited coverage was a third less using a femtocell than the macronetwork.

If operators can achieve such savings when expanding and rolling out new networks, and overcome obstacles to deployment, the case for femtocells could become more compelling in the long run.