Mobile network operators have up to now invested very large sums of money rolling out cellsites across the country before recouping their costs. Femtocells offer a much more scalable investment profile with much smaller initial fixed cost. This makes it lower risk and potentially much better cashflow.

Mobile Network Operators have a wide moat

Businesses which have a strong competitive advantage are sometimes said to have a wide moat – new entrants or competitors can’t easily storm the castle and steal their business.

One of the main reasons there aren’t too many mobile network operators in each country is the very high capital cost involved in providing a commercial service. Billions of dollars are required, broadly falling into four categories:

• Spectrum Licence. Varies tremendously between countries – some operators effectively got this free, others paid highly.
• Cellsites and Infrastructure. Site rental, basestations, towers, antenna, backhaul transmission etc.
• Customer acquisition. Handset subsidies, dealer commissions, advertising etc.
• Operations. Back office customer care, billing, power, staff.

Ballpark figure for this might be 25% each – perhaps something like $30 Billion in total for a UK 3G operator serving 20 million subscribers.

Smaller investments for traditional mobile networks don’t work

An example of a poorly performing investment was One-2-One, a UK operator now part of the T-Mobile empire. When they launched, their service was only available in the capital city (London). Although many potential customers might make 99% of their calls within this area, the thought that the service wasn’t available throughout the country drastically limited its takeup.

Once this was fully appreciated, coverage was rapidly rolled out nationwide and the problem addressed.

Femtocells have a small initial investment.

In order to launch a femtocell service, the main investments for an existing cellular network operator would be:

• Installing a femtocell  gateway
• Integrating this with back-office systems (provisioning and billing)
• Selecting and testing the femtocell
• Training customer care/sales/support staff
• Marketing and advertising

All of the above are required just to sell one single femtocell.

But it covers the country

Once this initial investment has been made, femtocells can be sold to any customer nationwide. There’s no need to wait until coverage has been extended to a particular location.

And it scales easily with capacity

Should a traditional cellular service be tremendously successful in a specific location, this can cause capacity problems. Calls drop, interference causes poor call quality, data services don’t run quickly. Operational departments then do their best to seek out alternative/additional sites and bring on extra capacity quickly.

This takes time, and there may be delays for reasons such as planning restrictions, protests from local communities or high site rental prices.

Femtocells scale easily and quickly. From a network capacity viewpoint, additional femtocell gateway can be installed easily and quickly by adding more cards/cabinets/gateways. This can be done in just a few locations – they don’t need to be geographically close to the customers who are connected via the internet. Where call traffic is being migrated from the macrocellular network across to femtocells, then voice switching capacity in the main MSC voice switches would not grow – just come from a different source. However, it’s likely that traffic volumes would grow and that would be dealt with by expanding the MSC, GSN and related equipment in the normal way.

Since the core network typically accounts for 20% or less of capex spend, and operators have relatively few concentrated switching centres, these additional servers shouldn’t be a major cost or have long lead times to deal with rapid growth.

Reduced Risk

Build and they will come, is an oft-quoted statement of the pioneer. Many new services have been developed and brought to market with variable results. Mobile networks themselves have been a prime example, but with spectacular financial returns.

Femtocells offer a reduced risk approach, where the relatively low initial costs allows operators to experiment with the pricing and packaging of the service without large investments.

Where the service is widely accepted and demand takes off, the associated customer contracts can be directly offset against the initial investment of the femtocell box in much the same way as for handset subsidies/dealer commissions. This reduces the long term risk by matching each incremental investment (of a femtocell box) with a customer contract.

Alternatively, operators could sell femtocells at or around cost price. Since they are tied to their own network, they will provide benefit to their own customers. This almost eliminates risk.

Cashflow is better

Cashflow tracks the money being spent versus the money coming in. For small businesses, it’s even more important than profit. The most important points on the chart are the maximum negative cash (which determines how much investment is required to fund the project) and the time to become positive (i.e. how long before I get my money back and can spend it on something else).

Accountants (and investors) love to see good cashflow charts. Less money committed for shorter time is always good.

Mobile networks typically need billions of dollars investment and don’t see anything back for years as they continue to invest in growing coverage/capacity and attracting new subscribers.

Enterprise and Outdoor Femtocells are different

There are different business cases for enterprise customers. These would normally expect their offices to be wired up with great coverage as part of the deal for signing up exclusively with a network operator. Femtocells now make this feasible to achieve for smaller businesses, the so-called SOHO/SME market. In these cases, the initial investment may be lower than picocell or DAS technologies used for larger businesses which were previously just too expensive to justify.

There is also a different scenario for the forthcoming 4G cellular networks, using an outdoor LTE femtocell rollout promoted by some. The cashflow and cost/benefit analysis is quite different, because this is more about providing high capacity rather than initial coverage during the launch phase.

Some example numbers for the domestic femtocell business case

A femtocell investment may only require a few million dollars to become fully operational even for large operators (it may be less – I haven’t seen any operator’s total project costs). Additional  investment may then follow based on takeup from customers. Even if 100,000 femtocells were given away free at a cost to the operator of $200 each, we’d be looking at a peak project cost of less than $25M.

Grow the lifetime value of each of these customers by $1000 and you’d be looking at a return of $100M. Sounds a good initial business case to me.

An alternative is to sell femtocells at or around cost price – this may be what Verizon Wireless are doing with their Wireless Network Extender. There’s very limited cashflow issue here – apart from carrying stock and the initial setup costs, each new femtocell sold will cover its costs. This would limit the peak cashflow to the setup costs.