Joe Madden, Principal Analyst at Mobile Experts, wasn't convinced about residential femtocells but strongly believes that carrier grade small cells for capacity are a different story. In this guest post, he explains why he's reached that conclusion.
With some insights into who will be the winners (and losers) from today's supply chain, he believes that small cells can deliver the same mobile data capacity at less than half the cost of a traditional macrocell approach. That's something to make the accountants sit up and take note.
Many people are attracted to small cells because they're new and interesting. We are trained, in the mobile industry, to latch onto the "next big thing". But experience has proven many times that the "next big thing" can be a flop if there's no benefit for a key stakeholder group.
Consumer femtocells are one example....great technology, and well executed by several companies. The cost structure of a femtocell came down nicely. But there was never enough benefit for the mobile operators to cause them to push hard for the femtocell....and in fact, there were enough doubts that few operators actually subsidized the residential femtocell. (Enterprise variations may be a different story. The jury is still out on that one)
Carrier-grade small cells for capacity applications should be a different story. Mobile Experts has forecasted for the last three years that high-capacity small cells will dominate the telecom picture in a few years. Here is a brief summary of how we continually reach that conclusion:
- Mobile operators make their money with voice calls, and so far they have supported mobile data because they want to attract more subscribers to their services. To date, most operators have not really made their profits from data services, but they have been able to collect enough data ARPU to break even, collecting profit from the voice and SMS traffic. Today, in developed markets the sheer weight of data can be 90% of the traffic on the network, but less than 40% of the revenue. To cope, operators are looking for a way to reduce cost on data traffic.
- Mobile infrastructure OEMs make their money through their system software. Selling a macro base station cabinet typically results in about 10-15% gross margin, making the hardware business unattractive for the OEMs. Of course, they all continue to sell hardware because it's a way to sell the software and make money. They are selling cabinets for $40,000 apiece, with a few thousand dollars of software value to increase gross margin into the 20-25% range. What if the OEMs could collect similar value for system software (let's say about $2,000) by selling a $4,000 small cell instead of a $40,000 cabinet? The guys in Accounting love this strategy.
- The supply chain changes dramatically in a market transition to small cells. The losers: Suppliers of air conditioners, large battery backup systems, generators, and towers. The winners: A few RF semiconductor vendors, antenna vendors, and installers. Of course nothing is black and white....the macro market will continue, with some growth related to LTE. But the major growth will come in the small cell world, where semiconductor integration has put all of the hardware complexity into chipsets, leaving little "value" in the box itself. There are at least 8 SoC vendors competing for this market now, so it's clear that the semiconductor market supports the trend to small cells. Profitability in SoCs is questionable with so much competition...but over time that will rationalize itself.
- The handset ecosystem, in some ways, does not care what happens in infrastructure. If there's a strong signal, the handset guys and OS developers and apps developers are happy. At a deeper level, the handset guys really want the infrastructure to provide a high signal-to-noise ratio and always-on connectivity, which implies widespread deployment of small cells. With most data traffic consumed indoors, the use of indoor small cells will provide better signal quality than any outdoor base station ever could. Wi-Fi will help, but the always-connected mentality of the apps developer will drive operators to think in terms of dual-mode Wi-Fi/LTE small cells, not in terms of simple Wi-Fi access points. Wi-Fi APs by themselves will not drive the end-user mentality to use data services constantly and everywhere.
Overall, the simple view of the mobile infrastructure market is that delivering each bit needs to get cheaper, or the mobile communications market will plateau. We have an opportunity to use small cell technology to deliver bits quicker and cheaper than ever before, so all major stakeholders will support the trend. The Mobile Experts forecast predicts that when the available products reach the right cost tradeoffs, small-cell growth will match the geometric growth in data demand.
The chart above illustrates the cost trend for small cells. So far, carrier-grade small cell products are not truly available for mass deployment because ongoing system software development and field trials must be completed. (The dashed line represents a hypothetical cost only) Backhaul options are still expensive, and core network integration solutions and transport are still klunky. However, in 2014 the Koreans will be in full swing and the kinks will get hammered out. We expect the cost of small cells to solidify at less than half the cost of macros, for the same capacity. Look for major deployment of carrier-grade, capacity small cells by the end of 2014.