Next-generation Networks and Femtocells

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On behalf of the Femto Forum, Signals Research Group, LLC developed a detailed business modeling tool that allows Femto Forum Full members to analyzerole that femtocells will have as part of their overall business strategy. Tis tool has been used as the basis of the ana lysis reported in this paper. Te authors inclMichael Telander (CEO and Founder), J. Randolph Luening (Vice President, Wireless Economics), and Mark Schulz (Vice President, Wireless echnologies). Athe sole authors of this paper, we believe that while scenar ios and assumptions that we have used in this whitepaper are for il lustrative purposes, they are also rsentative of real-world customer segments. In addition to providing technology assessment and operator business modeling services, Signals Research Group author of the Signals Ahead research newsletter andTe Dollars and Sense of Broadband Wireless, the rst independent in-depth study of next-generation broadban wireless network economics.

THE BUSINESS CASEFOR FEMTOCELLS INTHE MOBILE BROAD-BAND ERAA WHITEPAPER THAT ANALYZES THE ECONOMICBENEFITS OF FEMTOCELLS IN AN OPERATOR’SNEXT-GENERATION PRODUCT SUITE

MARCH 2010

Prepared by Signals Research Group, LLC

Whitepaper developed for the Femto Forum


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The Business Case for Femtocells In the Mobile Broadband EA Whitepaper That Analyzes the Economic Bene ts of Femtocells in an Operator’s Next-Generation Product Suite

Table of Contents

1.0 Executive Summary …………………………………………………………………………………………61.1 Summary of Results ………………………………………………………………………………………9

2.0 Methodology …………………………………………………………………………………………………132.1 Customer Lifetime Value …………………………………………………………………………………132.2 Reading a Waterfall Chart ………………………………………………………………………………13

3.0 The Mobile Broadband Era …………………………………………………………………………………15

3.1 Exponentially Increasing Wireless Data Traf c ……………………………………………………153.2 Data Of oad Is Real and Measurable …………………………………………………………………164.0 Introducing Four Segments, Circa 2012-2013 …………………………………………………………18

4.1 The Technology Savvy Family ……………………………………………………………………………184.2 The Socially Networked Family …………………………………………………………………………194.3 The Mobile Executive ……………………………………………………………………………………204.4 The Communications Enabled Firm ……………………………………………………………………214.5 Details: Devices, ARPU, Usage ……………………………………………………………………………214.6 The Impact of LTE ………………………………………………………………………………………25

5.0 An Incumbent European Operator with HSPA or LTE/HSPA Femtocells ………………… 275.1 Starting Point: Last Year’s Business Case …………………………………………………………… 275.2 A Journey into the Future ………………………………………………………………………………28

5.2.1 Changes in Behavior ………………………………………………………………………………285.2.2 Changes in Cost ………………………………………………………………………………………295.2.3 Changes in the Femtocell Market ………………………………………………………………295.2.4 The Technology Savvy Family ……………………………………………………………………305.2.5 The Socially Networked Family ……………………………………………………………………325.2.6 The Mobile Executive ………………………………………………………………………………345.2.7 The Communications Enabled Firm …………………………………………………………… 36

6.0 Operator View: Multiple Segments …………………………………………………………………386.1 Rationale / Economies of Scale Across Segments ……………………………………………… 386.2 Key Assumptions …………………………………………………………………………………………386.3 Summary Results …………………………………………………………………………………………43

7.0 Operator View: Large and Small Operators / Economies of Scale ………………………… 477.1 Important Up-Front Costs ……………………………………………………………………………477.2 Small Operator: An Entry Strategy …………………………………………………………………487.3 Large versus Small Operators: Cost Comparison ……………………………………………… 497.4 Large versus Small Operators: CLV Comparison ………………………………………………… 50

7.4.1 A Very Large Operator ………………………………………………………………………………517.4.2 A Large Operator ………………………………………………………………………………………527.4.3 A Small Operator with Full Integration …………………………………………………………537.4.4 A Small Operator with Minimal Integration ………………………………………………… 54


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7.4.5 A Very Small Operator with Minimal Integration ……………………………………………558.0 LTE/WiMAX Network Deployment Economics - Asia ……………………………………………57

8.1 The Concept …………………………………………………………………………………………………578.2 Key Assumptions ……………………………………………………………………………………………578.3 Market Demand for LTE …………………………………………………………………………………668.4 The Femtocell Market in Japan ………………………………………………………………………688.5 LTE Economics ……………………………………………………………………………………………708.6 Mobile WiMAX Economics ………………………………………………………………………………718.7 Optimizing the Mobile WiMAX Business Case ………………………………………………… 788.8 Incumbent Operator Deployment …………………………………………………………………79

8.9 Conclusions – LTE/Mobile WiMAX Network Deployment Economics in Japan ……… 839.0 Summary of Report ………………………………………………………………………………………85Appendix I: Additional Resources ……………………………………………………………………Appendix II: Customer Lifetime Value Methodology / Waterfall Chart ………………………………

10.0Customer Lifetime Value Methodology ……………………………………………………………8810.1 Customer Life Value Methodology / Bars in the Waterfall Chart ………………………… 8810.2Start Value …………………………………………………………………………………………………8910.3Add Femtocell Costs ……………………………………………………………………………………8910.4Network Cost Savings …………………………………………………………………………………8910.5Additional Network Costs Due to Increased Data Usage …………………………………… 8910.6Add Coverage-Related Increase in Voice Usage ………………………………………………… 89

10.7Add Free Calling Plan ……………………………………………………………………………………8910.8Add Basic Monthly Fee …………………………………………………………………………………9010.9 Add Reduction in Churn ………………………………………………………………………………9010.10Add Basic Value Proposition ……………………………………………………………………………9110.11 Add Value of Additional Family Member …………………………………………………………9110.12 Add Enhanced Services Revenue ………………………………………………………………………9110.13 Incremental Revenue from Existing Services ………………………………………………………9110.14Reduce Other Business Churn …………………………………………………………………………9110.15Enhanced Value Proposition ……………………………………………………………………………91

Appendix III: Macro Cellular Network Cost Modeling Methodology …………………………………11.0 Macro Network Economics Model …………………………………………………………………9211.1 RAN Modeling Coverage Methodology – Summary …………………………………………… 9311.2 Network Cost Modeling Methodology ……………………………………………………………9411.3 Femtocell Core Network ………………………………………………………………………………9811.4 Network Cost Savings …………………………………………………………………………………99


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Index of Figures

Figure 1. Expected Growth in Global Wireless Data Usage ………………………………………………15Figure 2. Expected Macro Cellular Data Of oad by Country ……………………………………………16Figure 3. The Technology Savvy Family …………………………………………………………………………18Figure 4. The Socially Networked Family ………………………………………………………………………19Figure 5. The Mobile Executive …………………………………………………………………………………20Figure 6. The Communications Enabled Firm …………………………………………………………………21

Figure 7. European Coverage-Challenged Household (2009 Business Case Whitepaper) ……… 27Figure 8. Technology Savvy Family, HSPA Femtocell …………………………………………………… 30Figure 9. Technology Savvy Family, LTE/HSPA Femtocell …………………………………………………31Figure 10. The Socially Network Family, HSPA Femtocell …………………………………………………32Figure 11. The Socially Networked Family, LTE/HSPA Femtocell …………………………………………33Figure 12. The Mobile Executive, HSPA Femtocell ………………………………………………………… 34Figure 13. The Mobile Executive, LTE/HSPA Femtocell ……………………………………………………35Figure 14. The Communications Enabled Firm, HSPA Femtocell ……………………………………… 36Figure 15. The Communications Enabled Firm, LTE/HSPA Femtocell …………………………………37Figure 16. Number of Devices with Access to an LTE/HSPA Femtocell …………………………… 40Figure 17. Number of LTE/HSPA Femtocells by Year ………………………………………………………41

Figure 18. Number of Devices with Access to an LTE/HSPA Femtcell ……………………………… 42Figure 19. Present Value of Femtocell-Related Expenditures, Retail Sales,Subsidies, and Pro t Contributions …………………………………………………………………………43Figure 20. Femtocell-Related Expenditures by Category by Year …………………………………… 44Figure 21. Pro t Contribution by Year ………………………………………………………………………45Figure 22. Cumulative Pro t Contributions / Breakeven Analysis …………………………………… 46Figure 23. Femtocell-Related Expenditures by Operator Size and Integration Strategy ……… 49Figure 24. Femtocell-Related Expenditures per Femtocell by Operator Size andIntegration Strategy ……………………………………………………………………………………………50Figure 25. Very Large Operator (Scenario I) Customer Lifetime Value …………………………………51Figure 26. Large Operator (Scenario II) Customer Lifetime Value ………………………………………52Figure 27. Small Operator, Full Integration (Scenario III), Customer Lifetime Value ………………53Figure 28. Small Operator, Minimal Integration (Scenario IV), Customer Lifetime Value ……… 54Figure 29. Very Small Operator, Minimal Integration (Scenario V), Customer Lifetime Value ……55Figure 30. Primary Coverage Area – Probability vs. Expected Data Rates ………………………… 58Figure 31. Primary Quality of Coverage – Required Number of Sites ……………………………… 60Figure 32. Secondary Coverage Area – Probability versus Expected Data Rates ……………………61Figure 33 .Secondary Quality of Coverage – Required Number of Sites …………………………… 62Figure 34. Alternative Quality of Coverage – Required Number of Sites ………………………… 63


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Figure 35. Total Number of Macro-Cellular + In-Building Sites withAlternative Quality of Coverage versus Primary Quality of Coverage …………………………… 64Figure 36. Network Cost Savings due to Slightly Slowed Deployment ……………………………… 65Figure 37. LTE Subscribers / Market Penetration by Year in Japan …………………………………… 66Figure 38. Assumption: LTE Operator Market Shares …………………………………………………… 67Figure 39. LTE Subscribers by Operator ………………………………………………………………………68Figure 40. Fully Allocated Cost of LTE/HSPA Femtocells in Japan …………………………………… 69Figure 41. Fully Allocated Femtocell Costs vs. Network Cost Savings ……………………………… 70Figure 42. Primary Quality of Coverage – Required Number of Sites (WiMAX) ………………… 72Figure 43. Secondary Quality of Coverage – Required Number of Sites (WiMAX) …………………73Figure 44. Alternative Quality of Coverage – Required Number of Sites (WiMAX) ………………74Figure 45. Total Number of Macro Cellular + In-Building Sites withAlternative Quality of Coverage vs. Primary Quality of Coverage (WiMAX) …………………… 75Figure 46 .Network Cost Savings due to Slightly Slowed Deployment (Mobile WiMAX) ……… 76Figure 47. Fully Allocated Cost of WiMAX/1X/EV-DO Femtocells in Japan ……………………… 77Figure 48. Fully Allocated Femtocell Costs vs. Network Savings (WiMAX) ………………………… 78Figure 49. Marginal Cost per GB by Technology …………………………………………………………99

Index of Tables

Table 1. Summary of Results ………………………………………………………………………………………12Table 2. Number of Devices and Femtocell Pricing ……………………………………………………… 24Table 3. ARPUs, MOU, and MBs ………………………………………………………………………………24Table 4. Distribution of Femtocells and Devices in a Multi-Segment Market …………………… 39Table 5. Key Expenditures by Operator Size / Integration Strategy ………………………………… 48Table 6. Number of Sites by Deployment Scenario ………………………………………………………80Table 7. Network Cost Savings by Deployment Scenario …………………………………………………81Table 8. Primary RAN Coverage Assumptions …………………………………………………………… 93Table 9. Link Budget Propagation Characteristics …………………………………………………………94Table 10. Uplink Link Budget Margins …………………………………………………………………………94Table 11. Capacity-Constrained Cell Site Capital and Expense ………………………………………… 96


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1.0 Executive SummaryIn 2009 Signals Research Group, LLC (SRG) authored the Femto Forum Femtocell Busine Case White paper (Femto Forum publication 005, June 2009) which describes in detail a rangeof consumer propositions and operator business cases for operators in North America, Europeand Asia. Te scenarios ± while hypothetical ± were intended to reect real operator offerings

Tey highlighted a number of important benets: voice coverage, home-zone pricing, churnreduction, macro cellular traffic offload, emerging services, and others.

Te results were broken into two categories, a “basic value proposition,” which was relativelyconcrete, and an “enhanced value proposition,” which included items which were more specul

tive and/or applied to only certain categories of operators.

In the past year wireless data usage has continued to escalate ± often making headlines inthe general press ± and manufacturers have made great strides in developing the chipsets anproduct architectures behind L E and WiMAX femtocells. Finally, a growing number of largeoperators have launched femtocell offerings, and the expected volume of femtocell shipmentin 2010 is likely to reach critical mass (jumping from a few hundred thousand units worldwideto millions of units).

It is time, therefore, to consider the impact of femtocells in the “Mobile Broadband Era.” In this whitepaper we jump forward in time ± ostensibly to 2012 -2013 ± to discuss the likely impacof femtocells in the rapidly approaching era of data-intensive smartphones, broadband enabled

laptops, and a growing number of highly capable mobile internet devices (MIDs).Based on the scenarios that we present in this whitepaper, we can reach several broad conclusions, which we substantiate later in this report, including:

The business case, while compelling in 2009, improves fur ther as data use continues to➤increase and as operators move from purely coverage-driven femtocell deployments to onebased on macrocell-offload, performance enhancement, and personalized home-zone andoffice-zone services. Home-zone and office-zone services, which are included only in a fewof the analyses in this report ± principally in connection with the enterprise - will providesignificant additional upside.

In all of the 3G and next generation cases studied using a customer lifetime value approach➤the macrocell-offload network savings exceed the cost of the femtocell. As part of this study

we identif ied four basic customer segments, ranging from the Socially Networked Familyto the Communications Enabled Firm. While the exact definition of each segment varies,they share several attributes, most notably they have widely adopted smartphones and otherdata-centric devices (e.g., embedded notebooks, USB dongles and MIDs), and they have anappetite for generating lots of mobile data traffic. o be specific, we assume that by 2012

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2013 the average monthly mobile data usage of laptops is 5 GB while the average monthlydata usage of smartphones is 500 MB. While 500 MBs per month of smartphone usagerepresents an order of magnitude jump from our business case last year, some trend-watcherconsider it rather conservative.

Further, we assume that the wholesale cost of the femtocell reaches more attractive pricepoints than those we assumed in our rst whitepaper as the market develops and as economies of scale are reached. Te combination of these two factors ± higher data usage, whichcan be offloaded via femtocells, and lower-cost femtocells ±i s what drives this conclusion.

An operator offering either 3G or dual-mode LTE/HSPA femtocells is able to realize a➤return of 10 times on their LTE/HSPA femtocell service investment across a wide rangeof mobile broadband customers. In the first whitepaper, the focus was exclusively on thecustomer lifetime value for a given customer segment. In reality, an operator is going to ultimately target numerous customer segments, perhaps going after each segment with a slightlydifferent strategy and service offering.

Since publishing the rst whitepaper, we have expanded the capabilities of the femtocellbusiness modeling tool so that it is possible to look at the multi-year effect of an operatortargeting several customer segments simultaneously. As demonstrated in Chapter 6, a 10xreturn is entirely realistic, and largely based on the premise that the initial femtocell investment is relatively modest. Said another way, unlike other network investment decisionsan operator’s decision to deploy femtocells does not come with the requisite huge upfroninvestment.

Instead, the upfront investment is relatively modest with incremental investments quicklybeing offset by the subsequent revenues for each femtocell customer that is added to thenetwork. As a result, the impressive returns that we demonstrate are entirely reasonable

while the risk to the operator is relatively modest.

In the specic example that we use in this whitepaper, we look at a representative European operator with 10 million subscribers who deploys femtocells to 10% of its customebase. Based on the assumptions that we lay out in Chapter 6, the operator is able to payback its initial femtocell-related investment by Year 4 and ultimately realize a 10x return oninvestment.

A business case exists even for a regional operator deploying only a few thousand femt➤cells.Many smaller regional operators, in addition to the large multi-national operators, areinterested in deploying femtocells. However, for the smaller regional operators, the upfrontinvestment can be more critical since the number of femtocell subscribers that they can signup will obviously be fewer than what it would be for a large operator.

As we demonstrate in Chapter 7, these smaller regional operators can also implement asuccessful and protable femtocell business strategy. Te key to their success is to delay


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or even minimize some of the upfront integration activities that a larger operator wouldnormally pursue before selling its rst femtocell. Instead, the smaller regional operator woulcomplete only the most essential integration activities and would instead bear additionaloperational expenses with each incremental femtocell subscriber. Te net result ± counterin-tuitive to large operators ± is that the small operator minimizes the potential disadvantagesof small scale.

A new entrant or incumbent deploying LTE or Mobile WiMAX can dramatically improve➤the customer experience by providing each new subscriber with a femtocell.One of thechallenges associated with deploying L E or Mobile WiMAX is that it requires the deploy-ment of a brand new network, and typically at a higher frequency band, which necessitatesadditional cell sites for basic coverage purposes. As an alternative to building out a full nexgeneration network across all regions of the network on day one, the operator could leveragefemtocells during the initial network rollout to curtail the need for deep in-building penetra-tion from the macro cell sites in certain non-critical areas within its network.

By taking this strategy the operator would modestly reduce, or at least partly delay, its macronetwork CapEx requirements. Further, the slightly diminished coverage associated with thisnetwork rollout strategy may not even be noticed by the consumer, especially if the operato

were to provide the consumer with a free femtocell that was entirely funded by some of theCapEx savings. In fact, the typical end user experience with such a strategy could arguablbe better than with a traditional network rollout strategy, in particular in those markets

where high-speed xed broadband connections are widely available.

In this whitepaper we examine how such a strategy would play out for an operator in the Asian market. Specically, we assume that the operator delays by a few years the buildinout of a full macro network across all regions with deep in-building coverage, but that itultimately does achieve this goal. During this interim period, the operator applies some ofthe operational savings toward giving away femtocells to all of its subscribers. Te benet ofthis strategy is the dramatically improved customer experience from the home or enterprisesince the femtocell with a high-speed backhaul connection will deliver much higher datarates than would be economically possible with a macro cellular network.

Te mechanics of how the whole strategy plays out is a function of several considerationsincluding the expected uptake of new subscribers, the choice of technology (Mobile WiMAX

or L E), the frequency band used by the next-generation network, and the degree to whichthe operator curtails its network rollout. However, we demonstrate that a “free femtocell forall” strategy can be entirely funded by deferring for a few years a mere 3.7% to 10% of thplanned macro sites. Te exact number of sites varies with each detailed scenario.

Tis whitepaper contains several different types of analyses that we believe best capture thepotential impact of femtocells in the mobile broadband era. In Chapter 2 we re-familiarize thereader with the notion of the customer lifetime value (CLV) methodology. Chapter 3 looks intothe future, circa 2012-2013, and how we and others believe the mobile data market will evolve


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Chapter 4 introduces the reader to four new customer segments that we use throughout the resof the whitepaper.

In Chapter 5 we apply the assumptions from Chapters 3-4 to a number of specic CLV scenariofor both HSPA/HSPA+ and L E. Chapter 6 looks at the overall femtocell business case for anoperator targeting multiple customer segments. Chapter 7 includes some sensitivity studies, particular it looks at the inuence of the size of the operator’s installed base of customers and hsmaller regional operators can deploy a successful femtocell strategy. Final ly, in Chapter 8 we lspecically at how femtocells can be used as part of an operator’s next-generation rollout strateusing either L E or Mobile WiMAX.

Appendix I points to a number of important external references. Appendix II describes thcustomer lifetime value (CLV) methodology and re-familiarizes the reader with how to interprthe waterfall charts that we use throughout this whitepaper. Appendix III provides critical bacground information on our approach to macro network economic modeling.

1.1 Summary of Results able 1 on page 12 provides a useful reference, summarizing key results, which we will discthroughout the rest of the whitepaper. In the coming pages we will consider four different segmenof users. We will look at the economics of HSPA femtocells and L E/HSPA femtocells and we will look at the economics of operators of different sizes. Te results in able 1 quantify each othese scenarios. o make the scenarios in able 1 as comparable as possible we have given thsimilar adoption curves. In each case we assume that 10% of the total subscribers of an operahave access to a femtocell along the lines of that service concept. In reality, operators are likelyserve multiple segments simultaneously, as described in Chapter 6. Our small operator studybased on the echnology Savvy Family (to be dened in a few pages), which is why the numbein the small operator study look similar to those of the echnology Savvy Family. In most cas

we focus on the “Basic Value Proposition” because it includes the most measurable effects. In case of the Communications Enabled Firm (also dened in a few pages), we show the EnhanceValue Proposition, because many of the bars it contains are ± for that segment ± signicant in thimpact and extremely likely, given the customer proposition.

Finally we include a “return on investment” calculation. In a textbook ROI calculation you mighave a large upfront investment (the “I”) at time zero followed by a string of positive cash o(the “R”). Te real world is often much more complex. In a femtocell business case the operatomakes a signicant upfront investment, principally in provisioning and billing system integratiand in femtocell-specic platforms. Te operator then continues to invest with each additionalfemtocell. Tat incremental investment ± which we call a subsidy - is the cost of the femtoceplus a long list of associated expenditures (allocated platform costs, marketing, sales incentithe cost of future upgrades, etc), less the amount the customer pays for the femtocell. One mighcalculate “investment” as the maximum negative cash ow of the business, relative to a busin

without femtocells. Such an approach would be consistent with the practices of many nanc


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professionals. Te results, however, would be highly sensitive to the assumed rate of adoptionof femtocells.

We have taken a different and slightly more conservative approach which we hope will be morintuitive to many readers. We have included in “investment” all of the expenditures (upfrontand incremental) needed to bring femtocells to market and to support the proposition long-term.

Te incremental expenditures are essentially the “net subsidy” required to support femtocells asa product line. Over time, some of the early femtocell users will churn off. Te infrastructurethat was purchased to support them will become idle and available for other femtocell users. In asimilar fashion, the initial investment in platforms will result in pre-purchased capacity, whichmeans that incremental expenditures for platform hardware will be minimal in the early years

Te system integration costs which the operator bears initially to launch the business will notbe repeated in later years. At the same time, periodic femtocell upgrades will continue. Sinc

we assume that femtocells reduce churn the acquisition costs of the overall business diminishes slightly, because the number of gross adds needed to maintain the operator’s market share(which we conservatively assume does not increase) is reduced.

Trough a fairly elaborate process with a large number of assumptions we look at all the cashows of the business (revenue and expense impacts) and compare the protability of the busines with femtocells to the protability of the business without femtocells. Te value of femtocells isthen the incremental prot contribution, the difference between these two hypothetical busi-nesses. Of course, there are many subscribers who never purchase or have access to a femtoceso their protability remains the same. Finally, we calculate the ratio of return (the incrementalprot contribution) to investment (in our construct, the sum of the up-front and incrementalinvestments over time). Tis produces a ratio which is not discounted for the time value ofmoney. It is like someone who purchases a house then sells it 30 years later. Tey will have ahuge return on investment (in nominal dollars or Euros), even though the value of the asset,after adjusting for ination or ± even worse ± after applying a market cost of capital, might havdecreased. In a similar fashion, we calculate a number of other nancial KPIs. We calculatethe present value of femtocell-related investments, the present value of the incremental procontribution, and the present value of the effective subsidies based on a 10% WACC. We alsocalculate an internal rate of return for the femtocell investment.

We have discovered that the return on investment (an undiscounted gure) and the IRR(reecting the time value of money) are big numbers. In most scenarios there is a 10 times

return on investment. One might ask, “How is this possible?” Unlike an industry sector whichcan independently attract capital and produce investor returns, femtocells represent a puddle ofprotability adjoining a much larger lake, which is the composite nancials of the operator. Anoperator can sell only so many femtocells to a certain protable segment before that opportunityis exhausted. While the return on investment is extremely high, the opportunity for investmentis nite.

If we look at other investment opportunities within an operator environment we see a similarpattern. If we consider the revenue an operator receives for text messaging, subtract direc


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expenses (termination costs, sales and marketing expense, billing expense, etc), then divide thprot contribution by the capital investment an operator makes in SMSCs (the platform infra-structure needed to deliver short messaging) the return on capital is stunning. Tese returns are

very real. If investors could invest only in SMSCs and magically capture all the associated texmessaging revenues, they would. Unfortunately, they also need to invest in the “other” parts oa mobile operator. Tat operator needs to purchase spectrum, build a costly cellular network,subsidize handsets, etc. ext messaging is therefore a “pool” of protability within a largebusiness entity. Voice messaging is another pool of protability. It is hard to imagine a modernmobile operator debating whether or not to offer text messaging (although people had thosedebates 20 years ago) or debating whether or not to offer voice mail. Each is considered an integral and inseparable part of the mobile franchise and each ± on a standalone basis ± continues tobe immensely protable. Fifteen years from now femtocells might be viewed in a similar lighas an integral part of the operator franchise, a protable platform investment, the wisdom of

which few would debate.

Does this mean that femtocells will signicantly impact operator nancials? It depends. Ouranalyses in this whitepaper (excluding Chapter 8) assume that femtocells are used by 10% osubscribers at the end of 5 years. Te present value of prot contributions from femtocells ±given such an assumption - falls in the range of 1% to 3% of the present value of an operator’total revenue. Tey represent a very nice uplift ± as did SMS or voicemail in the early days ± butbased on the numbers we have been running, will not singlehandedly transform an operator’sP&L. If femtocells were to penetrate faster ± which seemsentirely possible ± or if they were toreach much higher levels of penetration (e.g. 30%-40%), as some operators now envision, theimpact could be profound. Of course, as penetration increases and as femtocells become mainstream, the incremental return on investment is likely to diminish, since operators will have tobecome less selective. Even with very conservative penetration assumptions, the required levof investment is so small and the expected return on investment so high, that enabling femto-cells as a platform is a decision most operators should seriously consider.


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2.0 Methodology We refer readers to the appendix for a more detailed discussion of our methodology, includingadditional insight into how we calculate macro network economics. Last year’sbusiness case white paper (pub 005) also describes the important methodologies in detail.

2.1 Customer Lifetime Value We use throughout this whitepaper a methodology called “customer lifetime value,” which is widely used in many service-oriented industries. It views the world through the eyes of anindividual customer or ± more commonly ± a segment of customers. It calculates the presen

value of revenues and expenses over the expected l ife of the customer. Mobile subscribers cabe segmented along many different dimensions, including by prepaid/postpaid, by distributionchannel, by usage patterns/pricing plans, by psychographic characteristics, and by sophistcated multi-dimensional clustering algorithms. In this whitepaper we construct and discussa number of hypothetical proles ± individuals, families or corporations with certain wirelesusage patterns. Te suggestion is that mobile operators should analyze their subscriber base,designing propositions to target those segments for which femtocells can signicantly increascustomer lifetime value.

2.2 Reading a Waterfall Chart In this whitepaper customer lifetime value results are typically presented in the form of a watefall chart. Te rst bar shows the value of the customer segment before femtocells are introduced.Each subsequent bar shows the impact of a specic change. One bar represents the cost of thefemtocell (including various overheads and the cost of future upgrades). Another bar shows thimpact of macro cellular network offload. A waterfall chart is cumulative. Each successive bis oating in space. Te top of the bar (for one which is positive) represents the new sum. Bars

which are positive are colored green and bars which are negative are colored red.

Each waterfall chart begins with a “starting” NPV, representing the customer before femtocellsVarious bars appear, leading up to a “basic value proposition,” which represents a conservativ view of the value created by the femtocell. Te “basic value proposition” excludes effects whicare somewhat speculative or futuristic or which might apply only to a subset of operators.

Appendix II describes each bar in detail. Appendix III describes in some detail the sophisticated mobile operator network cost modeling which undergirds many of these results. In

additional to analyzing femtocell-specic elements our models characterize the economics omobile operator networks by technology / geography / spectrum band, etc. We have developeda detailed cost model with a worldwide database of geo-coded information, built from satelliteimagery, national demographic and economic data, and other reliable global sources. In studies

which consider coverage - as many do ± we model operator build plans using a portion of thesGIS databases along with industry-standard COS -231 coverage models.

Te nal study we present focuses on Japan. We broke the country into ve morphologies (denseurban, urban, suburban, rural clutter, and rural open) and modeled the number of sites needed

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for each, based on a statistical indoor coverage criterion. In discussing the study results wcompared our analytically-derived results with the current site count of the dominant mobileoperator in Japan and the reported future L E site counts of other operators. Te methodologybehind these analyses is described in greater detail in Appendix III and in much greater detaiin SRG’s 1000 page report on next generation infrastructure,Te Dollars and Sense of BroadbandWireless (http://www.signalsreasearch.com).

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3.0 The Mobile Broadband Era A central theme of this whitepaper is “mobile broadband,” and how wireless data traffic iincreasing exponentially in operator networks. Tis trend is likely to impact the business case forfemtocells in the coming years. In this whitepaper we use the term “mobile broadband” liberallyto connote not only laptops / mobile internet devices but also smartphones ± since smartphonedata usage is also rapidly increasing.

Te reader will discover that data offload ± an ancil lary piece of the analysis in last year’s femtocell business case whitepaper ± is poised to become a central piece in an operator’s decisiomaking process in the years ahead.

3.1 Exponentially Increasing Wireless Data Traf c Wireless data traffic has been rapidly increasing for several years, but it has recently reachedtipping point, in which managing the exponential growth in data traffic is increasingly becominga critical issue for operators.

Cisco, in collaboration with a handful of other partners, has mapped the growth of mobilebroadband data. As a result of increased adoption of smartphones, increased adoption of broadband data devices (dongles, cards, MIDs), and increased usage of each class of device, they forcast a 108% compound annual growth rate of mobile data. Figure 1 describes this exponentialgrowth in data over the next ve years.

Global Wireless Data Usage (Exabytes per Month)

2014201320122011201020090

500

1,000

1,500

2,000

2,500

3,000

3,500

Portables, netbooks, tabletsCAGR: 110%

SmartphonesCAGR: 140%

Non-SmartphonesCAGR: 82%

Broadband GatewaysCAGR: 108%

Source: Cisco Visual Networking Index: Global Mobile Data Traf c Forecast Update, 2009 –2014

Figure 1. Expected Growth in Global Wireless Data Usage

http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.pdfhttp://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.pdf


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3.2 Data Of oad Is Real and Measurable A dynamic we will d iscuss at length in this whitepaper is “offload.” Te notion is that trafficoriginating on devices with wide-area data capabilities is “offloaded” to another physicanetwork, relieving the mobile operator of the need to transport it. oday, offload occurs mostfrequently via Wi-Fi networks, largely because virtually all laptops and many mobile phonehave embedded Wi-Fi capabilities. In the future, as femtocells become more numerous, offload

will occur automatically for voice and data in femtocell-enabled environments.

Cisco also tracks the percentage of data traffic in the home that is being offloaded (referenceFigure 2). Tese gures include both Wi-Fi offload (common today) and femtocell offload (more

prevalent in the future). Te startling conclusion from these charts is not that 15% - 30% ofstationary traffic is being offloaded, but that 70% - 85% is not.

Tere are many reasons why consumers continue to use a wide-area network in their home. Oneis convenience. If the wide-area data network is free and if Wi-Fi is free then it is easiest forthem to “do nothing” and to use their devices in the home, as they use them out of the home.

With small form factor devices, there is also a battery power advantage to operating one radio(e.g. HSPA) versus two radios (e.g. HSPA + Wi-Fi). Femtocells offer a very clean solution. Teuser needs to do absolutely nothing. As soon as they show up in a femtocell-enabled environmentheir devices (phone, laptop, MID) migrate automatically to the femtocell. Te Femto Forum

white paperWireless in the home and Office: the Need for both 3G Femtocells and Wi-Fi Acces(pub 007) discusses in detail the benets of different types of wireless networks.

While the user may be relatively unaware of these various radio technologies ± and indifferen- the operator is not. If traffic can be reliably moved from the macro cellular network to an alternative network this translates into very measurable cost savings. We will discuss and quantifythese savings in many of the studies which follow.

Traffic Offload (%)

2014201320122011201020090%

5%

10%

15%

20%

25%

30%

35%US France Germany Italy UK

Source: Cisco Visual Networking Index: Global Mobile Data Traf c Forecast Update, 2009 – 2014

Figure 2. Expected Macro Cellular Data Of oad by Country

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EUROPE: ANINCUMBANTOPERATORINCREMENTALLYDEPLOYING HSPAOR LTE/HSPAFEMTOCELLS


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4.0 Introducing Four Segments, Circa 2012-2013Before we discuss the “Mobile Broadband Era” in more detail (starting in Chapter 5) we mustrst introduce several new segments. Each of these new segments is a category of consume(in many cases families) that operators might choose to target with a femtocell propositionDescribing the business case in terms of such segments makes our discussion very concrete. Ireality, there are an innite number of possible variations and there are segments with entirelydifferent attributes that might be extremely attractive.

Te segments an operator chooses to target are likely to reect unique attributes of their countryand of the operator. We have selected these segments to illustrate the likely impact of femtocells

in a variety of scenarios ±e ach reective of trends we see underway today.

4.1 The Technology Savvy Family Te “technology savvy family” has two smartphones, one laptop, and a mobile internet device(MID). Te MID includes many other types of devices: netbook computers, e-book readers, theiPad (pictured in Figure 3), and other special-purpose devices.

Source: Signals Research Group, LLC

Figure 3. The Technology Savvy Family

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4.2 The Socially Networked Family Te “socially networked family” is all about smartphones. Smartphones have increased froma niche a few years ago to 25% of the market in Europe and 32% of the market in the US.By 2012 they will represent 37% of the market in Europe and 44% of the market in the US.

Te “socially networked family,” with 4 smartphone users is, therefore, in an increasingly likelydemographic.


Figure 4. The Socially Networked Family



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4.3 The Mobile Executive Te “mobile executive,” as shown in Figure 5, with one smartphone and a wireless broadbandenabled laptop, increasingly characterizes the modern mobile knowledge worker. Many of thereaders of this whitepaper will t this prole.

Tis individual has a degree of mobility, but, more importantly, a desire to stay connected and a willingness to pay for that connectivity. An executive who makes a reasonable number of tripper month within a country could be highly motivated to purchase a mobile broadband plan but

would not necessarily have usage patterns that are dramatically different from those of the othesegments that we have discussed.


Figure 5. The Mobile Executive



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4.4 The Communications Enabled Firm Te “communications enabled rm” shown in Figure 6 is a rst glimpse at the enterprise femto-cell space. We assume that the rm has 50 employees. It has 10 employees with companyprovided smartphones and 10 employees with personal smartphones using the femtocell. Term also has 5 wireless broadband-enabled laptops.

4.5 Details: Devices, ARPU, UsageIn three of the consumer segments (the echnology Savvy Family, the Socially NetworkedFamily, and the Mobile Executive) the usage per device is the same. In constructing thesescenarios we have simply varied the number of devices per household. Te monthly APRU perdevice is also the same. A contract smartphone is €40 per month, a USB data dongle is €30 permonth, and a connected MID device is €15 per month. Laptops, at this future date, consume 5GBs per month (a gure which includes xed and mobile usage) wirelessly, in the absence of


Figure 6. The Communications Enabled Firm



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femtocell. A MID, similarly, consumes 1 GB per month (reective of its more limited function-ality and reduced monthly cost). A smartphone consumes 750 MOU per month and 500 MBsper month. Both of these are signicantly higher than European averages today but ± givencurrent trends - are likely to grow.

Since video has such a profound impact on usage, its likely effect on mobile consumption ibimodal. If the amount of mobile video were to stagnate at or near today’s level then these estimates of usage would be very high. On the other hand, if people were to consume video freelyas they do on their laptops and desktops (at increasing levels) then these assumptions would below. Currently, many mobile operators have restrictions in place (mobile application “approvarequirements and fair use policies which limit monthly wireless broadband consumption, etc.)If these restrictions were removed usage would very likely explode.

Te enterprise has fty employees. en employees have company-provided smartphones anduse 1000 MOU per month. Another ten employees have personal smartphones. Tey use 750MOU per month, just like their consumer counterparts described above. Te weighted averageusage, therefore, is 825 MOU per smartphone user per month. Te consumer ARPU is €40,as in other segments, and the business ARPU (company provided phones) is €60. Finally, weassume that the enterprise has ve laptop wireless data users in the rm, with data usage andpricing similar to that of the three other segments described earlier in this section. Te pricingand usage associated with these wireless data subscriptions is similar to the wireless data usagof the other segments.

We assume that the operator charges the consumer a €50 “price” for an HSPA femtocell plus€5 per month. oday, many operators are charging the full cost of the femtocell up-front withno monthly fee. Other operators charge a monthly fee until the femtocell is paid off in effect(in effect a lease-to-own plan). Te model of “full cost up-front” is wonderfully attractive to theoperator since it reduces their incremental investment per household to zero. It works with the

very early market where a small number of consumers are hungry for a femtocell (people witlots of money and absolutely no cellular coverage at home). As that segment is satised the nextier in the market will demand more attractive terms. Te other model we see is a monthly feeuntil the full price of the femtocell is paid off. Tis is also a reasonable model. With such anoffer there is most likely no commitment on the part of the operator to upgrade the femtocellin the future.

We have selected the model we used last year, €50 up-front + €5 per month as a reasonableconsumer model. We assume, unlike the other price structures described in this whitepaper,that the operator will upgrade the consumer every 36 months for life. Since the femtocell buildsloyalty and since the operator enjoys measurable monthly cost savings as a result of having thfemtocell in the home, it makes sense to keep the consumer happy with upgrades. Also, it islikely that by the time of the rst upgrade cycle femtocells will be so inexpensive (and the gat

ways and other non-recurring costs will be amortized) that it would be a poor business decisionfor the operator not to upgrade someone who had a femtocell and was using it.


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Tere is one twist on femtocell pricing which is technology-specic. We assume that the oper-ator sells the HSPA femtocell for €50 and the L E femtocell for €100. Tis is fair, since theL E/HSPA femtocell will be future-proof and will deliver signicantly higher speeds to those with L E-capable end-user devices. echnology enthusiasts will buy an L E/HSPA femtocell, whether they need it or not, and they won’t complain about the higher price. In the mean time,the mass market (our assumption: 75%) will be perfectly happy with an HSPA femtocell andthey will appreciate the lower price.

Te starting business case (the “S AR ” bar, before a femtocell is added) is stronger for L E,because an L E user consumes macro cellular data at a lower cost per GB. However, the costof the dual-mode HSPA/L E femtocell is higher ($275 wholesale versus $100 wholesale), evenafter adjusting for the additional €50 in purchase price (€100 - €50 = €50 = $68, which is lessthan $275 - $100 = $175). Te L E case is softened as well by the reduced impact of networkoffload.

Ironically, the older and the less efficient the macro cellular network the more impactful afemtocell will be. An operator that is still carrying a lot of traffic on GPRS/EDGE will seehuge benets from femtocells, because the cost of carrying traffic on the macro cellular networis enormous. As the macro cellular network is modernized (and devices are updated to use itscapabilities) the impact of femtocells from a data offload perspective are reduced. Tereforethe offload benet of an L E femtocell with an L E device is slightly less than the benet ofan HSPA femtocell with an HSPA device if usage is equal. Te net result is that in most casesthe L E/HSPA femtocell business case (the ending value minus the starting value) is slightly

weaker than the HSPA femtocell business case, although the results are extremely close. AsL E deployments become ubiquitous and L E/HSPA devices replace HSPA-only devices andas L E/HSPA femtocells are reduced in price a cross-over will occur where the mass market

will demand the more capable device and an updated calculation of operator economics will sa“Give it to them!”


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Te key characteristics of these segments are summarized in able 2 and able 3

As each subscriber adds a femtocell what happens? Our assumption is that usage patterns changein a way that is proportional to the “pre-femtocell” usage. We assume, as we did last year, that

voice usage occurs 36% in the home, 24% in the office, and 40% elsewhere. We similarly assumthat data usage occurs 45% in the home, 25% in the office, and 30% elsewhere. When we quotea gure for monthly usage (e.g. “750 MOU” or “5 GB”) this gure represents the combinedusage in all venues.

When a subscriber acquires a femtocell, we assume that usage changes, for a variety of reasons. the subscriber is in a coverage-challenged environment (which we assumed here as our startin

point) then their voice usage is likely to increase in their home (or office, in the case of the enteprise femtocell) because their phone will suddenly ring while previously it may not have rundue to poor coverage. Similarly, the subscriber is more likely to make a phone call using his oher mobile phone while at home if the subscriber knows that reliable coverage exists.

We assume that in coverage-challenged environments 33% of the voice traffic that would exisunder “normal” conditions, does not exist (calls are missed or calls are not originated or calare ended early due to poor quality). When coverage is restored we assume that those minutes

“return.” With the ratios described above, a consumer with poor coverage at home would see a

Segment Femtocell Price* SmartPhones Laptops MIDs

The Technology Savvy Family Price:€ 50 + € 5/Month 2 1 1

The SociallyNetworked Family

Price: € 50 + € 5/Month 4 0 0

The Traveling Executive Price: € 50 + € 5/Month 1 1 0

The CommunicationsEnabled Firm

Price: € 2,000 + € 5/Phone/Month 20 5 0

* LTE/HSPA up-front pricing is € 100, and € 2,500 for consumer and enterprise segments,respectively, as described above.


Table 2. Number of Devices and Femtocell Pricing

* Before introduction of the femtocell** The Communications Enabled Firm has 50 employees, with 10 company-providesphones (1,000 MOU) and 10 personal phones (750 MOU). Its composite usage is 875

MOU. The enterprise ARPU is€

60 per subscriber. The enterprise femtocell bundleincludes free xed and on-net mobile-to-mobile calling from the of ce.


Table 3. ARPUs, MOU, and MBsDevice ARPU* Voice* Data*

Smart Phone € 40** 750 MOU** 500 MBs

Laptop € 30 N/A 5GBs

MID € 15 N/A 1GB

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36% (portion of usage at home) x 33% (uplift due to coverage) = 12% increase in voice usage. Ia calling party pays environment, the outbound calls would be bil lable (increasing ARPU). Teinbound calls would increase operator prots (due to termination fees) but would not affect thesubscriber’s monthly bill, because they would be paid by someone else.

In a mobile party pays environment the logic is a bit more complex. Te subscriber does ulti-mately pay for the usage but we assume, because of the dynamics of large bucket plans commoin the United States, that the revenue effect is somewhat muted.

With data usage we have a parallel set of assumptions. We assume, however, that data is free (oat least included in the service bundle) in any femtocell environment. Te jump in data usageresults from a combination of several things (1) the realization that it is free, (2) the increase inusage due to improved coverage (if you have no macro cellular signal you are unlikely to use daapplications, and (3) the jump in usage due to dramatically improved data speeds and reducedlatencies. We assume that the impact of the femtocell on the mobile phone is the greatest, sincephones don’t have Ethernet ports and only a modest percentage have Wi-Fi. We assume thatsmartphone data usage triples (e.g. 500 MB of usage jumps to 1500 MB) and that laptop usageincreases by 50%.

In a non-femtocell world laptops users have many choice (including simply plugging into a wired connection), so the likely impact on their behavior is less. Our estimate of “pre-femtocelusage only includes wireless connectivity. A mobile broadband user without a femtocell who ha5 GB of usage per month would almost certainly have additional usage in a wired environment

When that user purchases a femtocell it is likely that much of the home usage becomes wirelesover the femtocell because it is suddenly “so easy” (no cables to connect, no Wi-Fi radio to turnon or off, and performance which is most likely limited only by the speed of the xed broadbanconnection).

4.6 The Impact of LTE L E will be deployed very differently in different regions of the world. In the United Statesit will roll out quickly and have near-ubiquitous coverage, because of the major operators whohave invested heavily in 700 MHz spectrum. In Europe, the story is a bit more complex. On theone hand, operators, who have aggressively promoted mobile broadband, are experiencing theipside of success: a need to rapidly grow capacity. Tese operators will be motivated to deployL E in the 2600 MHz band, even though it is a very expensive band in terms of cost of coverageOther operators with a bit more headroom might choose to deploy lightly at 2600 MHz thenmore aggressively in the digital dividend bands or 900/1800MHz when they become availableOur assumption, therefore, is that L E will roll out more slowly in Europe and that the newtechnology will not enjoy the ubiquity of HSPA for some time.

A key question, then, in calculating femtocell economics is “What percentage of the total macrocellular data usage of L E-capable devices will be carried on L E?” A parallel question i

“What percentage of all devices will be L E-capable?” L E/HSPA dongles are most likely to


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lead the charge with L E. MIDs (which demand less performance and are more cost-sensitive)might be next. Phones (which must, by denition, support voice) are likely to be last.

We assume in our calculations that 70% of the traffic that an L E/HSPA femtocell offloads would have been carried on HSPA and that 30% would have been carried on L E. Tus, theoffload benet of an L E/HSPA femtocell with a mix of L E-capable and HSPA-only devicesis moderately less than that of an HSPA-only femtocell with HSPA devices.


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5.0 An Incumbent European Operator with HSPAor LTE/HSPA FemtocellsIn this chapter we look at the impact of HSPA or L E/HSPA femtocells on the four segmentsdiscussed in the previous chapter.

5.1 Starting Point: Last Year’s Business Case Te scenarios we will soon describe in detail are extensions of a European consumer scenario we discussed in our business case whitepaper last year. Tat scenario, called the EuropeanCoverage-Challenged family, portrayed a family with two mobile phones. We assumed anaverage contract voice usage of 400 MOU per month and an average data usage of 50 MBs perphone. We assumed that the family had no other data devices.

In today’s environment, one can enjoy a lot of data services with that bandwidth allocation. As we look toward the future we believe that usage will change and the introduction of other datahungry devices is likely to signicantly change the consumption pattern of the typical family.

Te waterfall chart depicting the customer lifetime value of this family using the usage assump-tions from the rst whitepaper is shown in Figure 7. One can quickly observe that the network

€ 0

€€ 500

€ 1,000

€ 1,500

€ 2,000

€ 2,500

€ 3,000

Household Lifetime Value (€ )

START FemtocellCOSTS NetworkSAVINGS

DataUSAGE Coverage VoiceUSAGE

MonthlyFEE ReducedCHURN BASIC VALUEPROP

Figure 7. European Coverage-Challenged Household (2009 Business Case Whitepaper)


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savings due to the femtocell is small ± in large part because the amount of traffic owing ovthe macro cellular network is small, relative to its capacity. Modern networks, after all, cancarry a vast amount of voice traffic very cost effectively.

Te combination of the network cost savings, a monthly fee, and reduced churn results in a basic value proposition of €2,504, an increase of €924 (58%) over the starting value of €1,584.

5.2 A Journey into the FutureIn this section we explore the deltas that we believe will exist between the present day and thefuture, circa 2012-2013.

5.2.1 Changes in Behavior

As we journey into the future, what happens? Voice usage almost certainly increases. In Europ voice usage has been limited by relatively high tariff structures and by a calling party pays reglatory environment which ± while extremely equitable and inclusive of all economic segmenof society ± does not lend itself to low tariffs. As termination rates fall we can expect greataverage levels of usage for similar ARPUs.

In the United States some operators have average usage levels over 2,000 MOU per subscribe Te largest operators have recently starting offering and heavily promoting “all you can eattariffs. It is likely that usage in Europe will also move in an upward direction. We assumetherefore, that by 2012 usage increases from 400 MOU to 750 MOU per contract subscriber,

with the same €40 ARPU we assumed in our starting scenario.

We similarly assume that consumers increasingly move from feature phones to smartphones andthat smartphone usage continues to climb. Usage across the internet is increasingly dominatedby video. As mobile broadband speeds improve and as smartphone displays and processorbecome more capable it is only natural that a greater and greater amount of video will make its

way to mobile devices. Wireless data usage overall (reecting increased adoption and increaseusage per device) is growing at well over 100% per year. We believe it is reasonable, therefore, assume usage levels of 500 MBs per month in 2012 for smartphone-enabled users.

Finally, we can expect to see entirely new categories of devices. Apple has recently announcethe iPad. It will run mobile applications, browse the web, play music and video, display bookand perform a host of other functions ± many data intensive. It is likely to be owned by people

who already own other wireless data devices, such as smartphones and laptops.

We have also seen an explosion in the past of netbooks, a new class of computing device thameets the need for portability and for a very low price point, for those who would like to beconnected, but who do not need the capabilities or who do not wish to carry the bulk of atraditional laptop. A host of other data-centric devices will hit the market as well. Some of thesegments we described above include MIDs. We typically assume that the MIDs consume 1GB per month of data (versus the 5 GBs per month of data we assume for laptops in 2012) andthat the operator provides tariffs commensurate with that level of usage.


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5.2.2 Changes in Cost

Network costs will also change as we move into 2012-2013. Operators who today have HSPAnetworks with traditional core networks will increasing move to at IP core networks. Manyoperators will launch L E networks for additional capacity and additional performance.

Femtocells will migrate from today’s traditional architecture, which routes all traffic throughthe operator’s core to a local breakout architecture, eliminating the incremental expense of datausage within the home femtocell, except for those services which specically originate withithe operator’s network.

Finally, as mobile broadband becomes more common the cost per GB will fall and acquisitionand retention costs will also decline.

Te cost of a femtocell will also decrease, like any consumer product. We assumed in our originalbusiness case that the average wholesale price of a femtocell was $200. By 2012 we expect HSPfemtocells to decline to $100, dual-mode L E/HSPA femtocells to sell for $275, and dual-mode Mobile WiMAX / 1X / EV-DO femtocells to sell wholesale for $350. Arriving at a futureprice point for each category of femtocell was not easy. Te range of viewpoints among informedindividuals in the industry is wide. Te gures we cite are not the lowest or the highest.

Most agree that femtocells will follow a predictable path of declining prices, like any consumeproduct. Tey key question is “how quickly.” Te femtocell value chain currently has manylayers. As volumes increase the natural forces in consumer electronics will push for a compresion of the value chain. In the end the price point of a femtocell may not be as low as a Wi-Fiaccess point but it will be much closer than it is today, thus making it more affordable to mostconsumers, even without a subsidy.

Just as Wi-Fi access points vary widely in price, as they target various segments, bundle variouother functionality, and are embodied with “basic” or advanced standards, we expect femtocellto do the same. Te difference is that femtocells can play a central role in managing operatorcosts. As they drop in unit cost, as provisioning systems make deployment effortless, and aoperators’ up-front costs get amortized among early adopters, we could see a growing force ithe operator community to make femtocells widespread and to remove many of the obstaclesthat exist today which are curtailing consumer adoption.

5.2.3 Changes in the Femtocell Market Some key beliefs about the femtocell market will also change. A key assumption in our original business cases ± supported by operator experiences ± was that femtocells would signicaimprove customer retention (or, stated differently, would reduce churn). As the market maturesas femtocells become less “novel,” and as competing operators in a market start to offer femtocesolutions, we believe the impact of femtocells on churn will decrease. We have assumed, therefore, in our 2012 business cases that femtocells will reduce churn from their original level b10%, not the 20% we originally assumed.


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5.2.4 The Technology Savvy Family

Te echnology Savvy Family, with both a laptop and a MID, shows huge cost savings to theoperator from traffic offload plus some uplift for voice.

In this particular scenario, the network savings (€950.22) from offloading voice and data traffifrom the macro cellular network onto the femtocell network more than offsets the initial cost ofthe femtocell (€130.95 = €100.00 + 80.95 in allocated costs, less €50 up-front fee). Additionarevenue from increased in-home voice usage (€370.84), the monthly fee (€275.53 assuming€5.00 per month) and reduced churn (€263.07), results in a basic value proposition of €2,642.54 versus the starting value of €913.83 ±a n increase in the customer lifetime value of €1,728.71.

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START FemtocellCOSTS NetworkSAVINGS Coverage VoiceUSAGE MonthlyFEE ReducedCHURN BASIC VALUE PROP

Figure 8. Technology Savvy Family, HSPA Femtocell




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Figure 9 shows the same family with an L E/HSPA femtocell. Te differences between Figure8 and Figure 9 are subtle. Te starting value of Figure 9 is slightly greater. Te low cost perGB of an L E network is reected in a slightly higher pre-femtocell “S AR ” value. Tenet cost of the L E-capable femtocell is higher than that of an HSPA-only femtocell, evenafter adjusting for the difference in retail price. Te network savings associated with the L E-capable femtocell (assuming it is supporting some L E capable devices and that they, in turn

would, in the absence of a femtocell, send a portion of their traffic to L E macro cellular sites) iless per GB than that on an HSPA-only femtocell with HSPA-only devices (remember, legacytechnologies increase the value of a femtocell). Most of the other bars are the same. Te ending

value (“BASIC VALUE PROPOSI ION”) of Figure 9 is slightly higher than the ending valueof Figure 8 due to the higher starting value but the gain in value (the impact of the femtocell)is slightly less, assuming identical usage. We will see a similar pattern with most of the othesegments.

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Figure 9. Technology Savvy Family, LTE/HSPA Femtocell




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5.2.5 The Socially Networked Family

Te Socially Networked Family, with 4 smartphones, shows some uplift due to data offload anda lot of uplift due to voice (reference Figure 10).

In this scenario the network cost savings is not as great since the data usage is much lower thanit was in the rst scenario. Still, the combination of the increased revenue from the higherin-home voice usage (€741.68), the incremental revenue from the monthly fee (€275.53) andthe reduced churn (€387.05), results in a basic value proposition of €4,034.10, an increase o€1,647.01

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Figure 10. The Socially Network Family, HSPA Femtocell




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Te increase in value with L E/HSPA femtocells is similar. Te femtocells have a higher wholesale cost (€275 vs. €100) but are purchased by early adopters at a price point (€50 vs. €10that reections their greater functionality. Te percentage of dual mode (L E/HSPA) vs. singlemode (HSPA) femtocells will increase over time, as the difference in price narrows, as L Edevices become more widespread, as residential internet connection speeds increase, and as thadditional capabilities of L E increasingly become a consumer expectation.

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Figure 11. The Socially Networked Family, LTE/HSPA Femtocell




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5.2.6 The Mobile Executive

Te Mobile Executive is a “one person family” from the femtocell perspective. We assume thatthe data package has been very aggressively priced. It is possible, therefore, that the startinglifetime value of the Mobile Executive is modest. We see in the graph a huge uplift due to dataoffload. While the femtocell is not “leveraged” with the Mobile Executive in the way that it i

with a four-person family, the impact is still large. Mobile executives are easy to nd and likelto be early adopters of femtocell technology.

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Figure 12. The Mobile Executive, HSPA Femtocell




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5.2.7 The Communications Enabled Firm

In this last scenario we take a look at the enterprise femtocell. Here the starting value of the rmis extremely high (€28,205.51). raffic offload benets are also large (€3101.66). Te networksavings bar looks small simply because of the scale of its surroundings.

Interestingly, some of the greatest upside in this scenario is in the opportunity to recruit a fewof the other 30 employees not using the femtocell to the operator’s network. Te value this bar(€ 9,826.93) is the number of potential new subscribers (employees not yet connected) times the value of a new subscriber, discounted by the probability (20%) that the person would “converIn a family this usually results in a small impact. In a corporation, where there are lots o

employees and most are not using the femtocell, but see their colleagues using it, the potentialimpact is much greater. Finally, applications like PBX integration, presence (who is in the officeand who is not) and free calling within the office should be relatively easy to sell to enterpriscustomers.


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Figure 14. The Communications Enabled Firm, HSPA Femtocell




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If there is a segment most likely to desire L E-capable femtocells, it is the enterprise customer Tis segment is already paying a premium for an enterprise femtocell (€ 2000). Te incrementalcost of an L E capable femtocell one (€500) is small. More importantly, the enterprise is likelyto have a lot of demand for wireless data, is likely to have a lot traffic originating and termnating on internal servers, and is likely to have a fat backhaul connection. Collectively thesfactors make an L E capable femtocell a good value for the enterprise.

ousehold Lifetime Value (€ )

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Figure 15. The Communications Enabled Firm, LTE/HSPA Femtocell




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6.0 Operator View: Multiple SegmentsIn this chapter we look at the economic proposition of an operator targeting multiple customersegments, such as those that we identied in Chapter 4.

6.1 Rationale / Economies of Scale Across Segments We have up to this point discussed the business case for promoting femtocells within a singlecustomer segment. While an operator might initially target a single segment, once they gaincondence in the femtocell technology and in the correctness of the business case it is likely thathey would seek to exploit femtocell technology across multiple segments. Tis strategy could beas simple as pursuing a consumer segment in parallel with an enterprise segment. Many of thecosts associated with femtocell deployment are xed (e.g. billing and provisioning integrationcosts and initial platform investments). Te more femtocells that are deployed the less signi-cant these upfront costs are to the business case.

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