The Case for Subsidized Femtocells

Tier-one carriers in the U.S. have built their businesses on one primary model: Subsidize handsets for as much as a few hundred dollars, if necessary, to entice users to sign long-term contracts for voice and data service. Whether that model is advantageous for both operators and consumers is debatable, but the economics are pretty simple: It’s easy to make that money back if you’re charging users $100 or so a month for two years. This is especially true when the vast majority of U.S. consumers are more than willing to pay the monthly bills in exchange for drastic discounts on their hardware. Femtocells could further boost monthly revenues for carriers if a similar business model were employed, subsidizing the little base stations. So why aren’t more carriers doing so?

That’s what I’ve been wondering in the wake of Sprint’s move to give away EVDO femtocells away on a case-by-case basis to users who complain about coverage in their homes. Customers with coverage issues can get an Airave for no upfront cost and no monthly charge; all the voice, data and messaging use via the device is considered part of their monthly rate plans.

Compare that to Verizon Wireless’s Network Extender, which will set you back $150, even after a mail-in rebate. (The gadget supports only voice over Verizon’s 2G network, although a data-enabled 3G version is in the works.) Or, worse, compare Sprint’s offering to AT&T’s 3G MicroCell, which costs $150 in addition to a $20 monthly charge for unlimited voice and data usage despite the fact that use of the MicroCell still counts against monthly plans.

Keep in mind that femtocells enable carriers to ramp up usage while offloading traffic. The devices route voice and data transmissions through user-provided broadband connections, directing traffic to the Internet that would otherwise take up valuable cellular bandwidth. So while femtocells undeniably provide a benefit to the user in the form of better reception, the downside is that a model like AT&T’s double-dip charges femtocell customers who aren’t taxing the carrier’s network.

Which is why Sprint’s competitors would be wise to view femtocells the same way they view handsets: as a tool to generate recurring usage revenues. As Stacey wrote a year ago, “The carriers keep discovering that if you give people access to fat pipes, they’re going to use them.” Femtocells essentially provide a better, fatter pipe in a specific location, which paves the way for increased usage from customers with connectivity problems. That increased usage results in higher ARPU (average revenue per user), especially for carriers who — like AT&T — no longer support all-you-can-eat plans. Indeed, AT&T’s new plans — which employ heavy overage charges on users who exceed their monthly data allotments — are an ideal tool for monetizing femtocells, because increased usage results directly in increased monthly revenues, and the improved reception could also be enough to entice some users with in-home coverage problems to cut the cord and use the mobile exclusively.

Expectations for the femtocell market are huge, especially in the U.S. MarketsandMarkets predicts American femtocells will generate some $4.6 billion by 2014, seeing an estimated CAGR of 82.6 percent and accounting for nearly 41 percent of worldwide revenues by that time. A recent prediction from In-Stat is similarly optimistic, foreseeing 83.6 percent CAGR during the same period. The enterprise market will have to play a substantial role if those figures are to ring true, although carriers still have a lot of work to do to tap that market. The consumer femtocell market is ripe, if carriers are willing to take the hit on the front end and be satisfied with those lucrative recurring monthly revenues.

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Question of the week

Can network operators better monetize femtocells by giving them away to consumers?
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