EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
I) Value Proposition
Femtocells are small cellular base stations that act as miniature cell
phone towers by boosting cell phone reception in areas where traditional cell
phone towers are unable to provide service, either because of a remote
location or because the airwaves are oversaturated by dense city populations.
They can provide “5-bar” coverage in areas where there is no existing signal or poor coverage,
but only for a select number of users whose phone numbers are specially registered in
association with the femtocell. A typical femtocell can support three to eight mobile phone
numbers over a range of 40 feet from the device. Femtocells are primarily marketed to home
and small business users living in small towns such as Hanover, New Hampshire as well as users
in crowded cities such as Los Angeles, California. While these locations are fairly different in
demographics and population density, both are in need of enhanced signal strength and
capacity.
Cellular phone carriers such as AT&T and Sprint are now offering femtocells directly to
their customers for a retail price of $150 to 200 per unit. For users who require dependable cell
phone reception, this one-time cost may be worthwhile compared to the alternative of
frequently dropped calls or inadequate reception. With better connectivity, users may also be
able to divest themselves of the costs of a landline, saving roughly $10 per month, without
sacrificing dependability.
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
While this innovation is still in the early stages of deployment, cell phone carriers are
also offering femtocells for free to certain customers. Highly dissatisfied, irate customers who
call their carriers complaining about poor service and threatening to switch carriers may
sometimes receive a complimentary femtocell from their carrier. From the carriers’
perspective, it may be more cost-effective to appease the minority 1-2% of their customer base
by sending them a free femtocell than to install additional cell phone towers, which cost
between $250k and $1 million to build, depending on the location and coverage capacity.
Eventually, we expect cell phone carriers to stop offering complimentary femtocells to
customers once their uses have been discovered by the mainstream public. When femtocells
were first developed in 2009, they were a niche product that less than 600,000 users
purchased. Their user base grew to 1.9 million in 2010, largely due to targeted test market
deployments by Sprint, Verizon, and AT&T, but still flew under-the-radar. As the test
deployments were well-received, the number of femtocells sold in the world is expected to
surge to 40 million users by 2013, according to market research firm iSuppli.
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
II) Ecosystem
The femtocell ecosystem involves several different types of value partners. The
femtocell was developed by specialist design companies Uniquisys, ip.access, and Airvana.
These companies partnered with specialist manufacturing companies such as Samsung
Electronics to build their designs, which they brought to the attention of the major cell phone
carriers (a.k.a. Mobile Network Operators, or MNOs), including AT&T, Sprint, and Verizon. The
MNOs then needed to buy off on integrating femtocells with their own network infrastructure
and operations. Once committed, the MNOs were then largely responsible for the deployment
of femtocells to the end customer: the mobile phone user.
Femtocell Design
Companies,
e.g. Uniquisys,
ip.access, Aivana
Femtocell
Manufacturing Co’s,
e.g. Cisco Systems,
Samsung Electronics
Mobile Network
Operators,
e.g. AT&T, Sprint,
Verizon
End Customer:
Mobile Phone User
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
The challenge that the femtocell innovators initially faced was to convince the MNOs to
adopt their product instead of pursuing improvements in traditional cell phone towers. If
traditional cellular equipment manufacturers such as Alcatel-Lucent and Huawei could innovate
their own products so that towers were less costly to install, they could make a compelling case
to the MNOs since their towers are able to improve service for a larger population than
femtocells could. Luckily, innovations in the cell phone tower space did not emerge – either due
to a lack of technological improvements or because the MNOs decided it would be more
profitable to sell femtocells to a sub-segment of their customer base.
There was still considerable adoption chain risk associated with the femtocell. The first
hurdle was getting the MNOs to buy off on their innovation of dependable signal strength for
users who were (eventually) willing to pay extra for it. The second was to convince the MNOs
that the femtocell value proposition outweighed any potential risks to the MNOs’ pre-existing
relationships with the cellular tower manufacturers AND any loss of revenue in their landline
business. AT&T provides both mobile telephony and fixed landline telephony. If the femtocell
provided users with suitably reliable mobile phone service, it could make landlines obsolete.
From a consumer standpoint, this was a favorable proposition – individual and small business
cellular customers could effectively kill two birds with one stone, using their mobile phones
both on the go and in the comfort of their homes or businesses, without the risk of dropping
important calls.
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
Co-Innovation Risk:
Cheaper/Better Cell
Phone Towers
Innovation Strategy:
Dependable Signal
Strength
Execution Risk:
Cooperation of Players,
End User Willingness to
Pay
Informed Expectations:
Longer-term
Investment to Satisfy
Disgruntled Users
Adoption Chain Risk:
Integration with MNOs,
Threat to existing MNO
relationships &
operations
Ultimately, the benefits of the femtocell outweighed the costs for all of the key value
partners in the ecosystem. For the MNOs, the benefits of femtocells were in the cost savings
they could afford and the increase in customer satisfaction they could provide for a niche
segment of their customer population: the demanding user. By targeting a sub-segment of the
population, femtocells could both be viewed as substitutes and complements to traditional cell
phone towers. They are substitutes in remote areas where the low population density makes it
unlikely that a MNO will ever install a large tower. They are complements in densely-populated
areas where cell phone service is often unreliable. The potential loss of landline business is a
relatively small dollar value compared with the sizable upside of increased consumer
satisfaction and therefore customer retention.
Femtocells are a unique innovation in that they do not make traditional cell phone
towers obsolete, but rather enhance their capacity and coverage in a non-threatening way.
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
Mainstream cellular equipment manufacturers such as Alcatel-Lucent and Huawei are now
embracing femtocell technology and have started producing their own femtocells.
III) Strategy
While mobile carriers are able to bring in revenue by selling femtocells to their
consumers in-store and online, some carriers have taken a different approach to using the
femtocell as a means of increasing customer satisfaction with the quality of service the carriers
provide. Cell phone carriers have been able to use femtocells as a customer relations tool by
offering complimentary femtocells to consumers who call in to complain about shoddy service
at their homes or businesses. Even though offering the equipment for free represents a onetime cost to a cell phone carrier, the carrier is better positioned to retain a previouslyunsatisfied consumer – a relationship whose lifetime value greatly outweighs the expense of
purchasing and shipping a single femtocell.
Some cellular service providers, such as French company SFR and Japanese company
SoftBank Mobile, are taking a proactive step and offering free femtocells to all customers. SFR
uses Ubiquisys’ femtocell technology, a partnership that has benefits to both parties and
highlights how the femtocell ecosystem is one in which the interests of multiple actors can
easily align. As Chris Gilbert, CEO of Ubiquisys, said, “We are delighted that SFR, a major
European operator, is offering free femtocells to its entire customer base. More than ever,
operators are chosen for the overall quality of their service. Offering all customers a premium
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
mobile experience is great for customers and great for business." SFR’s partnership with
Ubiquisys, meanwhile, is beneficial to the former in terms of the message it sends to consumers
about SFR’s dependability and commitment to service relative to its competitors.
Before such strategic partnerships could be solidified, however, MNOs needed to be
certain that femtocells technology was an appropriate use of their resources. Among cell
phone carriers, the early players in the femtocell market in the United States were Sprint
Nextel, Verizon, and AT&T. An important step taken by these carriers in launching femtocell
technology was to set up test markets to determine the feasibility of a widescale market before
broadening femtocell availability nationwide. During the third quarter of 2007, Sprint
introduced its Airave femtocell, put out by Samsung Electronics, in Denver and Indianapolis. In
August 2008, following the success of this model in the test markets, Sprint expanded
availability of the Airave, which is compatible with any Sprint cell phone, throughout the United
States. Verizon followed suit in January of 2009, when it introduced its Wireless Network
Extender, with AT&T joining the nationwide femtocell market with its own 3G MicroCell in April
2010.
AT&T’s offering was released following late-2009 trials done in markets including
Georgia, North and South Carolina, and San Diego, with Las Vegas tested in early 2010. AT&T’s
femtocell product was created by Cisco Systems and ip.access and was the first femtocell to
support a 3G network. While AT&T’s product was the last of the big players’ to reach the
market, AT&T differentiated itself from the Sprint and Verizon models because it offered the
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EIS Mini Project: Femtocell
Kat O’Leary and Judy Lin
only 3G femtocell and benefited from the immense popularity of Apple’s iPhone, which had
until February 2010 been offered only to AT&T customers (with Verizon added during that
month). AT&T’s introduction of 3G technology into the femtocell market created an impetus
for Verizon and Sprint to upgrade their own femtocell offerings, and by the end of 2010, both of
AT&T’s major competitors had introduced their own 3G femtocells. Additionally, what had
been a disadvantage for AT&T – namely, its reputation for shoddy cell phone service in urban
centers (both voice and data), driven by network oversaturation by iPhone users – represented
a positive driver of sales for AT&T’s femtocell.
The test markets not only established that femtocells were an important step forward
for MNOs, but also served as a trial for strategic partnerships between major MNO players and
femtocell designers/manufacturers. They also ensured that there was indeed a market for this
new technology, and that consumers understood the value proposition of this fairly expensive
piece of equipment – especially when the need it fulfills is something many consumers may feel
should be automatically provided by their cellular carriers.
IV) Sources
http://lteworld.org/news/sfr-offers-free-femtocell-france
http://en.wikipedia.org/wiki/Femtocell
http://news.cnet.com/8301-30685_3-20001242-264.html
http://cnet.phonedog.com/cell-phone-research/blog/at-t-to-soft-launch-femtocell-nextweek.aspx
http://www.thinkfemtocell.com/FAQs/manufacturers.html
http://www.fiercewireless.com/story/t-adds-another-femtocell-test-market/2010-03-02
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