2G Femtocells: Silver Lining for “Winner’s Curse”

During a recent tradeshow a few companies from emerging markets, having heard about us as Femtocell leaders, came by our booth enquiring about the prospects for a 2G Femtocell. At the time I thought this was an interesting query from a fringe market when most of the world has moved over to 3G and taking their first steps toward LTE. However, after witnessing how the 3G spectrum license auctions in India are unraveling, and seeing increasing capacity and coverage problems with the current Indian wireless infrastructure, 2G Femtocells do not look all that ill-conceived to me now.

On last count (April 2010) the number of mobile subscribers in India had crossed 600 million – 40% more than the entire population of the US and closing in on two-thirds of India’s billion-plus total. So, there is still lot of room for the operators to grow and this has brought in many new players into the Indian market over the last couple of years (a total of 15 operators on last count), crowding out the market with up to eight operators competing for subscribers in some major cities. Given this, the competition at present is all about grabbing subscribers and thus market share, putting significant pressure on prices (with per-second pricing being the latest gimmick) and the bottom-line. Estimates for the Average Revenue per User (ARPU) in various studies vary anywhere from a couple of dollars to $5 per month. With that kind of revenue base and a growing mass of new subscribers, operators need deep pockets to expand the capacity of their networks or else look for cheaper alternatives to increase capacity and coverage. This is where 2G Femtocells look like an attractive option to me. Let us come back to this after a quick look at what is happening in Indian 3G spectrum license auction.

On the 3G front, two state owned operators in India – MTNL and BSNL – have been providing 3G services over the last few months. However, subscriber uptake for 3G service from these two providers has been dismal, partly due to lack of competition (and thereby the relative apathy of service providers) and partly due to price sensitivity of subscribers. As of May 13, bids for pan-Indian spectrum had reached a staggering $3.2 billion, well more than twice the original estimates of $1.3 billion. While this figure is good for the government, operators have already started talking about a “winner’s curse”. $3.2 billion is about $6 per subscriber (at the current 600 million subscriber count) for the license alone. Top it up with the cost of rolling out a 3G network and the cost of delivering 3G service per customer could easily reach a mark of $15 – and this is assuming that all 600 million subscribers would lap up 3G services, which is not realistic.

In fact, a 10% uptake for 3G services in India over the next couple of years would still be very optimistic. With that number, the per-subscriber cost easily jumps to $150. On top of that, assuming that Indian service providers will continue the current trend of not subsidizing the mobiles, each subscriber upgrading to 3G service would potentially end up spending another $150 on average to buy a new 3G-capable mobile. So, as you can see, the overall service cost for 3G service will be significantly higher (as compared to current 2G services) for the next two to three years, putting further pressure on subscriber uptake. This would make 2G Femtocell more attractive for operators, who are going to be stretched to use most of their capital on a 3G network rollout.

Assuming that the above market dynamics make 2G Femtocells more and more interesting for operators, what would it take to roll out 2G Femtocells? First and foremost, I believe 2G technology is here to stay in India for at least the next five years if not a decade, as a significant percentage of subscribers in India come from the lower-middle class (or below) who mostly use their phone for taking incoming calls (which is free in India) or making missed calls (again, does not cost anything) for people to call them back (most likely from a landline). One of the most likely scenarios would be that the mobile retail vendors (who are ubiquitous all over urban India) would install 2G Femto Access Points in their shops providing coverage in the radius of up to 200m. Another likely scenario (based on whether service providers will price Femtocell services on a flat-rate, all-you-can-use basis) would be for enterprises to install 2G Femtocells in their premises to bring down their mobile service expenses. There are many other similar scenarios that will help lower the burden on operators’ 2G macro networks, thereby enabling them to keep adding subscribers with minimal investment on 2G infrastructure while aggressively investing to build out 3G network infrastructure.

How would a 2G Femtocell work? One of the most common approaches discussed is collapsing the BTS and BSC into a 2G Femto Access Point, which will connect to a MSC through a concentrator over a broadband connection. Another common approach discussed is to bypass the existing 2G core network altogether and instead have a VoIP client on the 2G Femto Access Point, which will connect to a VoIP server in the service provider’s network. A VoIP server will interwork the VoIP call with the traditional PSTN.

A key driver to all of this is bringing a 2G Femto Access Point down to the $100-$150 price point, which in turn will be driven by Femto-optimized (both performance- and price-wise) RF and baseband silicon. Years of 2G-focused intellectual property work and expertise of system integrators (such as Sasken, Wipro, etc.) will come in very handy in solving this piece of the puzzle.

All in all, the current dynamics of emerging markets such as India make a compelling case for 2G Femtocells. India has a good technology ecosystem for real innovation in this domain in order to lead the way to meet the burgeoning needs of its billion-plus population to communicate while also ensuring that significant investment is made on the build-up of 3G networks – and LTE in the near future.

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