Structural issues the final hurdle for femtocells
Published: 20 January, 2009
READ MORE: Femtocells
Dealing with the technical issues has been the fundamental sticking point pre-occupying the femtocell industry for the last two years. Now, although technical problems still do exist, these have been largely addressed and the business case for femtocells - cheap backhaul, better indoor coverage, new services, femto-zone billing - have been widely espoused and largely accepted. The final hurdle is now one of credibility and some operators are still nervous about making the decision to deploy. In a report recently released by ARCchart, the research firm believes that femtocell volumes will not ramp until 2010.
The femtocell equipment market is dominated by pre-revenue, medium sized VC-backed companies with the major infrastructure vendors sitting on the sidelines (see chart). Although this is not unusual for a sector in the early stages of development, femtocells are tabled for mass roll-out in 2009-2010. This is causing some concern for mobile operators as they are being asked to place large orders with companies who lack the credibility of the established players.
With the large infrastructure players choosing to stay out of the market it has been left up to companies like ip.access and Airvana to build the market. Instead, the larger vendors have chosen to form OEM agreements with the smaller vendors and wait for the market to evolve - a strategy not unusual in a new market, but it means that the femtocell vendors lack the capital to truly exploit the potential of femtocells and gain acceptance by tier one operators. There is a catch-22 here as without the capital to subsidise a large-scale femtocell roll-out, the vendors are not able to prove the viability of femtocells, but without this proof of concept many operators will wait on the sidelines.
The problem is one of capital and risk. Without the sufficient capitalisation of say Ericsson - with a market capitalisation of $23 billion - many vendors simply cannot afford to build femtocells in sufficient volumes to achieve the cost benefits. Tier one operators have publicly stated that femtocells need to reach a unit price of $100 in order to be viable - especially as they will probably be subsidised by the operator rather than the subscriber. It seems unlikely that a small vendor will be able to reach the $100 mark in the next three years without taking a prohibitively large risk on production.
The obvious solution is a round of mergers and acquisitions ensuring the femto vendors are subsumed into larger capital structures. However, the current financial climate makes this unlikely, and the large number of VC investors backing the femtocell start-ups means there is sure to be demands for a high price. IPOs are also unlikely for at least another 18 months or until capital markets return to some sort of normality.
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