Creating value from Femtocells

Have you figured out how Telcos will create value from Femtocells? Signals Research developed a business modeling tool to allow Femto Forum members to analyze the role of Femtocell in their business strategy. The model is presented in a whitepaper published in April 2009 on the Femtocell Forum website.

The business model is fairly exhaustive and relevant. It is designed to calculate customer value creation for 6 different scenarios involving specific market segment and value propositions. These scenarios are localized to take into consideration national regulation models in the United States , Western Europe and Developed Asia. Assumptions presented in the whitepaper are considered conservatives. Ultimately these assumptions are customized for each operator when running the model.

The whitepaper provides an appreciation of value created by the Femtocell service strategy. Femtocells are particularly attractive in large geographical markets where 3G coverage is uneven, in households with high usage and multiple mobile subscribers and finally in markets where substitution of wireline by wireless is relevant.

There is no question about the fact that Femtocells are relevant and network operators should consider them in evaluating competitive strategies. The questions are rather where, when, to who and at what price?

In the model presented there are couple assumptions that are challengeable. Network cost reduction remains limited. Hence most of the value is created by either a reduction in churn or an increase in billed revenues.

Reduction in Churn

Extending the average lifetime by 25% with Femtocell is a big assumption to make. Some customers churn because they like to shop for phones: they are attracted to new rate plans or want to upgrade their mobile phone. Others terminate their subscription because they move or change their family status, or because their new employer provide them with a cell phone. But customers rarely churn because coverage is becoming poor all in a sudden. Other customers just don’t like to change operator anyway. They’ll keep their Femtocells for a few years, but the long customer life cannot be awarded to the Femtocell.

Therefore I doubt that such a churn reduction is an achievable target. Unless customers invest upfront a significant amount in the Femtocell device, most customers will churn as they usually do. I especially don’t see it happen in competitive markets with several MNOs heavily subsidizing devices.

Increased in Billed Services

The other assumption is that customers will pay an extra 15€ or 20€ for a free calling plan and improved indoor coverage. Customers don’t increase their phone bill by that much unless they think they’ll save somewhere else.

Femtocell users might save on their wireline phone bill. It makes sense in the US where wireline phone is still fairly expensive and where it is substituted by wireless, especially in households subscribing to cable. But in some Western European markets such a substitution won’t happen because unlimited phone usage is included in tripleplay broadband bundles.

Femtocell users will also save on their wireless phone bill. Since about 30% of their usage is from home, many will choose to downgrade their existing wireless plan and replace it with a Femtocell-enabled Free Calling Plan. Such cannibalization needs to be considered in the business cases scenarios.