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On behal o the Femto Forum, Signals Research Group, LLC developed a detailed business modeling tool that will allow FemtoForum Full members to analyze the role that emtocells will have as part o their overall business strategy. Te authors include MichaeTelander (CEO and Founder), J. Randolph Leuning (Vice President, Wireless Economics), and Mark Schulz (Vice President, Wire-less echnologies). As the sole authors o this paper, we believe that while scenarios and assumptions that we have used in this white-paper are or illustrative purposes, they are also representative o real-world customer segments. In addition to providing technologyassessment and operator business modeling services, Signals Research Group is the author o the Signals Aheadresearch newsletterand Te Dollars and Sense o Broadband Wireless, the rst independent in-depth study o next-generation broadband wireless networkeconomics.
FEMTO FORUM
FEMTOCELL
BUSINESS CASEWHITEPAPER
A WHITEPAPER PAPER THAT HIGHLIGHTSTHE ECONOMICS OF FEMTOCELLS UNDERA WIDE RANGE O F SCENARIO S AND
ASSUMPTIONS ON A GLOBAL BASISApril 2009
Prepared by
Signals Research Group, LLC
Whitepaper developed for the Femto Forum
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Femto Forum Femtocell Business Case WhitepaperA Whteae pae That Hghghts the Economcs of Femtoces Unde a Wde range of Scenaos and Assumtons on a Goba Bass
Table of Contents
1.0 Executive Summary 7
2.0 Methodology 10
2.1 Inputs and Assumptions 10
2.2 Customer Lifetime Value 10
2.2.1 CLV an illustrative example 12
2.3 Customer Lifetime Value From another Perspective16
2.4 The Customer and Operator Benets 17
2.5 Macro Network Economics Model 18
2.5.1 RAN Modeling Coverage Methodology Summary19
2.5.2 Network Cost Modeling Methodology 21
2.6 Femtocell Core Network 24
2.7 Network Cost Savings 25
2.8 Burdened Femtocell Costs 26
3.1 A Family with Teenagers that Love to Talk 30
3.1.1 Results, Analysis and Additional Assumptions 31
3.2 A Well-Heeled Coverage-Hungry Suburbanite 34
3.2.1 Results, Analysis and Additional Assumptions 353.3 A Voice-Oriented Small Business 36
3.3.1 Results, Analysis and Additional Assumptions 37
3.4 An Urbanite with Excellent Coverage 38
3.4.1 Results, Analysis and Additional Assumptions 39
3.5 A Coverage Challenged Family 39
3.5.1 Results, Analysis and Additional Assumptions 40
3.6 A High ARPU Family 41
3.6.1 Results, Analysis and Additional Assumptions 42
4.0 United States 44
4.1 A Family with Teenagers that Love to Talk 464.1.1 Results, Analysis and Additional Assumptions 47
4.2 A Well-Heeled Coverage-Hungry Suburbanite 49
4.2.1 Results, Analysis and Additional Assumptions 50
4.3 A Voice-Oriented Small Business 51
4.3.1 Results, Analysis and Additional Assumptions 52
4.4 An Urbanite with Excellent Coverage 53
4.4.1 Results, Analysis and Additional Assumptions 54
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4.5 A Coverage Challenged Family 55
4.5.1 Results, Analysis and Additional Assumptions 55
4.6 A High ARPU Family 56
4.6.1 Results, Analysis and Additional Assumptions 57
5.0 Developed Asia 58
5.1 A Family with Teenagers that Love to Talk 59
5.1.1 Results, Analysis and Additional Assumptions 60
5.2 A Voice-Oriented Small Business 61
5.2.1 Results, Analysis and Additional Assumptions 61
6.0 Sidebar Analyses 63
6.1 Femtocells for Providing Deep In-Building Broadband Wireless Services 63
6.1.1 A Very Quick Overview of Macro Network Modeling Assumptions 63
6.1.2 Quality of Coverage Requirements and Associated Network Costs 64
6.1.3 Adjustments to the Analysis 65
6.1.4 The Caveats 68
6.2 Femtocells for Providing Macro Network Ofoad 69
6.3 Femtocells for Increasing Rural Wireless Adoption 72
7.0 Sensitivity Studies 74
7.1 The Number of Subscribers Assigned to a Femtocell 757.2 The Wholesale Cost of the Femtocell 76
7.3 The Average Revenue per User (ARPU) 77
7.4 The Monthly Subscription Fee 78
7.5 The Reduction in Churn 79
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Femto Forum Femtocell Business Case WhitepaperA Whteae pae That Hghghts the Economcs of Femtoces Unde a Wde range of Scenaos and Assumtons on a Goba Bass
Index of Tables
Table 1. Operator and Customer Benets 17
Table 2. Primary RAN Coverage Assumptions 20
Table 3. Link Budget Propagation Characteristics 20
Table 4. Uplink Link Budget Margins 20
Table 5. Capacity-Constrained Suburban Cell Site Capital and Expense 22
Table 6. Western Europe CLV Scenarios 28
Table 7. Western Europe Summary of Results 29
Table 8. Service Concept Highlights A Family with Teenagers that Love to Talk(Western Europe) 30
Table 9. Service Concept Highlights A Well-Heeled Coverage-Hungry Suburbanite(Western Europe) 34
Table 10. Service Concept Highlights A Voice-Oriented Small Business (Western Europe) 36
Table 11. Service Concept Highlights An Urbanite with Excellent Coverage(Western Europe) 38
Table 12. Service Concept Highlights A Coverage-Challenged Family (Western Europe) 40
Table 13. Service Concept Highlights A High ARPU Family (Western Europe) 41
Table 14. United States CLV Scenarios 45Table 15. United States Summary of Results 45
Table 16. Service Concept Highlights A Family with Teenagers that Love to Talk(United States) 46
Table 17. Service Concept Highlights a Well-Heeled Coverage-Hungry Suburbanite(United States) 50
Table 18. Service Concept Highlights a Voice-Oriented Small Business (United States) 51
Table 19. Service Concept Highlights an Urbanite with Excellent Coverage (United States) 53
Table 20. Service Concept Highlights a Coverage-Challenged Family (United States) 55
Table 21. Service Concept Highlights a High ARPU Family (United States) 56
Table 22. Developed Asia CLV Scenarios 59Table 23. Developed Asia Summary of Results 59
Table 24. Service Concept Highlights A Family with Teenagers that Love to Talk(Developed Asia) 59
Table 25. Service Concept Highlights a Voice-Oriented Small Business (Developed Asia) 61
Table 26. Quality of Coverage Requirements 64
Table 27. Rening the Analysis 66
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Index of Figures
Figure 1. CLV Waterfall Chart 12
Figure 2. CLV Monthly Results 16
Figure 3. Marginal Cost per GB By Technology 25
Figure 4. Burdened Femtocell Costs 26
Figure 5. Western Europe Population Distribution 27
Figure 6. CLV Waterfall Chart A Family with Teenagers that Love to Talk (Western Europe)31
Figure 7. Customer Lifetime Value A Family with Teenagers that Love to Talk 33
Figure 8. CLV Waterfall Chart A Well-Heeled Coverage-Hungry Suburbanite(Western Europe) 35
Figure 9. CLV Waterfall Chart A Voice-Oriented Small Business (Western Europe) 37
Figure 10. CLV Waterfall Chart An Urbanite with Excellent Coverage (Western Europe) 39
Figure 11. CLV Waterfall Chart A Coverage-Challenged Family (Western Europe) 40
Figure 12. CLV Waterfall Chart A High ARPU Family (Western Europe) 42
Figure 13. United States Population Distribution 44
Figure 14. CLV Waterfall Chart A Family with Teenagers that Love to Talk (United States) 47
Figure 15. Customer Lifetime Value A Family with Teenagers that Love to Talk
(United States) 49
Figure 16. CLV Waterfall Chart A Well-Heeled Coverage-Hungry Suburbanite(United States) 50
Figure 17. CLV Waterfall Chart A Voice-Oriented Small Business (United States) 52
Figure 18. CLV Waterfall Chart An Urbanite with Excellent Coverage (United States) 54
Figure 19. CLV Waterfall Chart a Coverage-Challenged Family (United States) 55
Figure 20. CLV Waterfall Chart a High ARPU Family (United States) 57
Figure 21. Developed Asia Population Distribution 58
Figure 22. CLV Waterfall Chart A Family with Teenagers that Love to Talk (Developed Asia)60
Figure 23. CLV Waterfall Chart A Voice-Oriented Small Business (Developed Asia) 61
Figure 24. Hypothetical Network Costs on a per Household Basis Western Europe (2100MHz) 65
Figure 25. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy 67
Figure 26. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy 900MHz 69
Figure 27. 3GB Data User with a Free Femtocell 70
Figure 28. Amount of Voice and Data Trafc Required to Pay for a Femtocell by Technology 71
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Figure 29. Wireless Penetration versus Population Density by EA 72
Figure 30. The Impact of Varying the Number of Subscribers US Coverage-Challenged Family 75
Figure 31. The Impact of Varying the Wholesale Cost of the Femtocell 76
Figure 32. The Impact of Varying the Average Revenue per User 77
Figure 33. The Impact of Varying the Monthly Subscription Fee 78
Figure 34. The Impact of Varying the Reduction In Churn 79
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Femto Forum Femtocell Business Case WhitepaperA Whteae pae That Hghghts the Economcs of Femtoces Unde a Wde range of Scenaos and Assumtons on a Goba Bass
1.0 Executive SummaryIn 2008, the Femto Forum commissioned Signals Research Group, LLC (SRG) to develop aemtocell business case modeling tool that its ull members could use as they developed theirown strategies or deploying emtocells. At this years Mobile World Congress in Barcelona weprovided preliminary results based on our analysis, and, through the Femto Forum website, wedistributed a background paper which described the capabilities o the business modeling toolby providing some illustrative results.
Tis whitepaper provides ar greater insight into the business case or emtocells. In additionto amiliarizing the reader with our modeling methodology or analyzing the impact o the
emtocell on the macro network economics as well as the business case or the emtocell itsel,the whitepaper includes results or ourteen (14) dierence scenarios across three (3) regions othe world Western Europe, the United States, and Developed Asia. Te scenarios, in turn,take into consideration regional specic attributes, such as the radio access technology (UMS/HSPA or 1X/EV-DO), typical key perormance indicators (KPIs), including voice + data usageand average revenue per user (ARPU), and realistic emtocell strategies that would be appropri-ate or the region being analyzed.
Additionally, this whitepaper includes several sensitivity studies to determine the impact ovarying some o the key underlying assumptions. Tese assumptions include the wholesale costo the emtocell, the amount o churn reduction, the number o subscribers assigned to the em-tocell, the ARPU, and the monthly ee. Finally, the whitepaper includes a number o sidebar
analyses, including the use o emtocells to provide deep in-building coverage and the use oemtocells to ooad voice + data trac rom the macro cellular network.
Te highlights o this whitepaper include the ollowing:
he model uses a customer lietime value (CLV) modeling methodology to analyze thesuitability o a emtocell strategy to an operator oering a speciic proposition to a speciiccustomer segment. he model calculates the expected increase in the sum o the discountedcash lows associated with an average customer in that segment who adopts that speciicemtocell proposition. It is up to the operator to analyze its own customer base to determinethe size o the addressable market and the likely rate o adoption or each segment/proposi-tion combination.
here is no single strategy or making a successul emtocell business case. Instead, the busi-ness case is highly dependent on the attributes o the targeted customer segment, which canvary considerably, and the emtocell eatures that the operator wishes to make available. Insome instances the payback on the incremental investment can require as many as orty (40)months while in other instances the breakeven point is only 1 or 2 months. Likewise, theoperator has a high degree o lexibility in how much it charges or the emtocell and or theservices that it oers.
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Consistent with the previous inding, the regional- and country-speciic in luences on theemtocell business case are outweighed by other assumptions (e.g., ARPU, usage, etc), whichtranscend all regions o the world. Operators in dierent regions o the world will, how-ever, likely vary their go-to-market strategies. Operators in large geographic regions, such asNorth America, may leverage emtocells to provide improved indoor coverage. Conversely,operators in regions such as Western Europe where calling plans are more expensive mayplace a greater emphasis on ree calling plans. From a purely economics perspective thereis nothing that precludes any o the strategies rom being successul in any o the regionsalthough some will prove to be more popular than others.
As an example o the lexibility associated with a well-thought-out emtocell strategy andthe slight regional dierences that exist, we demonstrate that a North American amily otwo can purchase a subsidized emtocell or $50 and take advantage o an unlimited callingplan or $15 per month, plus a $5 monthly ee to provide improved coverage while the opera-tor can break even or that customer in 15 months and achieve a return on investment (ROI)on its emtocell investment o 443%. In Europe, consumers are less likely to pay or improvedcoverage, but they will pay or an unlimited call ing plan that uses the emtocell. Ater takinginto consideration other assumed dierences between the two regions (e.g., ARPU, voice +data usage, UMS/HSPA versus 1X/EV-DO, CPP versus MPP), the European operatorrequires 22 months to breakeven but realizes a 538% ROI.
Femtocells can be used to provide deep in-building broadband wireless services ar moreeconomically than a macro cellular network. In one representative sidebar analyses, we dem-
onstrate that a targeted emtocell strategy can be used to complement a lightly deployed3G network and deliver a true in-home broadband wireless experience with 2.5Mbps datarates or less than hal the incremental coverage-related expenditure that would be requiredat 2100 MHz i the same experience were delivered by the macro network. here can also beconsiderable savings associated with oloading traic onto the emtocell, in particular orheavy data users. Based on our analysis, the cost savings associated with oloading at least1.4 GB o HSPA data per month onto the emtocell rom a coverage-constrained macro cel-lular network would justiy a ree emtocell being dropped into the home.
he business case or emtocells does not depend on any one critical actor or assumptionin order to generate a avorable outcome. For example, increasing the wholesale cost o theemtocell by 50% (rom $200 to $300) reduces the dierence between the starting amily
lietime value and the basic value proposition amily lietime value by a mere 16.3%. Also,the business case is not contingent upon a reduction in churn even though it is a likely out-come o a emtocell deployment and has already been proven in other similar FMC productdeployments.
A well-thought-out emtocell strategy can be a win-win scenario or operators and theircustomers. he beneits to consumers depend on their particular needs and how they use theemtocell. hese beneits, which depend on the types o packages and applications that theoperator promotes with its emtocell service oering, include:
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Improved voice coverage and meaningul broadband connectivity versus what would bepossible rom the mobile network;
By extending the broadband connectivity indoors, the consumer will have a more consis-tent user experience than what is typically available with the macro network, in act, withthe emtocell the experience with using the operators services and eatures may actuallybe enhanced;
Some operators may oer unlimited data usage that is ree to the consumer while athome; and
Some operators may oer unlimited voice calling plans or the entire household. heseplans result in a substantial increase in usage, thus resulting in greater utility or themobile voice plan(s), the ability to save minutes or calls outside o the home, lowerwireline voice minutes, or, in the extreme, replacement o the wireline voice service.
Chapter 2 provides some background into our modeling methodology. Chapter 3 providesresults or Western Europe. Chapter 4 provides or the United States. Chapter 5 provides resultsor Developed Asia. Finally, Chapter 6 provides results or our sidebar analyses and Chapter 7provides results o the sensitivity studies.
Te Femto Forum is a not-or-proft membership organization ounded in 2007 to promote emtocell deployment worldwide.Te Forum is chartered to encourage the growth o a partner ecosystem committed to innovation in standards-based networkinrastructure and to achieve high levels o collaboration and product interoperability.
Te business case model and analysis described in this whitepaper were commissioned by the Femto Forum on behal o itsmembers. All members gain access to the ull results o the analysis perormed and Full members gain access to the underlyingmodel, enabling them to independently investigate scenarios and parameter ranges. See www.emtoorum.org or contact [email protected] or urther details.
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2.0 MethodologyTe emtocell modeling tool allows a wide range o user inputs in order to provide as much fex-ibility or each operators emtocell planning exercise. For purposes o this whitepaper we havechosen the inputs/assumptions to eature a number o representative customer segments thatlikely exist within an operators base o subscribers. Tese examples, which have a unique set oassumptions or the given region being analyzed (Western Europe, United States, and Devel-oped Asia), also illustrate the potential value proposition that emtocells can generate.
2.1 Inputs and Assumptions
We determined the inputs/assumptions used in this whitepaper, not to mention the most likely
emtocell service concepts, based on a number o activities or sources. We obtained operator-reported key perormance indicators (KPIs), such as churn, voice usage, and average revenue peruser (ARPU). We also interviewed numerous operators and emtocell/inrastructure suppliersrom around the world on emtocell costs, benets, and applications. Finally, we have directknowledge gleamed rom a collective 40+ years o work in the wireless industry.
We believe that all o our assumptions are reasonable, and in many cases conservative relativeto at least some operator benchmarks that exist. However, we also recognize that some o theassumptions, such as those pertaining to expected user behavior with the addition o a emtocell,are dicult to predict with a high degree o accuracy. Tereore, we are a lso including a numbero sensitivity studies in Chapter 7 to determine the likely impact o changes to some o the keydrivers o emtocell economics.
2.2 Customer Lifetime Value
Te business modeling tool uses a customer lietime value (CLV) methodology to estimate thenancial impact to a wireless operators business o introducing emtocells. A customer lietimevalue methodology looks at the uture cash fows associated with a customer relationship andcalculates their present value. It incorporates most o the conceptual elements o a traditionalmulti-year discounted cash fow analysis but, in the case o complex customer propositions, suchas emtocells, is arguably more powerul, especially as a communications tool. Te results o aCLV analysis, with a ew additional inputs largely relating to adoption can easily be con-verted into a traditional multi-year business plan, i desired.
Since the CLV methodology ocuses on the lie o an individual customer rather than on a busi-
ness as a whole it enables a detailed discussion o the nancial impact o specic propositionsor specic customer segments. It also showcases very powerully how value is created. ACLV approach thereore enables us to discuss a number o propositions in detail, each target-ing specic market segments and addressing specic needs. An operator can view the resultsthen make a determination or his own geographic market which service concepts are mostappropriate.
Finally, it is important to note that in a CLV approach it is not necessary to know the exactsize o the addressable market or the anticipated adoption or each proposition. Tis abstraction
The ClV methodoogy enabes a
detaed dscusson of the nancamact of secc oostons
fo secc custome segments
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allows us to thoughtully discuss a number o propositions and see nancial results, withoutconsidering exactly where they might be deployed or how large the target market might be.
O course, there are some limitations. o the extent to which scale infuences cost it is necessaryto make some belie set about the scale o the deployment. Product initiatives which are heavilydependent upon scale (e.g., a 2G to 3G transition) are more dicult to analyze using a CLVapproach. Fortunately, a emtocell deployment requires relatively little up-ront network invest-ment, relative to other operator initiatives, and relative to customer-specic costs. Femtocellsare thereore well-suited to a CLV approach.
In this exercise we have used very conservative assumptions relative to up-ront costs. Most real-world deployments are likely to have much greater scale and thereore realize much lower xedcosts on a unit basis. o calculate up-ront costs we assume a deployment o 100,000 emtocellsin a national market, across one or more segment-specic emtocell propositions. In a typicalEuropean market o 25 million households this represents 0.4% household penetration or asingle operator. In a larger market like the United States it represents 0.1% household penetra-tion. I an operator believes consumers will adopt emtocells, these are very bearish numbers. Athigher levels o penetration, which are likely, the allocated up-ront costs we have included willshrink (perhaps dramatically), resulting in a more avorable business case.
In the scenarios we wil l discuss in the next three chapters we will look at the customer lietimevalue o a amily or a small business (a.k.a. amily lietime value). Te amily lietime value isthe sum o all o the uture cash fows associated with a amily/small business adopting a spe-
cic proposition on a present value basis. Te way we calculate the value creation associated theintroduction o a emtocell is we look at the amily/small business lietime value beore a em-tocell is introduced then we look at it aterwards. Te increase in amily/small business l ietimevalue (in euros, dollars, or percent) presents the value creation per adopting entity associatedwith a particular emtocell proposition.
An operator, ater identiying the most compelling propositions and adjusting the inputs torefect their intended oering can take the result o the model on a per household/small businessbasis and multiply the increase in value per household/small business by the expected adoptionper household/small business in each period to arrive at an estimate o total value creation.Alternatively, the operator can take the assumptions showcased in the model and, adding someadditional assumptions, primarily around market size and adoption, create a traditional multi-
year nancial plan.
We believe the CLV approach is particularly powerul because it shits the operator mindsetrom a broad-brush yes/no decision, which may be common in many product decisions (andappropriate or those involved large scale-dependent up-ront investments) to a much morenuanced market segment and proposition-specic set o decisions. For many operators the ques-tion becomes less Should we introduce emtocells widely (a high risk yes/no decision)? andmore Into which segments, with which specic propositions, and at what speed should weintroduce emtocells?
The custome fetme vaue s
the sum of a of the futue cash
ows assocated wth a famy/
sma busness adotng a seccooston on a esent vaue bass.
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2.2.1 CLV an illustrative example
T e best way to appreciate the CLV approach and the business case or emtocells is to dive rightin and start looking at some sample results (reerence Figure 1). We will discuss each bar inthe ollowing sections. At a high level, each green or red bar represents the present value o theexpected uture cash f ow to an operator or that particular emtocell service. Some bars are red,such as the emtocell cost bar (value destruction) and many bars are green (value creation). o alarge extent the value creation/destruction associated with each bar is independent o the otherbars. However, as illustrated in the waterall chart, there is a cumulative e ect with the startingpoint o each bar dependent on the end point o the preceding bar (the bar to its let).
Since we are merely introducing the concept o CLV and how we present the results in this sec-tion we will not provide the underlying assumptions used in the analysis nor will we quantiythe results or each bar. In the next three chapters we wil l provide this level o detail. And as aside note, the illustrative example in this section is identical to the rst scenario that we presentin Chapter 3.
T e results are also not speci c to any one particular customer within the customer segment.Instead, the results represent an average customer within the prede ned customer segment.
Household Lifetime Value ($)
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Othe
rBus
iness
Chur
n
Exist
ingSe
rvice
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)
Enha
nced
Servi
ces
Fami
lyMe
mber
BASIC
VALUE
PROP
OSITION
ENHA
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PROP
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Redu
ction
inCH
URN
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E
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Increa
sed
COSTSD
ata
Netw
orkC
ost
SAVING
S
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ocell
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T
Source: Signals Research Group, LLC
Figure 1. CLV Waterfall Chart
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2.2.1.1 Stat Vaue
Te Start Value bar represents the present value o expected uture cash fows to the operatoro the amily beore they receive a emtocell. Tis amount includes revenue minus a ll expenses:acquisition, retention, customer care, marketing and advertising, and other. Network expense,in this context, includes not only network operating expenses but also depreciation and an allo-cation representing the cost o capital.
2.2.1.2 Add Femtoce Costs
Te Add Femtocell Costs bar refects the operator-based costs or putting a emtocell into thehands o the customer (reerence Figure 4 in an upcoming section), net any amount that the
customer pays.
2.2.1.3 Netwok Cost Savngs
Te network cost savings refect the cost savings associated with ooading the voice and mobiledata trac generated at home rom the macro network (reerence Figure 3 in an upcoming sec-tion). In this whitepaper we assume that the macro network is capacity constrained. Te antici-pated cost savings are partially reduced by the cost associated with the emtocell-generatedtrac going through the operators core network. Core network costs due to increased voiceand usage brought on by the presence o the emtocell are captured in subsequent charts. In theuture, data costs will be urther reduced once the local bypass eature is enabled.
o some readers the net cost savings in this illustrative example (and in many o the scenarios
that we present in this whitepaper) may not appear to be that signicant. However, the real issueis that in most cases we are only assuming a very modest amount o voice and data trac and weare assuming a very ecient 3G network. Had we assumed higher voice and, in particular, datausage, the cost savings associated with ooading the trac rom the macro network would bemore obvious. Likewise, had we assumed that the macro network was less ecient in carryingvoice and data trac (e.g., GSM/EGPRS) the cost savings or even a modest amount o voiceand data trac would have been more meaningul. In act, it can be demonstrated that or heavydata users the business case or emtocells can be justied, based solely on the savings associatedwith ooading the trac rom the macro network. We undertake such a study in Chapter 6 othis whitepaper.
2.2.1.4 Addtona Netwok Costs Due to inceased Data Usage
For all results that we present in this whitepaper we assume that the customer is given reemobile data usage over the emtocell. Tis bar depicts the cost associated with this increaseddata usage, which would not have existed without the emtocell, through the core network. Teincreased usage varies by scenario, but in all scenarios this bar is an example o value destruc-tion, albeit a benet to the customer and one o the reasons why the customer may wish to havea emtocell service.
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2.2.1.5 Add Coveage-reated incease n Voce Usage
Tis bar [i present] captures the revenues and associated costs that result rom improved net-work coverage within the home. I a household or small business has poor coverage in all orparts o the home or small oce, they will miss calls that go to voice mail, calls will get droppedand the customer will eel less inclined to talk or a long period o time on the phone or ear othe call dropping or because the quality o the call is less than satisactory. With the emtocellproviding in-building coverage these minutes are restored.
2.2.1.6 Add Fee Cang pan
In many o the scenarios that we describe in this whitepaper, the ree calling plan, which has
a monthly subscription ee, is probably the single biggest value proposition or getting the cus-tomer to purchase the emtocell and sign up or the service. A ree calling plan can result in ahigh degree o cannibalization something most operators will want to avoid. It is up to theoperator to determine the most appropriate pricing scheme, ideally one which is attractive to thecustomer yet represents a positive business case or the operator.
In the U.S. (or any mobile party pays country) we assume that all calls made rom the home,incremental to those in existing bundles, are ree. Since incremental usage is ree the incremen-tal usage associated with improved coverage is also ree.
In cal ling party pays countries a ll mobile-to-xed and mobile-to-on-net mobile cal ls are ree orthe entire household. In calling party pays countries we assume that call termination revenueis collected, as usual, on inbound calls. Te ree cal ling plan thereore eliminates the revenuepreviously associated with most outbound cal ling within the home. Te single exception ismobile-to-o-net-mobile calls, which are commonly excluded rom other calling party pays
unlimited bundles. Te amount o increased usage varies by scenario. Te increase in usageresults in an increase in network costs or all inbound and outbound calls and in additional rev-enue (termination ees) in CPP countries or inbound calls, since we assume that inbound andoutbound cal l volumes both increase.
We also assume that a certa in number o voice minutes at home or in the oce translates into anadditional voice minute that is used over the macro network and which is billed to the customer.Although it is dicult to predict how much additional usage actually occurs outside o thehome or small oce this is an adjustable parameter in the model we believe that a customerwill place a growing dependence on the mobile phone and placing or taking a voice call will
become a orce o habit that will be dicult to break, even i it isnt ree. We have seen similarbehavior with ree nights and weekends. Consumers enjoying the service inevitably orget thatminutes are not always ree. Tese ree services, thereore, inevitably result in some additionalbillable airtime.
Te ree calling plan, so as to avoid unacceptably high levels o cannibalization and other arbi-trage-like behaviors, is accompanied with some restrictions, which dier by regulatory regime.Tese restrictions can be turned on or o or modied within the emtocell model.
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2.2.1.7 Add Basc Monthy Vaue Fee
Several operators who have launched a emtocell or UMA service oering are charging a nomi-nal monthly ee. Tis ee helps oset the emtocell subsidy and operators may decide to justiythe ee because they are providing the consumer with an important service improved coverage.Operators in some regions may not be able to convince their subscribers to pay or coveragewhile other operators may tie the ee to the overall emtocell service package. In any event, inat least this illustrative example the monthly ee is not required to obtain a positive businesscase or emtocells.
2.2.1.8 Add reducton n Chun
A emtocell creates a high degree o operator stickiness and it can be used to address speciccustomer complaints, such as poor coverage, that generally result in the customer leaving theoperator and moving to a new service provider. In these scenarios the model calculates thechange in average customer lietime across the entire customer segment. Increased longevitytranslates into increased customer lietime va lue.
2.2.1.9 Basc Vaue pooston
Te Basic Value Proposition captures the revenues, cost savings, and newly generated costsassociated with the emtocell services that we have just discussed, and which appear to the leto the middle grey bar in the gure.
2.2.1.10 Add Vaue of Addtona Famy Membe
In many instances there are amily members or employees which belong to another operator.Tis bar captures the value o a amily member or employee joining the operator who is provid-ing the emtocell service. In the scenarios that we present in this whitepaper we assume a certainprobability that there is an additional individual in the amily/small oce who could join theoperator and an additional probability that the individual actually signs up with the operator.
2.2.1.11 Add Enhanced Sevce revenues
Examples o Enhanced Services include a virtual home number and SMS message alerts whenamily members come home or leave home. Generally speaking, these services will not be avail-able when the rst-mover operators introduce emtocells into their markets. Most o the servicesenvisioned (like the ones described) have close to 100% gross margin. Te modeling tool sup-ports any input value or enhanced services prot contribution.
2.2.1.12 incementa revenue fom Exstng Sevces
In many cases an operator may have existing services that are not widely used due to poor cover-age at home or in the oce. A mobile V service is one example o a service that may not per-orm well or subscribers that are located inside a building. We note that the coverage or a goodin-home mobile V service is ar rarer than the coverage or a good in-home voice experience.With a emtocell in the home, the user experience is greatly enhanced and the consumer may bemore likely to try the service at home and then continue using it while away rom home.
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2.2.1.13 reduce othe Busness Chun
Some operators have both wireless and broadband assets. T is bar ref ects the value creationassociated with reducing the churn or the wireline service. Although we have not done so inthis example, this bar could also be used to capture new subscribers to the broadband servicewho are attracted to the bundled plan that the wireline/wireless operator is able to o er.
2.2.1.14 Enhanced Vaue pooston
T e urthest grey bar in Figure 1 captures all o the projected cash inf ows and outf ows gener-ated by this par ticular emtocell service concept over the lietime o the customer.
2.3 Customer Lifetime Value From another PerspectiveT e customer lietime va lue can also be depicted as a series o cash f ow calculations over theexpected lietime o the customer. In Figure 2, which shows results which are identical tothose shown in Figure 1, we have plotted the expected lietime value o the customer in threescenarios: no emtocell, emtocells with the basic value proposition, and emtocells with theenhanced value proposition.
Source: Signals Research Group, LLC
Household Lifetime Value ($)
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Enhanced Value
Basic Value
NO Femtocell
9080706050403020100
Months
Figure 2. CLV Monthly Results
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All three plots start o negative due to the acquisition cost associated with adding the subscrib-ers to the network, as well as the cost o the emtocell or the two value propositions involvingemtocells. Te two lines associated with one o the emtocell value propositions extend urtherthan the other line due to our assumptions regarding the reduction in churn (e.g., the probabil-ity o a longer customer lietime). Te modest asymptotic decline in all three lines refects thetime value o money ca lculations.
2.4 The Customer and Operator Benets
able 1 highlights some o the key benets to consumers and operators o emtocells.
Benet DescriptionConsumer
BenetOperator
Benet
Improved Coverage Femtocells provide high quality coverage inhomes or ofces that might have poor macronetwork coverage.
Improved WirelessData Rates
Femtocells provide exceptionally high data rates(limited largely by the speed of the existing xedbroadband infrastructure).
Reduced NetworkTransport Costs
The cost per minute or the cost per MB ofsending trafc over a femtocell is less oftenmuch less than sending it over a normal macrocellular network.
Reduced Congestionin Locations withExceptionally HighNetwork CapacityRequirements
In some instances an operator is more concernedabout providing service than reducing cost.
This is often the case in areas with a largenumber of users where traditional options forlocating cell sites might be limited.
Examples include the top of skyscrapers,convention centers, and airports.
In these locations femtocells or picocellsmight make service possible or might improvethe quality of service from unacceptable ormarginal to acceptable or excellent levels.
Ability to IsolateUsage in SpecicGeographic Locations
If an operator can identify with condencewhich trafc is originating or terminating in thehome he can offer a wide variety of convergedofferings, with different bundles for home andwide area usage.
Ability to DeliverAdvanced Services If the operator can place a box within thehome and if that box can identify trafc withinthe home a wide range of new service offeringsbecome possible.
Table 1. Operator and Customer Benets
Source: Signals Research Group, LLC
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Te benets to the customer and the operator vary, based on the scenario that is being examined.In general, we can summarize the benets as ollows.
In all o the scenarios that we present we assume that the customer gets unlimited mobiledata usage while using the emtocell. his ree service al lows those individuals to savetheir MBs or those times when they are not ree (e.g., outside o the home or small oice).Although many operators are oering unlimited data plans, many consumers stil l sign up orless expensive plans where their usage is limited. Further, most unlimited plans still haveusage restrictions or they throttle the data rate above a certain monthly usage level, meaningthat they are not truly unlimited plans.
With the ree calling plan, the entire household gets unl imited voice cal ls, with restrictionswhich vary slightly by geography, relecting dierent regulatory regimes. In those scenariosthat include a ree calling plan we assume that usage rom home increases by 50%. heunlimited calling plan comes with a ee to the consumer, which is up to the operator todetermine, but this ee can be ar more economical than having each individual in the house-hold pay or its increased usage. In the extreme, this plan could reduce, or even eliminate,their need or a wireline phone, thus reducing the households overall telecommunicationexpenditures.
Customers with coverage problems or basic voice services will beneit rom the presence othe emtocell. All customers that use mobile data will beneit rom the higher data rates thatthe emtocell can deliver. Higher data rates will improve the user experience with data cards
or multimedia/smartphone handsets, including applications such as mobile V, watchingvideo cl ips (e.g., Youube), and Internet sur ing.
Some customers will be attracted to the enhanced eatures that the emtocell can support.hese eatures include a virtual home number, SMS alerts when someone leaves or comeshome, and smorgasbord o converged service oerings that an operators marketing groupidentiies.
2.5 Macro Network Economics Model
We are leveraging our proprietary next-generation networks economics model to accuratelycapture the relationship between ooading emtocell trac and its eect on macro networkeconomics, not to mention the impact o strategically deploying emtocells in order to provide
deep in-building broadband wireless coverage instead o providing this degree o coverage usingthe macro network.
Tis model, which took more than teen months to develop, supports very precise modelingusing GIS coded inormation or macro network deployments across sixty-ve (65) countriesthroughout the world. Te macro network economics model supports all current and uture gen-eration OFDMA-based wireless technologies, with the exception o PDC and D-SCDMA,it supports requency bands rom 450MHz to 3500MHz, it includes traditional and fat IP core
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networks, as well as several dierent backhaul technologies, and it supports a virtually l imitlessnumber o spectrum allocations, including DD and FDD band plans.
For purposes o the emtocell business modeling tool we have limited the selection o technolo-gies to GSM/EGPRS, 1X/EV-DO Rev A, and HSPA Release 6. We have also limited the re-quency bands/spectrum allocations to the most common ones used or these technologies. Ourhope is to expand the emtocell business modeling tool capabilities to include Mobile WiMAXand LE, as well as additional requency bands, in the uture.
In the Western Europe and Developed Asia scenarios that we present in this whitepaper weassume an HSPA network is deployed with 2x15MHz o spectrum. For the US scenarios thatwe analyze in this whitepaper, we assume a 1X/EV-DO network is deployed with 2x15MHz ospectrum. We also assume a traditional core network architecture with microwave and metroEthernet in dense urban, urban, and suburban regions and microwave in rural cluttered andrural open. Te model supports any RAN technology choice in any region and a wide selectiono requency/spectrum allocation pairings. For purposes o the whitepaper we assume that themacro network is capacity constrained. With the emtocell business modeling tool the user isable to explicitly input the amount o voice and data trac, not to mention the coverage require-ments and the country being studied, and the model will determine whether or not the macronetwork is capacity constrained.
Beyond describing the basic ramework or how we modeled the macro network we are notgoing to attempt to cover all o the salient details in this whitepaper as this topic alone would
require its own detailed paper. Instead we reer interested readers to our next-generation wire-less economics study which we published last year or more inormation.
2.5.1 RAN Modeling Coverage Methodology Summary
Our coverage modeling methodology, whose impact becomes visible when the model is run inits most customized mode, includes link budget calculations, assumptions about in-buildingpenetration loss and ading margins, as well as our approach to taking GIS-coded inormationso that we can determine the size o each morphology within the region being modeled.
We used the COS231-Hata and standard Hata propagation models to determine the eectivecell radius or a given link budget. Te resulting cell count may not be accurate or a speciclocation but the total cell count over the entire country should be quite close. able 2 on the ol-
lowing page contains the set o link budget assumptions that we used in doing our analysis.
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In addition to the parameters showed in able 2, a probability o coverage methodology is usedto calculate the necessary link budget margins required to achieve the target data rates. Tiscalculation includes Log-Normal ading and indoor path loss statistics which are a unctiono the morphology (Dense Urban, Urban, Suburban, Rural Clutter, and Rural Open). able 3contains this inormation.
Te inormation in the rst two tables results in our indoor probability o area coverage (POAC)or each morphology. Tis inormation is captured in able 4.
Table 3. Link Budget Propagation Characteristics
Source: Signals Research Group, LLC
Propagation CharacteristicsDense
Urban (dB)Urban
(dB)Suburban
(dB)Rural
Clutter (dB)Rural
Open (dB)
Outdoor Log NormalStandard Deviation
12.0 10.0 8.0 6.0 4.0
Indoor Log NormalStandard Deviation
8.0 7.0 6.0 5.0 4.0
Indoor Penetration Loss 20.0 16.0 12.0 10.0 8.0
Table 4. Uplink Link Budget Margins
Source: Signals Research Group, LLC
Coverage CriteriaDense
Urban (dB)Urban
(dB)Suburban
(dB)Rural
Clutter (dB)Rural
Open (dB)
80% Indoor POAC 26.0 20.4 14.8 11.3 8.0
85% Indoor POAC 29.0 23.0 17.0 13.1 9.3
90% Indoor POAC 32.8 26.2 19.7 15.2 11.0
Parameter Value
Uplink ReceiverSensitivities atAntenna Port
Voice Service: -122.4dBm
Data Service @ 64kbps: -119.4 dBm
Data Service @ 128 kbps: -116.0 dBm
Data Service @ 256kbps: -112.5 dBm
Data Service @ 512kbps: -109.0 dBm
User Equipment EIRPHandsets: 23 dBm - 3 dB (Body loss) = 20 dBm EIRP
Data Cards: 23 dBm EIRP
Cell SiteAntenna Gain
450 MHz: 12.0 dBi | 1900 MHz: 17.0 dBi
700 MHz: 13.6 dBi | 2100 MHz: 17.4 dBi
900 MHz: 14.5 dBi | 2500 MHz: 18.0 dBi
BTS Antenna Height 30 meters over ground level
Interference Margin 3dB
Cell Selection Gain 3dB
Table 2. Primary RAN Coverage Assumptions
Source: Signals Research Group, LLC
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2.5.2 Network Cost Modeling Methodology
Tis section describes at a high level how we model macro-network and emtocell-networkcosts. Tis section discusses voice costs per network minute and data costs per megabyte orboth HSPA and 1X/EV-DO. Tere are additional costs incurred or voice termination anddierences between nancially reported minutes and network minutes. We will skip thosetopics in this paper, since they impact macro network minutes and emtocell minutes in asimilar ashion.
o understand macro-network costs we begin by discussing a purely hypothetical networkoperator. Te numbers we have used in our whitepaper analyses assume a capacity-constrained
network. Coverage calculations thereore are largely irrelevant. In the detailed section o theemtocell model, however, we do calculate utilization. Coverage does have an impact on thesecalculations and in any real-world deployment. It is also worth noting that most o the analy-ses in this whitepaper refect marginal cost, which produces a dierent result than an averagecost calculation. In the case o a capacity-constrained network average and marginal costsare the same, which is partial ly why we have chosen it. Also, many operators who are todaycoverage-constrained are earul that they will run out o capacity given the rapidly increas-ing demand or data - and thereore have a capacity-constrained mindset.
Te ollowing traditional analysis il lustrates how coverage and capacity calculations are done.Consider a Western European regional operator with an HSPA network at 2100 MHz in 2x15MHz o spectrum covering 16 Western European countries: Austria, Belgium, Denmark, Fin-land, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden,Switzerland, and the United Kingdom.
Assume that in each country the HSPA network covers 70% o its population (supplementedby existing GSM coverage), beginning in the densest urban areas then continuing to increas-ingly rural areas. Further assume a 90% probability o indoor coverage or voice and a 90%probably o 64kbps data in the uplink. Te result is a network covering 279,173,371 people(70% x 398,819,101). Tis regional network has 52,626 sites. Tis is traditionally how wecalculate economics. In this paper and in the deault model settings we make the simpli-ying assumption that we are dealing with a capacity-constrained network since networkcost, while important, is secondary to other assumptions in most scenarios in calculatingemtocell economics.
Our base case also assumes a Greeneld buildout (vs. an overlay) with a traditional radioarchitecture (vs. remote radio heads). We calculate average investment per leased site. In addi-tion there is a signicant monthly operating expense or backhaul transmission (a mixture omicrowave and metro-Ethernet), and other expenses such as site lease and ongoing operations/equipment maintenance. Finally, we add the cost o centralized network assets: the capitaland expense associated with RNCs and the core network. Each o our calculations includesdepreciation, the weighted average cost o capital, and operating expenses.
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With the above network as an example, we make a number o simpliying assumptions or thispaper. First o all, we assume that the network is capacity constrained. In reality, this is thecase in some but certainly not all geographies. In act, with the high capacity o todays 3Gtechnologies it is more oten not the case. However, since many operators are experiencingexponential month-to-month growth in data trac, as a result o the rapid increase in datacards and the parallel increase in the adoption o smart phones, many are worried about capac-ity issues. In this paper we have, or simplicity, imagined that we are operating a capacity-constrained network. We also assume 100% population coverage in calculating cost or thewhitepaper. Te vast majority o expenditures are or urban and suburban sites, even thoughrural sites cover the most physical area. Tese are user-settable inputs in the model. Finally,the emtocell model that we developed has controls that enable the user to understand whether
they are operating in an environment which is coverage constrained or capacity constrained.
I we look at the cost o a capacity-constrained suburban site (HSPA with 2x15 MHz o spec-trum, with the backhaul dimensioned or broadband data, as an example) we see the ollowinginormation as displayed in able 5.
We assume HSPA has a voice capacity (AMR vocoder) o 150 Erlangs and a ull-buer down-link data throughput o 8.5 Mbps in 2x10 MHz o spectrum. For 1x/EV-DO, we assume avoice capacity (EVRC vocoder) o 150 Erlangs and a ull-buer downlink data throughput o8.0 Mbps in 2x10 MHz o spectrum.
The femtoce mode that we
deveoed has contos that
enabe the use to undestand
whethe they ae oeatng n an
envonment whch s coveage
constaned o caacty constaned.
Table 5. Capacity-Constrained Suburban Cell Site Capital and Expense
Source: Signals Research Group, LLC
Element Cost / Site
Gross Capital Investment
Radio Infrastructure $71,120
Power Supply, Batteries, Air Conditioning $15,000
Ancillary Electronics $8,000
Transmission Capital $15,000
Site Acquisition / Civil Works $150,000
TOTAL $259,120
Annual Operating Expense
Site Lease $18,000
Maintenance of Electronics $13,094
Transmission Expense $56,058
TOTAL $87,152
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It is important to note that when we discuss capacity we are discussing it on a statistical basis.Networks are dimensioned to provide a certain grade o service or voice (typically calculatedusing Erlang B trunking assumptions) and a latency grade o service or data. Te grade o ser-vice or data is typically represented as the percentage o packets that are delayed more than acertain amount o time (measured in milliseconds) during the busy hour, assuming the packetsthat are not transmitted are queued. 100% capacity, thereore, means that a site is operatingat the maximum capacity beyond which it would ail to meet this quality o service objectives.Our model also includes a number o other margins that align calculated capacity with that oa typical real-world network.
I we dimension the site or data then depreciate each o the capital assets based on its asset classand add the cost o capital and the operating expenses then divide this total by the capacity othe site or data we arrive at a set o unit cost results or data. I we instead dimension the siteor voice then divide by the sites capacity or voice, we arrive at a set o unit cost results or voice.Te ollowing results also include core network costs (see discussion below):
UMTS/HSPA Voice (cost/minute): $0.00368UMTS/HSPA Data (cost/MB): $0.00925
1X/EV-DO Voice (cost/minute): $0.00396
1X/EV-DO Data (cost/MB): $0.00988
I we look at core network costs alone, assuming a traditional core network, we arrive at theollowing gures. Tese costs apply to trac fowing through the emtocell:
UMTS/HSPA and 1X/EV-DO Voice (cost/minute): $0.00115UMTS/HSPA and 1X/EV-DO Data (cost/MB): $0.00234
Each o the aorementioned numbers refects the economics o a capacity-constrained site. In acapacity-constrained scenario average cost equals marginal cost. o quantiy the macro networkcost savings associated with emtocells it is appropriate to look at marginal costs. Te emtocellmodel allows the user to consider both capacity-constrained and coverage-constrained scenarios.In the latter, marginal costs (and thereore emtocell savings) are less than average costs.
Over time operators will migrate rom a traditional core network to a fat IP core network andemtocell core standards will include a local breakout option, which will divert local trac rom
fowing through the operators core network. Te migration rom a traditional IP core networkto a fat IP core network will reduce the cost o macro-network trac and emtocell trac. Temigration rom the current emtocell core network standard to one including local breakout willreduce the cost o emtocell-based trac.
Each o the unit costs represents a composite o ve morphologies (dense urban, urban, sub-urban, rural clutter, and rural open). Te weighting in calculating a capacity-constrained costrefects the proportionate cell count in each morphology. We typically calculate populationcoverage beginning in the densest area in each country and building outward.
The $/MB unt costs eesent a
comoste of ve mohooges
wth a weghtng facto that s
based on the ootonate ce
count n each mohoogy when the
netwok s caacty constaned.
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It is important to note that as a network lls up to capacity (prior to cell splitting) the averagecost is very high and slowly declines. It eventually reaches a minimum where each site is ullyutilized on a statistical basis. o add additional capacity the operator must split cell sites, inother words start adding new sites purely or capacity. At this point we say that the network is
capacity-constrained. Under capacity-constrained conditions the marginal cost and the aver-age cost are the same and, in principle, the economics do not change on a unit cost basis ascapacity is added. In reality, there is a point where it becomes more dicult and/or costly tocontinue to add sites.
SRG published a 1,000 page report in 2008, characterizing the economics o next generationOFDMA network. Tis report discusses in great depth the actors driving operator networkeconomics and how average costs vary widely by geography and by service concept (ully mobilevoice and data versus desktop modems versus outdoor-mounted antennas). We reer readers tothis report since it contains at least 100 pages describing our modeling methodology. Te reportalso includes several sensitivity studies to help the reader understand the impact o changing theassumptions that we have used.
2.6 Femtocell Core Network
We have also assumed that the voice and trac generated on the emtocell enters the mobileoperators core network. Te 3GPP standards body is currently working on local IP access, whichwill ooad certain trac beore it enters the mobile operators core network. Our assumptionis pragmatic since the local trac ooad eature is not being used today. However, it also tendsto overstate some o the emtocell operating expenses relative to what they will be like in theuture once local IP access is implemented.
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2.7 Network Cost Savings
Figure 3 shows the incremental cost o mobile data on a per GB basis or various network tech-nologies. T e net savings associated with o oading the tra c onto the emtocell network canbe determined by subtracting the emtocell bar rom the appropriate macro network cost. Wewill use the inormation in this gure when presenting results later in this whitepaper.
T e Y axis in Figure 3 depicts the marginal costs instead o the average costs. In a capacity-constrained network (e.g., ully loaded), additional capacity can only be achieved by buildingand provisioning a new cell site, not to mention all o the new hardware that is required. In acoverage-constrained network, additional capacity can be achieved merely by adding additionalcapacity (e.g., channel cards) at existing sites. Consequently, the marginal cost o a capacity-
constrained network is greater than the marginal cost o a coverage-constrained network, eventhough the average cost o a capacity-constrained network is less than the average cost o acoverage-constrained network.
$0
$20
$40
$60
$80
HSPAEV-DOCDMA2000 1XEDGEGPRS
$2.39
43.69
70.79
2.39
22.19
34.36
2.39
15.59
22.78
2.39
7.9610.12
2.39
7.21 9.47
Capacity-Contrained
Coverage-Constrained
Femto
Source: Signals Research Group, LLC
Figure 3. Marginal Cost per GB By Technology
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2.8 Burdened Femtocell Costs
Figure 4 shows the ul ly burdened cost o a emtocell in the U.S. T e actual amount that a cus-tomer pays or the emtocell varies or the di erent scenarios that we present in this whitepaper,typically ranging rom zero to ty dollars or, in Europe, to ty euros. T e cost speci callythe uture subsidy also varies as a result o retention costs which vary to ref ect regional di er-ences in average customer lietime or contract subscribers.
In addition to a $200 wholesale cost or the emtocell, we burden the emtocell with a numbero additional costs. T e provisioning and billing integration cost o $50 is based on several datapoints which suggest that an operator with a nationwide network could spend $5M to as much
as $10M on upront provisioning and billing system integration e orts required to support theemtocell network. Assuming $5M in integration expenses, our assumption o modeling $50 peremtocell suggests a deployment o 100,000 emtocells. Also worth noting, we have included anadditional subsidy to ref ect the replacement o the emtocell ater a three-year period.
In total, we believe we have taken a very conservative approach when actoring the cost o theemtocell in the CLV calculation. Operators will have the ability to make their own assump-tions, including reducing the wholesa le cost o the emtocell to ref ect economies o scale oncemore operators begin deploying the technology.
Ou assumton of modeng $50
e femtoce fo ntegaton
exenses suggests a deoyment
of 100,000 femtoces.
$0
$50
$100
$150
$200
$250
$300
$350
$400
Future Subsidyand Support Costs:
$62.98
Centralized Femtocell-Specific Platforms: $40.00
Provisioning & Billing:$50.00
Home Femtocell:$200.00
Customer Service(Set-Up Support):
$5.00Selling Costs: $30.00
Marketing/Advertising:$7.50
Figure 4. Burdened Femtocell Costs
Source: Signals Research Group, LLC
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3.0 Western Europe
5,00010,000
10,00025,000
25,00050,000
50,000100,000
> 100,000
0
2550
010
50100
1025
250500
2,5005,000
5001,000
100250
1,0002,500
Population per km2
Figure 5. Western Europe Population Distribution
Source: Signals Research Group, LLC
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We have identied six representative scenarios or this region. able 6 highlights the key di-erences in the scenarios, including which eatures are turned on/o, as well as assumptionsregarding the cost o the emtocell and the subscription ees or the various services that areactivated as part o the particular service concept. For simplicity, we are only activating theenhanced services or the Family with eenagers that Love to alk scenario. In reality, theseservices could have been included with any o the scenarios, thus increasing the attractivenesso the emtocell oering or both operators and consumers.
Scenarios
Numberof Voice/Data Card
Users
FemtocellCost
(to theoperator)
FreeData
CallingPlan
Coverage-Related
VoiceIncrease
Free VoiceCalling Plan
(monthlyfee)
MonthlyCoverage
Fee
ReduceChurn
AddMember
AddEnhancedServices(monthly
fee)
EnhanceExistingServices(monthly
fee)
Reduceother
BusinessChurn
A Family withTeenagers that Loveto Talk
2/0 $353 $20.25 $6.75 $6.75 $6.75
A Well-HeeledCoverage-HungrySuburbanite
2/0 $5
A Voice-OrientedSmall Business
5/2 $5
An Urbanite withExcellent Coverage
2/0 $353 $20.25
A Coverage-Challenged Family
2/0 $353 $6.75
A High ARPU Family 2/1 $353
Table 6. Western Europe CLV Scenarios
Source: Signals Research Group, LLC
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able 7 provides a summary o results or all Western Europe service concepts. Te rst twocolumns provide inormation about the customer in advance o receiving the emtocell. Tethird column (Increase in Lietime) describes the expected increase in the customers lietime.Te th column (Months to Breakeven) is an indication o how long it takes the operator torecoup its emtocell investment or that particular customer. In some scenarios, such as the
Voice-Oriented Small Business scenario, the payback time is zero since the customer is bear-ing the cost o the emtocell. In other scenarios, such as the Urbanite with Excellent Coveragescenario the payback time is relatively long, refecting the upront investment that the opera-tor made in subsidizing the ully burdened emtocell along with a relatively modest upside inemtocell-related income.
Te incremental return on investment (ROI) is calculated based on the incremental upront costincurred by the operator (e.g., the cost o the burdened emtocell that the operator pays) andthe subsequent incremental revenue that is generated due to the introduction o the emtocell.When looking at the absolute return, the benets are more modest, albeit still very attractive.
For purposes o this whitepaper we are only applying the enhanced value services to the am-
ily with teenagers that love to talk scenario. In real ity, the enhanced services are applicable toany o the scenarios that we have identied and they would result in urther upside above andbeyond the results that we present in the upcoming sections.
One nal point worth making is that in all cases we have assumed that the introduction o theemtocell increases the lietime o the customer. We believe this is a valid assumption since insome cases the emtocell is specically addressing a problem that could cause the customer tochurn to another operator. In other instances, there is a degree o operator stickiness associatedwith the emtocell, including the potential use o a mandatory contract extension in order or
Table 7. Western Europe Summary of Results
Source: Signals Research Group, LLC
ScenariosStartValue
Pre-FemtoFamily Revenue
(monthly)
Increase inLifetime (%)
BasicValue
Months toBreakeven
IncrementalROI
EnhancedValue
EnhancedValue
ROI
A Family with Teenagersthat Love to Talk
$2,138 $108 25% $3,464 22 538% $4,787 1056%
A Well-HeeledCoverage-HungrySuburbanite
$2,138 $108 25% $3,275 N.A. N.A. $4,599 N.A.
A Voice-Oriented SmallBusiness
$5,051 $432 25% $7,521 N.A. N.A. $8,844 N.A.
An Urbanite withExcellent Coverage
$2,138 $108 25% $3,030 36 369% $4,353 886%
A Coverage-ChallengedFamily
$2,138 $108 25% $3,352 25 495% $4,675 1012%
A High ARPU Family $6,230 $297 25% $8,676 17 1,093% $10,495 1804%
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the customer to receive the subsidized emtocell. However, in all cases our assumption regard-ing the reduction in churn is not required to generate a avorable outcome, although it does helpcreate value by extending the lie o the customer and its subsequent revenue contribution.
3.1 A Family with Teenagers that Love to Talk
able 8 highlights some o the important details or this scenario, which we have called A Fam-ily with eenagers that Love to alk. In this scenario we assume a European household withtwo adults and teenagers that love to talk on the mobile phone with their riends. Unortunately,their calling plans do not provide them with the number o minutes that they think they needto communicate with their riends. Tey keep nagging their parents and ultimately their parents
give in and sign up or the unlimited voice plan so that their teenage children are happy, not tomention the parents themselves since they can also take advantage o the service.
For purposes o this service concept we are not considering the revenue contribution rom teen-agers beore the introduction o the emtocell. Instead, they motivate the parents to sign up orthe emtocell service. Additionally, they represent potential members who in the uture couldbecome ull-fedged subscribers on the operators network.
Te parents are post-paid subscribers and they each pay $54 per month. Both parents use 400voice minutes and 50MBs o mobile data with their handheld device, which is likely to be asmartphone. Neither parent has a data card. We urther assume that 36% o the overall voice
usage and 45% o the overall mobile data usage occurs at home. Te assumption or the percent-age o mobile voice and data usage that is consumed at home is consistent with various marketresearch studies. In this particular scenario, mobile data usage has very little impact on theoverall business case or emtocells.
As urther indicated in able 5, the amily pays $67.50 or the emtocell, a $6.75 monthly ee tooset the cost o the emtocell and/or provide coverage, and a $20.25 monthly ee or unlimitedmobile-to-xed and unl imited mobile-to-on-net mobile voice calls while at home. Additionally,the amily gets unlimited mobile data over the emtocell.
Table 8. Service Concept Highlights A Family with Teenagers that Love to Talk (Western Europe)
Source: Signals Research Group, LLC
Description: Familiy with ateenagers that Love to Talk
ARPU Criteria 2 people x 40 ARPU ($54)
Family Usage Voice Two people, each with 400 MOU voice usage
Data Average data usage for two phones (2 x 50 MBs)
Family Economics Up-Front Cost 50 ($67.50)
Monthly Cost 5 + 15 ($6.75 + $20.25)
List of Features Coverage + Free Data at Home + Unlimited Fixed and On-NetMobile Calling
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3.1.1 Results, Analysis and Additional Assumptions
T e key assumptions and value o each bar in the CLV Waterall chart (reerence Figure 6) areas ollows:
stArt VAlue. T e start va lue or this household in advance o having a emtocell ser vice is $2,138,including monthly revenues o $54 per individual, $405 in acquisition costs, $620 in retentioncosts, and costs related to the macro network, customer service, marketing and advertising. Weassume an annual churn rate o 16.2%, thus the expected lietime o this customer beore receiv-ing a emtocell is 74 months.
FeMtoCell Cost. We assume that the amily pays a retail price o $67.50 or the emtocell and thatthe operator absorbs the other costs, as indicated in Figure 4.
netWorK Cost sAVings. T e network cost savings due to the tra c being o oaded rom themacro network and on to the emtocell network is $68.
AdditionAl netWorK Costs dueto inCreAsed dAtA usAge. T e incremental usage o 100MB perphone results in value destruction o $26.
Household Lifetime Value ($)
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Othe
rBus
iness
Churn
Exist
ingSe
rvice
s(TV)
Enha
nced
Servi
ces
Fami
lyMe
mber
BASIC
VALUE
PROP
OSITION
ENHA
NCED
VALUE
PROP
OSITION
Redu
ction
inCH
URN
Mont
hlyFEE
FREECA
LLING
Increa
sed
COSTSD
ata
Netw
orkC
ost
SAVING
S
Femt
ocell
COSTS
STAR
T
Source: Signals Research Group, LLC
Figure 6. CLV Waterfall Chart A Family with Teenagers that Love to Talk (Western Europe)
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Add Free CAlling PlAn. We assume that or a $20.25 monthly ee all mobile-to-xed and allmobile-to-mobile-in-network calls made within the home are ree or the entire household.Since this is a European scenario, we assume that cal l termination revenue is collected, as usual,on inbound calls. Te ree call ing plan thereore cannibalizes the revenue previously associ-ated with outbound calling within the home. We assume that each individual increases usage(inbound and outbound) within the home by 50%. We also assume that one in three reevoice minutes at home translates into an additional voice minute that is used outside o the homeand which is billed to the consumer. Te present value o the revenue generated by this eatureover the lietime o the customer is $612.
Add BAsiC Monthly VAlue Fee. We assume a ee o $6.75 per month. Te present value o theresultant revenue generated over the lietime o the customer is $372.
Add reduCtionin Churn. We assume that the operator is able to reduce its churn rate by 20%, orrom 16.2% to 13%. Te eective lietime o the household thereore increases rom 74 monthsto 93 months. Tis increase in average customer lietime results a prot contribution, in presentvalue terms, o $652.
BAsiC VAlue ProPosition. Te basic value proposition is $3,464, an increase in value o 62% overthe Start Value.
Add VAlueoF AdditionAl FAMily MeMBer. We assume that there is a 50% probability that there isanother amily member in the home that is not already a customer o the operator, and, i there
is another amily member, that there is a 40% probability that they will switch to the operator(50% x 40% = 20%). We multiply these discount actors by the starting CLV o one o the origi-nal subscribers to arr ive at a likely impact in present value terms o $263.
Add enhAnCed serViCes. . We assume $6.75 per household per month in incremental prot contri-bution per month. Te resultant value creation in present value terms is $434.
inCreMentAl reVenueFroM existing serViCes. We assume $6.75 per household month in incremen-tal prot contribution per month. Te resultant value creation in present value terms is $434.
reduCe otherBusiness Churn. We assume that the other business generates a monthly revenuestream o $40.50 with a 50% gross margin. We urther assume a churn rate o 15%, which is
subsequently reduced by 20% with the introduction o the emtocell service oering. Teseassumptions result in value creation in present value terms o $191.
enhAnCed VAlue ProPosition. Te enhanced value proposition is $4,787 versus the Start Value o$2,138 without the emtocell, resulting in an increase in value o 124%.
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T e customer lietime value can also be depicted as a series o discounted cash f ows, over theexpected lietime o the customer. In Figure 7 we have plotted the expected lietime value othe household with teenagers that love to talk under three scenarios: no emtocell, emtocellswith the basic value proposition, and emtocells with the enhanced value proposition. T e pres-ent value o the discounted cash f ows (the height at the end o each line) are identical to theirrespective values (e.g., Start Value, Basic Value and Enhanced Value) in Figure 6.
All three plots start o negative due to the acquisition cost associated with adding the subscrib-ers to the network, as well as the cost o the emtocell or the two value propositions involvingemtocells. T e two lines associated with one o the emtocell value propositions extend urtherthan the other line due to our assumptions regarding the reduction in churn (e.g., the probabil-ity o a longer customer lietime). T e slight decl ine over time in the rate o growth o each othe three lines ref ects the time value o money.
Source: Signals Research Group, LLC
Household Lifetime Value ($)
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Enhanced Value
Basic Value
NO Femtocell
9080706050403020100
Months
Figure 7. Customer Lifetime Value A Family with Teenagers that Love to Talk
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In this scenario the breakeven point or the basic value proposition is 22 months and the basicvalue ROI is 538%. For the enhanced value proposition the breakeven point is 10 months andthe ROI is 1,056%.
3.2 A Well-Heeled Coverage-Hungry Suburbanite
Tis scenario ocuses on wealthy individuals that happen to live in an area or own a secondhome where cellular coverage is not as good as they would like it to be. Even in Europe, wherecellular coverage is quite robust, there are still pockets where coverage is poor. Tis is especiallytrue or 3G coverage and in less urbanized areas, such as resort communities, isolated villas oreven entire villages. Tese individuals would gladly pay or any solution that would deliver high-
quality coverage in their home.
able 9 highlights the key assumptions or this scenario. O most importance, the customerpays the ull upront ee or the emtocell. In return the operator provides ree coverage [not reevoice] and ree data service within the home.
Table 9. Service Concept Highlights A Well-Heeled Coverage-Hungry Suburbanite(Western Europe)
Source: Signals Research Group, LLC
Description: Well-Heeled Coverage-Hungry Suburbanite
ARPU Criteria 2 people x 40 ARPU ($54)
Family Usage Voice Two people, each with 400 MOU voice usage
Data Average data usage for two phones (2 x 50 MBs)
Family Economics Up-Front Cost 315 ($425)
Monthly Cost Free
List of Features Coverage + Free Data at Home
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3.2.1 Results, Analysis and Additional Assumptions
T e results or this scenario are shown in Figure 8. For this scenario we are not including theupside revenue potential o the various enhanced services that the emtocell could deliver. Iwe had included them, they would urther strengthen the emtocell business case or this par-ticular scenario.
T e start value or this household in advance o having a emtocell service is $2,138, or identicalto what we assumed in Section 3.1. Likewise, since we are assuming similar voice/data usagebeore the introduction o the emtocell, the network cost savings ($68) and the additional net-
work costs due to increased data usage ($26) are identical to the rst scenario.
In this scenario the household is largely interested in the emtocell to improve in-building cov-erage, thus they bene t rom increased voice usage within the home, albeit with a cost due tothe increased usage. Since we also assume that 36% o all voice minutes occur within the home,this results in a 14% overall increase in usage per month (109 minutes) or the two individuals.T e monthly increase in pro t contribution is $11.05, which translates into a $516 increase inamily lietime value. Both results ref ect increased revenue minus increased costs. T e lattercalculation sums these inputs over the expected customer lietime.
Household Lifetime Value ($)
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
BASIC
VALUE
PROP
OSITION
Redu
ctioni
nCHU
RN
Cove
rage-Related
Voice
USAG
E
Increased
COSTSD
ata
Netw
orkC
ost
SAVING
S
FemtocellCO
STS
STAR
T
Source: Signals Research Group, LLC
Figure 8. CLV Waterfall Chart A Well-Heeled Coverage-Hungry Suburbanite (Western Europe)
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Finally, the reduction in churn or this customer segment is identical to the rst scenario, butthe revenue contribution is slightly lower, or $574, due to the dierent emtocell-related ser-vices/ees that this household has.
Te basic value proposition in this scenario is $3,275, or an increase in value o 53% over theStart Value. For brevity we have not included any o the enhanced emtocell services in thisscenario, although they would have urther strengthened the business case. Te ROI on theemtocell investment is, in theory, innite, since the amily pays in ull or the emtocell. Teamount the amily pays up-ront includes support costs, the cost o associated centralized em-tocell-specic inrastructure, allocated provisioning and billing integration costs, and utureupgrade costs basically everything.
3.3 A Voice-Oriented Small Business
For the Voice-Oriented Small Business scenario we assume that a smal l oce has poor coverage,just as the home in the previous scenario had poor coverage. Te small business is willing to payto improve productivity and to have ree wireless data within the oce.
able 10 highlights the key assumptions or this scenario. O note, there are 5 individuals withvoice plans and data plans or their handheld devices (e.g., smartphones) while 2 o the individu-als have a data card plan. In return or paying the ull amount or the emtocell, the small ocereceives improved voice coverage within the oce as well as unlimited d