Business Week: Home Is Where the Femtocell Is

Companies such as Motorola and Google are investing in femtocells, which promise to improve cell-phone coverage inside houses
by Olga Kharif and Bruce Meyerson

Ask the folks at T-Mobile USA why most people switch mobile-phone providers and they'll tell you it's not because of poor customer service or high-priced call plans. Consumers' main reason for seeking a new carrier? They can't get good network coverage inside their homes, where anywhere from 27% to 41% of all wireless minutes are spent.

There's a host of new technologies, from Wi-Fi to Voice over Internet Protocol, that customers can use in place of unreliable in-home cell coverage. But the most effective may be one few people have even heard of. It's known as a femtocell, and it acts as an in-home wireless access point. The femtocell looks like a typical modem or router and uses a high-speed Internet connection, rather than the wireless network, to convey a call from a handset to the carrier's switching station, where it's directed to its destination. Derived from the word "femto," denoting something one-quadrillionth the size of a given unit, femtocells sidestep nearby towers and the spotty coverage they sometimes provide.

The technology holds enough potential that a phalanx of tech companies, including mobile-phone maker Motorola (MOT) and Web search leader Google (GOOG), are dedicating serious resources to femtocell development. Ray Smets, vice-president of marketing in the broadband solutions group at Motorola, says femtocells are "getting an equal amount of energy in terms of importance" as other, more established technologies including Wi-Fi and WiMAX, which deliver high-speed Internet access. "We see it just as significant as other wireless technologies we are developing," Smets says. In February, Motorola bought startup Netopia to propel its femtocell efforts.

Giving Google a Leg Up

On July 20, Google joined a group of investors that parked $20 million in Britain-based femtocell startup Ubiquisys. Earlier in July, Thomson (TMS), the world's largest maker of DSL modems, struck a deal with infrastructure maker Nokia Siemens Networks to develop femtocell gear. On July 2, networking giant Netgear (NTGR), which makes Wi-Fi routers, co-founded the Femto Forum, designed to promote femtocell standards and use. Other forum members include Airvana, ip.access, picoChip, RadioFrame Networks, Tatara Systems, and Ubiquisys.

Why the seemingly sudden flurry of interest? By 2012, there will be more than 150 million users of femtocell products on 70 million access points worldwide, according to consultancy ABI Research. That's a quick ramp-up for a technology that's only in trials now. If and as it takes hold, analysts expect femtocell technology to give newcomers such as Google a big leg up in the wireless market, while adding to pressure on existing telecom providers such as AT&T (T) and Vonage (VG).

Some even speculate femtocells will supplant technologies such as Wi-Fi and WiMAX, which themselves are not always reliable or convenient. For instance, T-Mobile's HotSpot@Home service lets users make calls from home using a Wi-Fi network (see BusinessWeek.com, 6/27/07, "T-Mobile's Triple Threat"). But the users need to purchase special, expensive handsets, operating over both cellular and Wi-Fi networks. Because Wi-Fi operates on the same airwaves as garage door openers and microwave ovens, quality of service can be dicey. And Wi-Fi tends to drain handset batteries quickly.

Snatching Business from Landline Outfits

By contrast, femtocells conserve phone battery life. Chris Gilbert, chief executive of femtocell maker Ubiquisys, estimates that the battery life of phones working off of femtocells can be more than 200 times longer. And femtocells use dedicated wireless spectrum, so there's no interference, and call quality is easy to manage.

Femtocells also carry potential benefits to wireless service providers. By letting users bypass wireless towers when making a call, femtocells can boost a wireless network's capacity by up to 1,500 times, Gilbert says. Calls placed from a home would no longer clog the portion of the wireless network used by the caller. Femtocells could help carriers reduce costs of providing service by more than $70 billion by 2012, according to ABI Research.

What's more, wireless service providers can use femtocells to snatch business from landline phone service operators and Web-calling outfits such as Vonage. Already, 19% of Americans have dropped their landlines and rely solely on mobile phones, according to consultancy Parks Associates. Those numbers would probably surge as cellular service in the home improves.

Cheap Option for Operators

"We are seeing quite strong interest from U.S. operators," says Andy Tiller, vice-president of marketing at Britain-based femtocell equipment maker ip.access. Indeed, every major carrier in the U.S. is looking at femtocells: "We always look at new technologies, inclusive of femtocells, to determine relevancy to our customers," Verizon Wireless spokeswoman Brenda Raney writes in an e-mail.

For operators, deploying femtocells is relatively cheap. Gilbert estimates that Britain can be seeded with femtocell boxes for as little as $20 million, plus perhaps as much in network upgrades. Wireless spectrum to use with femtocells may be the most expensive part of such deployments. But carriers can use their existing spectrum to pass calls from the cell phone to the home femtocell box. Or they can purchase cheap, subprime spectrum—such as so-called guard bands, thin slivers of spectrum squeezed between other airwaves.

Technology Remains Untested

Google wouldn't comment on its plans. "We are focused on working with industry leaders to develop innovative services that provide people worldwide with direct access to our applications—and ultimately the information they want and need—right from their mobile devices," Google spokesman Jon Murchinson says in an e-mail.

To be sure, the technology remains largely untested outside labs and standards won't be developed till late 2008 at the earliest. "Without the standards, the market won't be that big," says Ake Jernberger, who works in the Wireless Network Solutions Segment at Andrew Corp. (ANDW). "It requires the whole ecosystem to work."

But if that ecosystem gets built, the wireless industry may never look the same.