European Femtocells MarketsNot Quite There Yet !

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February 2009

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Table of Contents

Preamble 6-7

Key Findings in the European Market 8-11

Femtocells- An Introduction 12-15- Overview of Femtocells 13- Features Supported by a Femtocell 14- Femtocell Network Connectivity 15

Femtocells Standards 16-17

Enterprise Proposition for Femtocells 18-19

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Enterprise Proposition for Femtocells 18-19

Key Drivers for Femtocells 20-23

Key Challenges for Femtocells 24-33- Interference Issues 25- High Cost of Femtocells 27- Regulatory and Billing Issues 28- Handover and Interconnectivity 29- Security Issues 30- Emergency Calls 31- Service Level Agreements and QoS 32- Intellectual Property Rights 33

Table of Contents (Contd…)

Femtocell Roadmap in Western Europe 34-35

Key Femtocell Vendors and Operator Trials in Europe 36-39

Market Forecast and Assumptions 40-49

Operator Strategies and Recommendations 50-54

Conclusion 55-59

Glossary 60-63

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Glossary 60-63

About Frost & Sullivan 64-68

Preamble

6

Preamble

• In 2007, many were of the view that femtocells would be the next revolutionary product which will take the European

cellular industry by storm. Two years since its inception, many currently regard that the femtocell concept was

introduced too early into the market, with so many challenges to overcome. So much so that nothing much has

drastically changed apart from a few Tier 1 mobile operators conducting small scale trials.

• Despite this, the hype and huge expectations of femtocells still exists as many mobile operators have realized

that in order to deploy next generation wireless technologies which will provide throughputs of more than 10Mbps,

huge investments need to be made in their backhaul to provide optimum quality of service. For most operators,

backhaul OPEX can be anywhere between 30 to 40 percent of operator costs and this is one of the primary reasons

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why mobile operators are bullish on deploying femtocells as the backhaul cost will now be imposed on the user rather

than the mobile operator, with the traffic running over the user's broadband network subscription. Some mobile

operators see this alone as a viable business case for femtocells.

• This research service is a continuation of our coverage in the mobile broadband wireless access domain and will

strategically analyse the market opportunity for femtocells in the European market. It will provide a detailed analysis

of the key drivers and challenges pertaining to femtocells and provide recommendations and strategies for the

various participants within the mobile value chain. Frost & Sullivan has spoken to key industry participants with

vested interests in femtocells and will clarify on the myths, hype and continuous debates that have been associated

with the technology ever since its inception in the European cellular market.

Key Findings

8

Key Findings

• By 2012, there will be 986,700 femtocell subscribers in Western Europe with femtocell vendors

generating revenues of approximately €46.9 million.

• By 2014, this is forecasted to grow to 11.8 million femtocell subscribers with femtocell vendors generating

revenues of approximately €401.2 million.

• European operators conducting lab trials or issued RFPs are as follows:-

- Vodafone in the UK, Germany, Italy, The Netherlands, Austria and Spain

- TeliaSonera in Sweden and Denmark

- O2 in UK

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- O2 in UK

- Orange and SFR in France

- T-Mobile in Germany, the Netherlands and the UK.

• European mobile operators are willing to commit to wide-scale deployment of femtocells only if the

femtocells are certified and based on an industry accepted standard.

• 2009 will primarily witness intensive laboratory testing of femtocells, followed by ‘soft launches’ by

Q4 of 2009 or early 2010.

• The first commercial certified femtocell product based on an accepted standard complying to the Iu-h

interface will be available by the first half of 2010.

• European operators are still concerned about the high costs associated with femtocells and the

interference it may cause with their macro cellular network considering that new femtocells can appear in

a network at any point of time thereby making it difficult for operators to do effective spectrum and client

device management.

• It is essential that operators put immense pressure on the chipset vendors to reduce chipset costs which

are currently around 50 Euro. In order to reach the 100 Euro mark for femtocells, many opine that chipset

costs alone need to be around 8 to 10 Euro.

Key Findings (Contd…)

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costs alone need to be around 8 to 10 Euro.

• Many operators are considering 3G LTE to be initially used for hot zones rather than providing a

nationwide coverage. Hence operators will deploy 3G LTE femtocells inside buildings/homes and

incrementally add capacity to their networks, with the 3G (UMTS) network used for macro coverage.

• Operators would opt for a self organised metro 3G LTE femtocell network if the recession still persists

over the next two years in Europe as it could avoid doing forklift upgrades to their macro cellular network,

thereby reducing CAPEX to a great extent.

• Once the 3G LTE subscriber base increase along with the availability of several 3G LTE handsets from

various terminal vendors, operators could eventually upgrade their macro networks for 3G LTE by the second

half of 2010. This will put them in a formidable position to brave the recession period which is expected to last till

the first half of 2010 and at the same time provide next generation 3G LTE technology at lower costs via

femtocells. However, in doing so, operators could potentially diminish the profit margins of equipment vendors

selling 3G LTE macro base stations.

• If dual-mode Wi-Fi or cellular handsets (with better battery life) from various terminal vendors, supporting

high-speed 802.11n, are made available to users at affordable costs for mass market, due to the time-to-

Key Findings (Contd…)

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high-speed 802.11n, are made available to users at affordable costs for mass market, due to the time-to-

market advantage and cost factor, users will continue to use Wi-Fi for high-speed data sessions, instead of

femtocells.

• Historically, users perceive any mobile service to be expensive, when compared to Wi-Fi or landline

services, and this perception alone can enable WLAN to have a competitive edge over femtocells.

• Mobile operators are looking at ways to avoid sensitive subscriber data information over the macro cell

being exposed when users are accessing femtocells which are connected to the operator’s core network

through a public IP network.

• If the technical and regulatory issues for femtocells are not resolved by the first half of 2010 in Europe, the

market opportunity for femtocells will be insignificant in comparison to various wireless alternatives.