Analyst: Femtocells Aren't Dead Yet!

Here at GigaOM we’ve pretty much decided that the femtocell market is dead. At the very least, it’s significantly smaller than what was forecast (GigaOM Pro, subscription required) when these tiny base stations for the home first started garnering attention last year. However, analysts at Deutsche Bank beg to differ, arguing in a new report that femtocells will be necessary to deliver fat data over mobile broadband networks. It comes just days after Atlas Ventures, Highland Capital Partners and Pond Venture Partners put $20 million into PicoChip, a maker of femtocell silicon.

The report says that femtocells, which use a consumer’s home connection to provide a stronger cellular signal inside a home or office, are merely at the trough of the S-shaped technology hype curve. It goes on to speculate that the carriers listed below aren’t the only ones conducting femtocell trials as all carriers will have to use them in order to keep up with the demand for mobile broadband. From the report:

One of the dark secrets of mobile technologies is that we are nearing the physical limitations for the speeds we can pump out of mobile networks. Cellular standards manipulate the timing, frequency and amplitude of radio waves. As we move into LTE and its enhancements, we are starting to maximize all those manipulations. Companies like Qualcomm have talked about this publicly, highlighting that the next major wave of improvement of cellular network performance will have to come from in advances in what they call ‘topography’ – the physical planning of network elements. Translated that means a larger number of and more sophisticated base stations. A big part of these topography improvements will come from femtos or some form of in-building coverage.

I’m willing to be surprised by the femtocell market opportunity, but without a compelling business model and consumer price point, the industry won’t make it very far trying to improve carrier networks by using femtocells to ride over consumer’s broadband connections. And even if systems makers can build a cheap femtocell and carriers offer them for free, carriers are already using Wi-Fi to ease the strain on mobile networks, and consumers have already bought into using Wi-Fi as an alternative to 3G in their homes and other settings. The number of Wi-Fi phones rose 177 percent between 2007 and 2008, according to a recent report by In-Stat, a number that’s expected to continue to rise.

So while the carriers and the several companies like PicoChip are probably right with their assertion that some type of network offload will be necessary, the carriers will have to play a huge role in making femotcells acceptable to users. After all, consumers with WiFi-enabled phones are already boosting their in-home data coverage and taking a load off of carrier networks with their in-home Wi-Fi networks. So in order to be viewed as a worthy competitor to Wi-Fi, the femto industry needs to do two things: make a really complicated piece of telecommunications gear cheaply and find some way to sell it to consumers.

Right now, carriers are pretty much charging consumers the price of the base station and a monthly fee to improve the carrier network. But consumers — understandably — aren’t terribly jazzed about paying too make life easier for carriers, especially given some of the limitations on what the femto actually offers. The dark secret here may be that carriers are going to have to improve their networks in a way that doesn’t pass on the femtocell cost to consumers. Are they ready to do that?