Strategic Perspectives

Verizon recently introduced a femtocell product that is strikingly similar to Sprint's Airave, introduced many months ago.  Meanwhile, rumors are that AT&T is close to launching their femtocell product.

What's not to like about awesome wireless coverage at home?

Apparently, the pricing - that's what.  Many commentators are taking all three carriers to task for making customers pay to be able to use your cellphone with reasonable success indoors.  Some also make the point that, since femtocells are taking minutes off the network, carriers should be happy and that benefit should pay for the device.

So, what's the deal?

Before I get too far, let's do a quick review of how femtocells work.  A femtocell acts like a mini cell tower in your home.  You plug it into your broadband router, and then your cellphone connects to the femtocell instead of to the nearest "macro" tower.  Your calls get routed across the broadband connection back to the carrier's network for call completion. 

And the results can be life changing.  My dad's house is on a spit of land surrounded by water.  No matter what carrier you have, your best bet for having a wireless conversation is to sit on the washing machine in the laundry room.  Why is this the case?  Quite simply, for some reason (probably zoning challenges, especially given the challenging geography), no carriers have been able to build a cellsite close enough to provide reasonable in-building coverage (except in that one corner of the house).  So last fall I bought my dad an Airave.  When we were home at Christmas, we made some tweaks in location, and now the main part of the house has great coverage.  He hasn't yet, but he now could consider cutting the cord.  I've heard more dramatic stories of how people no longer need to run upstairs and out the front door to answer their phone.  These customers are thrilled with what the Airave has done for them.

But for others, especially in this economy, they look at what the carriers are asking them to fork over, and they cry foul.

Reportedly, Verizon is charging $249 for their femtocell, but with no additional monthly charges.  All usage, though, does count against the customer's wireless plan.  Sprint charges $100 for the Airave, and then charges $5 - 20 per month to use it.  $5 simply for better coverage.  $10 for better coverage and unlimited in-home calling for a single Sprint phone (minutes don't count against your plan).  $20 for unlimited for multiple phones.  Pricing hasn't yet been disclosed for AT&T's forthcoming device.

So, there are three fundamental issues here:

1. Why are the carriers making me pay for this thing?

2. Why is Sprint charging me a monthly fee to use it?

3. Don't the benefits to the carriers cover the cost already?

Starting with charging for the device...  If we assume for a second that the device actually costs the carriers pretty close to the price that Verizon is charging, then that's a pretty big cost the carriers need to cover.  For a carrier to be able to give the device away, it would need to believe it was gaining ~$250 in benefits some other way.  If you assume that a customer will use the femtocell for 2 years, the carrier needs to receive a little over $10 in benefit each month.  Before launching Airave nationwide, Sprint performed market trials for several months.  Suffice it to say that gaining that level of benefits wasn't found to be possible.  (A bit more about that in the third point...)

So, why does Sprint charge a monthly fee?  In our trials, we found that most folks weren't going to shell out ~$250 for a femtocell.  (Who knows, maybe Verizon will be successful and we'll be able to revisit that conclusion.)  We believed that we needed to get the upfront cost down to less than $100.  But, that meant having to recoup the remainder of the device cost over the life of the customer using it.  The only way to accomplish that was by charging a monthly fee.

But why can't the benefits of moving minutes off the macro wireless network pay for the device?  In short, because there simply aren't enough femtocell users in the near term to really make a difference.  In reality, the cost differential between a single call going over a femtocell versus our macro wireless network is virtually zero.  The cost from the handset to the tower isn't meaningful.  The real meaningful cost comes in the cost of building and operating the cellsite itself.  The more subscribers we have in an area, the higher these costs because we have to operate more channels, but these are big steps of cost driven by lots of subscribers using our network.  A single subscriber switching to femtocell makes zero impact on our current cost.

Only if lots of subscribers switched to femtocells would it have a meaningful impact on our costs.  If we could start shutting down some channels or even entire cellsites, or better yet, not even have to build the cellsites in the first place, then we'd be talking about measurable savings.  Unfortunately, we're a very long way from having femtocell adoption anywhere close to having that kind of impact.  And even if we did, we'd still need to provide coverage for when people leave their homes and start walking or driving around the community.

Bottom line, for now anyway, moving traffic off the macro network and onto femtocells doesn't help at all in covering the cost for the femto devices.

That doesn't mean that we don't see the positives of helping our customers achieve great coverage in their homes.  And apparently our competitors see those positives too.  We think our approach to pricing is the best compromise that makes it affordable for both Sprint and our customers to enjoy these positive benefits.

What do you think?