Femtocells Offer Improved Receptionand Revenues

Femtocells are the home-based answer to cell-phone towers, and customers pay most of the cost

How does this offer sound? Your wireless operator—say, AT&T (T) or Sprint Nextel (S)—asks you to install, without pay, a new cell-phone tower in your neighborhood. In exchange you'll get better cell-phone reception in your home. Oh, and you'll help foot the bill for the cost of the new tower.

That, in essence, is the pitch consumers will start seeing in the next few months. Wireless companies will begin marketing femtocells (pronounced FEM-toe-sell), which are essentially mini-cell-phone towers for your home. The carriers will ask consumers to pay about $100 for a device slightly smaller than a toaster. The tiny tower will connect with up to five cell phones in the home and carry calls through a broadband Net connection to the telephone network. Subscribers will likely pay ongoing monthly fees for the "enhanced service" as well. All this to improve the cell-phone service they're already paying for.

The surprising thing is that the pitch may actually work. About half of the country's cell-phone users are unhappy with the coverage in their homes, analysts say, and femtocells can provide improved service. Sprint, the only wireless operator offering the technology in the U.S. now, says the customer reaction has been enthusiastic. "Once we give customers a box, we can never pry it out of their hands again," says Kevin D. Packingham, the company's senior vice-president for product and technology development. Analysts expect sales to take off as giants AT&T and Verizon begin offering femtocells to their customers next year.

It's easy to understand why wireless operators like femtocells. The technology lets them shift some of the burden of adding wireless capacity to their customers. Carriers pay for traditional cell-phone towers themselves, of course, and the costs can hit $500,000 per tower. In addition, community opposition to new towers is common and can delay construction for years. Carriers do pay for the femtocell box, which runs about $200 now, but they recoup the cost by reselling the box to consumers for about $100 and collecting ongoing fees for femto service. "There's a dirty little secret," says Tammy Parker, principal analyst at Informa. "The femtocell benefits the carrier more than the end user."

Carriers are working on ways for the technology to make financial sense for consumers, too. Their most compelling offer may be to make the service cheap enough and reliable enough that it can replace traditional landlines. The cheap part is easy. While basic home phone service runs about $50 a month, the wireless carriers could offer their service for much less. Sprint's service costs $25 a month for unlimited calling; carriers can track when customers are calling from cell phones at home, so they won't have to use up minutes on their calling plans.

Reliability is more complex. Traditional phone lines are engineered to work even when the power goes out, while femtocells can't. That difference may make customers reluctant to use femtocells as home phone replacements. "It's not clear right now that this is a super-compelling proposition," says analyst Richard Valera of Needham & Co.

The wireless operators will be working hard to change that. Jeffrey S. Brown, chief executive of RadioFrame Networks, one of several femtocell equipment makers, says the goal is to get the cost per box down to $100 or less for the carriers. Then carriers could slash the price for consumers, reduce the monthly fees to modest amounts, and develop more advanced services. "You'll see the operators get very creative," Brown says.

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