femto forum business case whitepaper

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On behalf of the Femto Forum, Signals Research Group, LLC developed a detailed business modeling tool that will allow Femto Forum Full members to analyze the role that femtocells will have as part of their overall business strategy. The authors include Michael Thelander (CEO and Founder), J. Randolph Leuning (Vice President, Wireless Economics), and Mark Schulz (Vice President, Wire-less Technologies). As the sole authors of this paper, we believe that while scenarios and assumptions that we have used in this white-paper are for illustrative purposes, they are also representative of real-world customer segments. In addition to providing technology assessment and operator business modeling services, Signals Research Group is the author of the Signals Ahead research newsletter and The Dollars and Sense of Broadband Wireless, the first independent in-depth study of next-generation broadband wireless network economics.

FEMTO FORUM FEMTOCELL BUSINESS CASE WHITEPAPERA WHITEPAPER PAPER THAT HIGHLIGHTS THE ECONOMICS OF FEMTOCELLS UNDER A WI DE R AN G E OF SC E NAR IOS AN D ASSUMPTIONS ON A GLOBAL BASIS

April 2009

Prepared by Signals Research Group, LLC

Whitepaper developed for the Femto Forum

April 2009


Femto Forum Femtocell Business Case Whitepaper A Whitepaper paper That Highlights the Economics of Femtocells Under a Wide range of Scenarios and Assumptions on a Global Basis

Table of Contents

1.0 Executive Summary ………………………………………………………………………………………… 7

2.0 Methodology …………………………………………………………………………………………………10

2.1 Inputs and Assumptions …………………………………………………………………………………10

2.2 Customer Lifetime Value …………………………………………………………………………………10

2.2.1 CLV – an illustrative example ………………………………………………………………………12

2.3 Customer Lifetime Value – From another Perspective ……………………………………………16

2.4 The Customer and Operator Benefits ………………………………………………………………… 17

2.5 Macro Network Economics Model ………………………………………………………………18

2.5.1 RAN Modeling Coverage Methodology – Summary …………………………………………19

2.5.2 Network Cost Modeling Methodology …………………………………………………………21

2.6 Femtocell Core Network ……………………………………………………………………………… 24

2.7 Network Cost Savings ………………………………………………………………………………… 25

2.8 Burdened Femtocell Costs …………………………………………………………………………… 26

3.1 A Family with Teenagers that Love to Talk ……………………………………………………… 30

3.1.1 Results, Analysis and Additional Assumptions ………………………………………………… 31

3.2 A Well-Heeled Coverage-Hungry Suburbanite …………………………………………………… 34

3.2.1 Results, Analysis and Additional Assumptions …………………………………………………35

3.3 A Voice-Oriented Small Business …………………………………………………………………… 36


3.4 An Urbanite with Excellent Coverage ……………………………………………………………… 38

3.4.1 Results, Analysis and Additional Assumptions ……………………………………………… 39

3.5 A Coverage Challenged Family ……………………………………………………………………… 39


3.6 A High ARPU Family ………………………………………………………………………………………41


4.0 United States ……………………………………………………………………………………………… 44



4.2 A Well-Heeled Coverage-Hungry Suburbanite …………………………………………………… 49


4.3 A Voice-Oriented Small Business ……………………………………………………………………… 51


4.4 An Urbanite with Excellent Coverage ……………………………………………………………53


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4.5 A Coverage Challenged Family …………………………………………………………………………55


4.6 A High ARPU Family …………………………………………………………………………………… 56


5.0 Developed Asia …………………………………………………………………………………………… 58



5.2 A Voice-Oriented Small Business ………………………………………………………………………61


6.0 Sidebar Analyses …………………………………………………………………………………………… 63

6.1 Femtocells for Providing Deep In-Building Broadband Wireless Services ………………… 63

6.1.1 A Very Quick Overview of Macro Network Modeling Assumptions ………………… 63

6.1.2 Quality of Coverage Requirements and Associated Network Costs…………………… 64

6.1.3 Adjustments to the Analysis …………………………………………………………………… 65

6.1.4 The Caveats ………………………………………………………………………………………… 68

6.2 Femtocells for Providing Macro Network Offload ……………………………………………… 69

6.3 Femtocells for Increasing Rural Wireless Adoption …………………………………………… 72

7.0 Sensitivity Studies ……………………………………………………………………………………………74

7.1 The Number of Subscribers Assigned to a Femtocell ………………………………………… 75

7.2 The Wholesale Cost of the Femtocell ……………………………………………………………… 76

7.3 The Average Revenue per User (ARPU) …………………………………………………………… 77

7.4 The Monthly Subscription Fee ……………………………………………………………………… 78

7.5 The Reduction in Churn ……………………………………………………………………………… 79

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Index of TablesTable 1. Operator and Customer Benefits ………………………………………………………………… 17

Table 2. Primary RAN Coverage Assumptions ………………………………………………………… 20

Table 3. Link Budget Propagation Characteristics …………………………………………………… 20

Table 4. Uplink Link Budget Margins …………………………………………………………………… 20

Table 5. Capacity-Constrained Suburban Cell Site Capital and Expense ……………………… 22

Table 6. Western Europe CLV Scenarios ………………………………………………………………… 28

Table 7. Western Europe Summary of Results ………………………………………………………… 29

Table 8. Service Concept Highlights – A Family with Teenagers that Love to Talk (Western Europe) ………………………………………………………………………………… 30

Table 9. Service Concept Highlights – A Well-Heeled Coverage-Hungry Suburbanite (Western Europe) ………………………………………………………………………………… 34

Table 10. Service Concept Highlights – A Voice-Oriented Small Business (Western Europe) 36

Table 11. Service Concept Highlights – An Urbanite with Excellent Coverage (Western Europe) ………………………………………………………………………………… 38

Table 12. Service Concept Highlights – A Coverage-Challenged Family (Western Europe) … 40

Table 13. Service Concept Highlights – A High ARPU Family (Western Europe) …………………41

Table 14. United States CLV Scenarios …………………………………………………………………… 45

Table 15. United States Summary of Results …………………………………………………………… 45

Table 16. Service Concept Highlights – A Family with Teenagers that Love to Talk (United States) ……………………………………………………………………………………… 46

Table 17. Service Concept Highlights – a Well-Heeled Coverage-Hungry Suburbanite (United States) ……………………………………………………………………………………… 50

Table 18. Service Concept Highlights – a Voice-Oriented Small Business (United States) …… 51

Table 19. Service Concept Highlights – an Urbanite with Excellent Coverage (United States) 53

Table 20. Service Concept Highlights – a Coverage-Challenged Family (United States) ………55

Table 21. Service Concept Highlights – a High ARPU Family (United States) ………………… 56

Table 22. Developed Asia CLV Scenarios ………………………………………………………………… 59

Table 23. Developed Asia Summary of Results ………………………………………………………… 59

Table 24. Service Concept Highlights – A Family with Teenagers that Love to Talk (Developed Asia) …………………………………………………………………………………… 59

Table 25. Service Concept Highlights – a Voice-Oriented Small Business (Developed Asia) …61

Table 26. Quality of Coverage Requirements …………………………………………………………… 64

Table 27. Refining the Analysis ……………………………………………………………………………… 66

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Index of FiguresFigure 1. CLV Waterfall Chart …………………………………………………………………………………12

Figure 2. CLV Monthly Results …………………………………………………………………………………16

Figure 3. Marginal Cost per GB – By Technology ……………………………………………………… 25

Figure 4. Burdened Femtocell Costs ……………………………………………………………………… 26

Figure 5. Western Europe – Population Distribution ………………………………………………… 27

Figure 6. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (Western Europe) 31

Figure 7. Customer Lifetime Value – A Family with Teenagers that Love to Talk ………………33

Figure 8. CLV Waterfall Chart – A Well-Heeled Coverage-Hungry Suburbanite (Western Europe) ……………………………………………………………………………………35

Figure 9. CLV Waterfall Chart – A Voice-Oriented Small Business (Western Europe) …………37

Figure 10. CLV Waterfall Chart – An Urbanite with Excellent Coverage (Western Europe) … 39

Figure 11. CLV Waterfall Chart – A Coverage-Challenged Family (Western Europe) ………… 40

Figure 12. CLV Waterfall Chart – A High ARPU Family (Western Europe) ………………………… 42

Figure 13. United States – Population Distribution …………………………………………………… 44

Figure 14. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (United States) 47

Figure 15. Customer Lifetime Value – A Family with Teenagers that Love to Talk (United States) ……………………………………………………………………………………… 49

Figure 16. CLV Waterfall Chart – A Well-Heeled Coverage-Hungry Suburbanite (United States) ……………………………………………………………………………………… 50

Figure 17. CLV Waterfall Chart – A Voice-Oriented Small Business (United States) ……………52

Figure 18. CLV Waterfall Chart – An Urbanite with Excellent Coverage (United States) …… 54

Figure 19. CLV Waterfall Chart – a Coverage-Challenged Family (United States) …………………55

Figure 20. CLV Waterfall Chart – a High ARPU Family (United States) ………………………………57

Figure 21. Developed Asia – Population Distribution ………………………………………………… 58

Figure 22. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (Developed Asia) 60

Figure 23. CLV Waterfall Chart – A Voice-Oriented Small Business (Developed Asia) …………61

Figure 24. Hypothetical Network Costs on a per Household Basis – Western Europe (2100MHz) …………………………………………………………………… 65

Figure 25. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy………… 67

Figure 26. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy – 900MHz ……………………………………………………………………………………………… 69

Figure 27. 3GB Data User with a Free Femtocell ………………………………………………………… 70

Figure 28. Amount of Voice and Data Traffic Required to Pay for a Femtocell – by Technology ………………………………………………………………………………………… 71

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Figure 29. Wireless Penetration versus Population Density – by EA ……………………………… 72

Figure 30. The Impact of Varying the Number of Subscribers – US Coverage-Challenged Family ……………………………………………………………… 75

Figure 31. The Impact of Varying the Wholesale Cost of the Femtocell ………………………… 76

Figure 32. The Impact of Varying the Average Revenue per User…………………………………… 77

Figure 33. The Impact of Varying the Monthly Subscription Fee …………………………………… 78

Figure 34. The Impact of Varying the Reduction In Churn …………………………………………… 79

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1.0 Executive SummaryIn 2008, the Femto Forum commissioned Signals Research Group, LLC (SRG) to develop a femtocell business case modeling tool that its full members could use as they developed their own strategies for deploying femtocells. At this year’s Mobile World Congress in Barcelona we provided preliminary results based on our analysis, and, through the Femto Forum website, we distributed a background paper which described the capabilities of the business modeling tool by providing some illustrative results.

This whitepaper provides far greater insight into the business case for femtocells. In addition to familiarizing the reader with our modeling methodology for analyzing the impact of the femtocell on the macro network economics as well as the business case for the femtocell itself, the whitepaper includes results for fourteen (14) difference scenarios across three (3) regions of the world – Western Europe, the United States, and Developed Asia. The scenarios, in turn, take into consideration regional specific attributes, such as the radio access technology (UMTS/HSPA or 1X/EV-DO), typical key performance indicators (KPIs), including voice + data usage and average revenue per user (ARPU), and realistic femtocell strategies that would be appropri-ate for the region being analyzed.

Additionally, this whitepaper includes several sensitivity studies to determine the impact of varying some of the key underlying assumptions. These assumptions include the wholesale cost of the femtocell, the amount of churn reduction, the number of subscribers assigned to the fem-tocell, the ARPU, and the monthly fee. Finally, the whitepaper includes a number of sidebar analyses, including the use of femtocells to provide deep in-building coverage and the use of femtocells to offload voice + data traffic from the macro cellular network.

The highlights of this whitepaper include the following:

➤ The model uses a customer lifetime value (CLV) modeling methodology to analyze the suitability of a femtocell strategy to an operator offering a specific proposition to a specific customer segment. The model calculates the expected increase in the sum of the discounted cash f lows associated with an average customer in that segment who adopts that specific femtocell proposition. It is up to the operator to analyze its own customer base to determine the size of the addressable market and the likely rate of adoption for each segment/proposi-tion combination.

➤ There is no single strategy for making a successful femtocell business case. Instead, the busi-ness case is highly dependent on the attributes of the targeted customer segment, which can vary considerably, and the femtocell features that the operator wishes to make available. In some instances the payback on the incremental investment can require as many as forty (40) months while in other instances the breakeven point is only 1 or 2 months. Likewise, the operator has a high degree of f lexibility in how much it charges for the femtocell and for the services that it offers.

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➤ Consistent with the previous finding, the regional- and country-specific influences on the femtocell business case are outweighed by other assumptions (e.g., ARPU, usage, etc), which transcend all regions of the world. Operators in different regions of the world will, how-ever, likely vary their go-to-market strategies. Operators in large geographic regions, such as North America, may leverage femtocells to provide improved indoor coverage. Conversely, operators in regions such as Western Europe where calling plans are more expensive may place a greater emphasis on free calling plans. From a purely economics perspective there is nothing that precludes any of the strategies from being successful in any of the regions although some will prove to be more popular than others.

➤ As an example of the f lexibility associated with a well-thought-out femtocell strategy and the slight regional differences that exist, we demonstrate that a North American family of two can purchase a subsidized femtocell for $50 and take advantage of an unlimited calling plan for $15 per month, plus a $5 monthly fee to provide improved coverage while the opera-tor can break even for that customer in 15 months and achieve a return on investment (ROI) on its femtocell investment of 443%. In Europe, consumers are less likely to pay for improved coverage, but they will pay for an unlimited calling plan that uses the femtocell. After taking into consideration other assumed differences between the two regions (e.g., ARPU, voice + data usage, UMTS/HSPA versus 1X/EV-DO, CPP versus MPP), the European operator requires 22 months to breakeven but realizes a 538% ROI.

➤ Femtocells can be used to provide deep in-building broadband wireless services far more economically than a macro cellular network. In one representative sidebar analyses, we dem-onstrate that a targeted femtocell strategy can be used to complement a “lightly deployed” 3G network and deliver a true in-home broadband wireless experience with 2.5Mbps data rates for less than half the incremental coverage-related expenditure that would be required at 2100 MHz if the same experience were delivered by the macro network. There can also be considerable savings associated with off loading traffic onto the femtocell, in particular for heavy data users. Based on our analysis, the cost savings associated with off loading at least 1.4 GB of HSPA data per month onto the femtocell from a coverage-constrained macro cel-lular network would justify a free femtocell being dropped into the home.

➤ The business case for femtocells does not depend on any one critical factor or assumption in order to generate a favorable outcome. For example, increasing the wholesale cost of the femtocell by 50% (from $200 to $300) reduces the difference between the starting family lifetime value and the basic value proposition family lifetime value by a mere 16.3%. Also, the business case is not contingent upon a reduction in churn even though it is a likely out-come of a femtocell deployment and has already been proven in other similar FMC product deployments.

➤ A well-thought-out femtocell strategy can be a win-win scenario for operators and their customers. The benefits to consumers depend on their particular needs and how they use the femtocell. These benefits, which depend on the types of packages and applications that the operator promotes with its femtocell service offering, include:

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❚ Improved voice coverage and meaningful broadband connectivity versus what would be possible from the mobile network;

❚ By extending the broadband connectivity indoors, the consumer will have a more consis-tent user experience than what is typically available with the macro network, in fact, with the femtocell the experience with using the operator’s services and features may actually be enhanced;

❚ Some operators may offer unlimited data usage that is free to the consumer while at home; and

❚ Some operators may offer unlimited voice calling plans for the entire household. These plans result in a substantial increase in usage, thus resulting in greater utility for the mobile voice plan(s), the ability to “save” minutes for calls outside of the home, lower wireline voice minutes, or, in the extreme, replacement of the wireline voice service.

Chapter 2 provides some background into our modeling methodology. Chapter 3 provides results for Western Europe. Chapter 4 provides for the United States. Chapter 5 provides results for Developed Asia. Finally, Chapter 6 provides results for our sidebar analyses and Chapter 7 provides results of the sensitivity studies.

The Femto Forum is a not-for-profit membership organization founded in 2007 to promote femtocell deployment worldwide. The Forum is chartered to encourage the growth of a partner ecosystem committed to innovation in standards-based network infrastructure and to achieve high levels of collaboration and product interoperability.

The business case model and analysis described in this whitepaper were commissioned by the Femto Forum on behalf of its members. All members gain access to the full results of the analysis performed and Full members gain access to the underlying model, enabling them to independently investigate scenarios and parameter ranges. See www.femtoforum.org or contact [email protected] for further details.

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2.0 MethodologyThe femtocell modeling tool allows a wide range of user inputs in order to provide as much flex-ibility for each operator’s femtocell planning exercise. For purposes of this whitepaper we have chosen the inputs/assumptions to feature a number of representative customer segments that likely exist within an operator’s base of subscribers. These examples, which have a unique set of assumptions for the given region being analyzed (Western Europe, United States, and Devel-oped Asia), also illustrate the potential value proposition that femtocells can generate.

2.1 Inputs and AssumptionsWe determined the inputs/assumptions used in this whitepaper, not to mention the most likely femtocell service concepts, based on a number of activities or sources. We obtained operator-reported key performance indicators (KPIs), such as churn, voice usage, and average revenue per user (ARPU). We also interviewed numerous operators and femtocell/infrastructure suppliers from around the world on femtocell costs, benefits, and applications. Finally, we have direct knowledge gleamed from a collective 40+ years of work in the wireless industry.

We believe that all of our assumptions are reasonable, and in many cases conservative relative to at least some operator benchmarks that exist. However, we also recognize that some of the assumptions, such as those pertaining to expected user behavior with the addition of a femtocell, are difficult to predict with a high degree of accuracy. Therefore, we are also including a number of sensitivity studies in Chapter 7 to determine the likely impact of changes to some of the key drivers of femtocell economics.

2.2 Customer Lifetime ValueThe business modeling tool uses a customer lifetime value (CLV) methodology to estimate the financial impact to a wireless operator’s business of introducing femtocells. A customer lifetime value methodology looks at the future cash flows associated with a customer relationship and calculates their present value. It incorporates most of the conceptual elements of a traditional multi-year discounted cash flow analysis but, in the case of complex customer propositions, such as femtocells, is arguably more powerful, especially as a communications tool. The results of a CLV analysis, with a few additional inputs – largely relating to adoption – can easily be con-verted into a traditional multi-year business plan, if desired.

Since the CLV methodology focuses on the life of an individual customer rather than on a busi-ness as a whole it enables a detailed discussion of the financial impact of specific propositions for specific customer segments. It also showcases – very powerfully – how value is created. A CLV approach therefore enables us to discuss a number of propositions in detail, each target-ing specific market segments and addressing specific needs. An operator can view the results then make a determination for his own geographic market which service concepts are most appropriate.

Finally, it is important to note that in a CLV approach it is not necessary to know the exact size of the addressable market or the anticipated adoption for each proposition. This abstraction

The ClV methodology enables a detailed discussion of the financial

impact of specific propositions for specific customer segments

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allows us to thoughtfully discuss a number of propositions and see financial results, without considering exactly where they might be deployed or how large the target market might be.

Of course, there are some limitations. To the extent to which scale influences cost it is necessary to make some belief set about the scale of the deployment. Product initiatives which are heavily dependent upon scale (e.g., a 2G to 3G transition) are more difficult to analyze using a CLV approach. Fortunately, a femtocell deployment requires relatively little up-front network invest-ment, relative to other operator initiatives, and relative to customer-specific costs. Femtocells are therefore well-suited to a CLV approach.

In this exercise we have used very conservative assumptions relative to up-front costs. Most real-world deployments are likely to have much greater scale and therefore realize much lower fixed costs on a unit basis. To calculate up-front costs we assume a deployment of 100,000 femtocells in a national market, across one or more segment-specific femtocell propositions. In a typical European market of 25 million households this represents 0.4% household penetration for a single operator. In a larger market like the United States it represents 0.1% household penetra-tion. If an operator believes consumers will adopt femtocells, these are very bearish numbers. At higher levels of penetration, which are likely, the allocated up-front costs we have included will shrink (perhaps dramatically), resulting in a more favorable business case.

In the scenarios we will discuss in the next three chapters we will look at the customer lifetime value of a family or a small business (a.k.a. “family lifetime value”). The family lifetime value is the sum of all of the future cash flows associated with a family/small business adopting a spe-cific proposition on a present value basis. The way we calculate the value creation associated the introduction of a femtocell is we look at the family/small business lifetime value before a fem-tocell is introduced then we look at it afterwards. The increase in family/small business lifetime value (in euros, dollars, or percent) presents the value creation per adopting entity associated with a particular femtocell proposition.

An operator, after identifying the most compelling propositions and adjusting the inputs to reflect their intended offering can take the result of the model on a per household/small business basis and multiply the increase in value per household/small business by the expected adoption per household/small business in each period to arrive at an estimate of total value creation. Alternatively, the operator can take the assumptions showcased in the model and, adding some additional assumptions, primarily around market size and adoption, create a traditional multi-year financial plan.

We believe the CLV approach is particularly powerful because it shifts the operator mindset from a broad-brush “yes/no” decision, which may be common in many product decisions (and appropriate for those involved large scale-dependent up-front investments) to a much more nuanced market segment and proposition-specific set of decisions. For many operators the ques-tion becomes less “Should we introduce femtocells widely (a high risk yes/no decision)?” and more “Into which segments, with which specific propositions, and at what speed should we introduce femtocells?”

The customer lifetime value is the sum of all of the future cash flows associated with a family/

small business adopting a specific proposition on a present value basis.

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Femto Forum Femtocell Business Case WhitepaperA Whitepaper paper That Highlights the Economics of Femtocells Under a Wide range of Scenarios and Assumptions on a Global Basis

2.2.1 CLV – an illustrative example

Th e best way to appreciate the CLV approach and the business case for femtocells is to dive right in and start looking at some sample results (reference Figure 1). We will discuss each bar in the following sections. At a high level, each green or red bar represents the present value of the expected future cash fl ow to an operator for that particular femtocell service. Some bars are red, such as the femtocell cost bar (value destruction) and many bars are green (value creation). To a large extent the value creation/destruction associated with each bar is independent of the other bars. However, as illustrated in the waterfall chart, there is a cumulative eff ect with the starting point of each bar dependent on the end point of the preceding bar (the bar to its left).

Since we are merely introducing the concept of CLV and how we present the results in this sec-tion we will not provide the underlying assumptions used in the analysis nor will we quantify the results for each bar. In the next three chapters we will provide this level of detail. And as a side note, the illustrative example in this section is identical to the fi rst scenario that we present in Chapter 3.

Th e results are also not specifi c to any one particular customer within the customer segment. Instead, the results represent an average customer within the predefi ned customer segment.

Household Lifetime Value ($)

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Other Busin

ess Churn

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ices (T

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on in CHURN

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ost

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Source: Signals Research Group, LLC

Figure 1. CLV Waterfall Chart

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2.2.1.1 Start Value

The Start Value bar represents the present value of expected future cash flows to the operator of the family before they receive a femtocell. This amount includes revenue minus all expenses: acquisition, retention, customer care, marketing and advertising, and other. Network “expense,” in this context, includes not only network operating expenses but also depreciation and an allo-cation representing the cost of capital.

2.2.1.2 Add Femtocell Costs

The Add Femtocell Costs bar reflects the operator-based costs for putting a femtocell into the hands of the customer (reference Figure 4 in an upcoming section), net any amount that the customer pays.

2.2.1.3 Network Cost Savings

The network cost savings reflect the cost savings associated with offloading the voice and mobile data traffic generated at home from the macro network (reference Figure 3 in an upcoming sec-tion). In this whitepaper we assume that the macro network is capacity constrained. The antici-pated cost savings are partially reduced by the cost associated with the femtocell-generated traffic going through the operator’s core network. Core network costs due to increased voice and usage brought on by the presence of the femtocell are captured in subsequent charts. In the future, data costs will be further reduced once the local bypass feature is enabled.

To some readers the net cost savings in this illustrative example (and in many of the scenarios that we present in this whitepaper) may not appear to be that significant. However, the real issue is that in most cases we are only assuming a very modest amount of voice and data traffic and we are assuming a very efficient 3G network. Had we assumed higher voice and, in particular, data usage, the cost savings associated with offloading the traffic from the macro network would be more obvious. Likewise, had we assumed that the macro network was less efficient in carrying voice and data traffic (e.g., GSM/EGPRS) the cost savings for even a modest amount of voice and data traffic would have been more meaningful. In fact, it can be demonstrated that for heavy data users the business case for femtocells can be justified, based solely on the savings associated with offloading the traffic from the macro network. We undertake such a study in Chapter 6 of this whitepaper.

2.2.1.4 Additional Network Costs Due to increased Data Usage

For all results that we present in this whitepaper we assume that the customer is given free mobile data usage over the femtocell. This bar depicts the cost associated with this increased data usage, which would not have existed without the femtocell, through the core network. The increased usage varies by scenario, but in all scenarios this bar is an example of value destruc-tion, albeit a benefit to the customer and one of the reasons why the customer may wish to have a femtocell service.

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2.2.1.5 Add Coverage-related increase in Voice Usage

This bar [if present] captures the revenues and associated costs that result from improved net-work coverage within the home. If a household or small business has poor coverage in all or parts of the home or small office, they will miss calls that go to voice mail, calls will get dropped and the customer will feel less inclined to talk for a long period of time on the phone for fear of the call dropping or because the quality of the call is less than satisfactory. With the femtocell providing in-building coverage these minutes are restored.

2.2.1.6 Add Free Calling plan

In many of the scenarios that we describe in this whitepaper, the free calling plan, which has a monthly subscription fee, is probably the single biggest value proposition for getting the cus-tomer to purchase the femtocell and sign up for the service. A free calling plan can result in a high degree of cannibalization – something most operators will want to avoid. It is up to the operator to determine the most appropriate pricing scheme, ideally one which is attractive to the customer yet represents a positive business case for the operator.

In the U.S. (or any mobile party pays country) we assume that all calls made from the home, incremental to those in existing bundles, are free. Since incremental usage is free the incremen-tal usage associated with improved coverage is also free.

In calling party pays countries all mobile-to-fixed and mobile-to-on-net mobile calls are free for the entire household. In calling party pays countries we assume that call termination revenue is collected, as usual, on inbound calls. The “free calling plan” therefore eliminates the revenue previously associated with most outbound calling within the home. The single exception is mobile-to-off-net-mobile calls, which are commonly excluded from other calling party pays

“unlimited” bundles. The amount of increased usage varies by scenario. The increase in usage results in an increase in network costs for all inbound and outbound calls and in additional rev-enue (termination fees) in CPP countries for inbound calls, since we assume that inbound and outbound call volumes both increase.

We also assume that a certain number of voice minutes at home or in the office translates into an additional voice minute that is used over the macro network and which is billed to the customer. Although it is difficult to predict how much additional usage actually occurs outside of the home or small office – this is an adjustable parameter in the model – we believe that a customer will place a growing dependence on the mobile phone and placing or taking a voice call will become a force of habit that will be difficult to break, even if it isn’t free. We have seen similar behavior with free nights and weekends. Consumers enjoying the service inevitably forget that minutes are not always free. These “free” services, therefore, inevitably result in some additional billable airtime.

The free calling plan, so as to avoid unacceptably high levels of cannibalization and other arbi-trage-like behaviors, is accompanied with some restrictions, which differ by regulatory regime. These restrictions can be turned on or off or modified within the femtocell model.

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2.2.1.7 Add Basic Monthly Value Fee

Several operators who have launched a femtocell or UMA service offering are charging a nomi-nal monthly fee. This fee helps offset the femtocell subsidy and operators may decide to justify the fee because they are providing the consumer with an important service – improved coverage. Operators in some regions may not be able to convince their subscribers to pay for coverage while other operators may tie the fee to the overall femtocell service package. In any event, in at least this illustrative example the monthly fee is not required to obtain a positive business case for femtocells.

2.2.1.8 Add reduction in Churn

A femtocell creates a high degree of operator stickiness and it can be used to address specific customer complaints, such as poor coverage, that generally result in the customer leaving the operator and moving to a new service provider. In these scenarios the model calculates the change in average customer lifetime across the entire customer segment. Increased longevity translates into increased customer lifetime value.

2.2.1.9 Basic Value proposition

The Basic Value Proposition captures the revenues, cost savings, and newly generated costs associated with the femtocell services that we have just discussed, and which appear to the left of the middle grey bar in the figure.

2.2.1.10 Add Value of Additional Family Member

In many instances there are family members or employees which belong to another operator. This bar captures the value of a family member or employee joining the operator who is provid-ing the femtocell service. In the scenarios that we present in this whitepaper we assume a certain probability that there is an additional individual in the family/small office who could join the operator and an additional probability that the individual actually signs up with the operator.

2.2.1.11 Add Enhanced Service revenues

Examples of Enhanced Services include a virtual home number and SMS message alerts when family members come home or leave home. Generally speaking, these services will not be avail-able when the first-mover operators introduce femtocells into their markets. Most of the services envisioned (like the ones described) have close to 100% gross margin. The modeling tool sup-ports any input value for enhanced services profit contribution.

2.2.1.12 incremental revenue from Existing Services

In many cases an operator may have existing services that are not widely used due to poor cover-age at home or in the office. A mobile TV service is one example of a service that may not per-form well for subscribers that are located inside a building. We note that the coverage for a good in-home mobile TV service is far rarer than the coverage for a good in-home voice experience. With a femtocell in the home, the user experience is greatly enhanced and the consumer may be more likely to try the service at home and then continue using it while away from home.

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2.2.1.13 reduce other Business Churn

Some operators have both wireless and broadband assets. Th is bar refl ects the value creation associated with reducing the churn for the wireline service. Although we have not done so in this example, this bar could also be used to capture new subscribers to the broadband service who are attracted to the bundled plan that the wireline/wireless operator is able to off er.

2.2.1.14 Enhanced Value proposition

Th e furthest grey bar in Figure 1 captures all of the projected cash infl ows and outfl ows gener-ated by this particular femtocell service concept over the lifetime of the customer.

2.3 Customer Lifetime Value – From another PerspectiveTh e customer lifetime value can also be depicted as a series of cash fl ow calculations over the expected lifetime of the customer. In Figure 2, which shows results which are identical to those shown in Figure 1, we have plotted the expected lifetime value of the customer in three scenarios: no femtocell, femtocells with the basic value proposition, and femtocells with the enhanced value proposition.



-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Enhanced Value

Basic Value

NO Femtocell

9080706050403020100

Months

Figure 2. CLV Monthly Results

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All three plots start off negative due to the acquisition cost associated with adding the subscrib-ers to the network, as well as the cost of the femtocell for the two value propositions involving femtocells. The two lines associated with one of the femtocell value propositions extend further than the other line due to our assumptions regarding the reduction in churn (e.g., the probabil-ity of a longer customer lifetime). The modest asymptotic decline in all three lines reflects the time value of money calculations.

2.4 The Customer and Operator BenefitsTable 1 highlights some of the key benefits to consumers and operators of femtocells.

Benefit Description Consumer Benefit

Operator Benefit

Improved Coverage Femtocells provide high quality coverage in homes or offices that might have poor macro network coverage.

•Improved Wireless Data Rates

Femtocells provide exceptionally high data rates (limited largely by the speed of the existing fixed broadband infrastructure).

•Reduced Network Transport Costs

The cost per minute or the cost per MB of sending traffic over a femtocell is less – often much less – than sending it over a normal macro cellular network.

•

Reduced Congestion in Locations with Exceptionally High Network Capacity Requirements

In some instances an operator is more concerned about providing service than reducing cost.

This is often the case in areas with a large number of users where traditional options for locating cell sites might be limited.

Examples include the top of skyscrapers, convention centers, and airports.

In these locations femtocells or picocells might make service possible or might improve the quality of service from “unacceptable” or “marginal” to “acceptable” or “excellent” levels.

•

Ability to Isolate Usage in Specific Geographic Locations

If an operator can identify with confidence which traffic is originating or terminating in the home he can offer a wide variety of “converged” offerings, with different bundles for home and wide area usage.

• •

Ability to Deliver Advanced Services

If the operator can place a “box” within the home and if that box can identify traffic within the home a wide range of new service offerings become possible.

•

Table 1. Operator and Customer Benefits


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The benefits to the customer and the operator vary, based on the scenario that is being examined. In general, we can summarize the benefits as follows.

➤ In all of the scenarios that we present we assume that the customer gets unlimited mobile data usage while using the femtocell. This free service allows those individuals to “save” their MBs for those times when they are not free (e.g., outside of the home or small office). Although many operators are offering unlimited data plans, many consumers still sign up for less expensive plans where their usage is limited. Further, most “unlimited plans” still have usage restrictions or they throttle the data rate above a certain monthly usage level, meaning that they are not truly unlimited plans.

➤ With the free calling plan, the entire household gets unlimited voice calls, with restrictions which vary slightly by geography, ref lecting different regulatory regimes. In those scenarios that include a free calling plan we assume that usage from home increases by 50%. The unlimited calling plan comes with a fee to the consumer, which is up to the operator to determine, but this fee can be far more economical than having each individual in the house-hold pay for its increased usage. In the extreme, this plan could reduce, or even eliminate, their need for a wireline phone, thus reducing the household’s overall telecommunication expenditures.

➤ Customers with coverage problems for basic voice services will benefit from the presence of the femtocell. All customers that use mobile data will benefit from the higher data rates that the femtocell can deliver. Higher data rates will improve the user experience with data cards or multimedia/smartphone handsets, including applications such as mobile TV, watching video clips (e.g., YouTube), and Internet surfing.

➤ Some customers will be attracted to the enhanced features that the femtocell can support. These features include a virtual home number, SMS alerts when someone leaves or comes home, and smorgasbord of converged service offerings that an operator’s marketing group identifies.

2.5 Macro Network Economics Model

We are leveraging our proprietary next-generation networks economics model to accurately capture the relationship between offloading femtocell traffic and its effect on macro network economics, not to mention the impact of strategically deploying femtocells in order to provide deep in-building broadband wireless coverage instead of providing this degree of coverage using the macro network.

This model, which took more than fifteen months to develop, supports very precise modeling using GIS coded information for macro network deployments across sixty-five (65) countries throughout the world. The macro network economics model supports all current and future gen-eration OFDMA-based wireless technologies, with the exception of PDC and TD-SCDMA, it supports frequency bands from 450MHz to 3500MHz, it includes traditional and flat IP core

April 2009



networks, as well as several different backhaul technologies, and it supports a virtually limitless number of spectrum allocations, including TDD and FDD band plans.

For purposes of the femtocell business modeling tool we have limited the selection of technolo-gies to GSM/EGPRS, 1X/EV-DO Rev A, and HSPA Release 6. We have also limited the fre-quency bands/spectrum allocations to the most common ones used for these technologies. Our hope is to expand the femtocell business modeling tool capabilities to include Mobile WiMAX and LTE, as well as additional frequency bands, in the future.

In the Western Europe and Developed Asia scenarios that we present in this whitepaper we assume an HSPA network is deployed with 2x15MHz of spectrum. For the US scenarios that we analyze in this whitepaper, we assume a 1X/EV-DO network is deployed with 2x15MHz of spectrum. We also assume a traditional core network architecture with microwave and metro Ethernet in dense urban, urban, and suburban regions and microwave in rural cluttered and rural open. The model supports any RAN technology choice in any region and a wide selection of frequency/spectrum allocation pairings. For purposes of the whitepaper we assume that the macro network is capacity constrained. With the femtocell business modeling tool the user is able to explicitly input the amount of voice and data traffic, not to mention the coverage require-ments and the country being studied, and the model will determine whether or not the macro network is capacity constrained.

Beyond describing the basic framework for how we modeled the macro network we are not going to attempt to cover all of the salient details in this whitepaper as this topic alone would require its own detailed paper. Instead we refer interested readers to our next-generation wire-less economics study which we published last year for more information.

2.5.1 RAN Modeling Coverage Methodology – Summary

Our coverage modeling methodology, whose impact becomes visible when the model is run in its most customized mode, includes link budget calculations, assumptions about in-building penetration loss and fading margins, as well as our approach to taking GIS-coded information so that we can determine the size of each morphology within the region being modeled.

We used the COST231-Hata and standard Hata propagation models to determine the effective cell radius for a given link budget. The resulting cell count may not be accurate for a specific location but the total cell count over the entire country should be quite close. Table 2 on the fol-lowing page contains the set of link budget assumptions that we used in doing our analysis.

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In addition to the parameters showed in Table 2, a probability of coverage methodology is used to calculate the necessary link budget margins required to achieve the target data rates. This calculation includes Log-Normal fading and indoor path loss statistics which are a function of the morphology (Dense Urban, Urban, Suburban, Rural Clutter, and Rural Open). Table 3 contains this information.

The information in the first two tables results in our indoor probability of area coverage (POAC) for each morphology. This information is captured in Table 4.

Table 3. Link Budget Propagation Characteristics


Propagation Characteristics Dense Urban (dB)

Urban (dB)

Suburban (dB)

Rural Clutter (dB)

Rural Open (dB)

Outdoor Log Normal Standard Deviation

12.0 10.0 8.0 6.0 4.0

Indoor Log Normal Standard Deviation

8.0 7.0 6.0 5.0 4.0

Indoor Penetration Loss 20.0 16.0 12.0 10.0 8.0

Table 4. Uplink Link Budget Margins


Coverage Criteria Dense Urban (dB)

Urban (dB)

Suburban (dB)

Rural Clutter (dB)

Rural Open (dB)

80% Indoor POAC 26.0 20.4 14.8 11.3 8.0

85% Indoor POAC 29.0 23.0 17.0 13.1 9.3

90% Indoor POAC 32.8 26.2 19.7 15.2 11.0

Parameter Value

Uplink Receiver Sensitivities at Antenna Port

Voice Service: -122.4dBm

Data Service @ 64kbps: -119.4 dBm

Data Service @ 128 kbps: -116.0 dBm



User Equipment EIRPHandsets: 23 dBm - 3 dB (Body loss) = 20 dBm EIRP

Data Cards: 23 dBm EIRP

Cell Site Antenna Gain

450 MHz: 12.0 dBi | 1900 MHz: 17.0 dBi

700 MHz: 13.6 dBi | 2100 MHz: 17.4 dBi

900 MHz: 14.5 dBi | 2500 MHz: 18.0 dBi

BTS Antenna Height 30 meters over ground level

Interference Margin 3dB

Cell Selection Gain 3dB

Table 2. Primary RAN Coverage Assumptions


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2.5.2 Network Cost Modeling Methodology

This section describes at a high level how we model macro-network and femtocell-network costs. This section discusses voice costs per network minute and data costs per megabyte for both HSPA and 1X/EV-DO. There are additional costs incurred for voice termination and differences between financially reported minutes and network minutes. We will skip those topics in this paper, since they impact macro network minutes and femtocell minutes in a similar fashion.

To understand macro-network costs we begin by discussing a purely hypothetical network operator. The numbers we have used in our whitepaper analyses assume a capacity-constrained network. Coverage calculations therefore are largely irrelevant. In the detailed section of the femtocell model, however, we do calculate utilization. Coverage does have an impact on these calculations and in any real-world deployment. It is also worth noting that most of the analy-ses in this whitepaper reflect marginal cost, which produces a different result than an average cost calculation. In the case of a capacity-constrained network average and marginal costs are the same, which is partially why we have chosen it. Also, many operators who are today coverage-constrained are fearful that they will run out of capacity – given the rapidly increas-ing demand for data - and therefore have a “capacity-constrained” mindset.

The following “traditional” analysis illustrates how coverage and capacity calculations are done. Consider a Western European regional operator with an HSPA network at 2100 MHz in 2x15 MHz of spectrum covering 16 Western European countries: Austria, Belgium, Denmark, Fin-land, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

Assume that in each country the HSPA network covers 70% of its population (supplemented by existing GSM coverage), beginning in the densest urban areas then continuing to increas-ingly rural areas. Further assume a 90% probability of indoor coverage for voice and a 90% probably of 64kbps data in the uplink. The result is a network covering 279,173,371 people (70% x 398,819,101). This regional network has 52,626 sites. This is traditionally how we calculate economics. In this paper and in the default model settings we make the simpli-fying assumption that we are dealing with a capacity-constrained network since network cost, while important, is secondary to other assumptions in most scenarios in calculating femtocell economics.

Our base case also assumes a Greenfield buildout (vs. an overlay) with a traditional radio architecture (vs. remote radio heads). We calculate average investment per leased site. In addi-tion there is a significant monthly operating expense for backhaul transmission (a mixture of microwave and metro-Ethernet), and other expenses such as site lease and ongoing operations/equipment maintenance. Finally, we add the cost of centralized network assets: the capital and expense associated with RNCs and the core network. Each of our calculations includes depreciation, the weighted average cost of capital, and operating expenses.

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With the above network as an example, we make a number of simplifying assumptions for this paper. First of all, we assume that the network is capacity constrained. In reality, this is the case in some but certainly not all geographies. In fact, with the high capacity of today’s 3G technologies it is more often not the case. However, since many operators are experiencing exponential month-to-month growth in data traffic, as a result of the rapid increase in data cards and the parallel increase in the adoption of smart phones, many are worried about capac-ity issues. In this paper we have, for simplicity, imagined that we are operating a capacity-constrained network. We also assume 100% population coverage in calculating cost for the whitepaper. The vast majority of expenditures are for urban and suburban sites, even though rural sites cover the most physical area. These are user-settable inputs in the model. Finally, the femtocell model that we developed has controls that enable the user to understand whether they are operating in an environment which is coverage constrained or capacity constrained.

If we look at the cost of a capacity-constrained suburban site (HSPA with 2x15 MHz of spec-trum, with the backhaul dimensioned for broadband data, as an example) we see the following information as displayed in Table 5.

We assume HSPA has a voice capacity (AMR vocoder) of 150 Erlangs and a full-buffer down-link data throughput of 8.5 Mbps in 2x10 MHz of spectrum. For 1x/EV-DO, we assume a voice capacity (EVRC vocoder) of 150 Erlangs and a full-buffer downlink data throughput of 8.0 Mbps in 2x10 MHz of spectrum.

The femtocell model that we developed has controls that

enable the user to understand whether they are operating in an

environment which is coverage constrained or capacity constrained.

Table 5. Capacity-Constrained Suburban Cell Site Capital and Expense


Element Cost / Site

Gross Capital Investment

Radio Infrastructure $71,120

Power Supply, Batteries, Air Conditioning $15,000

Ancillary Electronics $8,000

Transmission Capital $15,000

Site Acquisition / Civil Works $150,000

TOTAL $259,120

Annual Operating Expense

Site Lease $18,000

Maintenance of Electronics $13,094

Transmission Expense $56,058

TOTAL $87,152

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It is important to note that when we discuss capacity we are discussing it on a statistical basis. Networks are dimensioned to provide a certain grade of service for voice (typically calculated using Erlang B trunking assumptions) and a latency grade of service for data. The grade of ser-vice for data is typically represented as the percentage of packets that are delayed more than a certain amount of time (measured in milliseconds) during the busy hour, assuming the packets that are not transmitted are queued. “100% capacity,” therefore, means that a site is operating at the maximum capacity beyond which it would fail to meet this quality of service objectives. Our model also includes a number of other margins that align calculated capacity with that of a typical real-world network.

If we dimension the site for data then depreciate each of the capital assets based on its asset class and add the cost of capital and the operating expenses then divide this total by the capacity of the site for data we arrive at a set of unit cost results for data. If we instead dimension the site for voice then divide by the site’s capacity for voice, we arrive at a set of unit cost results for voice. The following results also include core network costs (see discussion below):

UMTS/HSPA Voice (cost/minute): $0.00368 UMTS/HSPA Data (cost/MB): $0.00925 1X/EV-DO Voice (cost/minute): $0.00396 1X/EV-DO Data (cost/MB): $0.00988

If we look at core network costs alone, assuming a traditional core network, we arrive at the following figures. These costs apply to traffic flowing through the femtocell:

UMTS/HSPA and 1X/EV-DO Voice (cost/minute): $0.00115 UMTS/HSPA and 1X/EV-DO Data (cost/MB): $0.00234

Each of the aforementioned numbers reflects the economics of a capacity-constrained site. In a capacity-constrained scenario average cost equals marginal cost. To quantify the macro network cost savings associated with femtocells it is appropriate to look at marginal costs. The femtocell model allows the user to consider both capacity-constrained and coverage-constrained scenarios. In the latter, marginal costs (and therefore femtocell savings) are less than average costs.

Over time operators will migrate from a traditional core network to a flat IP core network and femtocell core standards will include a local breakout option, which will divert local traffic from flowing through the operator’s core network. The migration from a traditional IP core network to a flat IP core network will reduce the cost of macro-network traffic and femtocell traffic. The migration from the current femtocell core network standard to one including local breakout will reduce the cost of femtocell-based traffic.

Each of the unit costs represents a composite of five morphologies (dense urban, urban, sub-urban, rural clutter, and rural open). The weighting in calculating a capacity-constrained cost reflects the proportionate cell count in each morphology. We typically calculate population coverage beginning in the densest area in each country and building outward.

The $/MB unit costs represent a composite of five morphologies

with a weighting factor that is based on the proportionate cell

count in each morphology when the network is capacity constrained.

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It is important to note that as a network fills up to capacity (prior to cell splitting) the average cost is very high and slowly declines. It eventually reaches a minimum where each site is fully utilized on a statistical basis. To add additional capacity the operator must “split” cell sites, in other words start adding new sites purely for capacity. At this point we say that the network is

“capacity-constrained.” Under capacity-constrained conditions the marginal cost and the aver-age cost are the same and, in principle, the economics do not change on a unit cost basis as capacity is added. In reality, there is a point where it becomes more difficult and/or costly to continue to add sites.

SRG published a 1,000 page report in 2008, characterizing the economics of next generation OFDMA network. This report discusses in great depth the factors driving operator network economics and how average costs vary widely by geography and by service concept (fully mobile voice and data versus desktop modems versus outdoor-mounted antennas). We refer readers to this report since it contains at least 100 pages describing our modeling methodology. The report also includes several sensitivity studies to help the reader understand the impact of changing the assumptions that we have used.

2.6 Femtocell Core Network We have also assumed that the voice and traffic generated on the femtocell enters the mobile operator’s core network. The 3GPP standards body is currently working on local IP access, which will offload certain traffic before it enters the mobile operator’s core network. Our assumption is pragmatic since the local traffic offload feature is not being used today. However, it also tends to overstate some of the femtocell operating expenses relative to what they will be like in the future once local IP access is implemented.

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2.7 Network Cost Savings Figure 3 shows the incremental cost of mobile data on a per GB basis for various network tech-nologies. Th e net savings associated with offl oading the traffi c onto the femtocell network can be determined by subtracting the femtocell bar from the appropriate macro network cost. We will use the information in this fi gure when presenting results later in this whitepaper.

Th e Y axis in Figure 3 depicts the marginal costs instead of the average costs. In a capacity-constrained network (e.g., fully loaded), additional capacity can only be achieved by building and provisioning a new cell site, not to mention all of the new hardware that is required. In a coverage-constrained network, additional capacity can be achieved merely by adding additional capacity (e.g., channel cards) at existing sites. Consequently, the marginal cost of a capacity-constrained network is greater than the marginal cost of a coverage-constrained network, even though the average cost of a capacity-constrained network is less than the average cost of a coverage-constrained network.

$0

$20

$40

$60

$80

HSPAEV-DOCDMA2000 1XEDGEGPRS

$2.39

43.69

70.79

2.39

22.19

34.36

2.39

15.59

22.78

2.39

7.96 10.12

2.39

7.21 9.47

Capacity-Contrained

Coverage-Constrained

Femto


Figure 3. Marginal Cost per GB – By Technology

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2.8 Burdened Femtocell Costs Figure 4 shows the fully burdened cost of a femtocell in the U.S. Th e actual amount that a cus-tomer pays for the femtocell varies for the diff erent scenarios that we present in this whitepaper, typically ranging from zero to fi fty dollars or, in Europe, to fi fty euros. Th e cost – specifi cally the future subsidy – also varies as a result of retention costs which vary to refl ect regional diff er-ences in average customer lifetime for contract subscribers.

In addition to a $200 wholesale cost for the femtocell, we burden the femtocell with a number of additional costs. Th e provisioning and billing integration cost of $50 is based on several data points which suggest that an operator with a nationwide network could spend $5M to as much as $10M on upfront provisioning and billing system integration eff orts required to support the femtocell network. Assuming $5M in integration expenses, our assumption of modeling $50 per femtocell suggests a deployment of 100,000 femtocells. Also worth noting, we have included an additional subsidy to refl ect the replacement of the femtocell after a three-year period.

In total, we believe we have taken a very conservative approach when factoring the cost of the femtocell in the CLV calculation. Operators will have the ability to make their own assump-tions, including reducing the wholesale cost of the femtocell to refl ect economies of scale once more operators begin deploying the technology.

Our assumption of modeling $50 per femtocell for integration

expenses suggests a deployment of 100,000 femtocells.

$0

$50

$100

$150

$200

$250

$300

$350

$400

Future Subsidy and Support Costs:

$62.98

Centralized Femtocell-Specific Platforms: $40.00

Provisioning & Billing:$50.00

Home Femtocell:$200.00

Customer Service (Set-Up Support):

$5.00Selling Costs: $30.00

Marketing/Advertising:$7.50

Figure 4. Burdened Femtocell Costs


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3.0 Western Europe

5,000–10,00010,000–25,00025,000–50,00050,000–100,000> 100,000

0

25–50

0–10

50–100

10–25250–500

2,500–5,000

500–1,000

100–250

1,000–2,500

Population per km2

Figure 5. Western Europe – Population Distribution


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We have identified six representative scenarios for this region. Table 6 highlights the key dif-ferences in the scenarios, including which features are turned on/off, as well as assumptions regarding the cost of the femtocell and the subscription fees for the various services that are activated as part of the particular service concept. For simplicity, we are only activating the enhanced services for the “Family with Teenagers that Love to Talk” scenario. In reality, these services could have been included with any of the scenarios, thus increasing the attractiveness of the femtocell offering for both operators and consumers.

Scenarios

Number of Voice/ Data Card

Users

Femtocell Cost

(to the operator)

Free Data

Calling Plan

Coverage-Related

Voice Increase

Free Voice Calling Plan

(monthly fee)

Monthly Coverage

Fee

Reduce Churn

Add Member

Add Enhanced Services (monthly

fee)

Enhance Existing Services (monthly

fee)

Reduce other

Business Churn

A Family with Teenagers that Love to Talk

2/0 $353 ✔ $20.25 $6.75 ✔ ✔ $6.75 $6.75 ✔

A Well-Heeled Coverage-Hungry Suburbanite

2/0 $5 ✔ ✔ ✔

A Voice-Oriented Small Business

5/2 $5 ✔ ✔ ✔

An Urbanite with Excellent Coverage

2/0 $353 ✔ $20.25 ✔

A Coverage-Challenged Family

2/0 $353 ✔ ✔ $6.75 ✔

A High ARPU Family 2/1 $353 ✔ ✔ ✔

Table 6. Western Europe CLV Scenarios


April 2009



Table 7 provides a summary of results for all Western Europe service concepts. The first two columns provide information about the customer in advance of receiving the femtocell. The third column (Increase in Lifetime) describes the expected increase in the customer’s lifetime. The fifth column (Months to Breakeven) is an indication of how long it takes the operator to recoup its femtocell investment for that particular customer. In some scenarios, such as the

“Voice-Oriented Small Business” scenario, the payback time is zero since the customer is bear-ing the cost of the femtocell. In other scenarios, such as the “Urbanite with Excellent Coverage” scenario the payback time is relatively long, reflecting the upfront investment that the opera-tor made in subsidizing the fully burdened femtocell along with a relatively modest upside in femtocell-related income.

The incremental return on investment (ROI) is calculated based on the incremental upfront cost incurred by the operator (e.g., the cost of the burdened femtocell that the operator pays) and the subsequent incremental revenue that is generated due to the introduction of the femtocell. When looking at the absolute return, the benefits are more modest, albeit still very attractive.

For purposes of this whitepaper we are only applying the enhanced value services to the fam-ily with teenagers that love to talk scenario. In reality, the enhanced services are applicable to any of the scenarios that we have identified and they would result in further upside above and beyond the results that we present in the upcoming sections.

One final point worth making is that in all cases we have assumed that the introduction of the femtocell increases the lifetime of the customer. We believe this is a valid assumption since in some cases the femtocell is specifically addressing a problem that could cause the customer to churn to another operator. In other instances, there is a degree of “operator stickiness” associated with the femtocell, including the potential use of a mandatory contract extension in order for

Table 7. Western Europe Summary of Results


Scenarios Start Value

Pre-Femto Family Revenue

(monthly)

Increase in Lifetime (%)

Basic Value

Months to Breakeven

Incremental ROI

Enhanced Value

Enhanced Value ROI


$2,138 $108 25% $3,464 22 538% $4,787 1056%


$2,138 $108 25% $3,275 N.A. N.A. $4,599 N.A.


$5,051 $432 25% $7,521 N.A. N.A. $8,844 N.A.


$2,138 $108 25% $3,030 36 369% $4,353 886%


$2,138 $108 25% $3,352 25 495% $4,675 1012%

A High ARPU Family $6,230 $297 25% $8,676 17 1,093% $10,495 1804%

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the customer to receive the subsidized femtocell. However, in all cases our assumption regard-ing the reduction in churn is not required to generate a favorable outcome, although it does help create value by extending the life of the customer and its subsequent revenue contribution.

3.1 A Family with Teenagers that Love to TalkTable 8 highlights some of the important details for this scenario, which we have called “A Fam-ily with Teenagers that Love to Talk.” In this scenario we assume a European household with two adults and teenagers that love to talk on the mobile phone with their friends. Unfortunately, their calling plans do not provide them with the number of minutes that they think they need to communicate with their friends. They keep nagging their parents and ultimately their parents give in and sign up for the unlimited voice plan so that their teenage children are happy, not to mention the parents themselves since they can also take advantage of the service.

For purposes of this service concept we are not considering the revenue contribution from teen-agers before the introduction of the femtocell. Instead, they motivate the parents to sign up for the femtocell service. Additionally, they represent potential members who in the future could become full-fledged subscribers on the operator’s network.

The parents are post-paid subscribers and they each pay $54 per month. Both parents use 400 voice minutes and 50MBs of mobile data with their handheld device, which is likely to be a smartphone. Neither parent has a data card. We further assume that 36% of the overall voice usage and 45% of the overall mobile data usage occurs at home. The assumption for the percent-age of mobile voice and data usage that is consumed at home is consistent with various market research studies. In this particular scenario, mobile data usage has very little impact on the overall business case for femtocells.

As further indicated in Table 5, the family pays $67.50 for the femtocell, a $6.75 monthly fee to offset the cost of the femtocell and/or provide coverage, and a $20.25 monthly fee for unlimited mobile-to-fixed and unlimited mobile-to-on-net mobile voice calls while at home. Additionally, the family gets unlimited mobile data over the femtocell.

Table 8. Service Concept Highlights – A Family with Teenagers that Love to Talk (Western Europe)


Description: Familiy with ateenagers that Love to Talk

ARPU Criteria 2 people x €40 ARPU ($54)

Family Usage Voice Two people, each with 400 MOU voice usage

Data Average data usage for two phones (2 x 50 MBs)

Family Economics Up-Front Cost €50 ($67.50)

Monthly Cost €5 + €15 ($6.75 + $20.25)

List of Features Coverage + Free Data at Home + Unlimited Fixed and On-Net Mobile Calling

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3.1.1 Results, Analysis and Additional Assumptions

Th e key assumptions and value of each bar in the CLV Waterfall chart (reference Figure 6) are as follows:

stArt VAlue. Th e start value for this household in advance of having a femtocell service is $2,138, including monthly revenues of $54 per individual, $405 in acquisition costs, $620 in retention costs, and costs related to the macro network, customer service, marketing and advertising. We assume an annual churn rate of 16.2%, thus the expected lifetime of this customer before receiv-ing a femtocell is 74 months.

FeMtoCell Cost. We assume that the family pays a retail price of $67.50 for the femtocell and that the operator absorbs the other costs, as indicated in Figure 4.

netWorK Cost sAVings. Th e network cost savings due to the traffi c being offl oaded from the macro network and on to the femtocell network is $68.

AdditionAl netWorK Costs due to inCreAsed dAtA usAge. Th e incremental usage of 100MB per phone results in value destruction of $26.


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Figure 6. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (Western Europe)

April 2009



Add Free CAlling PlAn. We assume that for a $20.25 monthly fee all mobile-to-fixed and all mobile-to-mobile-in-network calls made within the home are free for the entire household. Since this is a European scenario, we assume that call termination revenue is collected, as usual, on inbound calls. The “free calling plan” therefore cannibalizes the revenue previously associ-ated with outbound calling within the home. We assume that each individual increases usage (inbound and outbound) within the home by 50%. We also assume that one in three “free” voice minutes at home translates into an additional voice minute that is used outside of the home and which is billed to the consumer. The present value of the revenue generated by this feature over the lifetime of the customer is $612.

Add BAsiC Monthly VAlue Fee. We assume a fee of $6.75 per month. The present value of the resultant revenue generated over the lifetime of the customer is $372.

Add reduCtion in Churn. We assume that the operator is able to reduce its churn rate by 20%, or from 16.2% to 13%. The effective lifetime of the household therefore increases from 74 months to 93 months. This increase in average customer lifetime results a profit contribution, in present value terms, of $652.

BAsiC VAlue ProPosition. The basic value proposition is $3,464, an increase in value of 62% over the Start Value.

Add VAlue oF AdditionAl FAMily MeMBer. We assume that there is a 50% probability that there is another family member in the home that is not already a customer of the operator, and, if there is another family member, that there is a 40% probability that they will switch to the operator (50% x 40% = 20%). We multiply these discount factors by the starting CLV of one of the origi-nal subscribers to arrive at a likely impact in present value terms of $263.

Add enhAnCed serViCes. . We assume $6.75 per household per month in incremental profit contri-bution per month. The resultant value creation in present value terms is $434.

inCreMentAl reVenue FroM existing serViCes. We assume $6.75 per household month in incremen-tal profit contribution per month. The resultant value creation in present value terms is $434.

reduCe other Business Churn. We assume that the other business generates a monthly revenue stream of $40.50 with a 50% gross margin. We further assume a churn rate of 15%, which is subsequently reduced by 20% with the introduction of the femtocell service offering. These assumptions result in value creation in present value terms of $191.

enhAnCed VAlue ProPosition. The enhanced value proposition is $4,787 versus the Start Value of $2,138 without the femtocell, resulting in an increase in value of 124%.

April 2009



Th e customer lifetime value can also be depicted as a series of discounted cash fl ows, over the expected lifetime of the customer. In Figure 7 we have plotted the expected lifetime value of the “household with teenagers that love to talk” under three scenarios: no femtocell, femtocells with the basic value proposition, and femtocells with the enhanced value proposition. Th e pres-ent value of the discounted cash fl ows (the height at the end of each line) are identical to their respective values (e.g., Start Value, Basic Value and Enhanced Value) in Figure 6.

All three plots start off negative due to the acquisition cost associated with adding the subscrib-ers to the network, as well as the cost of the femtocell for the two value propositions involving femtocells. Th e two lines associated with one of the femtocell value propositions extend further than the other line due to our assumptions regarding the reduction in churn (e.g., the probabil-ity of a longer customer lifetime). Th e slight decline over time in the rate of growth of each of the three lines refl ects the time value of money.



-$2,000

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NO Femtocell

9080706050403020100

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Figure 7. Customer Lifetime Value – A Family with Teenagers that Love to Talk

April 2009



In this scenario the breakeven point for the basic value proposition is 22 months and the basic value ROI is 538%. For the enhanced value proposition the breakeven point is 10 months and the ROI is 1,056%.

3.2 A Well-Heeled Coverage-Hungry SuburbaniteThis scenario focuses on wealthy individuals that happen to live in an area or own a second home where cellular coverage is not as good as they would like it to be. Even in Europe, where cellular coverage is quite robust, there are still pockets where coverage is poor. This is especially true for 3G coverage and in less urbanized areas, such as resort communities, isolated villas or even entire villages. These individuals would gladly pay for any solution that would deliver high-quality coverage in their home.

Table 9 highlights the key assumptions for this scenario. Of most importance, the customer pays the full upfront fee for the femtocell. In return the operator provides free coverage [not free voice] and free data service within the home.

Table 9. Service Concept Highlights – A Well-Heeled Coverage-Hungry Suburbanite (Western Europe)


Description: Well-Heeled Coverage-Hungry Suburbanite




Family Economics Up-Front Cost €315 ($425)

Monthly Cost Free

List of Features Coverage + Free Data at Home

April 2009




Th e results for this scenario are shown in Figure 8. For this scenario we are not including the upside revenue potential of the various enhanced services that the femtocell could deliver. If we had included them, they would further strengthen the femtocell business case for this par-ticular scenario.

Th e start value for this household in advance of having a femtocell service is $2,138, or identical to what we assumed in Section 3.1. Likewise, since we are assuming similar voice/data usage before the introduction of the femtocell, the network cost savings ($68) and the additional net-work costs due to increased data usage ($26) are identical to the fi rst scenario.

In this scenario the household is largely interested in the femtocell to improve in-building cov-erage, thus they benefi t from increased voice usage within the home, albeit with a cost due to the increased usage. Since we also assume that 36% of all voice minutes occur within the home, this results in a 14% overall increase in usage per month (109 minutes) for the two individuals. Th e monthly increase in profi t contribution is $11.05, which translates into a $516 increase in family lifetime value. Both results refl ect increased revenue minus increased costs. Th e latter calculation sums these inputs over the expected customer lifetime.


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Figure 8. CLV Waterfall Chart – A Well-Heeled Coverage-Hungry Suburbanite (Western Europe)

April 2009



Finally, the reduction in churn for this customer segment is identical to the first scenario, but the revenue contribution is slightly lower, or $574, due to the different femtocell-related ser-vices/fees that this household has.

The basic value proposition in this scenario is $3,275, for an increase in value of 53% over the Start Value. For brevity we have not included any of the enhanced femtocell services in this scenario, although they would have further strengthened the business case. The ROI on the femtocell investment is, in theory, infinite, since the family pays in full for the femtocell. The amount the family pays up-front includes support costs, the cost of associated centralized fem-tocell-specific infrastructure, allocated provisioning and billing integration costs, and future upgrade costs – basically everything.

3.3 A Voice-Oriented Small BusinessFor the Voice-Oriented Small Business scenario we assume that a small office has poor coverage, just as the home in the previous scenario had poor coverage. The small business is willing to pay to improve productivity and to have free wireless data within the office.

Table 10 highlights the key assumptions for this scenario. Of note, there are 5 individuals with voice plans and data plans for their handheld devices (e.g., smartphones) while 2 of the individu-als have a data card plan. In return for paying the full amount for the femtocell, the small office receives improved voice coverage within the office as well as unlimited data usage.

With the introduction of the femtocell and the resultant improvement in coverage, we assume that voice and data usage increases over what it was without the femtocell. Specifically, we assume that each individual increases its voice usage by 33% while within the office to reflect the one in three voice minutes that were previously lost. Given that only 24% of voice minutes are consumed in the office, this equates to overall voice usage for the office increasing to 2,174 minutes per month.

Likewise, we assume that average cell phone data usage increases usage by 100MB per phone per month and that average data card usage increases by 1,000MB per data card per month. In

Table 10. Service Concept Highlights – A Voice-Oriented Small Business (Western Europe)


Description: Voice-oriented small business

ARPU Criteria 5 x €40 ARPU ($54) + 2 x €30 data card ARPU ($40.50)

Business Usage Voice 5 x 400 MOU

Data Average data usage for five phones (5 x 50 MBs) + Average data usage for two data cards (2 x 2000 MBs)

Business Economics Up-Front Cost €315 ($425)

Monthly Cost Free

List of Features Coverage + Free Data in Office

April 2009



this scenario the data usage within the offi ce, including the incremental usage within the offi ce due to the introduction of the femtocell, is free to the customer but a cost to the operator.


Th e results for this scenario are depicted in Figure 9. We are once again ignoring any upside due to the enhanced services that a femtocell could deliver.

Since there are 5 individuals with a voice plan and 2 individuals with a data card plan, the Start Value is considerably higher than in the earlier scenarios, or $9,864. Th e network cost savings due to offl oading the voice and data traffi c and the additional network costs due to increased data usage over the femtocell are higher due to the 5 voice + data plans and the 2 data card plans. Specifi cally, with the assumptions that we have made the result is that the femtocell offl oads 654 voice minutes per month (480 original voice minutes + 174 incremental voice minutes). With our assumption that 25% of the data usage occurs within the offi ce, the femtocell offl oads 562.5MB of the pre-femtocell data traffi c per month – the incremental data traffi c due to the free data feature are captured in the next bar.

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Figure 9. CLV Waterfall Chart – A Voice-Oriented Small Business (Western Europe)


April 2009



The network cost savings due to the traffic being offloaded from the macro network and on to the femtocell network is $300. The incremental usage of 100MB per phone and 1,000MB per data card (2,500MB total) due to the increased usage brought on by the free data offer and the improved user experience that the femtocell offers relative to the macro network results in value destruction of $322 over the lifetime of the customer. In total, the femtocell offloads 3,062.5MB per month (2,500 + 562.5 = 3,062.5).

As in earlier scenarios we assume that one in three minutes (33%) are “lost” in the absence of the femtocell. Since we also assume that 24% of all voice minutes occur within the office, this assumption results in a 9% increase in overall usage per month, or 174 minutes of additional traf-fic that is carried by the femtocell. The monthly increase in profit contribution is $17.61, which equates to a present value of $823, net of all associated expenses, over the lifetime of the small office customer.

Finally, our assumptions regarding the reduction in the churn rate are identical to the assumptions that we used in Section 3.1. This application of the customer lifetime results in value creation of $2,250. There are five individuals assigned to the femtocell, hence the much higher figure.

The basic value proposition for a voice-oriented small business in Western Europe is $12,919, an increase in value of 31% over the Start Value ($9,864). Since the customer pays for the femtocell up-front, the operator’s investment is zero. The operator is therefore profitable from day one.

3.4 An Urbanite with Excellent CoverageIn this scenario we assume that an urbanite couple has excellent coverage and that they wish to have a femtocell in order to take advantage of the free calling plan. Table 11 highlights some of the key assumptions for this particular scenario.

Description: Urbanite with Excellent Coverage





Monthly Cost €15 ($20.25)

List of Features Enhanced Coverage for High Speed Data (Voice Coverage is Already Fine) + Free Data at Home + Unlimited Fixed and On-Net Mobile Calling

Table 11. Service Concept Highlights – An Urbanite with Excellent Coverage (Western Europe)


April 2009




Th e results for this scenario are shown in Figure 10.

Th is scenario is very similar to the “family with teenagers that love to talk” scenario. Th e biggest diff erence is that in this scenario we assume that the household does not pay the €5.00 ($6.75) monthly fee because they have excellent coverage before receiving a femtocell. Additionally, we are not showing the potential upside due to the enhanced services that a femtocell could deliver.

Th e results for this scenario indicate that the basic value proposition is $3,030, an increase in value of 42% over the start value. Th e basic value ROI is 369% with 36 months required for the femtocell business case to breakeven.

3.5 A Coverage Challenged FamilyIn this scenario we assume that the family has poor coverage in some or all rooms within their home or apartment. While coverage in Europe is generally excellent relative to other regions of the world, there are still areas within networks where coverage is not as good as it should be. Th is is especially true for 3G voice + data services which are currently deployed at 2100MHz.


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Figure 10. CLV Waterfall Chart – An Urbanite with Excellent Coverage (Western Europe)

April 2009



As a result the family purchases a femtocell at a deeply-discounted price along with a $6.75 monthly fee to partially off set the subsidy and to provide the enhanced coverage. In return the family receives improved voice coverage, free mobile data services at home, and the ability to take advantage of enhanced femtocell services when they become available. Table 12 provides the highlights for this service concept.


Figure 11 provides the results for this service concept.

Table 12. Service Concept Highlights – A Coverage-Challenged Family (Western Europe)


Description: Coverage-Challenged Family





Monthly Cost €5 ($6.75)



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Figure 11. CLV Waterfall Chart – A Coverage-Challenged Family (Western Europe)

April 2009



In this scenario the assumptions and results for the first four bars are identical to earlier sce-narios. The differences begin to emerge with the additional voice usage due to improved cover-age bar. The value creation due to improve coverage and the subsequent increase in voice usage are identical to the well-heeled suburbanite scenario, or $516. The $6.75 monthly fee combined with the 20% reduction in the churn rate across this customer segment results in a basic value proposition of $3,352, or a 57% increase over the start value. The basic value ROI is 495% and the business case for femtocells for this particular customer segment requires 25 months to breakeven.

3.6 A High ARPU FamilyFor this scenario we assume that a family spends a lot on wireless voice and data usage each month. As a result the operator is more willing to cater to the demands/needs of the customer. As indicated in Table 13, the monthly ARPU and usage are quite high so the operator believes that it can provide a free femto-cell without a monthly cost, and still recoup its investment due to the additional voice usage that the customer generates as well as the statistical increase in the customer’s lifetime with that operator.

Table 13. Service Concept Highlights – A High ARPU Family (Western Europe)

Description: A high-ARPU family

ARPU Criteria 2 people x €80 ARPU ($108) + 1 person x €30 data card ARPU ($40.50)


Data Average data usage for two phones (2 x 50 MBs) + Average data usage for one data card (2000 MBs)

Family Economics Up-Front Cost

Free

Monthly Cost

Free

List of Features

Coverage + Free Data at Home


April 2009




Figure 12 highlights the results for this scenario. Relative to the earlier household scenarios, the customer lifetime value prior to the introduction of the femtocell is considerably higher, or $8,636. Due to the higher voice and data usage, the network cost savings are also much higher, or $291 in savings due to the existing voice and data usage albeit off set by an incremental cost of $155 due to the unlimited free data usage at home.

Th e assumptions used to calculate the increased voice usage at home due to the improved voice coverage are identical to earlier scenarios. However, since the base usage is considerably higher in this scenario, the resulting increase in absolute usage is also considerably higher, thus result-ing in value creation of $1,033 for the resultant extra usage that occurs over the femtocell. Finally, the reduction in churn contributes an additional $1,834 in value creation. Th e net result is a basic value proposition of $11,287, for a 31% increase over the start value. Th e basic value ROI is 1,234% and the breakeven point is 19 months.

In this scenario, like the small business scenario, the percentage increase over the start value is less than it is with other scenarios. However, on an absolute basis the contribution is very


Figure 12. CLV Waterfall Chart – A High ARPU Family (Western Europe)

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April 2009



meaningful due to the high value that this particular customer segment possesses. Also worth noting, the favorable results for this scenario did not depend on having both the revenue from the increased usage and the reduction in churn. Instead, the contribution of either femtocell benefit would have been sufficient to generate a favorable return.

April 2009



4.0 United States


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Figure 13. United States – Population Distribution

April 2009



For purposes of this whitepaper we are using the same six scenarios for the United States that we for Western Europe (reference Table 14). There are, however, important differences in the underlying set of assumptions. First, the average usage in the United States is considerably higher. Second, the United States is not a mobile calling pay country, so the operator does not benefit from termination fees associated with inbound calls. Third, given that the first two operators to launch a femtocell service in the United States use the CDMA2000 family of technologies we are using 1X/EV-DO as the underlying macro technology instead of UMTS/HSPA.

Table 15 highlights the results for the service concepts that we analyzed for the United States.

For the United States scenarios we are using 1X/EV-DO as the underlying macro technology

instead of UMTS/HSpA.

Scenarios

Number of Voice/Data Card

Users

Femtocell Cost

(to the operator)

Free Data Calling

Plan

Coverage-Related

Voice Increase

Free Voice Calling

Plan (monthly

fee)

Monthly Coverage

Fee

Reduce Churn

Add Member


fee)


fee)

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Business Churn


2/0 $345 ✔ $15 $5 ✔ ✔ $5 $5 ✔


2/0 $5 ✔ ✔ ✔


5/2 $0 ✔ ✔ ✔

An Urbanite with Excel-lent Coverage

2/0 $345 ✔ $15 ✔


2/0 $345 ✔ ✔ $5 ✔

A High ARPU Family 2/1 $345 ✔ ✔ ✔

Table 14. United States CLV Scenarios


Table 15. United States Summary of Results


Scenarios Start Value

Pre-Femto Family Reveneue

(monthly)

Increase in Lifetime

(%)

Basic Value

Months to Breakeven

Basic Value ROI

Enhanced Value

Enhanced Value ROI


$1,742 $100 25% $3,084 15 443% $3,916 740%


$1,742 $100 25% $2,573 N.A. N.A. $3,405 N.A.


$5,562 $370 25% $7,770 N.A. N.A. $8,602 N.A.


$1,742 $100 25% $2,859 19 360% $3,681 656%

A Coverage- Challenged Family

$1,742 $100 25% $2,459 31 220% $3,291 517%

A High ARPU Family $5,384 $260 25% $7,229 19 686% $8,424 1112%

April 2009



As was the case with the Western Europe, our assumptions regarding the reduction in churn for this customer segment are not required to generate a favorable business case for any of the scenarios that we analyzed.

Consistent with the assumptions that we used in the Western Europe scenarios we are only applying the enhanced value services to the family with teenagers that love to talk scenario. In reality, the enhanced services are applicable to any of the scenarios that we have identified and they would result in further upside above and beyond the results that we present in the upcom-ing sections.

4.1 A Family with Teenagers that Love to TalkTable 16 highlights some of the important details for this scenario, which is similar in many respects to the Western Europe scenario with the same title (reference Section 3.1). The biggest difference is the monthly minutes of usage, which in this scenario are 800 minutes per individ-ual, versus only 400 minutes in the Western Europe scenario. ARPUs in these US scenarios are slightly higher than the comparable European scenarios. Doing the math, the price per minute in these US scenarios is significantly lower – reflective of the market.

Table 16. Service Concept Highlights – A Family with Teenagers that Love to Talk (United States)


* Note: the “unlimited calling plan” is carefully designed to prevent cannibalization of the revenues associated with home-based minutes in the original bundle. In other words, only usage above and beyond that which is included in the starting bundle is free.

Description: Families with teenagers that love to talk

ARPU Criteria 2 people x $50 ARPU



Family Economics Up-Front Cost $50

Monthly Cost $5 + $15

List of Features Coverage + Free Data at Home + Unlimited Home Calling*

April 2009




Figure 14 provides the results for this US-based scenario.

stArt VAlue. Th e start value for this household in advance of having a femtocell service is $1,782, including monthly revenues of $50 per individual, $300 in acquisition costs per subscriber, $200 per subscriber in retention costs every 24 months, and costs related to the macro network, cus-tomer service, marketing and advertising. We assume an annual churn rate of 25%, thus the expected lifetime of this customer is 48 months.

FeMtoCell Cost. We assume that the family pays a retail price of $50 for the femtocell and that the operator absorbs the other costs, as indicated in Figure 4.

netWorK Cost sAVings. Th e network cost savings due to the traffi c being offl oaded from the macro network onto the femtocell is $77, in present value terms

AdditionAl netWorK Costs due to inCreAsed dAtA usAge. Th e incremental usage of 100MB per phone results in $18 of incremental cost, in present value terms.


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Figure 14. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (United States)

April 2009



Add Free CAlling PlAn. We assume that a $15 monthly fee all incremental usage within the home is free for the entire household. We assume that each individual increases usage (inbound and outbound) within the home by 50%. We also assume that one in three “free” voice minutes at home translates into an additional voice minute that is used outside of the home and which is billed to the consumer. This present value of the revenues generated by this feature over the lifetime of the customer is $788.

Add BAsiC Monthly VAlue Fee. We assume a fee of $5 per month. The present value of the resultant revenues generated over the lifetime of the customer is $197.

Add reduCtion in Churn. We assume that the operator is able to reduce its churn rate by 20%, or from 25% to 20%%, thus the effective lifetime of the household increases from 48 months to 60 months. The statistically longer customer lifetime results in a present value contribution of $644.

BAsiC VAlue ProPosition. The basic value proposition is $3,084, for an increase in value of 77% over the start value.

Add VAlue oF AdditionAl FAMily MeMBer. We assume that there is a 50% probability that there is another family member in the home that is not already a customer of the operator, and, if there is another family member, that there is a 40% probability that they switch to the operator (50% x 40% = 20%). The resultant value creation is $220.

Add enhAnCed serViCes. We assume $5 per household per month in incremental profit contribu-tion per month. The resultant value creation is $235.

inCreMentAl reVenue FroM existing serViCes. We assume $5 per household month in incremental profit contribution per month. The resultant value creation is $235.

reduCe other Business Churn. We assume that the other business generates a monthly revenue stream of $30 with a 50% gross margin. We further assume a churn rate of 15%, which is subse-quently reduced by 20% with the introduction of the femtocell service offering. These assump-tions result in value creation of $142.

enhAnCed VAlue ProPosition. The enhanced value proposition is $3,916 versus the start value of $1,742 without the femtocell, resulting in an increase in value of 125%.

April 2009



In Figure 15 we have plotted the expected lifetime value of the “household with teenagers that love to talk” under three scenarios: no femtocell, femtocells with the basic value proposition, and femtocells with the enhanced value proposition.

Th e basic value ROI is 443% and the basic value breakeven point is 15 months. Th e enhanced value ROI and the breakeven point are 770% and 9 months, respectively.

4.2 A Well-Heeled Coverage-Hungry SuburbaniteTh e Well-Heeled Coverage-Hungry Suburbanite scenario is very comparable to the scenario that we used in Western Europe. Th e key diff erences pertain to the ARPU and, in particular, the average voice usage per month. While outside the scope of our eff orts, it is also more likely that the addressable market for this customer segment is larger in the United States than it is in other regions of the world, in particular Western Europe and Developed Asia.


Figure 15. Customer Lifetime Value – A Family with Teenagers that Love to Talk (United States)

Months


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Basic Value

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April 2009



Table 17 identifi es the key assumptions for this scenario. Of note, the average usage is 800 minutes per subscriber per month, which is considerably higher than what we assumed in the Western European scenario.


Figure 16 provides the results for this service concept. If we had considered the revenue poten-tial of any of the enhanced features, the results for this scenario would be even more favorable.

Table 17. Service Concept Highlights – a Well-Heeled Coverage-Hungry Suburbanite (United States)


Description: Well-Heeled Coverage-Hungry Suburbanite





Monthly Cost Free



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Figure 16. CLV Waterfall Chart – A Well-Heeled Coverage-Hungry Suburbanite (United States)

April 2009



The Start Value is identical to the previous scenario ($1,742), but in this case we assume that the customer purchases the femtocell. The biggest difference with this scenario is that the customer does not sign up for the unlimited voice plan. Instead, the household merely takes advantage of the free data feature and the enhanced in-home coverage offered by the femtocell.

With the reduction in churn ($504), the basic value proposition becomes $2,573, or 48% higher than the start value, and the breakeven point is only 1 month due to our assumption that the customer absorbs virtually all of the costs associated with the femtocell. Both results are quite favorable since the operator’s cost associated with putting the femtocell into the hands of this customer segment is only $5.

4.3 A Voice-Oriented Small BusinessFor this scenario we analyze the potential benefits of a small office having a femtocell. As was the case with the similar scenario in Western Europe, we assume that there are 5 voice subscribers and 2 data card subscribers. Conversely, the voice usage is considerably higher in this scenario while we are also assuming that the macro network is 1X/EV-DO instead of UMTS/HSPA.

Table 18. Service Concept Highlights – a Voice-Oriented Small Business (United States)



ARPU Criteria 5 x $50 ARPU + 2 x $60 data card ARPU


Data Average data usage for five phones (5 x 50 MBs) + Average data usage for two data cards (2 x 2000 MBs)

Business Economics Up-Front Cost $400

Monthly Cost Free

List of Features Coverage + Free Data in Office

April 2009




Figure 17 provides the results for this scenario.

Th e Start Value is considerably higher than in the earlier scenarios ($5.562), due to our assump-tion regarding the number of voice and data users. Likewise the network cost savings due to offl oading the voice and data traffi c and the additional network costs due to increased data usage over the femtocell are higher due to the 5 voice + data plans and the 2 data card plans. Specifi cally, with the assumptions that we have made the result is that the femtocell offl oads 1,197 voice minutes per month (960 original voice minutes + 237 incremental voice minutes). Likewise, with our assumption that 25% of the data usage occurs within the offi ce, the femtocell offl oads 562.5MB of data traffi c per month – the incremental data traffi c due to the free data feature are captured in the next bar.

Th e network cost savings due to the traffi c being offl oaded from the macro network and on to the femtocell network is $423. Th e incremental usage of 100MB per phone and 1,000MB per data card (2,500MB total) results in value destruction of $230 over the lifetime of the customer, which in this case is the small business (5 voice customers + 2 data customers).

BASIC VALUE

PROPOSITION

Reducti

on in CHURN

Coverag

e-Rela

ted

Voice USAGE

Increase

d

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NetworkC

ost

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l COSTSSTART


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Figure 17. CLV Waterfall Chart – A Voice-Oriented Small Business (United States)

April 2009



As in earlier scenarios we assume that one in three minutes (33%) are “lost” in the absence of the femtocell. Since we also assume that 24% of all voice minutes occur within the office, there are 237 minutes of additional traffic that is carried by the femtocell. The monthly increase in revenue is $11.41, which, net of all expenses, equates to a present value of $287 over the lifetime of the small business as a customer. Finally, the basic value proposition is $7,770, an increase of 40% over the start value. There are five individuals associated with the femtocell, hence the large financial impact.

4.4 An Urbanite with Excellent Coverage

In this scenario we assume that the household has excellent coverage and that they purchase a subsidized femtocell in order to take advantage of the unlimited calling plan. Table 19 high-lights the key assumptions for this scenario.

Description: Urbanite with Excellent Coverage





Monthly Cost $15

List of Features Enhanced Coverage for High Speed Data (Voice Coverage is Already Fine) + Free Data at Home + Unlimited Home Calling*

Table 19. Service Concept Highlights – an Urbanite with Excellent Coverage (United States)



April 2009





Relative to earlier scenarios, the biggest diff erence is the introduction of the free calling plan and the absence of the monthly fee. Th e free calling plan results in 50% higher in-home usage (288 incremental minutes) and an increase in usage outside of the home (171 minutes).

Th e basic value proposition is $2,849 or 64% higher than the start value. Th e basic value ROI and breakeven are 360% and 19 months, respectively


BASIC VALUE

PROPOSITION

Reducti

on in CHURN

FREE CALLI

NG

Increase

d

COSTS Data

NetworkC

ost

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Femtocel

l COSTSSTART

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$4,000


Figure 18. CLV Waterfall Chart – An Urbanite with Excellent Coverage (United States)

April 2009



4.5 A Coverage Challenged FamilyTable 20 provides the key assumptions for this scenario. Th is scenario is similar to the “Well-Heeled Suburbanite with Coverage Problems” scenario. Th e two key diff erences pertain to the use of a femtocell subsidy and the use of a monthly fee. In this scenario the femtocell is subsi-dized and the monthly fee is used to off set this subsidy. It is the exact opposite in the “Well-Heeled Suburbanite with Coverage Problems” scenario.



Description: Coverage-Challenged Family





Monthly Cost $5


Table 20. Service Concept Highlights – a Coverage-Challenged Family (United States)



$-

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on in CHURN

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Increase

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ost

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l COSTSSTART


Figure 19. CLV Waterfall Chart – a Coverage-Challenged Family (United States)

April 2009



As indicated in the results, the femtocell business case is barely breakeven if we only take into consideration the various effects through the monthly fee. With the assumption regarding the 20% reduction in churn – the customer lifetime value increases from 48 months to 60 months, $542 in incremental revenue is generated and the basic value proposition becomes more favor-able. Specifically, the basic value proposition is $2,459, or 41%. The basic value ROI is 220% and 31 months are required to reach breakeven.

4.6 A High ARPU FamilyIn this scenario we assume that a family which generates a high ARPU each month has a cov-erage problem at home. The operator provides them with a free femtocell and does not charge them a monthly fee under the premise that this is a valuable customer that the operator does not want to lose.

Table 21 provides the highlights for this scenario.

Table 21. Service Concept Highlights – a High ARPU Family (United States)


Description: A high-ARPU family

ARPU Criteria 2 people x $100 ARPU + 1 person x $60 data card ARPU

Family Usage Voice Two people, each with 1,600 MOU voice usage

Data Average data usage for two phones (2 x 50 MBs) + Average data usage for one data card (2000 MBs)

Family Economics Up-Front Cost Free

Monthly Cost Free


April 2009




Figure 20 provides the results for this scenario. Of note, we are not including the revenue con-tribution of any of the enhanced features.

Due to the high amount of traffi c that is carried on the femtocell, including the incremental traffi c due to the introduction of the femtocell, the business case is already positive, although just barely positive. Th e assumption regarding the increased lifetime of the customer (12 months) generates $1,365 in incremental revenue, and results in a basic value proposition of $7,229 – 34% higher than the start value. Th e basic value ROI is 686% and 19 months are required to breakeven.


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l COSTSSTART


Figure 20. CLV Waterfall Chart – a High ARPU Family (United States)

April 2009



5.0 Developed Asia


5,000–10,00010,000–25,00025,000–50,00050,000–100,000> 100,000

0

25–50

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50–100

10–25250–500

2,500–5,000

500–1,000

100–250

1,000–2,500

Population per km2

Figure 21. Developed Asia – Population Distribution

April 2009



For purposes of this whitepaper we have limited the Developed Asia region to two scenarios, as indicated in Table 22.

Table 23 provides a summary of the results for the scenarios that we analyzed.

5.1 A Family with Teenagers that Love to TalkTable 24 highlights some of the important details for this service concept. Relative to the US scenario, we are assuming a lower ARPU and lower voice usage, not to mention the use of UMTS/HSPA instead of 1X/EV-DO. Additionally, we are not including the $5 monthly fee – something we did include for this scenario in the United States.

Scenarios

Number of Voice/Data Card

Users

Femtocell Cost

(to the operator)

Free Data

Calling Plan

Coverage-Related

Voice Increase

Free Voice Calling

Plan (monthly

fee)

Monthly Coverage

Fee

Reduce Churn

Add Member


fee)


fee)

Reduce other

Business Churn


2/0 $360 ✔ $22 ✔ ✔ $5 $5 ✔


5/2 $4 ✔ ✔ ✔

Table 22. Developed Asia CLV Scenarios


Table 23. Developed Asia Summary of Results


Scenarios Start ValueTotal ARPU –

pre-Femto (monthly)

Increase in Lifetime (months)

Basic Value Months to Breakeven

Incremental ROI

Enhanced Value

Incremental ROI


$1,817 $80 18.5 $3,712 14 731% $4,719 1118%


$3,796 $320 18.5 $5,805 N.A. N.A. $6,813 N.A.

Table 24. Service Concept Highlights – A Family with Teenagers that Love to Talk (Developed Asia)

Description: Family with teenagers that love to talk





Monthly Cost $22

List of Features Coverage + Free Data at Home + Unlimited Home Calling*



April 2009





Th e free calling plan generates $1,535 in incremental revenue. Th is contribution is considerably higher than the comparable scenarios from the other regions and it is largely due to our assump-tion regarding the monthly fee for this service, which is $22 - $7 per month higher than what we assumed in the US. Th e fee, however, is consistent with what some operators are currently charging in this region. Th e free calling plan also results in the household incurring 149 min-utes of incremental usage outside of the home. Th is incremental usage, which results from the customer becoming more dependent on the cell phone, is billed to the consumer and it contrib-utes $6.40 in revenue per month. Th is contribution is also captured in this bar.

We assume that the lifetime of the customer increases 25%, or 18.5 months. Th is reduction in the churn increases value by $659, resulting in a basic value NPV of $3,712 – 104% higher than the start value. Th e basic value ROI is 731% and 14 months are required to breakeven.

Once we include the remaining features, the enhanced value NPV is $4,719. Th e enhanced value ROI increases to 1,118% and 9 months are required to breakeven.


$-

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ess Churn

Existi

ng Serv

ices (T

V)

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ced Se

rvices

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ber

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PROPOSITION

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on in CHURN

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CALLING

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l COSTSSTART

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Figure 22. CLV Waterfall Chart – A Family with Teenagers that Love to Talk (Developed Asia)

April 2009



5.2 A Voice-Oriented Small BusinessTable 25 highlights the key assumptions for this scenario, which is largely comparable to the small business scenarios that we used for Western Europe and the United States. Th e diff er-ences pertain to the amount of voice usage and ARPU.




ARPU Criteria 5 x $40 ARPU + 2 x $30 data card ARPU


Data Average data usage for fi ve phones (5 x 50 MBs) + Average data usage for two data cards (2 x 2000 MBs)

Business Economics Up-Front Cost $425

Monthly Cost Free

List of Features Coverage + Free Data in Offi ce

Table 25. Service Concept Highlights – a Voice-Oriented Small Business (Developed Asia)



Figure 23. CLV Waterfall Chart – A Voice-Oriented Small Business (Developed Asia)Household Lifetime Value ($)

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l COSTSSTART

$1,000

$0

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April 2009



In this particular scenario, the benefits of offloading the existing voice and data traffic largely offset the cost associated with the incremental increase in data due to the free data plan. Thus, the business case can be justified even in the absence of any incremental revenue – note that the small business absorbed the cost of the femtocell. The incremental usage results in value creation of $683 and the reduction in churn results in a further value creation of $1,733. Once again, the numbers appear high but when averaged across 5 voice and 2 data users they are largely compa-rable with other scenarios.

The basic value proposition is $10,055, or 32% higher than the start value.

April 2009



6.0 Sidebar AnalysesFor purposes of this whitepaper we are going to look at three sidebar analyses: femtocells for providing deep in-building broadband wireless services, femtocells for providing macro net-work offload, and femtocell for increasing rural wireless adoption.

6.1 Femtocells for Providing Deep In-Building Broadband Wireless ServicesOne of the more desirable service concepts involving femtocells is the notion of using femtocells to provide deep in-building broadband wireless coverage. In particular, the femtocell can provide a household or small business with its own dedicated 3G base station that is “up close and per-sonal.” Relative to the distant macro 3G base station, the femtocell would be able to deliver a far more compelling user experience (e.g., higher data rates) and presumably for a much lower cost.

There is a common misconception that 3G networks have ample broadband capacity to deliver deep in-building coverage. The reality is that while they may or may not have ample capacity to deliver high data rates, this is a fundamentally different issue than having sufficient coverage to provide broadband wireless services in hard to reach places, such as inside houses or apartments. Let us demonstrate.

6.1.1 A Very Quick Overview of Macro Network Modeling Assumptions

Most readers normally associate 3G data rates with the data rates that are delivered in the downlink, or the path from the cell site to the subscriber. However, while their interest may be on the downlink data rates, it is the uplink, or the path from the mobile subscriber to the cell site, that determines how far away from the center of the cell that these data rates can be obtained. This phenomenon is true because a mobile handset transmits at a much lower power level than a macro cell site. When the network becomes heavily loaded with traffic the down-link can be the limiting factor, but for deployment purposes an operator will plan its network based on the uplink limitation. As networks become loaded, new cell sites are added for capac-ity purposes and the uplink again defines the effective coverage area of the cell. Finally, in this example we are modeling a very stringent uplink data speed, which puts even more emphasis on the uplink link budget.

Another key consideration is that the achievable data rates in the uplink also have a direct impact on the achievable data rates in the downlink. Specifically, the uplink is used to send acknowl-edgement messages that the data sent in the downlink was successfully received. Typically, the ratio of maximum downlink data rates to the required uplink data rates for the acknowledge-ment packets is 10:1. For example, a 2.5Mbps downlink data rate would require data rates of approximately 250kbps in the uplink.

The macro network economics model that we developed over a 12 month period allows us to accurately model on a statistical basis the number of cell sites required to achieve a target data rate for a network covering a certain percentage of the population for 65 countries throughout the world. Additionally, we have developed cost and performance assumptions that allow us to model the CapEx and OpEx of the overall network (radio access, core and backhaul/transport)

While 3G networks may have ample capacity to deliver high data rates,

this is a fundamentally different issue than having sufficient coverage

to provide broadband wireless services in hard to reach places.

April 2009



resources required to provide coverage and support the amount of voice and data traffic on the network. With all of this information it is then possible to calculate the marginal or average cost of delivering a voice minute or a data MB.

6.1.2 Quality of Coverage Requirements and Associated Network Costs

We have defined five coverage requirements based on a network delivering a target data rate with a certain probability of achieving that target data rate. These five coverage requirements are defined in Table 26.

The first requirement (85% probability of achieving indoor coverage @ 500-1,000kbps) is prob-ably the minimum coverage requirement that an operator would design its network to support, otherwise its network would have very spotty coverage and it would not meet customer expecta-tions in a competitive market. At the other extreme (90% probability of achieving indoor cov-erage @ 5-6Mbps) the network deployment costs would be prohibitive, even though it would provide a very compelling user experience.

Quality of Coverage Voice Data

A 85% of area indoors 85% of area indoors @64kps (0.5 – 1 Mbps downlink)

B 90% of area indoors 90% of area indoors @64kps (0.5 – 1 Mbps downlink)

C > 90% of area indoors 90% of area indoors @128kps (1 – 1.5 Mbps downlink)

D >> 90% of area indoors 90% of area indoors @256kps (2 – 3 Mbps downlink)

E >>> 90% of area indoors 90% of area indoors @512kps (5 – 6 Mbps downlink)

Table 26. Quality of Coverage Requirements


April 2009



Figure 24 provides the hypothetical network costs on a per household basis for a pan-European operator deploying a network across Western Europe that covers the top 70% of the population in each country. We assume that the network is deployed at 2100MHz and that the operator has 2x15MHz of spectrum. We have also included the cost of a femtocell for reference purposes although we will not dwell on it until the next section.

It is already apparent that the cost associated with deploying a network that provides a broad-band wireless service with deep in-building penetration is very expensive relative to what we consider to be the cost required to support a minimum level of coverage (e.g., 85% at 64kbps).

6.1.3 Adjustments to the Analysis

As we will discuss in an upcoming section, an analysis that involves the direct comparison of a macro network and a femtocell is a bit problematic since in many respects it is like comparing apples to oranges. However, the comparison is still relevant as long as the caveats are known and attempts have been made to compare like for like whenever possible. With that in mind, we must make some important adjustments to the results shown in Figure 24.

In order to make a fair comparison we need to consider the following issues:

$0

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FemtocellNetwork Buildout

E. 90%@512kbpsD. 90%@256kbpsC. 90%@128kbpsB. 90%@64kbpsA. 85%@64kbps

Industry (5 Operators) Network Capital Investment per HH

$244

421358

421

546

421

841

421

1,306

421

UPLINK Coverage Criteria

Figure 24. Hypothetical Network Costs on a per Household Basis – Western Europe (2100MHz)


April 2009



➤ Each operator in this market must indiscriminately cover all homes with its macro network even if no one in that home subscribes to its service.

➤ In a competitive market a mobile operator might only have, say, 20% market share.

➤ Our analysis focuses exclusively on capital expenditures. In reality, a large portion of the cost associated with delivering a MB over the macro network is due to operating expenses (leased lines, leased sites, etc.).

➤ Many households do not have a perceived coverage problem so not every single household would require a femtocell for coverage purposes.

At a Femto Forum event in 2008 a pan-European operator commented that 19% of the sub-scribers in a European market experienced poor coverage in their home. Fifty-three percent (53%) of those with poor coverage also experienced a coverage problem in every single room in their home. If voice coverage is poor then one can assume that data coverage is even poorer.

We will adjust our numbers in Figure 24 and assume that perhaps 50% of the households would benefit from a femtocell, in particular if broadband coverage is desired. In increasing the percentage from 19% to 50%, it may seem that we are trying to artificially boost the value proposition for femtocells. In fact, this assumption has the opposite effect as we will demon-strate shortly.

Table 27 highlights our effort to refine the analysis and it allows us to compare the cost of providing in-building broadband wireless services with a femtocell and with a macro network. The top row of the table contains the macro network CapEx costs from Figure 24. If we had included operating expenses in the analysis the numbers would have been substantially larger.

At a Femto Forum event in 2008 a pan-European operator

commented that 19% of subscribers in the UK experienced poor

coverage in their home.

Calculation/Results 85%@64kbps 90%@64kbps 90%@128kbps 90%@256kbps 90%@512kbps

1. Beginning Values – Industry Capital Expenditure per Household (Operator with 20% market share)

$244 $358 $546 $841 $1,306

2. Establish 85% @ 64kbps as “zero” baseline, since each operator will need to provide basic coverage to be in business

$0 $114 $302 $597 $1,062

3. Multiply denominator by 50%, since only some households have data users needing improved coverage.

$0 $229 $604 $1,195 $2,124

Table 27. Refining the Analysis


April 2009



It is our belief that a competitive operator would need a network that, at a minimum, supports at least 64kbps with an 85% probability of achieving that data rate indoors throughout the area covered by the cell site. In the second row of the table we have subtracted the minimum network cost (€181) from the costs associated with the remaining networks which support higher data rates. Th is adjustment results in the incremental cost – above and beyond the minimum target data rate – on a per household basis, which is required to achieve the higher data rates.

In the third row of Table 27 we multiply the denominator by 50% – the same 50% that would benefi t from the enhanced coverage off ered by a femtocell in their home. Th e result is the incremental cost of achieving the various data rates with the macro network for each household that “needs” a femtocell. Once again, these are incremental costs that an operator must spend after it has deployed a “thin” macro network that supports 64kbps with an 85% probability of in-building coverage.

Th e information that appears in Table 27 is shown again in Figure 25 along with our assump-tion regarding the cost of a femtocell.

Figure 25. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy



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Incremental Capital Investment per Coverage-Challenged HH (20%)

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2,124

421


Downlink data rates of 0.5 – 1.0 Mbps at 90% probability OR higher data rates at a lower

probability of coverage

Downlink data rates of 1.0 – 2.0 Mbps at 90% probability

OR higher data rates at a lower probability

of coverage

April 2009



If an operator’s goal is to provide in-building coverage consistent with the two network profiles that are highlighted then the operator might elect to leverage its macro network to provide the requisite in-building coverage requirements. If, however, the operator wants to provide “real” broadband wireless coverage to its subscribers while they are at home or working in their small office environment then a femtocell approach would be far more economical.

6.1.4 The Caveats

As we acknowledged upfront it is very difficult to compare a femtocell with a macro cell site since they were both designed to provide a specific service. Making the assumption that they can also provide a service for which they were not designed – a femtocell providing wide area coverage, a macro cell site providing personalized in-building coverage – can be problematic

In particular:

➤ When an operator elects to invest in a greater depth of coverage they will also be deploying a large amount of new capacity that would otherwise not be available. Additionally, they would be filling in coverage holes or improving the quality of the user experience throughout its entire network, including locations in the network where the placement of a femtocell would not be practical.

➤ The previous argument can be turned on its head. Namely, by building out its macro network the operator would be deploying coverage and capacity to regions of its network where they are not required – additional capacity in areas where there is very little traffic and additional coverage in areas where nobody lives or traverses.

➤ Consumers can purchase end-user devices with higher gain antennas and/or greater transmit power, including desktop modems, window-mounted antennas, or modems with outdoor-mounted antennas. To varying degrees these solutions would at least somewhat improve in-building coverage beyond what is achieved today with an existing macro network.

➤ Some data applications, such as push e-mail services, do not necessarily require high data rates or uniform coverage throughout the house. Consumers may not even notice that their emails were taking a little bit longer to get delivered while it could be difficult for consumers to notice the improvement in coverage for these applications. On the other hand, network performance is noticeable for real-time downloads of email attachments.

➤ Operators in some countries have, or will soon have, the ability to deploy HSPA at lower frequencies, in particular 850MHz or 900MHz. The lower frequencies have more attractive propagation characteristics and this reduces the capital expenditures required to achieve the higher performance requirements. Conversely, there is generally less spectrum available in these lower frequency bands so operators still run the risk of having to deploy incremental cell sites for capacity purposes. Spectrum changes alone also cannot deliver other benefits of femtocells associated with localized tariff plans, value-added services, etc.

if an operator wants to provide “real” broadband wireless coverage

to its subscribers while they are indoors then a femtocell approach

would be far more economical than using the macro network.

April 2009



Th e assumptions used to achieve the results in Figure 26 are identical to the assumptions that we used to achieve the results in Figure 25, with the notable exception being the use of 900MHz versus 2100MHz. In this case, the value proposition of using femtocells specifi cally for deliv-ering in-building broadband wireless coverage does not become favorable until the operator targets a data rate of 2.5Mbps (90% probability of achieving 256kbps). It is worth reiterating that we have not included operating expenses, which would signifi cantly improve the case for femtocells, in this analysis.

6.2 Femtocells for Providing Macro Network Offl oadIn the scenarios that we have presented so far in this whitepaper, the cost savings associated with offl oading the voice and data traffi c have been relatively modest. Given that one of the initially perceived benefi ts of a femtocell was that it would signifi cantly reduce the cost associ-ated with carrying the traffi c over the macro network, the results that we have presented may be somewhat surprising. Th e reality is that the relatively modest savings to date are due to the conservative assumptions that we made regarding the amount of voice + data usage that the femtocell offl oads from the macro network.

in the analysis for this section we have not included operating

expenses, which would signifi cantly improve the

business case for femtocells.


0

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Incremental Capital Investment per Coverage-Challenged HH (20%)

$-

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Figure 26. Incremental Macro Network CapEx versus a Targeted Femtocell Strategy – 900MHz


April 2009



Mobile data usage is growing at seemingly an exponential rate, thus while multi-GB mobile data users may not be widely prevalent today, they will become more prevalent in the coming years.

In this sidebar analysis we examine the economic impact of offl oading a much larger amount of data traffi c – 3GB to be exact. In our analysis we did not take into consideration the dispro-portionate amount of macro network resources that an indoor subscriber uses versus an outdoor subscriber. In a CDMA-based network (UMTS/HSPA or 1X/EV-DO) the capacity of the network is a function of the available resources as well as the amount of interference in the net-work. Had we taken this phenomenon into consideration in our analysis the results would have been even more compelling for the use of the femtocell versus the macro network.

Th e results, depicted in Figure 27, are for a hypothetical scenario in which a US data card subscriber has an ARPU of $60 per month and uses 3GB per month (all venues) in a coverage-constrained wide-area HSPA network with 2x15 MHz of spectrum. If the usage is higher than 3GB per month, if the operator has a less effi cient radio access technology, if the operator has less spectrum, or if the macro network is capacity-constrained rather than coverage-constrained then the value associated with the femtocell increases. Th is is, therefore, a relatively conserva-tive heavy data user scenario.

We did not take into consideration the disproportionate amount

of macro network resources that an indoor subscriber uses versus an outdoor subscriber.


Figure 27. 3GB Data User with a Free Femtocell

START Add Femtocell COSTS Network Cost SAVINGS Reduction In CHURN BASIC VALUE PROPOSITION


$-

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April 2009



Figure 28 illustrates the diff erence in voice and data costs by technology between a macro cel-lular environment and a femtocell environment. Th e femtocell numbers in this case do not include the up-front cost of the femtocell itself or any of its usage-insensitive costs. Instead they represent the marginal cost of carrying an additional 1000 minutes or an additional GB of data over the femtocell. Th e graph compares those numbers with the marginal cost of carrying the same traffi c over a capacity-constrained macro cellular network with 2x15MHz of spectrum. Th e saving on a marginal cost basis can be calculated by multiplying the diff erence in unit costs for voice by the volume of home minutes plus the diff erence in unit costs for data by the volume of home data. Th e resulting marginal cost savings can then be compared to the usage- insensi-tive costs of deploying a femtocell and to other elements in the business case. If a femtocell in a GSM/EDGE macro cellular network carries 2,000 MOU per month and 0.5 GBs of data per month then its marginal cost savings will be 2*($6.20-$1.15) + .5*($34.36-$2.39) = $26.09 per month.


Figure 28. Amount of Voice and Data Traffi c Required to Pay for a Femtocell – by Technology

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WCDMA/HSPA1X/EV-DO Rev A1XGSM/EDGEGSM/GPRS

Macro DATAFemto DATAMacro VOICEFemto VOICE

VOICE Cost ($/1000 MOU) or DATA Cost ($/GB)

$1.15

6.202.39

70.79

1.15

6.202.39

34.36

1.153.96

2.39

22.78

1.153.96

2.39

10.12

1.153.68 2.39

9.47

April 2009



6.3 Femtocells for Increasing Rural Wireless AdoptionMany areas of rural United States are poorly served by cellular operators and as a result wireless adoption in these regions lag the nation at large. One likely contributing factor is the lack of good coverage within the home since customers could conclude that “if my cell phone doesn’t work in my house then it isn’t worth owning.”

One solution to this problem would be for the operator to sell/provide the customer with a fem-tocell. In addition to achieving many of the economic benefits identified earlier in this white-paper, the operator can also increase the wireless penetration rate in its region – something that we did not consider in the earlier scenarios.

Figure 29 plots the wireless penetration rate for each of the 176 Economic Area (EA) license regions in the United States. It is evident that there is a correlation between the population den-sity of the licensed region and the wireless adoption rate – in densely populated licensed areas the wireless adoption rate is higher. To be specific, the wireless penetration rate in the urban areas is around 95% while it is approximately 65% in rural areas. Therefore, there is a 30% spread between the two regions.

50%

60%

70%

80%

90%

100%

110%

1 10 100 1000

Wireless Penetration (%)

Population Density by Economic Area (People per Square Mile)

Figure 29. Wireless Penetration versus Population Density – by EA


April 2009



One challenge with this analysis is that in order for a femtocell to address the problem the rural household would need to have some form of broadband, be it DSL, cable modem, or even broadband wireless from one of the 10,000 Wireless ISPs that exist throughout the United States. A next step would be to develop a model which overlays the existing broadband coverage over the cellular coverage to determine those areas where broadband coverage exists but cellular coverage does not. To date, we have not attempted to quantify the potential benefits that a fem-tocell strategy could deliver when it comes to driving wireless penetration rates in rural areas.

April 2009



7.0 Sensitivity StudiesIn this whitepaper we made a number of assumptions that have a direct influence on the results. The question then becomes how much influence do our assumptions have on the business case for femtocells and what would happen if the “real world” answer turned out to be different than what we assumed?

We have identified 5 key assumptions that we have made throughput this whitepaper which relate to topics that have generated a lot of buzz in the industry (e.g., the cost of the femtocell) or which could be a bit controversial. In this chapter we will provide the results of sensitivity studies in which the assumption under study is varied through a wide range of values while all other assumptions are held constant. The results provided in this chapter are important for read-ers that may have a different opinion regarding one of our assumptions or who are interested in knowing the parameters which really drive femtocell economics.

For all sensitivity studies we start with the “Coverage-Challenged Family” scenario for the United States (reference Chapter 4.5) and then make the relevant adjustments depending on the assumption that is being analyzed.

April 2009



7.1 The Number of Subscribers Assigned to a FemtocellIn this sensitivity study we change the number of revenue-generating subscribers that are assigned to the femtocell. In the base case scenario we assumed two individuals. In this sensi-tivity study, we vary the number from one to fi ve individuals.

As a point of reference the second set of bars in Figure 30 depicts the results for the base case that we used in Chapter 4. Figure 30 also suggest a couple of other important considerations. First, the basic value proposition is slightly positive, even with only one subscriber assigned to femtocell. Second, the addition of new subscribers does not have as big an impact on the femtocell business case as one might expect to observe. As an example, increasing the number of paying subscribers by 50% (going from 2 to 3 subscribers), increases the diff erence between the pre-femtocell and basic value family lifetime values from $717 ($2459 – $1742) to $1,136 ($3,749 - $2,613), or 58% ($1,136/$717-1). As expected, increasing the size of the family has a proportionate impact on the “pre-femtocell” value and a disproportionate impact on the gain associated with adding a femtocell, in part because the cost of the femtocell is amortized over a larger number of subscribers.

If we look at the enhanced value proposition relative to the pre-femtocell family lifetime value we see that it increases from $1,549 to $1,968, or 27%, as the number of people in the fam-ily increases from two to three. Many of the features in the enhanced value proposition are

The addition of new subscribers does not have as big an impact

on the femtocell business case as one might expect to observe.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

54321

$871 1,168

2,0001,742

2,459

3,291

2,613

3,749

4,581

3,484

5,040

5,872

4,355

6,330

7,162


Enhanced Value PropositionBasic Value PropositionPre-Femtocell

No. of Subscribers per Household

Figure 30. The Impact of Varying the Number of Subscribers – US Coverage-Challenged Family


April 2009



not proportional to the revenue generated by the family. Instead, we have modeled a specifi c increase in revenue or profi t contribution per family for things like femtocell-specifi c enhanced services (virtual home number, SMS alerts, etc). While the value of the enhanced value propo-sition as a whole increases with the number of family members, and while it increase more in absolute terms than the basic value proposition, the increase is smaller as a percentage because it is not proportional to the starting family lifetime value.

7.2 The Wholesale Cost of the FemtocellIn this sensitivity study we vary the wholesale cost of the femtocell between $100 and $300. Such a study is relevant since it is likely that femtocells will drop in price once more operators launch a femtocell service and economies of scale are achieved. Recall that throughout this whitepaper we assumed a wholesale cost of $200 and that we burdened the femtocell with a number of indirect costs.

Figure 31 provides the results for this sensitivity study.

Interestingly, the femtocell business case is highly insensitive to the cost of the femtocell. A $100 (50%) increase in the wholesale cost of the femtocell from $200 to $300 reduces the

A $100 (50%) increase in the wholesale cost of the femtocell from $200 to $300 only reduces

the basic value proposition for femtocells by 16.3%.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500


$1,742

$2,559

$3,391

$1,742

$2,509

$3,341

$1,742

$2,459

$3,291

$1,742

$2,409

$3,241

$1,742

$2,359

$3,191

$300 $250 $200 $150 $100


Wholesale Price of Femtocell ($)

Figure 31. The Impact of Varying the Wholesale Cost of the Femtocell


April 2009



diff erence between the pre-femtocell value and the basic value proposition from $717 to $617, or 16.3%. For the enhanced value proposition a $100 increase in the wholesale cost lowers the value creation from $1,549 to $1,449, or 6.5%. In hindsight, this fi nding should be expected since the cost of the femtocell is dwarfed by the combination of a number of revenue-generating opportunities that exist for any practical femtocell strategy.

7.3 The Average Revenue per User (ARPU)In this sensitivity study we vary the ARPU from as low as $20 per subscriber to as high as $70 per subscriber (the usage remains unchanged). Recall that for the base case scenario we assumed an ARPU of $50 per subscriber. Figure 32 provides the results for this sensitivity study.

In this study we scale acquisition and retention cost to the ARPU of the subscriber, as this is what tends to happen in the real world. Otherwise, as the ARPU declines the “pre-femto” CLV of the family would become negative. We assume no operator would knowingly design and implement a value-destroying strategy.

Th e results for this sensitivity study are similar in nature to the impact of varying the number of subscribers that are assigned to the femtocell. Specifi cally, a $10 increase in ARPU from $50 to $60 increases the diff erence between the pre-femtocell family lifetime value and the basic value

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$70 $60 $50 $40 $30 $20



$486 $687

$1,362

$904

$1,278

$2,005

$1,323

$1,868

$2,648

$1,742

$2,459

$3,291

$2,161

$3,049

$3,934

$2,580

3,640

4,577

Subscriber ARPU Before Introduction of Femtocells

Figure 32. The Impact of Varying the Average Revenue per User


April 2009



family lifetime value from $717 to $888, or 24% ($171). It similarly increases the gain associated with the enhanced value position from $1,549 to $1,773, or 14% ($224).

As in the other studies a change in assumptions causes a larger dollar value impact with the enhanced value proposition relative to the basic value proposition, but a smaller proportion-ate change.

7.4 The Monthly Subscription FeeIn this sensitivity study we vary the monthly coverage fee that the subscriber pays to off set the subsidy, not to mention for the enhanced coverage service that the femtocell delivers. In the base case we assumed a $5 monthly fee. In this study we vary the fee in $5 increments from a low of $0 to a high of $20.

Figure 33 provides the results for this sensitivity study. Th e basic femtocell value proposition still provides a positive business case even if the femtocell is fully subsidized. Th e results also indicate that increasing the monthly coverage fee from $5 to $10 increases the diff erence in family lifetime value between the pre-femtocell and basic value propositions from $717 to $952, or 33% ($235). It increases the gain associated the enhanced value proposition by an identical dollar amount, from $1,549 to $1,784, or 15% ($235).

increasing the monthly coverage fee from $5 to $10 increases the

gain associated with the basic value proposition for femtocells by 33%.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

54321

$871 1,168

2,0001,742

2,459

3,291

2,613

3,749

4,581

3,484

5,040

5,872

4,355

6,330

7,162



No. of Subscribers per Household

Figure 33. The Impact of Varying the Monthly Subscription Fee


April 2009



7.5 The Reduction in ChurnIn this sensitivity study we vary our assumption for the reduction in churn in increments of 5% from a low of 0% to a high of 50%. A 20% reduction in churn means that the churn rate before the introduction of femtocells is reduced to (100%-20%) of its starting value. For example, if the “reduction in churn” is 20% then a 25% annual churn rate would be reduced to 25% x (100%

- 20%) = 20% per year, as a result of the introduction of femtocells. Of course, the reduction in churn accrues only to those families that adopt a femtocell.

Th e reduction in churn contributes favorably to the value created by the basic value proposi-tion. Some operators have reported reductions as high as 50% for FMC propositions similar to femtocells. We have conservatively assumed a 20% reduction as the baseline. In reality, after an operator adjusts for the percentage of subscribers adopting femtocells the composite change in churn is modest, although the impact is signifi cant among femtocell users.

If we shrink the reduction in churn from 20% to 10% we discover that the value created by the basic value proposition (the diff erence between the basic value family lifetime value and the pre-femtocell family lifetime value) falls from $717 per household to $422 per household, or 41% ($295).

Th e impact of churn is greatest in the basic value proposition, because that is where the eff ect is directly captured. If we run the numbers for the enhanced value proposition, reducing churn from a 20% to 10% change we fi nd that the increase in family lifetime value falls from $1,549 to $1,188, or 24% ($368).

Figure 34 provides the results for this sensitivity study.


Enhanced Value PropositionBasic Value PropositionPre-Femtocell Enhanced Value PropositionBasic Value PropositionPre-Femtocell

$0

$1,000

$2000

$3,000

$4,000

$5,000

50%30%20%15%10%5%0%

$1,742 1,830

2,540

1,742

1,945

2,682

1,742

2,070

2,836

1,742

2,206

3,004

1,742

2,356

3,188

1,742

2,700

3,612

1,742

3,652

Reduction in Churn Rate (% of Original Figure)

4,928

Figure 34. The Impact of Varying the Reduction In Churn


April 2009



The impact of churn is relatively insensitive to the femtocell business case while even if there was no reduction in the churn rate the femtocell business case would still be slightly positive.

Finally, if there were no reduction in churn the femtocell business case would be slightly posi-tive. It is also important to note that churn reduction is often a byproduct of delivering other customer benefits. To the extent to which the femtocell delivers compelling benefits, either in coverage, in voice or data pricing, in femtocell-enabled services, or in strengthening community (enabling the family or small business to stay better connected) churn is likely to improve.

April 2009




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