Original URL: http://www.theregister.co.uk/2007/02/09/femtocell_ubiquisys/

The age of the femtocell?

Ubiquisys gets set to startle the market

By Guy Kewney

Posted in Mobile, 9th February 2007 18:48 GMT

Column There's nothing quite as hard for a venture capitalist as not gloating. When they "execute" on their exit strategy (sell off a company they launched) it seems they just can't help telling someone how clever they were - and from such a boast, it seems, comes the strong rumour that a new technology has hit centre stage.

The new technology is "femtocell" - smaller than a mobile cell, smaller than a microcell, and smaller even than a nanocell; usually, a mobile phone cell in the privacy of your home. The only picocell I know of is the Picochip silicon, which is now the star of most activity in this new market.

VC-funded Ubiquisys is the highest profile of the new generation of companies building femtocells - or at least, till the coming weekend. After that, according to finance sources, Accel, Advent and Atlas will have comfortably over $100m to share out among new startups as they cut and run.

The news is good for Ubiquisys, however. It will probably be announced Monday or Tuesday in Barcelona, and will startle the market, because while femtocells are seen as "the big new little thing" in mobile, nobody expected Ubiquisys backers to be able to execute on their exit strategy for another couple of years.

Word of its celebrations appears to have reached very few, so far. The buyout is too small a deal to frighten WiMAX investors, but it should cause it serious concern, once it analyses it.

Best guess for who is providing the $150m plus to buy the out VCs is Avaya, the VoIP market leader in corporate comms, which is known to see femtocells as a threat to its current business model. Avaya needs to expand into the smaller business sector.

It recently announced plans to expand in the South Pacific SMB sector; an area where mobile phone usage has started using 3G technology, which is notoriously bad at penetrating buildings.

Femtocells provide a way of making 3G phones reliable inside buildings.

The technology puts a very small, low-power transmitter/receiver inside the building. The walls of the building prevent the signal from "leaking out" into the streets in exactly the same way they prevent the signal getting in in the first place; and the undoubted good security of the mobile phone network prevents hackers from using it to gain access to the corporate LAN.

And the internet sends the phone traffic to the cell.

Eventually, most femtocells will be in private homes, subsidised by the big operators, because of the "lock-in" they provide. If Vodafone provides a femtocell, it will be the strongest signal, by far, inside the building, making it harder for the subscriber to switch suppliers.

The femtocell sector is undoubtedly set to boom, but most observers were expecting to have to wait until the big mobile operators bought into the technology. That was supposed to start happening in 2007.

But that date is slipping. Big mobile operators, despite their real problems with getting 3G signals into the home or into the office building, are facing growing scepticism from investors, who want to see this new technology working reliably before they invest the large sums involved.

VCs, faced with the likelihood that their investment would not bear fruit on the expected boom scale this year, seem to have got cold feet about the Ubiquisys project. Avaya, however, can take a longer-term view - including the assessment that Ubiquisys is a bargain buy at $150 odd million, and might well fall into the hands of a rival - and so it wants in now.

It also can't afford to see mobile VoIP technology becoming monopolised by mobile telcos.

Ubiquisys has started trials of its Zonegate product in Eastern Europe. "The system comprises an access point installed in a user's home," says the product spec. Normally, it would require broadband to feed the signals from the phone network. There is also software - a management system integrated with the mobile operator's core network. "The system works with existing GSM/UMTS handsets and has no recourse to WiFi," the company points out.

In the UK at least, the mobile telcos are probably two years from large-scale rollout. Trials on a small scale are believed to be underway in France Telecom's UK research department; Vodafone is not known to be doing anything in Europe, and if T-Mobile is doing anything on a large scale, it hasn't said anything about it. Telefonica has other problems.

Right now, they see their main threat as the rollout of Wi-Fi based mobiles, such as the Nokia E61, through startups like Truphone, which can bill for far smaller charges. It will take them a while to whip up enthusiasm among their bigger investors for a switch to a femtocell strategy, which they will almost certainly have to subsidise.

At the moment, roughly half of UK households have broadband. But if each home decided to install a femtocell, and the operators had to subsidise the installation, it would probably cost over $100 per home just for the hardware, and maybe twice that for the manpower.

That's an investment of £2bn which now looks essential if the dream of "mobile data windfalls" is to come true.

The reason it's essential is subtle. If 3G "killer applications" like video blogging actually took off on a large scale - something phone makers like Sony Ericsson are counting on! - the data traffic would explode - and the main macro cells simply couldn't carry all the bits. Prices would have to rise, killing the market.

By offloading the bulk of data traffic to the broadband network, the outdoor masts would be freed up to carry genuine mobile data to (and from) the outdoor users, at a reasonable cost.

"The ZoneGate solution addresses two key issues for consumers – cost and coverage," observes Ubiquisys. "It provides in-building GSM/UMTS coverage and capacity where existing network service is poor, congested or non-existent and enables operators to offer fixed telephony and VoIP rates within the home."

A spokesman for Ubiquisys today responded "off the record" to the rumours with a simple "there is no truth to this story" statement. But others in the femtocell market have agreed that the match would be a good one.

Sources inside Kineto Wireless, which is starting to focus closely on the Ubiquisys product line, have expressed interest in the possibility of the Avaya takeover but nobody was prepared to make a comment on events in America until the US offices open this afternoon.

At direct rivals IP Access, senior executives have been discussing the change in the market and expressed some scepticism about Avaya's ability to take the product range to market.

"You have to sell femtocells to the mobile operators," marketing manager Chris Cox said. "These things work on licensed spectrum, and you can't install them yourself - you need people with a licence. That applies even indoors."

This was recently confirmed at a conference where Cox specifically asked an Ofcom regulator to clarify the law: "Even indoors on private property, if it transmits on UMTS frequencies, a device needs a licence," said the Ofcom executive.

Avaya, however, doesn't have much track record on selling to the mobile operators, and is normally seen as one of the SIP VoIP specialists which the mobile telcos regard as close to being the Devil incarnate.

IP Access believes that its approach, which supports both 3GPP and IMS standards, will be competitive, even if it has to face Avaya in mobile markets. ®