Picocell technology could help make fixed-mobile convergence a reality

An interesting thing happened in 1999. The unit price of a long-distance voice call to consumers, which had been falling since the early 1980s, finally crossed over the cost curve and long-distance voice became a loss leader. This eventually led to the acquisition of the long-distance giants by the regional Bells. It was certainly one of those pivotal events in telecom history, but another 1999 event might be even more important.

That also was the year when profit goals for the carriers shifted from wireline to mobile, and there’s evidence now that the mobile horse may not race much longer.

If something makes less money — or is likely to — producers are apt to invest less in it. The mobile players started to slow-roll their capital builds last year and that had an immediate impact on network equipment vendors with the most exposure in the mobile space. At least once in the last four quarters, Alcatel-Lucent and Ericsson blamed mobile market conditions for their disappointing quarterly numbers. They’re likely to cite the same problem in the next four quarters, too.

The core of the problem with mobile is that FCC data tends to show that communications spending is a zero-sum game; it makes up about the same percentage of household budgets as it did 20 years ago. All of the advances of networking are competing for a share of a static pie. When you add to that the impact of over-the-top services such as VoIP that create competition for incumbents without generating profit to build additional network capacity, you have the formula for some major challenges. The big issue for the industry today is how those challenges will be met.

Operators have really only two choices; cut costs or create new revenue-generating services. The latter of these is more attractive on the surface, but it still runs into the problem of static household budgets. The cost-cutting option is therefore more appealing, but three of every four cost dollars is operations and administration, and much of that is customer acquisition, retention and care. In the capital budget area, it’s hard to find spots to cut.

The operators may have an answer to their problem that straddles the cost/revenue fence: fixed-mobile convergence. FMC has been promoted as a benefit to customers, a way to create unified calling plans that roll calls between wireless and wireline. It’s been seen by operators as a way to establish a new generation of capital programs, including the ever-popular IP Multimedia Subsystem (IMS). That makes equipment vendors — particularly IMS supporters — smile. But none of this is the real driver; that honor goes to “picocells”.

Picocell is the term that’s becoming popular for either WiMAX or 3G femtocell technology, which use a small local base station in a home or office to create a zone of wireless coverage whose traffic is carried not over the standard cellular network but from the base station back over the customer’s wireline broadband service. Picocells do create a potential convergence between mobile and wireline voice calling, but most importantly they draw mobile data traffic off the wireless networks.

Wireless data is expensive, in no small way because spectrum is expensive. Verizon spent $9 billion on the 700MHz FCC auction for spectrum alone. At the company’s current estimate for FiOS buildout, they could pass 11 million homes for that. And because wireless per-cell capacity is limited (to about 2Mbps), that typically means smaller cells to limit the number of users per cell. The limiting case is that you end up with one cell in every home and office, which is picocells.

Picocells could revolutionize wireless because they could make the transmission of wireless data far less costly, making it possible to support the only widely accepted wireless data service — Internet — at a profit. Look at all the wireless backhaul that you can eliminate by supporting users’ data connections with picocells while they’re at home or in the office. Picocells could be the most significant element in savings of wireless data costs yet devised.

It would be even better if you can link some FMC features with it. This includes the old “wireless/wireline voice calling convergence” that’s been talked about since FMC was first raised as an option, but more significantly it includes things such as controlling your personal video recorder with your mobile phone instead of a remote, using your phone for channel guides, increasing the popularity of Short Message Service and handset e-mail services … you get the picture. SMS is already the fastest-growing piece of non-voice services in the mobile space, and getting users socialized to video on small handset screens while in the home might even help promote mobile video down the line.

Maybe FMC still won’t happen, but there have been a lot of signs that it will. The big tag on the spectrum auction is one. Verizon’s strategy for opening handsets, which reduces the value of calling plans in retaining customers and creating loyalty, is another. FMC might even regionalize mobile competition, creating the biggest benefits for the two major wireless providers — AT&T and Verizon — that are also big broadband incumbents. It could also be another way to take a slice out of the cable competitors, which don’t have mobile properties. But in the final analysis, the industry can’t give up on mobile yet because there’s too much invested in it. That makes FMC look like a very strong option indeed.

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Copyright © 2008 IDG Communications, Inc.

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