Small cells, big sales

The recent news that bellwether AT&T Inc. is scaling back capital expenditures for 2014 and 2015 from $22 billion per year to $20 billion may have rattled some telecom networking vendors. But suppliers in at least one segment of the industry can count on continued investment.

While some spending is slowing, the Dallas telecom said during its first-quarter earnings call in April that it will not scale back funds for its Project Vector IP, to upgrade its fiber and wireless networks.

With its long-term evolution, or LTE, wireless broadband coverage rapidly expanding, AT&T wants to increase the "density" of its network, so it can meet the growing burden facing its network. Spikes in wireless traffic, like those following explosions at the Boston Marathon that stalled networks, highlight the potential for demand to outstrip capacity.

Among other efforts, the carrier will add 40,000 small cell transmitters -- mini wireless towers -- to its network.

AT&T's deployment is a boon for the small cell sector, which includes a range of companies. Though small cells hold promise for growth, the applications and the market are still evolving. Compared to the market for macro cells that sit in wireless towers, small cells are, well, relatively small. Depending on whom you ask, the segment is also fragmented.

In what could be a signal of coming M&A activity, Cisco Systems Inc. agreed to buy small cell developer Ubiquisys Ltd. for $310 million in April. Cisco does not produce traditional macro cell stations, but has been elbowing its way into the wireless market through acquisitions.

"I expect there will be more deals," said Daryl Schoolar of the technology consultancy Ovum.

"If I were one of the vendors working with Ubiquisys," he said, "I would look around seeing who could I buy so I don't have a supplier of key tech bought out by a competitor."

There is broad field of companies designing small cells for homes and small businesses to corporate offices, stadiums and public areas. In addition to Ubiquisys, the list includes Airvana LLC, ip.access Ltd., PureWave Networks Inc. and SpiderCloud Wireless Inc.

There are also a number of general networking venders that have a hand in the sector, such as Airspan Networks Inc., Alcatel-Lucent SA, Cisco, Ericsson AB, Huawei Technologies Co., NEC Corp., Nokia Siemens Networks Oy, Samsung Corp. and ZTE Corp.

Small cells operate on spectrum licensed by the government, whereas Wi-Fi uses unlicensed spectrum. The type used depends on the size of the job.

Femtocells are at the lower end of the small cell devices in terms of capacity and coverage range. They are often used in homes or small businesses, but can be packaged to cover larger spaces.

Picocells have greater capacity and cover larger areas, and are often set up in corporate offices.

A microcell or metrocell can handle hundreds of users and would likely be used in an urban center or a more remote area demanding greater coverage.

There are differing views of whether the market is fragmented. There are many more players than there are in the market for macro cells. However, there are a number of market segments and in some niches there is a limited amount of competition.

"Small cells, revenue wise, don't match the macro cell investment. It's a fraction of it, maybe 20%," Schoolar said.

The macro cell market includes six companies: Nokia Siemens Networks, Ericsson, Huawei Technologies, Alcatel-Lucent, ZTE and, to a degree, Samsung. Ericsson, Nokia Siemens and Huawei command over 70% of the market, Schoolar noted.

"There are almost 3 times as many small cell as macro cell developers, despite the fact that the macro market is larger," he added.

SpiderCloud Wireless chief marketing officer Ronny Haraldsvik says that the field is less cluttered when looking at specific segments of the market.

"It appears that there may be a lot of players in the small cell markets," he said, "but really there are only a few" in some niches.

Haraldsvik compares the small cell market to the segmentation that occurred in Wi-Fi a decade ago, with residential companies such as Linksys, now owned by Cisco, and developers of largest corporate systems such as Aruba Networks Inc.

"You just do not deploy a Linksys where you need an Aruba system or vice versa," he said.

In large-scale, indoor deployments for corporations or in stadiums, SpiderCloud's one consistent competitor has been Alcatel-Lucent, he said, although Cisco may have ambitions in the segment with the purchase of Ubiquisys.

Designing in-building cellular networks is a "struggle," Haraldsvik said, and is "costly, time consuming and requires highly trained radio engineers."

The residential and small business market, in which products are developed with readily available chips from Qualcomm Inc. or Broadcom Corp., has more players.

Informa Telecoms & Media estimates there will be $22 billion in global spending on small cells through 2016. Nearly 75% of the funds are expected to develop networks in public areas. The report called installing small cells in dense urban markets "one of the defining mobile network trends in the coming years."

AT&T's small cell deployment includes both indoor and outdoor transmitters. It does not include femtocells for consumers' homes.

Spending on small cells may be a hallmark of future development of wireless networks. "Look at capital expenditures for mobile operators. It's basically flat for the next five years," said Nick Marshall of ABI Research.

Data throughput projections, however, are expected to increase by 17 times to 25 times over the same period.

"How do they do that? Maybe the answer is small cells," Marshall said.

The consultant estimates that there are about 0.5 small cells for each macro base station. By 2018, he projects there will be 7 per macro station.

ABI ranked Ubiquisys as the top vendor of femtocell stations for the residential and enterprise market. Alcatel-Lucent and ip.access were second and third, respectively.

Ubiquisys has development deals with Nokia and NEC Corp.

Japanese carrier Softbank Corp. is a Ubiquisys customer, noted Catherine Trebnick of Northland Securities Inc., which adds to the company's appeal. AT&T's ambitious small cell deployment plans likely gave Cisco more motivation to make a purchase.

Trebnick believes that small cells and Wi-Fi will ultimately "marry up." "There is a need for the carriers to have Wi-Fi and to have small cells," she said. "Who doesn't use Wi-Fi on their cellphone?"

Ubiquisys might have been appealing to a company such as Ruckus Wireless Inc., she suggested, which has greater exposure to Wi-Fi.

Cisco already had a toe in the small cell market, through a stake in U.K. vendor and manufacturer ip.access.

Ip.access develops residential femtocells for AT&T and has shipped 1 million residential small cell units. The company has backing from Amadeus Capital Partners, Intel Capital, Qualcomm, Rothschild, Scottish Equity Partners and TE Connectivity.

Though ip.access declined to comment on the outlook for small cells, CEO Simon Brown told trade publication The Mobile Network that the Ubiquisys deal would prove that his company was more than just "a Cisco shop." It has 100 deployments, Brown said, of which Cisco is just one.

Another player is Airvana, a Chelmsford, Mass., company that develops femtocells. S.A.C. Private Capital Group LLC, Blackstone Group LP's leverage hedge fund GSO Capital Partners LP, Bain Capital LLC's Sankaty Advisors LLC credit arm and media private equity firm ZelnickMedia Corp. took the company private for $540 million in 2010.

Airvana is suing Ericsson, alleging that the Swedish networker breached a contract to use its technology without paying for it. The company seeks $330 million in damages and in court pleadings has raised the suggestion that Ericsson's options include buying the company.

Santa Clara, Calif.-based PureWave Networks has been developing outdoor small cells for rural settings and corporate campuses since 2009. It is introducing indoor small cells that emulate macro base stations but have lower power and physical dimensions suited to be deployed within a building.

"We are very big believers in public access small cell," PureWave vice president of marketing and business development Ronen Vengosh said. "There are not a lot of players in that segment of the market."

PureWave has funding from ATA Ventures, Leapfrog Ventures, Allegis Capital and Benhamou Global Ventures.

"Ultimately, I do expect there will be mergers in this space, particularly some of the big guys taking off the table some of the smaller players to pick up solutions they would not want to develop on their own," Vengosh said

"Looking at a market like Korea, which was one of the first ones to deploy LTE networks and one of the first to experience the capacity crunch that is coming with really uncontrollable growth in data demand, you're seeing some of these folks deploying a macro cell every 120 meters," he added.

It is difficult to increase the density of macro stations. Small cells have lower power ratings, reducing interference, and can be placed closer to users. "When you see that happening in other markets," Vengosh said, "you know that something big is going to happen."

Ovum's Schoolar suggested that Airspan Networks Inc., of Boca Raton, Fla., needs LTE small cells to reduce its dependence on WiMax. Airspan is publicly traded, but is controlled by Oak Investment Partners.

Small cells can provide a company such as Cisco, which does not produce macro stations, with a means to expand in wireless networking. "It's hard to get into the macro cell business," Schoolar said.

There are opportunities in small cells, data analytics, network planning and other niches. "If you want to be in the mobile infrastructure business," he said, "those are probably areas where there is an opportunity to get into the market."

With Ubiquisys leaving the market, the M&A opportunities for small cells are diminished by one.

The deployments by AT&T and others will define just what is at stake and how much networking companies stand to gain or lose by participating or passing. Cisco is not likely to be the last company to make a play.