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April 5, 2012
Industry Report
Table of Contents
Overview: Small Cells Possibly Coming Soon to a Lightpost Near You ........................................................................ 3 Mind the Gap Innovation Required ............................................................................................................................... 4 Network Evolution 1G/2G/3G; 4G approaches Shannons Law Limits ........................................................................ 5 Small Cells: From Macro to Pico to Femto ...................................................................................................................... 6 Market Forecasts: Femto Cells => Pico Cells .............................................................................................................. 10 Key Technical & Business Challenges of Small Cells ................................................................................................... 11 Small Cells: An Emerging Ecosystem ........................................................................................................................... 12
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Youve been talking about small cells for the past couple of years [] Can you let us know if you think this will be the year of the small cells in the form of either carrier WiFi or picocells? (Mark McKechnie) [] on the small cells stuff, I mean thats obviously started now with people starting to deploy some of those cells. The issue with the current deployment is that you have interference created between femtocells and the macrocells when you run them on the same frequency. So what weve developed is a lot of self-organizing networks and interference management technologies that weve put into some of the products that have launched. But in terms of when its going to really be a mainstream thing, we do see some operators taking that approach that they are going with a lot of small cells and I dont think its going to be mainstream for a few years yet. [] We really are talking about a pretty radical rethinking about the way the networks are going to be built out. [] So we think that eventually small cells will be kind of the cost of a phone, maybe even cheaper than a phone, that you'll see densification to the standpoint that it's almost maybe 1:1 small cells and phones. (Paul Jacobs, Qualcomm CEO) GSMA Mobile World Congress, 2/27/12
Exhibit 1: Small Cells Possibly Coming Soon to a Lightpost (or Windowsill) Near You
Source: Alcatel-Lucent Metro Cells brochure, AT&T M-Cell website, Ubiquisys website
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base stations to intensify as we move to 4G smart phones. There is really no other way to offer capacity absent the small cell, either through cellular (3G/4G), carrier-WiFi, or more likely a combination of both, in our view.
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Exhibit 3: Bridging the Gap Between Traffic Growth and Network Capacity
Source: ThinkEquity LLC estimates We see four options to fill the gap: 1) open more spectrum to carriers to add more channels to current cells; 2) upgrade from 3G to 4G to improve bandwidth per available spectrum; 3) small cells in the form of 3G/4G picocells and/or carrier WiFi; or 4) adaptive traffic management in the form of deep packet inspection or video processing. Alternatively, policy management or metered pricing could also be used to reduce the demand. Adaptive Traffic Management. While this is a subject for another separate piece, there are companies which offer a new approach to managing the IP traffic intelligently. This includes DPI (Deep Packet Inspection) from the likes of Allot Communications, Sandvine, and Procera. Adaptive Traffic Management companies include Bytemobile, Ortiva Wireless, Vantrix and Media Excel which intelligently adapt video and other content to the available network bandwidth and thus conserve scarce traffic capacity, or Movik Networks, which enables carriers to smartly direct RAN traffic across 3G/4G and WiFi networks. Stay tuned for more on this segment.
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Cellular architecture to the n degree. With spectrum and site acquisition the scarce resources for offering cellular coverage, the key innovation in the 1980s and 1990s was spectrum reuse in which a carrier uses the same spectrum over and over across its network of base stations or cells. The first mobile phone network, IMTS, consisted of a huge antenna in the Chicago area which offered 20 miles of mobile phone coverage with just one base station. This of course was analog and could initially only support approximately 25 simultaneous calls. To add more capacity, the concept of a cell was born in which the carrier reused the same scarce spectrum over many cells, each of which could support the same 25 users, thus 10 cells could support 250 users. 2G, 3G and 4G all added to the efficiency of the networks by squeezing more bits out of the scarce spectrum, which is measured in Hertz (Hz).
th
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Exhibit 7: Examples of Macro, Small and Femtocells ERIC RBS6000 macro cell Ruckus WiFi + LTE small cell ip.access femtocell
Source: Ericsson
Source: Ruckus
Carrier WiFi vs. 3G/4G. The two competing small cell solutions include 1) carrier WiFi and 2) 3G/4G small cells. We also believe mixed-mode small cells will become the norm, as a carrier who secures the real estate and backhaul for a small cell will want to offer 3G/4G for voice and Carrier WiFi for data. Carrier WiFi makes a lot of sense as it uses unlicensed spectrum, handsets all generally support WiFi, and WiFi silicon costs have come down to hit the sweet spot, in our view. Additionally, the new HotSpot 2.0 standard offers automatic authentication for smart phone users tied to their SIM account at a carrier. Thus as an AT&T wireless subscriber, the carrier can automatically connect or offload a user to WiFi when an AT&T WiFi cell is available.
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Pico
< 200m
10-30
1-20W
MSPD BRCM
Femto
~10m
2-10
20-50W
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Mobile Experts weighs in with precision. A 2011 Mobile Experts study revealed the following projections: sales of about $1.5B worth of small cell gear for wireless backhaul in 2016; enterprise and public area picocells are set to grow from 140K in 2012 to 540K in 2016, a 4x increase; and public access small cells which are mostly installed outdoors and encompass microcells and metrocells are set to grow from 595K in 2012 to 2.9M in 201 (+480%). In addition, the study noted that between 2012 and 2015, public access small cells should evolve from traditional designs to next generation models. The study also indicated that in 2011, femtocells deployments numbered 21; there are three thus far into 2012. Additionally, we highlight increased adoption rates amongst service providers with deployments growing to 39 total providers in 23 different countries during 1Q12, with eight of the 10 largest mobile operators now offering femtocell services.
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Motivations for small cell deployment. A December 2011 report from Infonetics highlights the catalysts for small cell deployments in the enterprise. As we anticipated, optimization of an existing local deployment highlights the leading driver amongst respondents. The survey indicated that operators are expecting to double the percentage of small cell station units from 6% in 2011 to 12% in 2012.
Source: Infonetics
AT&T actively deploying femtocells. Recently, at the Mobile World Congress in Barcelona, AT&T announced the intention to test small cells within its network later this year along with the announcement that it presently counts several hundred thousand Cisco femtocells in its existing network. AT&T began offering Cisco femtocells in April 2010. The device acts as a miniature base station, allowing users to tie AT&T service to their home internet connection
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Source: Informa
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As shown below, Infonetics qualitative analysis into service provider obstacles associated with deployment of femto/small cells indicates the transition from a macro-centric environment to next-generation solutions remains the key technical challenge in the deployment of small cells.
Source: Infonetics
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Source: Informa Weve seen this act before, and have an inkling that the smaller players may be the ones to watch. Below, we lay out our view of the small cell ecosystem: Primary Participants ALU, ERIC, NSN, Huawei. The macro base station vendors have long spoken of the HetNet, or Heterogeneous Network, in which a spectrum of radios / base stations ranging from 3G/4G, carrier WiFi and pico/femtocells will be used to effectively provide coverage and capacity across the geographic topologies. ALUs lightRadio architecture uses the cube as a key RF building block in pico to macro cells with various configurations depending on the deployment requirements. All appear heavily invested to become the system integrator of choice to the global carrier community. ERICs recent acquisition of carrier WiFi play BelAir Networks illustrates the urgency of new thinking in network roll-outs. CSCOs MWC announcement of small cell product lines reinforces the theme. Emerging Systems Makers. The entrepreneurial efforts are alive and well in small cells with a range of players offering differing approaches are emerging. Ruckus Wireless, a Silicon Valley-based leader in enterprise WiFi systems, is moving aggressively into the small cell space in both carrier WiFi and mixed mode solutions which add 3G/4G. The companys core competence involves the ability to scale across large user bases by way of its smart antenna technology and controller architecture. Tests done by Toms Hardware illustrate the advantages of Ruckus system which we have confirmed from various industry sources. ip.access, a UK-based small cell player, has emerged as a leader in 3G femtocells by supporting one of the larger global deployments with AT&T Wireless and its home femtocells that offer cellular coverage to customers with poor signals near their homes. The
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companys solution includes a wide range of femto and picocells along with a proprietary controller to connect back to the macro network. Ubiquisys, also UK-based, is another emerging leader with a twist. Ubiquisys announced its smart cell line up at MWC which together with INTC silicon offers a unique solution that offers local caching with ~40G of on-board flash to ease the backhaul burden by caching regularly used content (i.e. video) for a local area. Each of these companies brings their own unique core competencies to the table including first to market, unique system architecture where most offer their own controller hardware. Backhaul Players. We focus primarily on the wireless backhaul players but also believe the classic fiber suppliers will feel the additional traffic demand from WiFi/3G small cells. Most of our industry contacts see a large enough opportunity in the standard $8B wireless backhaul space with small cell backhaul as gravy. There appear to be some disruptive solutions from newer companies such as Exalt Communications, which may be gaining share by starting with a clean sheet to design Ethernet-based solutions and BridgeWave which is aggressively targeting the 80GHz market. Tower Companies/WISPs (wireless internet service providers). Towerstream (TWER) is getting involved by securing real-estate rights in densely-populated metro regions in NYC, Chicago and SF which it plans to lease or resell to the larger carriers including Verizon and AT&T to augment their carrier WiFi footprint. iPass (IPAS) is focused on playing the middle man to support global roaming of WiFi users. Devicescape provides WiFi offload capacity through its virtual network of third-party WiFi hotspots based on a given operators policy preferences. Chip Makers. We see a classic David vs. Goliath dynamic brewing amongst the chip makers for their fair share of the overall BTS (base transceiver station) silicon space. There is a battle staged between the incumbent macro cell vendors such as FSL and TXN trying to move down to the pico/femtocell space, and the small cell challengers starting with a beachhead in femto cells and trying to move up to pico cells, but they may not ever make it up to the macro cell. We estimate ~$1,000 of content for the macro cells, which could be higher depending on the number of users supported and power levels and ~$25-$50 for the small cell players. Small cell participants include MSPD, BRCM, and QCOM. MSPD recently bought small cell leader PicoChip to provide near-term 3G femtocell business ahead of its 4G Transcede ramp. Top customers include ALU which showed off a lightRadio cube-based solution with MSPDs baseband at MWC, ip.access, which resells products through CSCO to AT&T and has 11 carrier relationships, along with some content in BelAirs (ERIC) dual-mode metro solution. We note that ip.access has begun working with FSL for their 4G solution in the 2013 solution, but believe MSPDs 3G business has growth ahead and may be able to capture follow-on 4G content. BRCM may have bought Percello for $86M in November 2010 as its play on small cell but also appears to have good internal WiFi capabilities and may be a contender with recent wins at Ubiquisys. QCOM is making a strong push with its FSM small cell solution that gets them back into the infrastructure market and who we believe may be designed into CSCOs new product line. INTC is showing up with a focus to support smart cell solutions from Ubiquisys and may move into basebands with its CEVA-based Infineon division. On the RF/Transceiver side, MXIM and ADI appear positioned with analog transceivers; MXIMs recent investment in private company Scintera which makes analog pre-distortion products may prove important in achieving price points and scale necessary for broad market deployments of small cells. There also appears to be interest from the traditional RF food chain including RFMD and SWKS in the emerging small cell space as well as privately-held CMOS Power Amplifier companies such as BlackSand, Amalfi, and RF Access.
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Investment Risks. Small Cells represent an emerging technology which we believe may prove disruptive to the overall industry. We see numerous risks or ramp limiters which may prevent, slow, or otherwise impact the deployment of small cells relative to our views. Key risks for the industry include 1) carrier capex budgets, 2) technical / integration risks of small cells into the macro network, 3) macro cell advances could accelerate to diminish the relative benefit of small cells, and 4) small cells require real estate site acquisition and backhaul solutions.
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Rating Definitions
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/ Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity recommends initiating or increasing exposure to the stock. Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock is fairly valued. Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity recommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
133 53 11
12 1 0
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This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Additional information on the securities referenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of FINRA and SIPC. Copyright 2012 ThinkEquity LLC, A Panmure Gordon Company
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