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Ubiquisys sheds VCs as Avaya sees femtocell business up for 3GSM

Highest profile of the new generation of companies building very very small mobile phone cells, or femtocells, would be VC-funded Ubiquisys - or at least, till the coming weekend. After that, say finance sources, Accel, Advent and Atlas will have comfortably over a hundred million dollars to share out amongst 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 was expecting Ubiquisys backers to be able to execute on their exit strategy for another couple of years.

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

Best guess for who is providing the $150m plus to buy the VCs out is VoIP market leader in corporate comms, Avaya, 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. SMB is an area where mobile phone usage has started using 3G technology. And 3G technology is very 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 that 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 under way 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 being the rollout of WiFi 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 amongst their bigger investors for a switch to a femtocell strategy, which they will almost certainly have to subsidise.

At the moment, very 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 two billion pounds sterling 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."

Zonegate details