Small Cell-Big Implications

June 27, 2012

EMERGING TECHNOLOGY RESEARCH

Small Cells, big implications –
tackling the wireless capacity crunch
Equity Research
What are Small Cells, and why do they matter?
“Small Cells” are an emerging type of wireless infrastructure equipment,
including flavors such as femto, pico, and micro cells, that connects mobile
devices (e.g. handsets, tablets, etc.) to a carrier’s network.That function is
currently served by base stations in the Radio Access Network (RAN),
which is a $35 bn market led by vendors such as Ericsson, Huawei, AlcatelLucent, and Nokia-Siemens Networks. Carrier spending on the RAN is the
single biggest driver of wireless capex, at about 80% of the total.

Market inflection caused by the wireless capacity crunch
Due to the rapid adoption ofsmartphones and tablets, mobile data is
growing at 80-100% annually. Base stations alone (also known as macro
cells) will not be able to keep pace with the growth, even accounting for the
upgrade to 4G/LTE (which allows a 2X gain in capacity) and continued
tower additions (up ~5% annually). This means that Small Cells, including
WiFi, will be needed to “densify” the network in order to provide thenecessary capacity. We believe that inflection is starting this year, with
AT&T starting a trial deployment in late 2012, likely followed by a
commercial deployment of Small Cells in 2013. We estimate the Small Cell
market will grow from $1 bn in 2011 to $6 bn by 2016, representing 18% of
the RAN market by 2016.

The key debate: Incremental, or cannibalistic?

Simona Jankowski, CFA
(415)249-7437 simona.jankowski@gs.com
Goldman, Sachs & Co.

Jason Armstrong, CFA
(212) 902-8156 jason.armstrong@gs.com
Goldman, Sachs & Co.

James Covello
(212) 902-1918 james.covello@gs.com
Goldman, Sachs & Co.

Tim Boddy
+44(20)7552-1036 tim.boddy@gs.com
Goldman Sachs International

Simon F. Schafer
+44(20)7552-3631 simon.schafer@gs.com
Goldman Sachs International

James Schneider,Ph.D.
(917) 343-3149 james.schneider@gs.com
Goldman, Sachs & Co.

Kent Schofield
(415) 249-7489 kent.schofield@gs.com
Goldman, Sachs & Co.

Our conversations with carriers suggest that while they plan to adopt Small
Cells as part of their RAN, they will likely do so at the expense of, rather
than in addition to, their spending on base stations, as they try to keep
their overall capitalintensity (capex/sales ratio) in check. Thus, we expect
Small Cells to be cannibalistic to the basestation supply chain over time, in
particular in areas where deployment is attached to dense urban rooftops.

Jonathan Hong

Stock implications: positive for BRCM, NTGR, QCOM, and
CSCO; negative for ALU and ERIC; neutral for Towers/Telcos

Alexander Duval

We see Small Cells as anincremental opportunity for Qualcomm (chip and
IP provider), Broadcom (chip provider), Netgear and Cisco (Small
Cell/WiFi providers). We see it as a long-term threat to Alcatel-Lucent and
Ericsson (basestation providers). For basestation chip providers Altera and
Xilinx, we see any impact over the next 1-3 years as far outweighed by the
benefit of their rising semiconductor content in LTE basestations. We see
neutral implications for the Towers and the Telco stocks.

(212) 357-9111 jonathan.hong@gs.com
Goldman, Sachs & Co.

Amanda O'Brien, CFA
(212) 357-4810 amanda.obrien@gs.com
Goldman, Sachs & Co.

+44(20)7552-2995 alexander.duval@gs.com
Goldman Sachs International

Doug Clark
(415) 249-7453 doug.clark@gs.com
Goldman, Sachs & Co.

Gabriela Borges
(212) 357-2692gabriela.borges@gs.com
Goldman, Sachs & Co.

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