T-Mobile Backs Femto Chip Startup

T-Mobile Venture Fund has dipped into its purse to invest in another femtocell company and this time put its money into Israeli semiconductor startup Percello Ltd. (See Percello Raises $12M.)

Percello just raised $12 million in Series B financing, led by 6691|Granite Ventures LLC} and Vertex Venture Capital, bringing the total amount raised to $18 million since the company started up last year. T-Mobile joined as a strategic investor in the latest funding round.

The deal is T-Mobile's second femtocell investment. Earlier this year, T-Mobile revealed that it is a strategic investor in U.K.-based femto firm Ubiquisys Ltd. and that it was trialing the vendor's home base station in Europe. (See T-Mobile Invests in Femto Firm.)

"T-Mobile considers femtocells as an important technology going for mobile broadband," said Dr. Klaus-Jurgen Krath, senior VP of radio network engineering and quality at T-Mobile International AG , in a press statement. "The baseband chip that Percello develops is the most critical component related to quality and mass market compatible price points."

Percello makes baseband processor chips for 3G and Long-Term Evolution (LTE) femtocells. Its first chip for 3G femtos, the PRC6000, complies with 3rd Generation Partnership Project (3GPP) Release 7 and can deliver 21.6 Mbit/s on the downlink and 5.76 Mbit/s on the uplink. (See Percello Uses CEVA.)

The PRC6000 will be available to customers for integration in the first quarter next year. It will be commercially available at the beginning of 2010. Percello targets femtocell access point vendors and residential gateway manufacturers, but the company has not announced any customers.

The startup is also developing a dual-mode chip that supports both UMTS and LTE, according to CEO Shlomo Gadot.

"LTE is an evolution, not a revolution," says Gadot. "It's much better for operators to do more than have just a single-mode LTE [femto]."

The femtocell chipset market is wide open to startups like Percello and its more established competitor picoChip Designs Ltd. because the home base station market is not big enough yet to attract the big chip makers.

“The larger silicon vendors don’t yet see enough volume to make dedicated femtocell chips worthwhile,” says Gabriel Brown, senior analyst at Heavy Reading. “That provides an opportunity to smaller, VC-backed, companies.”

Other femto vendors have taken a different approach with their chipset strategies. For example, Airvana Inc. (Nasdaq: AIRV) uses commercial components and adds its own software, while RadioFrame Networks Inc. designs its own silicon for its femtocell devices. (See Femto Vendor Lands $28M.)

Qualcomm Inc. (Nasdaq: QCOM) is understood to be working on a femto chip and has a strategic investment in ip.access Ltd. WiMax silicon provider Runcom Technologies Ltd. recently said it will develop WiMax and LTE femtocells. (See Qualcomm Invests in ip.access and LTE Hopeful Runcom Pockets $10M .)

Femto silicon providers are under pressure to reduce the cost of the chips, as this is a critical factor for operators to devise business plans for offering femto devices and services. But it is a classic chicken-and-egg scenario: Volume orders from operators will drive prices down, but operators are reluctant to place big orders until they see clear evidence that prices will drop. (See PicoChip Unveils Low-Cost Femto Chip, Vodafone CEO Seeks Cheap Femtos, and Femto Chips Too Costly.)

“Operators want to see a significant amount of investment going into femtocells," says Brown. "It’s important for carriers to see there’s money going into the component side because it gives them more confidence in the supporting ecosystem.”

Percello's Gadot adds, "Operators are trying to drive this market. It's of interest to them because they want to get into the house and take out all the traditional old telephone systems. Whenever they feel it's mature enough they’ll start buying in big numbers."

— Michelle Donegan, European Editor, Unstrung