The emergence of the "residential gateway" as an entry point to the burgeoning home network market and the impressive revenues it promises is sparking increased interest among a growing collection of service providers, set-top box and cable modem manufacturers, and a host of other entrants.

The home network market is expected to be valued at $5.5 billion by 2005, with 68 million households having multiple computers and about 37 million households having some type of home networking connection, according to Parks Associates. For many service and hardware providers, this translates to greater profits.

Motorola Broadband Communications Sector's DCT-5000+ set-top.

Add to the residential gateway mix new technologies and services such as audio amplification, DVD, HDTV, telephony, personal video recorders (PVRs) and more, and the residential gateway market suddenly becomes a viable, albeit vast, business.

"As a business, it's (residential gateways) worth billions of dollars, and the goal is to supply the growing demand for home network devices without truck rolls. The business model is putting all the capabilities and applications into a box or modem," says Kurt Scherf, senior analyst for Home Networks for Parks Associates, a Dallas-based media research and analyst firm.

Defining a residential gateway is tricky, however. But Parks' definition is probably as good as any. It defines a true residential gateway as: "A device allowing Customer Premise Equipment (CPE) connected to in-home networks to use services from any external network, regardless of media."

Cisco's Internet Home Gateway product.

Building the gateway to home networks and connecting myriad devices throughout the home is a work in progress. Just where, and from whom, the revenues will come from, and which type of gateway device will end up as best of breed is prompting a cross-section of manufacturers and service providers to explore their best business options in the fledgling gateway market.

"At this point, the technology is still ahead of the game and demand. But it's in the right place, and few people doubt that we'll see cable offering gateway services such as voice, and there's a lot of different flavors to set-tops and modems for that," Scherf says.

Wading into the potential revenue pool of residential gateways isn't without risk, however. Costs and competing standards such as HPNA (Home Phone Networking Alliance), Home RF and others, along with varying degrees of interest in power line, Ethernet and wireless applications are muddying the waters, pushing most companies into a cautiously optimistic business strategy.

"We know the costs we would have to incur to embed applications like Bluetooth into our set-top boxes, but the costs generally look really good for silicon additions and are not a barrier to making our Explorer set-tops true gateway devices. But the standards will dictate to us what the applications will be," says Tony Wasilewski, chief scientist for software systems for Scientific-Atlanta Inc.

The cost of adding a disc drive to S-A's Explorer series 2000, 3000 and yet-to-be-released 6000 is approximately 30 percent higher than the regular box, or $90 more for S-A's Explorer 6000, Wasilewski notes, making the 6000 price about $390. "Adding disc drives and DVD can happen now because we've already architected the Explorers with buses and basic connectivity. So the addition of disc drives is a factory stuffing option," adds Wasilewski.

Dwight Sakuma

The market, however, will determine just how many boxes come equipped with gateway-type applications and features. "We want to see multiple set-tops in homes as the market demands different boxes, and want to provide features such as PVR capability and audio amplification. We haven't embraced the functionality yet of one box pulling several services and PCs. We're on a path to add features, but our three- to five-year strategy is toward that strategy," says Dwight Sakuma, director of marketing development for the digital network systems group at Motorola.

Gateway providers are being pulled from another source as well. Says Sakuma: "Replay systems like Tivo and Replay are out there with EchoStar and DirecTV, so MSOs (Multiple System Operators) are telling us they have to have this technology to compete because consumers are now understanding the technology for time recording capabilities."

Motorola's gateway business model will also include the retail market, Sakuma adds, including a brand awareness campaign. "Our retail split is 10 to 15 percent of distribution into 2002, and then we'll start seeing retail momentum. We're looking at a product line model to ready ourselves for bigger retail sales in 2002 and want to build a brand name awareness," he explains.

Yet many companies entering the residential gateway market are still debating the cost versus ROI (Return on Investment) during the market's infancy stage, especially at the retail level. Adds Sakuma: "We've done some rough cuts on the DVD and PVR markets, and the numbers are sketchy. We've also looked at the best numbers for Tivo and Replay, which go for $400 and $600 respectively, and we're saying the numbers are real iffy. It's great technology, but consumers don't get the value yet."

MSOs seem to be getting it, however. According to Motorola, cable operators are sending "strong indications" that they will buy 30 percent to 40 percent of their set-top boxes with PVR capabilities by first quarter 2001, and boxes with HDTV decoders, DVD and audio amplification capabilities by fourth quarter 2001.

Kelly Atkinson

Some modem manufacturers such as Com21 Inc., however, are moving their gateway products outdoors to the side of the home, and building their business models around that strategy. "Demand is currently driving the gateway market and MSOs are buying access into homes with video, voice and data services, and the satellite guys can't do that. There's lots of connectivity inside the home with appliances being added all the time," says Kelly Atkinson, senior product manager for Com21.

DOXgate is Com21's Integrated Access Device (IAD), which is now in lab trials and scheduled for field trial at year's end. It will be the company's gateway product for telephony services. "Wires from a Bell box will be connected to DOXgate at the side of the house. It has HPNA specs and eventually will have power line, and will offer four toll-quality voice lines over the cable," Atkinson says.

Yet Com21, Atkinson explains, won't roll DOXgate out to the retail market. "We're pushing forward on our retail market strategy with our regular cable modems, not DOXgate, which is installed by cable operators at the side of the house, and designed to reduce the number of boxes in the house from three to two," he points out.

3Com Corp., another cable modem producer, recently announced its residential gateway product, HomeConnect, which is built to connect multiple PCs inside the home.

Despite the apparent financial benefits derived from offering residential gateway services, at the end of the day, cost efficiency and scalability rank near the top of the service providers' wish lists regarding residential gateways, and are two of the four key gateway attributes they look for, says Mark Dwight, manager of product marketing for Cisco Systems Inc.

"Sheer scalability; supplying home networks with connectivity; voice-over-IP for broadband and integrating services like voice and data; and managed services are the attributes service providers are looking for," Dwight says.

Cisco's entry into the residential gateway market will be marked by several partnerships, Dwight adds. "We'll do lots of partnerships with equipment manufacturers and device manufacturers for gateway connections for telephony, Web tablets, managed services and with other Internet enabling companies like Whirlpool to help network their appliances."

Modularity, Dwight notes, is also a factor in Cisco's migration to the residential gateway market. "Residential gateways need to be a good router and need good modular interfaces with different power lines. That's what we're working on," he says.

Cisco, Dwight admits, doesn't have a commercially available residential gateway product with HPNA yet, but that is changing. Says Dwight: "We're planning to introduce a commercial product early next year with HPNA built into it, and we're adding multiple ports for Ethernet and voice-over IP." The street price, he adds, will range from $299 to $499.

"Cost is an important factor and it can get away from you fast when you add media servers and other components. The minute a component is thrown into a box, customers don't see the value. So, we're trying to unbundle these gateways," concludes Dwight.

The residential gateway market may need some unbundling itself, however, and comes with some caveats. Concludes Atkinson: "Networking tends to move very quickly, and the market tends to get overblown with hype, like a dot-com."