The business of delivering broadband to multi-tenant buildings is undergoing a shakeout as companies are forced to sharpen their focus to survive
At first glance, it seems like a slam-dunk. As broadband services spread throughout both urban and suburban neighborhoods across the country, it would seem that extending those broadband pipes to businesses located in confined spaces (i.e., multi-tenant buildings or campus environments) would be a natural way to make loads of dough on top of any steadily rising residential revenue.
Most large companies (those with more than 500 employees) already have high-speed access. But, those big companies don't make up the majority of business enterprises in the United States. It's the vast horde of medium- and small-sized businesses that occupy most of the space in office buildings, parks and campuses around the country. And, the vast majority of these (80 percent), have Internet access via a Stone Age dial-up connection.
More than 20 companies were formed in the late 1990s to target this nascent MTU market. Today, however, a number of those companies have had to lay off employees, some have merged or been acquired, while others have had to pull the plug.
Nancy Szekreta, an analyst for Allied Business Intelligence Inc. and author of the recently released ABI study, "MTU, MDU and Hospitality Markets," says the retrenchment of the MTU market follows an almost fantasy-like period when investors poured money into the market and asked for little in return. Recent economic uncertainties have brought those footloose and fancy-free days to a grinding halt.
"The market," says Szekreta, "started about two years ago. In the beginning, we saw a huge land grab. It was like every company was saying, 'We've got more buildings than you.' But nobody was really doing anything with them.
"We now see a lot of companies changing their focus, rather than trying to get as many buildings as they can. Now, they'd rather have five buildings that are lit (and producing revenue), instead of signing up 10 new buildings."Getting the lay of the LAN
This overall market segment is often called the MTU (multi-tenant unit) market, although Cisco has coined the acronym MxU to describe this general category.
It's made up of several sub-categories. This includes MCUs, or multi-commercial/company units that cover commercial office buildings, including skyscrapers, as well as small- and mid-sized buildings and campuses. There's also the MDUs, or multi-domestic/dwelling units that represent residential apartments and condominiums.
Then, there's the MHUs, or multi-hospitality units that represent hotels, motels and resorts. Added to those categories is the MPUs, or multi-public units. This category covers public access areas like airports, airplanes, convention centers, train stations and restaurants/cafes.
There are also two generally accepted telecommunication approaches to multi-tenant structures. Service can be delivered through an in-building point of presence (POP), or from the outside through the more traditional central office (CO) deployment.
The more popular in-building approach uses either DSL or a variant thereof, or the HPNA (Home Phoneline Networking Association) standard. Other service providers and equipment manufacturers deliver content using dedicated fiber or category 5 copper wiring (i.e., traditional Ethernet cabling).
The debate between DSL over copper and switched Ethernet can be boiled down to several tradeoffs. DSL travels farther distances (up to 18,000 feet with ADSL, and up to 12,000 feet with HDSL), but has lower transmission rates (8 Mbps/ADSL, 1.5 Mbps/HDSL). There's also the issue of crosstalk, or interference, from nearby copper wires, and DSL-based services require a special CPE (customer premise device).
By contrast, switched Ethernet provides greater bandwidth and throughput rates (anywhere between 10 Mbps and 100 Mbps). But, it requires CAT 5 twisted pair and delivers signals only 330 feet without a boost.
HPNA technology gives providers an Ethernet hybrid that can run over the ubiquitous twisted pair phone line. Because it is standards based, it's compatible with a growing number of HPNA-compliant CPE entering the marketplace. This is particularly important in the MDU and MHU markets, where more CPE would be deployed.
While wire-based solutions are gaining the most attention in the MTU market, others offer wireless networking technology for mobile applications or for older buildings where installing new wiring is cost-prohibitive.Who's on (the) first (floor)?
In a December 2000 report "MTU Update: Growth Spurts in an Infant Market," Amy Helland, an analyst for Cahners In-Stat Group (an independent research division of CED's parent company), explains how the small and medium enterprise (SME) market is not a homogenous group. In fact, she says, it's characterized as "a split personality, with two very unique behaviors that (MTU) service providers can approach."
Type I companies, as she calls them, represent the vast majority of the SME market and are characterized as being relatively unfamiliar with communication technologies and are typified by "rudimentary or nonexistent connectivity capabilities." While these companies may currently have antiquated dial-up access, they're a prime market for broadband services and value added services (VAS), says Helland.
Type II companies are relatively tech-savvy and have more sophisticated networking needs. As a result, she says these companies represent "the more immediate potential to service providers to market a full suite of VAS products."Players, players everywhere
Despite the venture capital/funding drought that's spurring a retrenchment of the MTU market, there are still plenty of service providers and equipment manufacturers in place (see Figure 1). On the service provider side, many are learning from the mistakes other companies have made, and they're bowing to investor pressure to produce more revenues, not more building contracts.
Figure 1: Despite layoffs and a few closings, the MTU market has plenty of players.
Everest Broadband Networks, an MTU service provider, is very serious about learning from the mistakes of others, says Mike Granieri, senior public relations director for Everest. He notes that while the company received a much needed $50 million infusion last December, it's not resting on its bank account. In fact, it's just the opposite.
"Right now," says Granieri, "we have to make the assumption that this $50 million has to last us until we get to the point that we're self-funding. If the capital markets don't open up, we are prepared not to wire any more buildings and continue to sell in those buildings we've already wired to get us to where we can fund ourselves."
To help concentrate its efforts, says Granieri, the company has put most of its energy in developing its MCU services and products.
Granieri says Everest is currently focusing on seven markets with approximately 150 wired buildings. The company's sales force has been directed to sign up as many tenants and/or services as possible in those buildings.
The company offers high-speed Internet access, competitive long distance telephone service, Web hosting services, digital broadcast satellite television, and advanced Internet applications.
The company recently announced the rollout of its Liquid MegaBit service where customers can increase their bandwidth on the fly. There are plans to roll out local phone service in the near future, as well as VoIP (voice-over-Internet protocol) service not long after that.
This concerted effort to get to profitability, says Granieri, serves two important functions. "I think investors are really looking for companies that have smart business models," says Granieri. "They're saying the model needs to prove out over time or they won't get any more capital.
"(At the same time), we're trying to get as deep into the pocketbook for telecom and IT spending as we can with the small- and medium-sized business customers. Not only does it mean you generate more revenue per customer on a monthly basis, but it also means the more services you sell, the more loyalty you build with the customer in terms of whether they want to switch providers or not."
Kenetec Inc. has developed a delivery platform for service providers who are interested in snagging a part of the MTU market. "We are a hardware and software delivery platform," says Nate Kalowski, vice president of marketing for Kenetec. "What we do is enable service providers to turn on these services very quickly and cost-effectively inside of these shared tenant facilities."
Figure 2: SBAN architecture. Kenetec’s SBAN architecture is designed specifically for service providers to tap the MTU market. ©2001 Kenetec.
The company's products are based upon a Services-oriented Building Area Network (SBAN) architecture (see Figure 2). The SBAN solution is helped along with the company's EdgeXpress products. The EdgeXpress 1000 Service Access Unit, which resides in the tenant's office, provides 100 Mbps data access, as well as legacy and packetized voice on a single fiber or copper riser. The unit can support businesses with up to 250 to 300 people and/or up to 48 trunk lines.
The EdgeXpress 5000 Series Service Platform is an aggregation device typically located in the basement of the building it serves. It receives traffic and directs it either to a local server farm, which could reside in the building as well, or to a WAN, POP or the service provider's CO/headend outside of the building.
"It could be very important to the service provider to be able to switch that traffic locally within the building," says Kalowski, "particularly if you see some local value added service (VAS) opportunities. There are some interesting things you can do.
"The service provider could offer backup services for client businesses. They could provide caching services for video streaming applications. There's a number of things they can do, and they can charge for them."
Because EdgeXpress equipment will be facilitating voice and video applications, Kenetec developed a three-tiered quality-of-service (QoS) functionality into the system as well.
Ben Gibson, senior product manager for Cisco's Building Broadband Solutions Unit, says his company started looking at the MTU market about two years ago when it started to see an increase in Ethernet switches being deployed by service providers.
Cisco did its research and found that 85 percent to 90 percent of the applicable buildings worldwide were not wired for data.
"What we wanted to do," says Gibson, "was combine the benefits of Ethernet, which is, in fact, the de facto corporate networking standard, and all the benefits of Ethernet in terms of cost and performance. We also wanted to find a way to extend Ethernet over single pair voice wiring, which currently only has a reach of 100 meters."
The company came up with what it calls Long-Reach Ethernet (LRE), which enables the simultaneous delivery of voice, video and data services at 5 Mbps to 15 Mbps over existing twisted pair at distances up to 5,000 feet.
This ability to exploit existing wiring has definite benefits, says Gibson. Cisco and Starwood Hotels and Resorts Worldwide recently formed a strategic relationship to introduce broadband technology in Westin, Sheraton, Four Points by Sheraton and W hotels beginning this year.
Starwood will work with Cisco to develop new broadband-based communications and entertainment services, such as VoIP. Gibson believes the Starwood deal could just be the beginning.
"We see a shift in this market where the property or hotel owner is really looking to invest in the network and infrastructure and then take the majority of the revenue windfall from those services being piped over existing wires."
Many companies, whether they're large or small, have staff members on the road a good part of the time. Often, those people need to access their corporate intranet or even a VPN. MobileStar Network Corp. took that task in hand and created a "virtual office" experience with its wireless broadband Internet access service.
Its growing national "footprint" takes wireless connectivity to the locations travelers frequent most, such as hotels, airports, restaurants, business service centers, and even coffee shops. The company recently announced a deal where it'll supply wireless Internet service to more than 4,000 Starbucks coffeehouses across the country over the next two years.
George Sutton, MobileStar's COO, says the service is a real benefit to traveling executives who need to stay in touch with their office. "Our service is a client-less based service," says Sutton, "which means you don't have to load special client software onto your PC or system to be able to access through your corporate VPN or office servers or networks. This a boon because I think something like 83 percent of the Fortune 1500 have VPNs in place now."
MobileStar uses what it calls access point technology based on the 802.11b standard. The access points, which are located in high-traffic areas, work with a special PCMIA card in traveling laptops.
Sutton says its business model can include a sharing of revenues with access point hosts. But, he says, that's changing as well. "There's a changing model where more and more of the venues are willing to help us with implementation and build out because they see it as migrating from a nice amenity to a necessity over time.The 500-POUND gorillas?
While there's lots of discussion about competition from other entrepreneurial companies, analysts and entrepreneurs alike note that the big boys (i.e., the remaining RBOCs) are sniffing around the MTU yard and could pose a credible threat in the future.
In fact, late last year, Verizon completed its acquisition of OnePoint Communications Corp., a provider of packaged data and voice services to apartment buildings and condominiums. The new entity, renamed Verizon Avenue, plans to expand into the MCU market as well.
Kenetec's Kalowski doesn't seem worried...just yet. "Verizon is targeting the residential space," says Kalowski. "AT&T and Sprint, as far as I am aware, do not have an in-building solution. Of course, they're (somewhat) involved in these markets. But they are not deploying in the same way a traditional BLEC (building local exchange carrier) or an in-building service provider does."
Cahners' Helland thinks the market will stay essentially flat this year, with a possible uptick in '02. "For the short term," says Helland, "you'll see a lot more of the same. That is, some of the companies that entered the market last year will fall to the wayside.
"I think we'll begin to see some of the traditional players entering the market. As far as deployments, I think they'll continue to (be) fairly slow the rest of this year. That will probably pick up in 2002."
ABI's Szekreta says that while one or more of the big boys may buy their way into the market, the entrepreneurs who have blazed the MTU trail and survived will only get stronger.
"I think some of them (the RBOCs) might try to do their own thing," says Szekreta. "And because this industry has left so many other players weak, there is a good chance that some of them will be bought up (by the RBOCs). However, some of the RBOCs may just stay out of it and wait and see how it pans out. That's because of what they've seen so far–it hasn't really been anything they want to jump into.
"I see a lot of rebuilding for other companies. Unfortunately, there will also be a lot of companies bowing out of the market. But those that remain really have no other (way) to go but up, because there is such a great potential here.
"There are a variety of factors in play here, with the economy and the technology being pretty much figured out. However, among the people I've spoken with, everybody has faith in this market. I definitely think we're going to see a lot more activity."