Profiting from the puzzling array of products and services loosely defined as a home network is a tricky business. In fact, some believe it's not a business at all, at least not yet.

Few are actually making significant money from home networking services, which could include anything from home security to talking refrigerators, depending on the device du jour. Just defining a home network can be an exercise in futility, and making a business case to build and market a home network can be as complicated as the definition itself.

Consequently, cable operators are proceeding cautiously into the home network space, while competitors such as ILECs, ISPs and select telcos are just slightly more assertive.

Figure 1

Nevertheless, most believe some of the myriad components that make up a home network will eventually be chargeable services and products, whether as stand-alone offerings or when sold in a bundle. The other products are projected to simply be value-added services to enhance a cable operator's or other service providers' core products. Either way, many experts agree the business case for home networks is intriguing, and revenues potentially spectacular.

For example, The Yankee Group forecasts that 1.6 million homes will have added networks by year's end, a figure that will grow to 9.5 million homes by 2003. Revenues from those services are projected to reach $2.2 billion by 2005, according to Paul Kagan Associates. Cahners In-Stat Group predicts 6.1 million U.S. households will have some form of home networking by year's end, and 15.8 million will be networked by 2004. And the numbers keep coming.

For the cable industry especially, the home network business model is being explored with increased interest. Competition, additional revenue streams, churn reduction and lift for its core products are driving operators into the home network space, albeit with caution and questions as to whether there's real money to be made in the home network market.

Some experts suggest cable operators may not have a choice. "Operators want to stay in the video business, but they must get into home networking to compete with DSL. They have no choice because DSL is entering the home network business," says Michelle Gao, research analyst for broadband and wireless technology for Frost & Sullivan, a media research and analyst group.

Choosing to enter the home network market is far from a no-brainer, however. Customers have yet to show a genuine interest in home network products, and in most cases, don't even know what they are, and business cases are just now being explored. "It's a work in progress, but it's occurring and we want to be part of the home network market. That's our business strategy and it's a significant strategy in our portfolio," says Mark Bell, product development manager for Cox Communications.

Cox, Bell notes, will conduct a "friendly" trial of home network products to 50 employees for 30 to 60 days, then with 200 hand-picked customers. "We need to trial these products to see what the market will bring and what they're willing to pay for. We think products like energy management, home security and automation, and connection of data services are possible businesses, so we're looking at being the in-home network provider," he says.

Predicted revenues for various combinations of home network products, either stand-alone or in a bundled package, vary greatly. One study from Minerva Networks, a player in the home network market via it's IP television service, projects revenues between $40 and $315 per month for home network services, which could include PVRs, gaming, VOD, digital music, t-commerce, an unlimited number of live TV channels and targeted advertising.

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"Movies and movies-on-demand are very profitable, and targeted advertising is very lucrative. Today, our business model is with the telcos, but all of these numbers hold true for cable," says Patrick Sweeney, vice president of marketing for Minerva Networks (see charts).

Home network vendors such as Ucentric Systems, which provides home networking software, are pushing deeper into the cable space as well, evidenced by Ucentric's trials with Comcast and retail giant Sears, Roebuck and Co. "This is an emerging market, and sometimes the marketing model doesn't flow with the business model, so we have to create a pull in demand, but there is huge revenue potential, retention and acquisition possibilities for a cable operator's business, and retailers are looking for new ways to bring services to market and revenues to their P&L. Those make a pretty good business model case," says Paula Giaecola, director of marketing for Ucentric Systems.

She cites a recent Roper-Starch report which found that a majority of surveyed customers would pay between $27 and $30 a month extra for additional home network-type services. Says Giaecola: "They told us they'd pay for additions to their broadband services. We know they'll pay for rich content; now we're in the feasibility phase of the business model."

For that business model to succeed, a layering phase is required as well, says John Marshall, senior director of marketing for 2Wire, whose HomePortal gateway recently was selected by Verizon Online as its first home network product.

"As home network devices are added or layered on top of each other, services can be added and sold as revenue generators. But the whole home network eco-system must work together to be successful," Marshall insists.

Figure 3

A healthy home network ecosystem comes with a price, however. Admits Marshall: "There's an investment in the infrastructure to be made, and the capital expenditures can be hefty to support the equipment for home network services. Those must be kept at a manageable level."

The cost to deploy video over copper is about $1,000 per subscriber, the Minerva report notes, and includes modem, network, headend and software. The ROI is three years for a positive cash flow, depending on the size of the system.

Not good enough, say some cable operators, whose current strategies don't include home networks as a viable stand-alone business. "We don't believe home networks is a business. There aren't enough margins, and we tend to view them as value-added services. It looks promising at first blush, and some believe it's a business right now, but it's no cakewalk," says Steve Craddock, senior vice president of new media development for Comcast Communications.

Comcast, Craddock notes, isn't entirely pooh-poohing the home network business. "Our strategy is an 18- to 30-month period of flushing out home network services and revenues. There's all sorts of in-home connections, and the topology we would deploy is a combination of wireless, Home PNA and other topologies. We're figuring it out, but we need the business model that will pay bills now."

Just where that business model will come from is being determined. "The number-one question is: Where is the business case? But the market is still developing and cable operators are real diamonds in the rough for the home network business. They're looking at smart homes and bundled services. That's where the revenues will come from," says Jeff Manning, business manager for Agere Systems Inc.

Yet home networks aren't just about revenues, experts insist. They're about saving costs as well. Adds Manning: "Operators don't want to pull out walls in homes, and (they) want to eliminate truck rolls. They understand that better than most."

They also understand price drops, which Agere recently announced for its ORiNOCO wireless Internet access kit, dropping the price to $199.

The cost savings associated with some home network services will likely reduce truck rolls and prompt more customer involvement in installations and troubleshooting, but for most service providers, it's the potential of additional revenue streams that count. "Managing the home network infrastructure is the key service that could generate revenue for cable operators. Customers want their networks managed; then we can talk about home security, automation and appliances," says Andy Chang, vice president of marketing for SOHOware, a software provider to the home network market.

For most service providers, however, a viable home network business model is two to three years away. "They're still figuring out their models and want to get away from their leasing business models. But they don't want the risk of buying thousands of boxes that won't work a year from now. The ROIs are wide open," suggests Jeff Orr, product marketing manager of home networking for Proxim Inc., a provider of home RF wireless products.

The home network market is wide open as well, and is expected to attract a growing number of players. Concludes Gao: "If you can provide one connection for all the devices in a home, grab all those services and put them on one bill, that's a home network. And that's a very lucrative business."