Cable considers how to reap the financial benefits of
a fast-moving home networking market
Home is where the network is, or should be–according to a growing legion of cable operators and an emerging group of home networking proponents and related companies, whose mission is to explore the revenue potential, cost implications and customer demands of such services.
Connectivity, productivity, entertainment, and of course, profitability, are nudging the cable industry toward a workable home network business model, with the operative word being workable.
Revenue potential abounds for services such as multiple PC connections, TV, music and gaming bundles, home security, energy management and a full-out home organization and management network.
Yet few agree on just how a home network business model should look, where the revenue will actually come from, or even if a viable model can exist. Most concur, however, that the revenue derived from a variety of home network services could be very appealing, albeit several years away, and the competitive edge and churn reduction benefits of a functioning home network business model are added attractions.
"Clearly, cable operators view home networks and the triple play as the Holy Trinity into the home," says Kurt Scherf, vice president of research for Parks Associates, a media research and analyst firm. "But cash is key now, and capital expenditures are falling off after network upgrades. Now, they are desperately trying to make back those investments. The question is: How does cable change and make money for each new device in the home? I think it will be awfully skittish about home network business models."
Skittish or not, cable operators are well aware of the projected revenue likely to come from home networking services. For example, the overall U.S. home network market will total $5.3 billion in 2007 with 28 million installed home networks connecting a multitude of gaming devices, PVRs, DVD players, PCs and more, reports In-Stat/MDR, a high-tech research firm that's owned by CED's parent company, Reed Elsevier. And, by 2007, 50 million U.S. households will subscribe to broadband Internet service, with a compound annual growth rate (CAGR) of between 32 and 40 percent and far outdistancing rival DSL service.
Devices connected in home networks.
(U.S. households with home LANs, n = 3,691.)
Source: “Broadband Access @ Home III,” a survey of 10,500 U.S. Internet households. Parks Associates, 2002.
"Home networking is an appealing space and it's growing," says Mark Bell, product development manager for Cox Communications. "We're pulling together the business model now, but it's not a static model, and we'll need to revisit and tweak it in the coming months. We want to drive additional value into the market, like firewalls and spam control and look for services we can charge for and seek strategic partners, without bearing the burden of capital equipment."
With much of its capital equipment already in place via its RoadRunner service, Time Warner is exploring its own business model that would include rolling out a wireless version of RoadRunner and expanding its home network service offerings.
"At one point, you have to say more customers are wanting wireless connectivity of PCs in their homes, and we recognize millions of homes already are networked," says Pat Armstrong, senior vice president of new product management for Time Warner Inc. "However, if we roll out wireless RR right, it will be profitable. We want to price it separately and get a handle on the capital expenditures while setting ourselves up to design a whole lot of home network services in the future."
Most experts suggest that for home network revenues to hit their stride, it will take a bundle of four or five services sold as a separate package, or as a value added proposition. "The business model isn't fully defined," maintains Adi Kishore, analyst for media and entertainment at the Yankee Group. "You can factor in the impact of churn, but the big home network push will be in 18 to 24 months, because today there is little consumer enthusiasm for connected security, lighting, energy management and other like services. Moving content around the home is definitely the most appealing."
The appeal for Comcast, which currently serves 3.6 million subscribers at various levels, is to push its three-tiered home networking strategy into customers' homes. Priced from $42.95 to $95 a month, Comcast's High-Speed Internet, Home Networking and Pro levels of service are emerging as the company's home networking model.
Supporting the various home networking models now being designed is crucial to any business model, maintains Ralph Brown, vice president and chief software architect for CableHome, CableLabs' managed home networking initiative.
"Operators are looking at energy management, home security, medical monitoring and other home networking type services, and they can be built on a basic CableHome platform and provide revenue opportunities," he says. "But not all customers will take these services, so operators could offer them as a bundled package of four or five services for a fee. That is the model which will probably evolve."
For that model to work, however, cable operators must ask some penetrating questions. Adds Brown: "We've reached the basic infrastructure stage–now, what are the real home network services and revenue opportunities? Do cable operators want to manage home networks? CableHome allows them to do that, and (provides) the tools to automate the back office functions."
CableHome's DOCSIS 1.1 specification will allow extended home networking applications in the near future, Brown notes, and will help refine the functionality, quality of service, and the correct specifications to be integrated into home networks.
Integrating a home network business model and the services that comprise it into a living, breathing, complex, sophisticated cable network is no gimme, however.
"Cable operators are all different in their home network business models. They're transporters of services, and if their higher margin products are content-driven, they need the infrastructures to get there. Today, the home network can be a roadway to handle the traffic," says Jim Grayton, director of marketing for SercoNet Inc., a provider of home networking systems.
SercoNet's NetHome residential home network system is a case-in-point. It includes a series of $250 "smart outlets" which replace existing telephone faceplates in the home and fuse wireless LAN and distributed network topology. Adds Grayton: "We've built the business model that looks at demand, uptake rate of data service, expenses and ROI (return on investment) to help operators, but the biggest challenge is educating them and consumers about home networks."
Many are learning their lessons, however. "MSOs are ahead with their thinking regarding home networks and they recognize home networking is a platform for future services they must be in, but it's still very new to them and every provider has its own vision and priority. And, we have to prove (home networking) is a solid business," says Janie Tsao, executive vice president of business development for Linksys Group Inc., a developer of networking, wireless and broadband networking gear sold via retail.
Proving a return on investment for home network services is high on an operator's to-do list. And rightfully so. With more than $70 billion in capital expenses poured into network upgrades and rebuilds, few operators have the cast-iron stomachs to ingest huge expenditures with little or no payback.
"The combination of capital expenditures and the cost of launching a new business is high," maintains William Glasgow, CEO of Security Broadband Corp., a provider of home network services. "If operators start with losses, they must show very large returns in the near future to take the risk. They've seen huge revenue and cash flow growth with digital and high-speed Internet services, so they'll need those 12 to 14 percent growth numbers for home networks."
They'll also need a savvy business plan that incorporates some vision and thoughtfulness. "We're just starting to take advantage of the full range of home networking services, some of which haven't even been determined yet," says Dr. H. Dean Cubley, chairman and CEO of Eagle Broadband, a multi-service provider.
For that to happen, he continues, operators must search for a workable business model. "Now, we need bandwidth and a group of people that can make it a business. But once the investment is made in the infrastructure, at what point can you make it a business? There's no easy answer, but home networks will eventually extend to places we don't consider home, and technology will be portable and transparent within range of our homes."
With the advancement of new technologies and standards, and a growing acceptance of home network-type services in customers' homes, the appeal of the business is driving some companies back into the space, an indication that home networking may finally be finding its rightful place in the broadband industry.
"No question, the home network and small business markets have been the growth markets, so for us, it wasn't a hard decision to re-enter the home network market," says Georganne Benesch, vice president of product management for Proxim Corp.'s LAN division. Proxim recently acquired Agere's Orinoco wireless home network product, marking its re-emergence into the home network market.
The hard part, she admits, is how to make money off of it. "Several providers have been struggling with a business model to deliver home network services, and the service model is the obstacle to growing market share. They've been focused on getting broadband into more homes and generating more revenue from existing customers and services. Now, the challenge is educating customers about the technologies and generating awareness."
Some of that control and subsequent revenue is likely to come via set-top boxes, experts maintain. "The first step in connecting home devices is through cable modems and DOCSIS 2.0, and later a home network gateway consisting of a modem, router and wireless access point in one device," explains Mike Laraia, director of product management and marketing for Motorola Broadband, which recently rolled out its SBG 1000 wireless cable modem gateway and DOCSIS 2.0-certified cable modem. "The challenge is to facilitate the right service with a robust, credible business model and turn a promising technology into a business."
But that's the tricky part. "Home networking is a real revenue opportunity, and technically, there are few issues," says Bob Van Orden, vice president of strategy and product planning for Scientific-Atlanta Inc. "The hard part is finding the business opportunities. We've been deploying DOCSIS set-top boxes for 18 months and there's lots of talk about Wi-Fi, but who'll make the money and where's the business? The model of installing and managing a home network must happen quickly."
The workable home networking business model is in sight, experts insist, but must contain certain crucial elements. "Cable will look for companies with end-to-end solutions in place and positioned to work with all the various service providers, and set-tops would include home network solutions, but set-tops aren't the answer," Scherf says. "Instead of cobbling the pieces together, the business model would call for an end-to-end home network solution."
Others aren't so sure. Adds Kishore: "Set-top manufacturers are ahead of the curve with home network-ready devices, and they'll be pushing for home network models. Now, it's a matter of getting them into the field."
Just where the field is and what the revenue implications and costs are for cable operators to benefit from a whole-home network remains a mystery. What is becoming clear, however, is that the plans are being molded, and set-top makers, home network service providers, a gaggle of ancillary companies and cable operators themselves are testing the revenue waters in search of the ultimate home network business model.