investment opportunities in networked home technologies

MGMT-463 Management of Technology

Term Paper

“Investment Opportunities in Networked Home Technologies”

December 5th, 2003

To the attention of:Prof. Greenstein

Group members: Ignacio AlvarezJeff JudyDaniel MartzMichael MöglichAna Sanabria

MGMT-463 Final Paper Networked Home Technologies

Objectives of this paper:

This paper’s purpose is to recommend to an investor (investment bank, venture capital) an

investment strategy to profit from Networked Home Services. Although many sectors will

benefit from these services (Domestic appliances manufacturers, content providers, real estate

companies…) we have focused our analysis on the data transmission component exclusively.

Furthermore, data transmission involves typically transmission “inside home” (from the main

point of connection of the home with external networks to the interior of the home) and “outside

home” (any other operations carried out from that point to the backbone communication

networks). Our study concentrates on the “inside home stretch”, although synergies with the

backbone technologies will eventually be considered (See picture below).Time wise, the main

focus is on short/medium-term horizon, i.e. 1-3 years, however, longer term prospects will also

be considered for a better understanding of short term recommendations.

Services in the Networked Home:

The concepts of Networked Home, Domotics or Smart House are quickly spreading as a

promising but still abstract revolution. Some reports mention that more than 6.4 M Networked

Homes in the US in 2002, and a potential growth of 30% yearly for the next 3 years. These

numbers depend however on the exact definition of Networked Home. In general terms we

defined it as “households with several entities (persons or devices) communicating with each

other and external entities through a home communications network”, but the first step to take

advantage of this opportunity must be a clear understanding of the services underlying these

concepts. This will help assess the technologies and players best positioned to supply these

services as well as the evolution of demand that can be expected under different scenarios.

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Backbone networks

Home aggregationaggregationpoint

Homeaccess points

Network aggregation points

Inside Home Transmission Technologies:

Traditional Phone/ DSL/CoaxDedicated Wires/ EthernetWirelessPowerline communication

Scope of this paper


From the technological side the Networked Home services can be grouped according to the

requirements that each service demands:

Group Services

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Remote automated security

Tele-surveillance

Dist Low High High High High Low LowTele-measurementRemote automatic appliance control

Operated local control

Appliance controlDist. Low

LowLow Low Low High LowAmbient control Low

Mobility Support HighEnhanced Entertain-ment

Enhanced Audio/Video Cent High Low

High LowHigh High HighEnhanced Games Low Low

Enhanced E-commerce Low HighProfessional communications

Tele-workingCent

High High High HighHigh High LowTele-education High Low Low Low

Tele-medicine Low High High HighDist: Distributed topology (multiple and scattered access points inside home)Cent: Centralized topology (reduced number of concentrated access points inside home)

Remote automated security: For these services the key technological requirement is maximum

quality, security and reliability of communications (especially with external entities).

Operated local control: These services are usually less demanding in terms of quality, as a

service failure can be eventually overcome with local human action. The key requirement is user

friendliness and distributed points of communications for a comfortable control.

Enhanced Entertainment: These services require high internal and external bandwidth and a

high level of standardization, although communications are less critical in terms of quality and

security.

Professional Communications: These services demand both high quality and bandwidth.

Security and reliability are also important.

In the following sections we will analyze how each of the alternative technologies respond to

these service requirements and we will later analyze how the diffusion curves for those

technologies and services impact on the prevailing technical solutions at each stage of service

adoption.

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and

Traditional communications infrastructure (copper pair/DSL/TV coax)

The internet era was born with dial-up access. Though numerous other access and networking

technology standards have emerged, and are quickly diffusing and replacing dial-up, at the end

of 2002 approximately 71% of households in the US that had internet access were still using

dial-up1. In 2007, this number is expected to decrease to 48%2, as broadband and wireless access

technologies become more prevalent, and the market for dial-up access continues to mature.

Further, dial-up’s limited performance capabilities point to a continued downward trend, and

eventual extinction, which is also applicable to its usage as networked home technology.

Conversely, Digital Subscriber Line (DSL) is one of the emerging technologies in the fixed

broadband internet access and home networking market, which is quickly replacing dial-up. In

the first six months of 2003 subscribers grew from 6.5M to 7.6M in US and from 36M to 46.7M

worldwide (DSL Forum data). Its main advantage is that it operates on the copper wire

infrastructure that exists in most homes in the form of telephone lines. A process called

modulation allows established copper wires to transmit large amounts of data over greater

distances and at higher rates than previously possible with telephone lines (up to 2 Mbps over

long distances). There are several variations of DSL technologies, the most common and

applicable to high-speed internet access being ADSL and G lite. Others such as HDSL (used for

PBX’s, POP’s, internet servers and private data networks), SDSL (used for videoconferencing or

remote LAN access) and VDSL (fiber based full service networks and HDTV), can all transmit

larger amounts of data at higher speeds, but have significant limitations in terms of the distance

that the signal can travel. VDSL does show promise in home applications, as it allows telephone

companies to deliver High Definition Television (HDTV) programming. The others are better

suited to commercial applications at this point.

1 As per Gartner Dataquest 2 As per Gartner Dataquest

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There are three standards for ADSL that are competing for user acceptance: Carrierless

Amplitude Phase Modulation (CAP), Discrete MultiTone (DMT), and G.lite. CAP has had

products available since 1993 but is not approved by ANSI, the governing body that sets the

standards for telephone line transmission in the US. DMT and G.lite have both had products

shipping since 1999. DMT is approved by ANSI and G.lite by the ITU-T, the worldwide

telecommunications standards body. CAP has products in place, the DMT coding scheme

promises superior technology, while G.lite is fully compatible with and complementary to the

current versions of ADSL3. It is unclear at this point which standard will emerge as the leader.

The table below shows how DSL (ADSL as a proxy for the others) responds to each of the

performance criteria for the in-home services outlined in the introduction. This analysis will form

the basis for our assessment of which in-home services are best rendered by DSL (or dial-up in

the short-term) access technology:

Criteria Evaluation

Topology Generally Centralized. Telephone jack (filtered) for Dial-Up (DSL).Bandwidth Medium-high

o For in-home access, up to 2 Mbps, o For short-range VDSL (generally commercial), up to 52 Mbps (with

1.6 Mbps on return path)Reliability High (service provider dependent)Sensitivity toInterference

Low

Security Relatively high (protocol and software dependent)ExternalInteraction

Supports high degree of external interaction due to direct link to external networks Advantage of already establishes DSL backbones and aggregation points

Local UserInteraction

Not ideal for local interaction due to centralized nature of access topology

Standardization Med-High. Still uncertainty as to which standards will emerge.

Most of the characteristics identified for DSL are also valid for TV coax networks upgraded for

communications, as the number of home outlets, bandwidth, quality, security and

backbone/access topology are very similar. From now on we considered both technologies as a

single group called “traditional home communications infrastructure”

Traditional infrastructure provides the home network customer with an attractive value

proposition as infrastructure is already deployed and limited investment is required (DSL filters,

coax converters). Although the limited number of phone outlets limits the applicability of

traditional technologies for home-networking applications, its current deployment will give them

an advantage in the short term and will be progressively combined with new technologies

33 Gartner

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(wireless, dedicates cabling) that lack the backbone infrastructure that they can offer. Given its

performance characteristics, DSL and coax are especially well positioned to support Security and

Enhanced Entertainment applications in the short future.

The major players in the US market for DSL providers are Bellsouth, Qwest, SBC

Communications and Verizon. They are all well-positioned to catch short term opportunities till

new technologies spread.

Dedicated cabling (Wired Ethernet)

In 2002, 74% of all U.S. home networks4 use Ethernet protocol as wireline technology to

transmit data for computing, entertainment and utility home applications. Ethernet, which can

connect to any type of network backbone, owes its popularity primarily to a combination of low

cost and high-bandwidth, providing throughputs of 10 - 100 Mbps conventionally.

While most home Ethernets are relatively simple structures that consist of external cables

plugged between router, computer and peripheral devices, often by use of a hub, the number of

complex, widely ramified installations rises continually. The main obstacle to becoming a mass

phenomenon obviously lies in the inconvenience of its deployment. Retro-fitting a home with a

thorough wired network typically involves drilling holes in drywalls, displacement of furniture

and a lot of noise, dirt and general disruption. Getting a network to function properly can be

technically challenging too. Pre-wired homes, on the other hand represent a major growth driver

for Ethernet as “digital plumbing” is on the verge of becoming a common component of the

infrastructure for new homes.5 Future-proof pre-wiring (i.e. allowing for increases in bandwidth

demand) adds $2,000-3,000 to the construction cost of a new home.

Ethernet protocol comes in three standards, allowing bandwidths of 10, 100 and 1000 Mbps,

provided the right cable.6 Created as a universal, high-speed interconnect for a variety of

consumer electronics and personal computers, the more recent IEEE 1394 protocol offers 4 8% of U.S. home networks use wired Ethernet in combination with a wireless technology. Source: Forrester Research, July 2003.5 “By the year 2004, nine out of ten new homes will be built with cable wiring capable of delivering data, entertainment and security services throughout the home” Bob Burich, President of Verizon Connected Solutions (Jan 2002) - we are not there yet as necessary standards take longer than expected to materialize. However, the trend is clear and can be seen abroad also, e.g. earlier this year, the South Korean government developed a $1.7bn plan build Ethernet-based high-speed home networks in 10m Korean households by the end of 2007.6 The commonly used cable infrastructure for Ethernet is the category 5 copper cable, which allows speeds up to 100 Mbps. For high-speed networks enhanced cat. 5 or cat. 6 wires offer certified speeds of up to 1Gbps. The same holds for RG6 coaxial cables. While coax cable normally connects home entertainment devices, its use as home backbone conduit is technically feasible and potentially less inconvenient than the installation of additional copper wires (Coaxsys recently introduced the product PureSpeed, a 100-Mbps Ethernet-over-coax platform). Further increases in bandwidth will ultimately be achieved by fiber optics networks.

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superior performance capabilities in home entertainment (see above) at comparable maximum

speeds, i.e. up to 1200 Mbps for 1394b. It is unlikely that 1394 will replace Ethernet over the

next couple of years, as it suffers from a cable length limitation (4.5m).7 In fact, standards bodies

are currently developing bridging adapters to transfer the signals between the two protocols so

that an Ethernet backbone can be used by clusters of AV clients.8

The following table summarizes this technology’s response to our analysis criteria:

Criteria EvaluationTopology Mainly distributed, as it may have multiple access points, reaching every room

Installation can be inconvenient and difficult (integrated network)Bandwidth High: 10 Mbit/s – 1000 Mbit/s depending on protocol standard and cable typeLocal user interaction

Requires physical link to closest outlet unless combined with wireless Very convenient usage, standardized interfaces

Reliability High degree of reliability as shielded from most external factorsSensitivity to Interference

Low: Minimal interference issues; issues may arise if installed closely to electrical outlet

Security Relatively high, can be further increased through firewalls/dedicated applicationsExternal Interaction and Compatibility

In theory compatible with all other transmission technologies and home appliances/ electronic devices; unclear if power line solution exists

Standardization/ Cost efficiency

Widely proven and accepted networking standard Pre-wiring moderately expensive, depending on technology Network equipment so far somewhat cheaper than wireless or powerline

Service groups Suitability for each service groupsProfessional communications

Original and standard application for computing, widely used for broad range of tele-services

Enhanced entertainment

Conventional Ethernet lacks crucial QoS features to transmit broad AV signals (e.g. HDTV) requires improved standard/bridge to handle streaming video9

Local control Needs physical link between appliance device and outlet (many devices lack it)Remote automated control

No problem with bandwidth and signal format Advantage of security offered by dedicated wired connection

Home Ethernet companies divide into ones that view the technology as platform for their content

and connectivity services and others that focus on the very network wiring business. Although

first category-players like telephone (e.g. Verizon) or cable TV providers (e.g. Comcast, Cox)

today offer many Ethernet-based solutions, their commitment is limited and may shift to wireless

or other technologies. Dedicated players, on the other hand, will play a crucial role in this

technology diffusion. In this arena, however, fragmentation slows down the efforts of the

7 However, in an experimental setting the 1394 Trade Association has recently demonstrated a system in which an HDTV stream in FireWire/ 1394 format travels over 100 meters.8 This effort is led by the Consumer Electronics Association, a body formed by consumer electronics OEMs and some computer companies, e.g. HP and Microsoft.9 Quality of Service (QoS) describes requirements to transmit HDTV and other broad AV data streaming in optimum quality. Contrary to the consumer electronics protocol IEEE 1394 (also FireWire) Ethernet does enable neither isochronous data transfer nor the required prioritization of data transmission and precision of data synchronization (Different data packet sizes and intervals also).

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construction industry.10 So some big consumer electronics chains (ex: Best Buy and Sears)

teamed up with local construction companies and other partners to take the lead, rolling out

home pre-wiring services in various markets.11

Wireless Technologies:

There are two main areas where wireless technology has been developed: the Wireless Local

Area Network (WLAN or Wi-Fi) and the Wireless Personal Area Network (WPAN), both

standards defined by the IEEE.

WLAN has three major extensions: 802.11b, 802.11a, and 802.11g, developed to operate at

different radio frequency bands and data rates. This technology is intended to replace the wired

Ethernet connection with a wireless connection and now that the maximum data rate offered by

802.11g (108 Mbps) has surpassed that of a traditional Ethernet connection (100 Mbps), it is not

hard to see that WLAN is going in the right direction. Wi-Fi was originally marketed to the

enterprise space, but has now entered the SOHO and home networking markets and will gain

more relevance as costs go down and the technology continues to develop and diffuse.

WPAN, in contrast with WLAN, is a short distance wireless network. The standard developed

by IEEE for WPAN is 802.15 and two main technologies are based on this standard: Bluetooth

and ZigBee. Unlike Wi-Fi and HomeRF (now extinct)12, Bluetooth and ZigBee do not compete

directly against each other, but address different needs. ZigBee is better suited for remote

monitoring and control systems (such as remote controls for lights, thermostats and security

systems), applications where ease of use, low cost, and low power consumption (for long battery

life) are key. Bluetooth, on the other hand, is geared towards voice and higher data rate

applications, such as cell-phones and headsets. In this case, low cost, low complexity, and low

power consumption are still important, but not as efficient as there is a need for a robust

connection. Working with the IEEE to develop standards for these technologies and increase

10 Industry standard are emerging though, e.g. electrical contractors can now be certified as home technology integrators (HTI) enabling them to manage home networking projects for both new construction and retrofit work.11 Best Buy launched its Networked Home Solutions service in 2002 and is currently working with six builders in the Minneapolis and Dallas markets. So far, about 3,600 homes have been contracted to include the networking package. Sears Connected Home provides builders with design, installation and support services for integrated networking solutions via a growing network of independent installers.12 The HomeRF Working Group, created in 1998 by Proxim, Intel, Siemens, Motorola and Compaq to compete with Wi-Fi, was disbanded in January 2003. The greater and growing support for 802.11b helped to drive the evolution of the 802.11 standards and lower costs faster than HomeRF. The toughest hit for HomeRF took place in March 2001, when Intel decided to leave the group and focus on Wi-Fi.

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their diffusion are the Bluetooth Special Interest Group (SIG) with promoter companies

including, Ericsson, IBM, Intel, Lucent, Microsoft, Motorola, Nokia and Toshiba, and the

ZigBee Alliance, with Honeywell, Invensys, Mitsubishi, Motorola, Philips and Samsung.

Wireless has gain a lot of terrain and now has strong foothold to continue its diffusion. Gartner

Dataquest has forecasted that the penetration rate of WLAN into the professional mobile PC

install base will grow from 9% in 2000 to almost 50% by the end of 2003, and to 90% in 2007.

In the home networking space, an important consideration outside the technical benefits the

technology provides is the familiarity that people already have with devices such as TV remote

controls, and cordless and mobile phones. This familiarity will be a key enabler for the

technology to get into the households and it is reflected in the results from a Gartner Dataquest

survey from May 2001, where over 50% of respondents preferred wireless over powerline,

phoneline, and dedicated cabling as the connectivity architecture in the networked home13

But the penetration rate for the home networking market is still much lower than in the business

environment: of the 6.2 million households that had a home PC network in June 2002, 13

percent had a wireless home networking14. Although wireless has the potential to continue its

diffusion into the early adopter segment of this market as support from the industry is strong and

prices continue to go down, there are several aspects that may hinder a fast adoption.

First and foremost is the complexity of the technology. As most of the customers in the home

networking market will not have the technical expertise present with enterprise customers or the

IT support available to them, it is imperative that customers are presented with a user-friendly

product and that technical support is available.

Another key issue is security, with its two major components: encryption and authentication of

user. There have been several attempts by the IEEE and the industry to make wireless more

secure, beginning with the Wireless Equivalent Privacy (WEP) and the Virtual Private Network

(VPN). WEP did not resolve all of the problems and vulnerabilities still existed, while both

made the implementation and use of the technology even more complex. WEP has now been

replaced by the Wi-Fi Protected Access (WPA), which improves both data encryption and

authentication and was made available by Microsoft to its Windows XP users earlier this year.

13 Gartner Dataquest. Four types of networks were included in the survey: sharing PC peripherals, sharing high-speed internet connection, home control, and entertainment network. Wireless was no. 1 in all categories.14 Gartner Dataquest

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But even more promising is the new standard that the IEEE is currently working on, 802.11i,

which will eventually replace WPA and eliminate the need for VPN.

The development of standards has been crucial for the diffusion of wireless, and new standards

have been and will be incremental, so there should be no major concerns in that respect.

Bringing these standards to the market in a timely fashion will be a key element for the success

of wireless in the home networking space. However, the development of different technologies

according to the needs of the different applications and devices that will be used in the

networked home, although extremely useful as they address different needs, brings an important

challenge: the interoperability of WPAN and WLAN. For instance, the fact that 802.11b and g,

and Bluetooth and ZigBee all operate in the same 2.4 GHz band (not to mention cordless phones,

microwaves, baby monitors, etc.) and that WPAN enabled devices will likely need to run on

WLAN environments, means that some level of mutual interference can take place. The IEEE is

currently working on a coexistence model to quantify the effect that WPAN and WLAN have on

each other and on mechanisms and practices to facilitate the coexistence of both.

The table below summarizes the different aspects under which we can evaluate wireless in terms

of its success in the home networking market.

Criteria Evaluation

Topology Points of access distributed to cover specified areaBandwidth Medium-High

WLAN: from 11 Mbps to 108 Mbps WPAN: Bluetooth= 730 Kbps, ZigBee= 220 Kbps

Reliability Medium: Service is not 100% reliable. Inconvenience of repairs. Distance and objects between devices hinder performance

Sensitivity toInterference

Medium: Potential for interference in the 2.4 GHz band

Security Medium: Standards are still being developed and user perception is worse for wireless than for wired technologies

External Interaction Inconvenience of required interconnection with wired backbonesLocal User Interaction Optimal for a comfortable local operation by users anywhere at homeStandardization Med-High: Clear standards evolution (changes on those are incremental) but

still interconnection issues. Need to develop effective standards for security

Power Line Communications:

Power lines, present in almost every U.S. home, are typically thought of as a power supply for all

types of electronic devices. However, in the last decade their use has evolved from simply a

power source to a communications source as well. Although still in its infancy, power line usage

as a media type has potential.

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Currently there are two competing standards within the power line communications industry.

The first, HomePlug, uses existing AC power lines and was developed specifically for the small

office/home office (SOHO) market. Speeds for HomePlug are around 14 Mbps and are

increasing with newer standards. HomePlug uses a home’s electrical wiring system to transfer

data between PCs and other devices. The second PLC technology is X10. X10 uses existing

110V electrical wiring in a home to send communication signals to other plugged in X10

devices. X10 is primarily used for command and control applications such as thermostats, lights,

and security systems. Of the two standards, HomePlug is dominant. The HomePlug standard is

represented through the HomePlug Alliance, a non-profit corporation formed to provide a forum

to create open standards for high-speed power line networking products/services. The most

recent standard adopted by the HomePlug Alliance, HomePlug AV, can serve as a high-

bandwidth backbone for the home, although it is still in early stages of development.

There are many advantages of using power lines as a media type. First, power lines have the

most outlets in a home (versus cable or telephone) averaging over 40 per house. This large

installed base makes for a very attractive communications channel. There are also little if any

installation needs (besides connecting the Ethernet or USB bridge to the power outlet). Finally,

most devices that would send and receive digital data are already plugged into a power outlet.

There are also a number of negatives to power line technology. Bandwidth over power lines is

somewhat limited compared to other competing technologies. The technology has also arrived

late to market versus other media types such as DSL and wireless. Marketing has also been very

limited compared to other technologies such as wirelesses Wi-Fi. Also, the HomePlug standard

has mainly been targeted at the SOHO and consumer market, enterprise possibilities have not

been explored fully. Finally, the HomePlug Alliance has not been able to persuade many chip

companies and system houses to invest in complimentary development/marketing.

The table below summarizes the different aspects under which we can evaluate power line

technology in terms of its success in the home networking market.

Criteria Evaluation

Topology Electrical outlets. Highly distributed in all locationsBandwidth Slow to Medium

HomePlug: up to 14 MbpsReliability Medium:

Service is not 100% reliable Electrical lines are not designed for data communications

Sensitivity to Medium – High: Potential for interference from electric currents

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InterferenceSecurity High: Not transmitted over the air, so low possibility of outside accessExternal Interaction Supports low degree of external interaction due to source of power linesLocal User Interaction Strong option for local interaction due to high number of electrical outletsStandardization Medium-to-Low: Although HomePlug is the leading standard in power line

technology, the new HomePlug AV standard is still in development. Exact needs and requirements for the new standard are still being debated.

There are a number of equipment manufacturers for HomePlug. One of the largest Linksys, was

recently acquired by Cisco Systems. Linksys has a bridging device and a wall adapter for

HomePlug, however it still focuses most of its efforts on WLAN. Other equipment

manufacturers for HomePlug include Iogear Inc, NetGear Inc, and Phoenix Broadband Corp,

although they also focus on other home networking technologies. These manufacturers report

interest rising for HomePlug, but much slower than technologies such as WLAN.

Power line technology has significant potential. The HomePlug Alliance must act quickly in

setting new standards and marketing the benefits of this technology. Power line technology

should not necessarily be viewed as and either/or proposition versus other technologies such as

wireless. A merged HomePlug/wireless network could offer a great solution for handling audio

and video distribution. HomePlug could provide the established home backbone and then end

users could connect wireless access points around the house to send the data the last few feet.

Although there is much potential, uncertainty is also high yet about adoption limits.

Summary of Technologies:

The previous analyses permits to identify the technologies that best serve the requirements

demanded by the services. We highlighted in bold the key elements that define the most

appropriate technologies for each group of services:

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Group

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Remote automated security

DistW PDW P

LW P T D

High

D

High

T D

High

D

High

T D

LowT D P

LowW P T D

Operated local controlDist

W P.

LowW P T D

LowW P T D

LowW P T D

LowW P T D

LowW P T D

High

W

LowW P T D

Enhanced EntertainmentCent

T D

High

T D

LowW P T D

High

T D

High

T D

High

T D

LowW P T D

High

T

Professional communicationsCent

T D

High

T D

High

D

High

T D

High

T D

High

T D

LowW P T D

LowW P T D


T: Traditional infrastructure (Dial up, DSL) and TV coaxD: Dedicated cabling (Ethernet)W: WirelessP: Power Line Communications

Diffusion analysis:

As we discussed in the previous chapter, technological fit indicates which would be the

prevailing technology from a static and theoretical point of view. However, the timing of supply

of technologies vs demand of services plays a critical role for several reasons:

An already deployed technology can have a significant first mover advantage if alternative

technologies are costly/slow to be deployed and if performance difference is not very

remarkable. Convenience of installation and start of service plays a role in customers’

preference for technologies.

Other prerequisites to successfully market a technology to an early majority of consumer

are ease of installation and use, reliability (“peace if mind”) and compatibility with

existing and future applications.

The size, geographical distribution and timing of demand will determine to which extent

deployed technologies enjoy those advantages and how possible it is for a younger

technology to catch up and gain leadership in the short run.

Comparisons of these elements separated by service segments will also determine the

trend towards a single winning technology for all kind of applications or separated niches

of services/users affiliated with specific winning technologies.

Technologies supply diffusion: The following chart depicts the current and projected penetration

of the alternative technologies in US households for the following 10 years (% of US households

with expected installed infrastructure for data transmission purposes inside home)

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This translates into key conclusions for the next 3 years:

1. Although traditional infrastructure (copper wires or TV coax cables) are available in most

of our homes, the number of households with an installed base of strong data

transmission technology (DSL) on that infrastructure is much lower (~7% for DSL in

2002). However, the familiarity and large deployment of this infrastructure will prove to

be an advantage in the first stages of development of Networked Home Services.

2. Dedicated cabling has a smaller installed base, but counts with a large presence (>70%)

among early adopters of Networked Home Services, so it can be expected that in the

small and medium term it will remain as a widely adopted technology.

3. The other two alternatives (Wireless and Power Line Communication) have still very

low penetration. Although these technologies present the strongest growth rates, it will

take them more years to be massively adopted.

Services demand diffusion: The flip side of the technology supply is the demand for Home

Networked Services. Evidently service demand and technology supply feedback each other to

determine penetration growth, however some groups of services have higher natural growth rates

and expected margins than other and this will determine the timing of opportunities for the

technologies that better serve them.

Technologies that require expensive and/or delayed installations will be employed only in the

segments in which demand is naturally expected to grow more slowly or margins are enough

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

DSL lines

Wireless

Dedicated

Power Line

Expected diffusion of data transmission technologies in US Homes

Group of services Current early adopters (today)

Potential majority users

(10 years)

Mass market adoption speed

User perceived value/expected

marginsRemote automated security < 1 % 15-20 % Slow HighOperated local control 1-2 % 35-40 % Medium LowEnhanced Entertainment 5-10 % 50-60 % Fast MediumProfessional communications 2-5 % 25-30 % Medium Medium

We need to be precise here: Are we talking about access technologies where DSL/ Cable rules or is it home transmission, where the share of telephone lines is smaller? If it is something in between, we need to define and explain…If it were access, I guess DSL/ Cable should be even higher, starting just below 30% and reaching 60% in 10 years


profitable for a low penetration (ex: remote automated security) while, those services that

population is more easily ready to adopt (enhanced entertainment and professional

communications) will favor technologies with an already large deployed base or very easy

scalability.

The following table shows the current and expected penetration of each service group among US

households (~105M in 2003) as well as its expected adoption speed and margins.

Table: Diffusion characteristics of Home Networking Services

The expected diffusion pattern for those services can therefore be depicted as follows:

The mmMain considerations observed from the analysis, especially for the short term future in

the chart are the following:

1. tworked entertainment systems are already present in many homes, therefore the insta

entions is very high and growth would be linear. Digital and high definition formats will

provide additional push.

Current buyer segment: early majority

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EnhancedEntertainment

ProfessionalCommunications

Operated localcontrol

Remote automatedsecurity

Expected diffusion of Networked Home Services in US Homes


2. Professional networked communications don’t have a very high penetration yet, but its

demand will increase very quickly as many workers continue adapting their professional

habits to the opportunities of the information society. The number of families in which a

member decides to significantly work in a remote/home networked environment are

however limited in the long term, which will drive penetration to a certain upper limit.

Current buyer segment: at the chasm between early adopters and early majority

3. Home control applications, both local/operated and remote/automatic have now very low

demand, but will show the higher growth rates in the following years. Penetration limits

for these applications is even harder to estimate in the long run.

Current buyer segment: innovators and early adopters

Prevailing technologies:

Considering both diffusion charts jointly brings us to different conclusions for each service:

1. For the enhanced entertainment services, technologies with an already large deployment

will prevail in the long and medium term as demand is already large and early majority of

users has been captured. Technologies like DSL or traditional cable respond also to the

technical requirements analyzed in the first sections and therefore will retain most of the

market. Dedicated cabling and wireless already made significant inroads in households

also, and we expect both of them to increase dramatically that presence in the medium term.

2. In professional communications, traditional technologies also enjoy some advantage in the

short term, but dedicated cabling could win in the medium term as its response to technical

requirements is more favorable and standardization of services has not spread yet.

3. For the remote automated security segment, dedicated cabling looks also as the winning

technology, as its higher technological fit is reinforced with the fact that demand is still low,

which eliminates the advantage of already deployed technologies. Powerline may become

another option here but needs more standards and a higher awareness of its value proposition.

4. Finally, in the local operated control segment the technical advantages of wireless solutions

are very high, and this technology will also be able to deploy fast enough to meet a still low

and cautiously growing demand.

In summary, we expect the following combinations of technologies for each stage:

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EVALUATION OF PREVAILING TECHNOLOGIES FOR EACH SEGMENT AND TIME FRAME

(Estimated market size in $B in brackets for each segment/time frame)

Short term

(1 year)

Short term

(1 year)

Long term

(5-10 years)

Long term

(5-10 years)

Medium term

(3 years)

Medium term

(3 years)

Enhanced Entertainment

($3B)

DSLTradit.Cable

Professional Communications

($1B)

DSL,TraditCable

DedicCable

Automated remote control

($0.2B)

DedicatedCable

Operated local control($0.3B)


($4B)

Traditcable/DSL

Dedic.Cable


($2.5B)

Traditcable/DSL

DedicCable


($0.5B)

DedicatCable

Operated local control($1B)


($6B)

Tradit. Ca/DSL

Dedic.Cable


($5B)


($1B)

Operated local control($2.5B)

Wireless

Wireless

Wireless Wireless

Tradit. Ca/DSL

Dedic.Cable

Wireless

Wireless

DedicatCable

Wireless

Tradit.Cable/DSL

DedicCable

Wireless

TraditDedicCable

Wireless

PLC

TraditDedicCable

Wireless

PLC PLC

PLC

Recommendations:

According to our analysis we would suggest the following recommendations for investors:

For the short term (1 year) profits will accrue to established telco companies (DSL operators,

traditional cable) who will show the additional revenues from Networked Home Services as a

promising source of stable grow. However, investors should mistrust long growth forecasts and

limit their investments in these companies to a short horizon, as new technologies will offset

their incumbent advantage and gain presence in the medium term.

Dedicated cabling offers a good opportunity as demand will be strong in the short and medium

term, but investments should not have very long objective as in the long run wireless will prevail

Home Wireless solutions will not be profitable yet at this point, but given the promising

prospects for the long term, this can be a good moment for investors and venture capitalists to

invest in the leading providers of these solutions (especially if they gain market prescription

power through concentration and standards control).

Picking the winner service providers is tough and makes the approach risky. Winners will master

high-speed technologies, own important intellectual properties, have access to complementors,

e.g. through partnerships and respond to early majority customers’ needs.

Another option is to invest in less risky companies that serve as suppliers for the growing

technologies. In this sense we would recommend to invest in manufacturers or wireless

equipment and installers of dedicated cabling solutions

17


In the medium term (3 years) we would recommend investors to shift from traditional DSL and

cable companies to emerging wireless operators. Dedicated cabling will still be profitable

especially in “new homes segment” so opportunities will arise for communications companies

signing agreements with construction companies.

Powerline communications is in a comparatively early stage but its potential should be decided

over the next couple of years. Although it is now a highly speculative bet, in the medium term it

could offer a more certain opportunity for some specific segments and services.

In the long run (>5 years) wireless will be the leading technology as it will progressively

substitute the other technologies almost in all service segments. For low risk investors it is

recommendable to wait several years till this technology spreads in US homes, however long

term investors pursuing high returns should start acquiring stakes right now and increase

progressively their involvement in the best performing ventures.

Bibliography

Dow Jones Newswires, Home Networking Platforms Vie for Buyers’ Attention, January 11, 2002

The New York Times, Running the Home Remotely, August 31, 2003 Gartner, SOHO/ Home Networking Technologies: An Overview, February 22, 2002 Gartner, Interest Surging in Power Line Home Networking, March 27, 2002 Gartner, Cable’s Connected Future: Modems Morph Into Home Gateways, March 13,

2003 Gartner, Hype Cycle for Consumer Technologies, 2003, June 06, 2003 Financial Times, Bringing IT Home, September 20, 2002 Reed Business Information EDN, Growing a spine; Developing the high-speed home

backbone, June 26, 2003 CMP Media Electronic Engineering Times, Cross-standard bridges being built for

home nets, June 16, 2003 CMP Media Electronic Engineering Times, Concerns over home nets take center

stage at IEEE, June 16, 2003 CMP Media Electronic Engineering Times, QoS, a concern in linking 1394, Ethernet,

June 16, 2003 Reed Business Information, CED, Cashing in on home networking, June 01, 2003 The Korea Herald, Korea leads in making homes more intelligent, October 6, 2003 San Antonio Express – News, Home networking takes off; Getting connected; It’s not

just the techies who have home computer systems these days, July 6, 2003 Electrical Construction & Maintenance, The Wired Home Part 9, September 1, 2003 Reed Business Information, Twice, CE Retailers Connecting With Builders Channel,

June 23, 2003 Gartner, Digital Subscriber Line (DSL) in the U.S.: Perspective, October 8, 2002 Gartner, U.S. Consumer Internet Service Provider Market, 2001-2003, June 13, 2003

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Internet News, Wi-Fi Is Hot But Users Still Warming to It, November 21, 2003 InfoWorld, Key to Wi-Fi Security, January 10, 2003 InfoWorld, Microsoft Delivers Wi-Fi Update for XP, March 31, 2003 El Tiempo, Wi-Fi al Doble de Velocidad, November 12, 2003 Gartner, Wireless LANs Enter the Mainstream Alongside Ethernet, March 15, 2002 Gartner, Wireless LAN and Bluetooth: Entering a Gold Rush Period?, March 15,

2002 Gartner, Will 802.11b Becoming a Household Name?, May 15, 2001

http://www.palowireless.com

http://www.bluetooth.com

http://www.bluetooth.org

http://www.zigbee.org

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http://www.zigbee.org/

http://www.bluetooth.org/

http://www.bluetooth.com/

http://www.palowireless.com/

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