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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.
2
Backbone networks
Home aggregationaggregationpoint
Homeaccess points
Network aggregation points
Inside Home Transmission Technologies:
Traditional Phone/ DSL/CoaxDedicated Wires/ EthernetWirelessPowerline communication
Scope of this paper
MGMT-463 Final Paper Networked Home Technologies
From the technological side the Networked Home services can be grouped according to the
requirements that each service demands:
Group Services
R eq ui re m en ts
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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 communi- cations
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.
3
MGMT-463 Final Paper Networked Home Technologies
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
4
MGMT-463 Final Paper Networked Home Technologies
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
5
MGMT-463 Final Paper Networked Home Technologies
(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.
6
MGMT-463 Final Paper Networked Home Technologies
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).
7
MGMT-463 Final Paper Networked Home Technologies
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.
8
MGMT-463 Final Paper Networked Home Technologies
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
9
MGMT-463 Final Paper Networked Home Technologies
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.
10
MGMT-463 Final Paper Networked Home Technologies
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
11
MGMT-463 Final Paper Networked Home Technologies
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:
12
Group
Top
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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
MGMT-463 Final Paper Networked Home Technologies
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)
13
MGMT-463 Final Paper Networked Home Technologies
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
14
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
MGMT-463 Final Paper Networked Home Technologies
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
15
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
MGMT-463 Final Paper Networked Home Technologies
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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MGMT-463 Final Paper Networked Home Technologies
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)
Enhanced Entertainment
($4B)
Traditcable/DSL
Dedic.Cable
Professional Communications
($2.5B)
Traditcable/DSL
DedicCable
Automated remote control
($0.5B)
DedicatCable
Operated local control($1B)
Enhanced Entertainment
($6B)
Tradit. Ca/DSL
Dedic.Cable
Professional Communications
($5B)
Automated remote control
($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
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MGMT-463 Final Paper Networked Home Technologies
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
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MGMT-463 Final Paper Networked Home Technologies
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