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| EMagazine Volume 6 Issue 2 Apr/May 2001 |
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When bundled services enter the picture, every service provider (for example, the cable company, the telephony company, the ISP, even the power supplier) becomes a competitor. Simply stated, if a service provider is merely deploying broadband modems or Virtual or Web-Centric RGs, it can be thought of as “leasing the virtual real estate with an option to buy.” It may have the early advantage, but others can (and will) attempt to move in on the real estate. by Michael Greeson |
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Introduction
As new broadband access technologies begin to compete with xDSL and cable for the residential market, and as consumers are offered greater choice in selecting a broadband provider, the battle for the last-mile will become increasingly intense. Service providers must identify ways to differentiate both their brand and their service offerings or they will likely lose significant ground to those competitors who do.
These challenges are further complicated by the commoditization of telecommunications and data services to the home. Regardless of the access technology (be it fixed wireless, xDSL, HFC, or even fiber), an increasing number of service providers will be able to offer the residential consumer the same types of services at the same price points. For example, cable companies are deploying circuit-switched voice (and in near future packet-switched telephony), thus adding a powerful complement to their existing digital video and high-speed data services. And telcos, be they incumbent or competitive, understand that in order to survive in this competitively charged landscape they too must add additional services (such as video) to their voice and data services.
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Its About The Real Estate, Stupid!
Now the common line goes something like this: as service offerings become more standardized and the pressure to compete slices margins razor-thin, the market will be able to support fewer and fewer competitors. And if a company is among the first “to own the real estate” (that is, to have its customer-premised equipment [CPE] deployed to initiate a broadband service), it stands the best chance to be the first to deliver the plethora of next-generation, high-margin services to millions of potential subscribers. This perhaps means survival in the short term, and higher margins in the long-term.
To paraphrase, “It’s about the real estate, stupid.” And placing a service provider’s branded (or at minimum co-branded) equipment within the residence goes along way toward securing that real estate against one’s competitors and providing a platform for the delivery of new services as they become available.
Yes, there is some evidence that the presence of branded equipment may help to reduce churn. But whether or not this translates into “owning the real estate” and is sufficient to withstand the competitive pressure may ultimately depend upon the type of consumer-premised equipment that is deployed. And herein lies the challenge: how to (A) be the first to “own” the residential relationship, and to make this relationship sufficiently “sticky” by providing a flexible, branded platform for the delivery of any of the new services that a specific residential consumer may want, (B) avoid deploying too simple of a device (one which demands costly upgrades or even replacement) and (C) avoid deploying too advanced of a device (one that enables services which may never find a market), and therein stranding millions of dollars. In other words, how to select and deploy a device that will be sufficient to establish and retain the consumer relationship without stranding millions in capital. Sufficiency, at least in this context, can be understood as the median below which the consumer jumps ship to another service provider, and above which the service provider strands millions in a end-user device that enables services for which there is no demand.
The Many Faces of the Residential Gateway
Let’s examine a few of the residential CPE deployment scenarios:
If a simple broadband modem is deployed, then high-speed data is the only service that can be offered. But if a service provider seeks competitive differentiation and customer retention (over both the short and long term), a device more intelligent than a simple modem must be deployed: limited services mean more room for competitors to move in on the real estate. Simply stated, if you’re deploying broadband modems only, you’re merely “leasing” the real estate.
If the CPE is a Virtual Residential Gateway (a co-located broadband modem and a router with a firewall), then dynamically-routed high-speed data service could be accentuated with revenue from remote software upgrades for the home PC, or even revenue from the sale of home networking technology. If the CPE is a Web-Centric RG (a single box solution which incorporates the broadband modem with a router and advanced security features), similar services could be offered.
However, as the consumer begins to better understand the value associated with receiving bundled services from a single provider (and shows a pecuniary interest in receiving such a bundle), a provider either has to upgrade or replace the CPE. This would most certainly involve a truck roll, perhaps even for each individual type of service that is brought online. Yes, the consumer may see the original provider as the default choice for adding additional services. But when bundled services enter the picture, every service provider (for example, the cable company, the telephony company, the ISP, even the power supplier) becomes a competitor. Simply stated, if a service provider is merely deploying broadband modems or Virtual or Web-Centric RGs, it can be thought of as “leasing the virtual real estate with an option to buy.” It may have the early advantage, but others can (and will) attempt to move in on the real estate.
If the CPE is a Multi-Service or Set-Top RG (which include a broadband modem, router, security features, plus either voice or video functionality), a host of legacy and next-generation services can now be offered. New service bundles could include high-speed data, legacy or packetized voice services (which means the potential of adding virtual voice lines as well as PBX-style features), broadcast TV, and digital entertainment services (including Near-VOD, VOD, PPV, PVR, etc.). In such a deployment scenario, the CPE may only be used originally for data and video, but can be remotely upgraded to enable voice or other services. A more advanced CPE, certainly. A higher cost, definitely. A guarantee of future loyalty, perhaps. Penultimate “stickiness” and ownership of the residential real estate is not complete. Think of it this way: if you deploy a Multi-Service or Set-Top RG, “you may own the building but you don’t own the land.”
If the CPE is a Whole-House RG, the service provider can deliver every conceivable service enabled via any access network that serves the home. Any network, any service – the optimal solution for delivering legacy and next-generation services to the home, and generating multiple new revenue streams. The Whole-House RG not only enables all of the services previously outlined, but the more advanced, “Jetson-style” services such as home control, energy management, remote home monitoring, etc. Although Whole-House RGs are currently associated more with structured-wiring build-outs in new homes, devices are now coming to market that promise to take up less space than a DVD-player, interface with every wide area network, and distribute the content anywhere in home, wirelessly or without-new-wires. But in exchange for such extraordinary functionality, a Whole-House RG requires a much higher level of investment on the part of either the service provider, end-user, or both. These devices are and will be for sometime more expensive (priced between $1000 and $20,000, depending, of course, on the functionality, networking, and customization involved). In such a deployment scenario, the consumer relationship is about as sticky as it can be, and the real estate as close as possible to being “virtually owned” by any single provider. That is, provided the company can deliver on its promises by providing high-quality consumer services at a great value!
Well, then – the choice is easy, right? The best strategy would be to deploy Whole-House RGs to every residence within reach of a service provider. A company could limit the functionality of the device, at least initially, to delivering only specific legacy and first-generation services such as telephony, high-speed data, and digital video services. Given that most service providers do not currently have the infrastructure to deliver, support and bill for many of the next-generation services, this could provide the necessary time to incrementally upgrade the networks. And within the next three to five years, as these new services come on board, the provider can simply configure and enable the services remotely because the hardware/software to support these services was embedded within the Whole-House RG at the start. Step by step, these new services are enabled and additional revenue streams are incrementally generated.
In Search of a Market
Are such devices commercially available? As previously stated, both the requisite hardware and software for a Whole-House RG is available, and many companies have already rolled out devices that carry the “any network, any service” distinction.
Then why are service providers not deploying these devices by the millions? Why doesn’t every new home start or high-speed data or digital cable subscription come with a Whole-House RG? The simple answer: to deploy these devices on a mass scale would require significant additional investment above and beyond what is required to deploy a simple broadband modem or router; capital which (1) is very hard to come by at this time, and (2) if invested, would have to be recovered by charging the end-user or by (hopefully) cashing in on the demand for these new value-added services once they are brought on-line). Either way, this strategy involves capital commitments well above current costs with no certainty that once these new services become available the end-user will embrace them (read “cough up the monthly service fee”).
The risks inherent in the residential broadband market are very real: if a service provider deploys too simple of a device, it runs the risk that (1) the consumer will jump ship at the first sign of better value (understood as a function of both price and quality), or (2) it may have to replace or upgrade the CPE if and when these services become viable. On the other hand, deploying too advanced of a device could result in stranding millions in boxes that may never generate a cent in new service revenue.
So at what point does:
(1) a particular form of RG become “sticky” enough to assure that the end-user will not jump ship to another service provider that can offer either more services, greater value, or both?
(2) a particular form of RG merely becomes a cash trap?
Conclusion
The desire to gain the virtual residential real estate in a sufficiently sticky fashion so as to minimize churn must be balanced against the desire not to strand a ton of capital in a device that will never generate sufficient returns. Selecting the appropriate business strategy for balancing these opposing priorities depends upon:
(1) which services the provider is going to offer the residential market;
(2) when these services are going to come online;
(3) what costs are associated with:
(a) a minimalist (modem-only or Virtual or Web-Centric RG) strategy as opposed to:
(b) a mid-range (Multi-Service or Set-Top RG) strategy or;
(c) a high-end (Whole-House RG) strategy.
(4) what financial risks are associated with:
(a) a minimalist approach being insufficient to attract/retain the residential consumer;
(b) a mid-range approach either being insufficient to attract/retain the residential consumer or stranding capital on hardware/software in excess of demand; or
(c) a high-end approach that may strand millions.
All of these issues must be understood in relationship to one another, and to the total market environment (both now and at each point along the business model’s time horizon). Determining which business model is most appropriate, and the form(s) of RG to be deployed, must be the logical outcome of reconciling the need to be the first and best with the need to not strand capital. Understanding the subtleties and nuances of the residential market is a prerequisite to easing this tension, identifying a market, and efficiently leveraging resources in such a way that risk is reduced and margins are optimized.
Michael Greeson, Senior Analyst, Emerging Residential Technologies
Michael Greeson examines broadband residential access technologies and services, customer-premised broadband equipment, home networking, and voice-over-broadband products and services. His recent work includes:
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The Broadband Networked Home: Profiles of an Emerging Market (on going)
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The Residential Gateway Report: Third Edition (December 2000)
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Broadband Access @ Home: Update of the Deployment of Broadband Services (November 2000)
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“Consumer Interest In Next-Generation Broadband Services,” IEC Annual Review of Telecommunications, to be published June 2001
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“The Residential Gateway as Energy Manager,” HomeToys, December 2000
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“MMDS: The Next Beast of Broadband?” HomeToys, September 2000
Mr. Greeson is frequently cited in the technology press, including San Jose Mercury News, Broadband Week, the Associated Press, ZDNet, HomeToys.com, XChange, TelecomBusiness, and many other publications.
Mr. Greeson often addresses audiences regarding developments in home networking and residential technology. His most recent engagements include IIR’s Residential Gateway European Congress, the DSL Forum in Vancouver, and the IP Cable Telephony Forum.
Michael recently joined Parks Associates after completing a BA in Philosophy from the University of Central Oklahoma and an MA in Interdisciplinary Social Science at the University of Chicago.
