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November 5, 2001 Provided by System Dynamics Inc. in association with Pulver.com

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IN THIS ISSUE:

Special Report on Broadband Home Fall 2001
There's Lots To Feel Good About!


Special Report on Broadband Home Fall 2001: There's Lots To Feel Good About!

Why this Special Report? : Taking Churchill to Heart

Writing the Broadband Home Report each month, we fret over its tendency to get too long. Sometimes we (Dave and Sandy) exchange testy words about whose pearls of wisdom ought to be cut to shorten the final version. We wanted our readers to avoid the conclusion Winston Churchill came to when assessing one report: "This report, by its very length, defends itself against the risk of being read." So, this separate issue of the Broadband Home Report highlights Broadband Home Fall 2001. Recent news and featured articles will soon follow soon in a separate issue .

Highlights

Providing the highlights of this Broadband Home conference is a tough job -- and it's not just because of the richness of the content. The personal contacts and interactions with the people who make up the broadband home community are an integral but "unsummarizable" piece of the experience. Special thanks to all the speakers and delegates, who, despite the trying times and worries about travel, made this our most spirited and vibrant conference yet! (And apologies to the many interesting talks we don't have room to mention below.)

As we kicked off the conference, we felt it was important to explain why -- amidst the gloom that permeates telecom, Internet applications and the economy -- we were still holding a conference on "the broadband home". Our answer, echoed throughout the three days by others, was:

  • RESIDENTIAL BROADBAND IS INEVITABLE

  • IT WILL HAVE HUGE IMPACTS ON BOTH CONSUMERS AND BUSINESSES

  • IT WILL CREATE NEW WINNERS AND LOSERS.

If you want another voice behind this perspective, see Stewart Alsop's take on broadband after speaking at Fall BBH (see postscript below).

Three major topics encompass much of what the conference was about:

  • Broadband access provides the foundation for a wide variety of new products and services.

  • This is about much more than PCs and the Internet.

  • Although money is tight now, the economic impact will be HUGE.

Our opening speech and instructions for downloading other talks from the conference are available at http://www.thebroadbandhome.com/presentations.html#Fall2001 .

"Fulfilling the Promise"

Our opening talk laid out several topics which were explored and debated more fully in other sessions. Observing that residential broadband promises to be a bright spot amid all the doom and gloom, we reminded everyone that it's happening all over the world. We strongly believe that future broadband penetration will match PC and Internet penetration today. Its impact on businesses and consumers will be profound and it will represent a huge opportunity for some companies and a huge challenge for others.

The promise of the broadband home in the short term is that all home PCs will be connected through the broadband pipe to broadband applications and content. Broadband will move beyond the PC and the Web and be used for communications, entertainment, security and control. It will provide access to jukeboxes of music, movies, TV and games delivered to digital audio and video players anywhere in the house. It will support personal voice and video conferencing, and make it possible to share photos and videos with friends and family, and to control VCRs, lights from anywhere. Much of this is starting to happen today and was made tangible in the demos by speakers.

To demonstrate humorously how broadband provides the foundation for new products and services, we showed a "broadband soap" from BLOKKS (www.blokks.com), a Swedish company, demonstrating how even the clueless will use a broadband connection for telephone, television, music and home security services.

To realize the full potential of new applications and services, the underlying access foundation needs high bandwidth and quality. Several European countries are building much stronger foundations for broadband than in the United States. Previous BBHR articles have discussed the approach to broadband in Stockholm and Milan. In both cities, providers are using fiber to deliver IP over Ethernet at 100 Mbps symmetric.

By anemic comparison, the US FCC defines broadband as "at least 200 kbps in each direction". US broadband access is generally quite asymmetric, typically with 1.5 Mbps (or less) "downstream" toward the home, and 64 to 384 Kbps upstream. This makes a huge difference in the products and services that can be built, and is likely to put the United States at a disadvantage in the future.

We believe that the United States should develop a coherent public policy for broadband if it is to receive broadband's full benefits. Such a policy would need to consider several key questions:

  • Should public policy favor broadband approaches that provide higher speed?

  • How will we make broadband available and affordable - especially in rural areas and for the economically disadvantaged?

  • How and whether we can encourage new entrants -- especially facilities based ones?

  • How to rationalize the different regulatory regimes as “cable” and “telephone” services blur?

The emergence of the Broadband Home will have a huge impact on industries that represent a big chunk of the US (and world) economy. Over the next decade, physical delivery (of newspapers and CDs, for example) will largely give way to electronic delivery, and analog formats - which still dominate in telephone and television services - will give way to digital formats. Industries as diverse as telephone companies, movie studios, newspaper publishers and home builders will be impacted by this transition - and by the public policy decisions.

Broadband Access Provides the Foundation For New Products and Services

Whatever the arguments may be between the competing forms of broadband access, their providers generally agree on one thing: high bandwidth is an integral and increasing part of the requirement for broadband to and in the home. As Intel stated in a recent filing before the FCC "The true benefits of broadband will require that a critical mass of users have high-bandwidth broadband" to start the virtuous cycle of innovative applications. As we observed, this is happening in some countries while the US is falling behind.

The delivery of truly high-bandwidth broadband was a major topic of the conference. The most graphic depiction of today's access technologies was undoubtedly that by Bernard Daines, of World Wide Packets, who represented them as dead fish! His message was that although many countries outside the U.S. are pro-active in deploying true broadband, the only ones in the U.S. who seem to "get it" are some power companies, municipalities and real estate developers.

This subject was also covered in the general session on Broadband Access Evolution, a talk by Narad Networks and breakout sessions on "future proofing" and "fiber to the home". Almost all agreed on the need for and feasibility of much higher bandwidth -- while disagreeing on specific technologies. Narad's talk focused on how and why the current cable plant could be modified to accommodate what they call "true broadband", meaning much more than what we think of as the "mid-band" services offered as broadband today.

Donny Fowler of TechNet discussed the public policy questions regarding US broadband deployment. He reflected on the lack of success of the 1996 Communications Act in lowering prices and improving availability of innovative services. TechNet's Broadband Working Group is struggling with the question of where the demand for broadband services will come from and how to make the services affordable. TechNet is encouraging the Bush administration to take the lead in defining US broadband policy.

While the many forms of broadband access were the subject of some lively discussion, there seemed to be a general understanding that scarcity of access is a transitional stage and the time will come when broadband access is a commodity. Access providers reflected this perspective in discussing their plans for including home networking and gateways in their businesses. Bernd Lutz of CableLabs said "The connected home is strategic. The time is now"

The sessions on home networking made it clear that the industry players understand that these networks will need to carry multiple channels of TV, and today's technologies need to evolve into ones that can carry the increasing multimedia load. Speakers described a variety of wired and wireless technologies to achieve this goal.

The home gateway element of the enabling infrastructure has made significant progress since our last conference. Discussion about gateways included not just what this relatively new class of devices will do, but also emphasized the mix of distribution channels that will get them into the homes of end users. Linksys founder and VP Janie Tsao explained their strategy of using a combination of retail, e-commerce and service providers with differentiated products to optimize customer access. Janie is no stranger to retail and distribution, with a background that includes being System Manager at Carter Hawley Hale.

New Applications and Services - It's More than the PC and the Web

Personal computers and Internet applications have been the main driving force pulling broadband into the home and will continue to drive the growth of home networking. Many new broadband devices and applications are entering the market to move beyond Web browsing and email.

Microsoft intends a play a major role in this evolution. Mike Toutonghi, heading Microsoft’s consumer-focused eHome Division, described the opportunities for infrastructure, devices, and services in three areas: entertainment, communications, and convenience / control. The entertainment opportunity is to "bring together the worlds of consumer electronics and the PC" to create exciting new products and technologies for "digital audio, digital video, digital photography, PVR, VOD". (Putting words into action, shortly after the conference the eHome Division announced an agreement with Korea's Samsung Electronics "to collaborate on consumer PCs and consumer electronics products for the digital home.")

In a breakout session on "Sharing Your Audio and Video", Luminati and SONICblue each talked about newly-released home media servers which store many hours of digital audio and video for listening and viewing throughout the home. These are designed to use broadband in the home media center and are packaged as consumer electronics devices. John Canning of Microsoft introduced the session by saying that these products are addressed to meeting real customer needs "Archiving videos, music and photos appeal to the end customer – stop the clutter". (Following the conference, both SONICblue and Luminati participated in the Windows XP launch.)

New applications and devices based on "broadband voice" are also an important part of what's happening. Bob Selzler of InnoMedia observed that 10 million homes in North America already have broadband connections and that these provide a good base for new voice products and services; he talked about InnoMedia's BuddyTalk product for "converged communications" using the PC and ordinary telephones. Sung Park of Soundpipe discussed a new "Internet enabled telephone answering device" which uses Internet email to deliver telephone messages anywhere in the world. Mark Dzwonczyk of Sigpro observed that the reason for the focus on voice is that "Communication creates Communities"; he pointed out the support for voice applications built into Windows XP and expressed his belief that "Convergence is not about all services on one device - it is about all devices having voice".

In a breakout session on interactive games, Cameron Ferroni of Microsoft Xbox discussed the "keys to widespread adoption" of gaming in the broadband home. While "content is king" it is only the first factor; "it is the community that makes the connected device sing." The major challenges are overcoming complexity in home networking and gameplay, and developing "business models that allow for reasonable pricing, but are still appealing to the consumer." Britt Morris of Sega.com said that broadband's advantages for today's Sega titles were minimal since the games were optimized for dialup; in the future, Sega intends to support broadband on many different platforms including gaming consoles, PCs and handheld devices. Finally, George Liddle of Sigpro brought the voice and gaming topics together: he said that "Talk is a natural part of playing games" and increases the delight value by adding realism, communicating emotion, and enhancing the feeling of "community".

One of the seemingly great concepts that has not yet found market acceptance was explored in our closing session on Webpads. Ken Anderson of Intel and Clark Stevens of SONICblue have strong backgrounds in understanding user needs and behaviors, including working in the Broadband Innovations Group at Mediaone (later AT&T). To meet user expectations Webpads should enable people to get information, entertainment, communications and control in a way that is "unchained, spontaneous, comfortable, fun" and simultaneously "reliable, rich and entertaining, an extension of the PC and flexible". To date, no one has yet succeeded in getting the right combination of function and price. When we get there, we agree with Craig Slawson that it will be a "preferred touchpoint for digital home applications."

We're always interested in what new applications and devices will flourish in a broadband home. The slideware and demos addressed the intellectual piece of the question. Over the next few months we intend to explore the experiential piece -- do these things actually deliver on what they promise? Now that we finally have broadband, we'll test some of these new devices and services in our house and give you our feedback.

Where's the Money?

Even if the infrastructure is being put in place and there are plausible applications, a big question these days is "where's the money?" The question really has two parts: "What will the consumer spend money for?" and then "Where will the capital investment come from to fund development of these great new things?"

The first question is at least partially answered by the observation that people spend real money today for communications, video rentals, home security, advertising, shopping, etc. Many of these will be transformed IF their new versions are simple, affordable, and improve people's lives. That transformation will re-direct many of today's money flows and create new ones. We believe that people have learned from sad experience that "free" telephony, music etc. are not long-term sustainable business models--so finding sustainable business models is an on-going challenge. Augie Grant reminded us that money is a key resource and "easiest to identify, but...analysis of time (learning curve, habits), interest and other resources" can spell the difference between success and failure.

Let's assume that the consumer is willing to spend money to buy this "great new stuff". Before they can do so, companies need to invent, build, market and service it. So what's the investment climate to make that happen? Despite all the negatives, BBHR continues to list new funding for broadband businesses every month--albeit in diminished volumes. The assessment of our six venture capitalist speakers was that today's investment climate is demanding, but not impossible. Comparing the situation two years ago with today, Guy Kawasaki observed that "then" was like a hospital delivery room on a busy night, while "now" it's more like an emergency room. The software for entrepreneurs "then" was PowerPoint, but "now" what's needed is Excel. Whereas before success was measured by the future, today it's measured by the past. Or as one of our other VC speakers observed, "Going public is no longer the objective. The worry today is getting the company to a positive cash flow."

Despite the rough times, Guy also shared "10 reasons why it's a great time to invest in a start-up". Some of the good things about starting a business now include how much easier it is to recruit and retain talented people and how much lower the rents are in places like Silicon Valley. Gary Lauder provided an appropriate quote for today's circumstances: "Prosperity is a great teacher...adversity a greater.”

The clear message was that the bar is very high to get funding for something new and that deals take a long time to close. One panelist felt the secret of spending his time well is to make rigorous judgments about which ventures don't have long term prospects and cut them off now. The slowdown in new deals is reflected by the larger proportion of time spent by VCs these days on portfolio management vs. new ventures. Stewart Alsop indicated that the balance of his time was weighted toward the 40-50 follow-ons that he is involved with, although he has 20 new deals this year. Another panelist was weighted even more to follow-on work, currently dividing his time 90/10 between portfolio management and new ventures.

As people who like challenging the status quo and pushing the envelope, we particularly liked Alsop's view that "the role of a VC is to upset the apple cart for companies that have grown fat and lazy." At the moment, funding for those insurgents is tough to come by.

For another perspective on both the financial marketplace and the state of deregulation and competition in the US, we recommend "Weathering Telecom's Dark and Stormy Night", an interview with former FCC chairman Reed Hundt in the October 2001 McKinsey Quarterly, http://www.mckinseyquarterly.com/article_page.asp?L2=22&L3=78&tk=263747:1123:22&ar=1123&pagenum=1

In the next issue of BBHR, we'll highlight additional viewpoints on related topics from Columbia Business School's recent session on "The Broadband Economy".

Postscript:

As we were about to "go to press", we noted that Stewart Alsop's musings on broadband in the 10/29/01 Fortune Magazine mesh well with our own. Reflecting on his talk at Fall Broadband Home and his recent personal experiences with broadband, he concludes that despite all the "depressing stuff" that's going on, once you've got it, you get "so used to a broadband connection that our lives have changed." The article is titled "The Good News Of My Addiction", referring to his conclusion that anyone using a home network and high speed Internet connection becomes addicted -- great news for companies selling this stuff. You can read the article at: http://www.fortune.com/indexw.jhtml?doc_id=204727&channel=artcol.jhtml&_DARGS=%2Ffragments%2Ffrg_column_archive.jhtml_A&_DAV=artcol.jhtml

Most of the presentations referenced in this article are available online. Please visit http://www.thebroadbandhome.com/bbhfall/#present to see instructions for downloading them.


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Sandy Teger and Dave Waks
Sandy and Dave's Report on The Broadband Home
Originally published as The Broadband Home Report
November 5, 2001

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