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The February 25, 2002 Issue Provided by System Dynamics Inc.
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New Homes: How "Broadband Ready" Are They?

A Visit to the International Builders' Show

Our report on the "broadband home" often concentrates on the "broadband" part of the topic, its technology, its applications and its suppliers. Since "home" is the other half of our subject, we thought it was time to take a closer look at what's happening there. Specifically, we wondered whether and how new homes are being equipped with built-in wiring and electronics systems so their owners can readily enjoy broadband-enabled applications, both today and in the future.

The International Builders' Show (IBS), sponsored by the National Association of Home Builders (NAHB), was a great place to get some perspective on what developers, builders and their suppliers are doing to incorporate technological capabilities enabling home entertainment, PC networking and Internet sharing, communications, home security and control. Since this is a big show (over 71,000 attendees) that includes things like doors, roofing, bathroom fixtures, and masonry products, we were delighted to find that many of the exhibits and vendors we wanted to see were grouped together in a section called tecHOMExpo.

New homes are only a small fraction of the housing market, but historically have been the place where new technologies first take hold. Air-conditioning went into new homes first, since it was so much simpler to build in than add-on. Eventually the demand grew, the methods for retrofitting became simpler and the huge base of existing homes became part of the potential market. In the US, about 1.2 million new single-family homes are built annually, in a country with a base of about 75 million single-family homes. New homes are a small fraction of total housing, but a leading indicator of where the market is going. ( ) ( )

So what did we learn? -- A summary

1. We're early in the life-cycle of the industry focused on building technology infrastructure into the home -- It has a long way to go till maturity, but is headed in the right direction. If we liken it to the stages of human development, the baby has mastered crawling and is into the toddler phase.

2. We're moving toward critical mass for broadband TO the home and the demand for the right "plumbing" within the home will follow -- As Malcolm Gladwell wrote in "The Tipping Point", "ideas and behaviors and new products move through a population very much like a disease does". We've seen that phenomenon with consumers using the Internet. And that use is a part of what is driving home infrastructure. Today 60% of US homes have PCs and over 30% of those with PCs have more than one. Those correlate highly with the 10% of US homes having high speed Internet access and also with the homes that have adopted some form of computer networking (among multiple-PC households with broadband, nearly 60% already have a network).

3. Educational barriers must be overcome -- Most consumers don't know the benefits of putting in the appropriate broadband plumbing when their house is being built, so they may not ask the builder about it. The builder hears the customer asking about things like kitchen cabinet upgrades but not necessarily about A/V wiring to multiple rooms or computer networking, so isn't being pushed by the average consumer to think about home technology infrastructure. In addition, it's unfamiliar territory for the builder, with unknown margins and problems, so why offer it? These factors are beginning to change. Younger buyers and others who take technology for granted are starting to ask about technology infrastructure. Some builders are looking to technology as one of the ways to distinguish their homes from the competition.

4. Complexity is a big impediment -- The complexity of the technology, the number of different technology suppliers and fragmentation of the builder and installer industries are all impediments. The signs are again hopeful for progress. Aggregators who bundle and simplify technologies into clearly targeted packages are starting to appear.

5. The TechHome Rating System is a great educational tool -- The TechHome Rating System developed by the Consumer Electronics Association (CEA) is part of an excellent effort to educate buyers, builders and realtors about the technology elements that can be built in to enable audio, video, voice, data and security applications. Its early impacts are being seen in a few cities, and with continuing support we expect the number of areas to grow substantially.

6. Developers are of mixed minds on whether to offer broadband services -- Some land developers and builders are starting to participate in the broadband services market, either on their own or in partnership with others. They see putting fiber to the home and offering services over it as an additional way to distinguish themselves from other communities and to gain annuity revenues. Others see the many levels of complexity -- from technology, competition, regulation, etc. -- and don't want to consider offering services.

7. Despite the general economic downturn, the US housing industry looks strong, the show was well attended and results reported by vendors in this market were positive. We expect the move toward incorporating new technology infrastructure has a healthy home building climate to flourish in.

The Home Electronics Systems Infrastructure

Modern homes include electronics systems for a wide range of applications. As we've discussed in previous issues of this report, these applications fall into several broad categories: data, telephony, audio, video, and telemetry/control (see for more detail).

In new construction, the trend is to prewire the infrastructure to support the electronic systems while the house is being built. Telephone wiring has long been included in new homes, and coaxial cable was added several decades ago.

Structured cabling systems have emerged as the preferred way to centralize technology distribution. These systems are evolving to span the full range of applications, with increasingly elaborate electronics included in the infrastructure.

The major elements of the infrastructure include:

  • An enclosure to centralize the wiring at the center of a star configuration;
  • Outlets in each room (or several places in a room);
  • Wiring, typically a mixture of Category 5E twisted-pair cables and RG-6 coaxial cables, running from the enclosure to each of the outlets;
  • Electronics in the enclosure, including audio and video distribution modules; data networking switches and hubs; and lighting, security and heating systems.

More elaborate systems include additional elements:

  • Touchscreen displays mounted on walls and portable webpads to control the electronics
  • In the enclosure, a residential gateway, audio server, video server, PBX

The value chain includes many different roles:

  • Core technology suppliers provide piece parts ranging from enclosures, cabling and outlets to touchpads, servers and software
  • Aggregators assemble complete "structured cabling systems" from the piece parts
  • Integrators purchase the systems and install them in homes during and after construction, often as subcontractors to builders
  • Home builders select base systems bundled into the base prices of homes, and then (often through integrators) sell more advanced systems
  • Property developers may specify minimum cabling configurations for homes and may play a role in offering services such as video, data, and telephony.

Many companies play several roles in the value chain. Some core technology providers configure and sell pre-packaged sets of piece parts directly to builders. Some aggregators manufacture piece parts. Some integrators bypass the aggregators and assemble their own systems. The builder may sell a package which includes all the structured wiring plus a contract for the services.

Technology Players

Here is a summary of our discussions with many players in the value chain:

  • Bobby Riesdorph in Leviton booth --> Click for larger pictureLeviton is one of the largest manufacturers of electrical and electronics parts and offers pre-packaged structured wiring systems. We talked with Bobby Riesdorph of its Integrated Networks Group, which works directly with builders to configure wiring systems to fit the needs of each home model. Bobby told us that it was easy to convince builders to use structured wiring for telephony and video distribution, but hard to convince them to include additional wiring for data and other applications. He said that the vast majority of homes equipped with structured wiring in 2001 had only one CAT5E for telephony and one RG-6 for video, even though it would cost the builder less that $100 to add a second CAT5E for data. ( )
  • Doug Fikse of OnQ --> Click for larger pictureOnQ Technologies is said to be the leader in providing structured wiring systems. A spinout from AMP Inc., long one of the major connector manufacturers, OnQ offers a wide range of pre-packaged systems and modules spanning the whole range of applications. Doug Fikse, OnQ's President, confirmed what we had heard from Leviton - most of their sales last year were minimum systems with one CAT5E and one RG-6. Only a small number of systems included support for data, lighting, or home management. ( )
  • Mark Schmidt of Home Director --> Click for larger pictureHome Director is said to be #2 in structured wiring systems. A spinout from IBM, Home Director offers a wide range of systems. They used the show to announce an entry-level "Contractor Series" for the mass market and deals with ITT and CorAccess for advanced technologies. Mark Schmidt, VP and GM, showed us the new products to provide a complete home networking infrastructure: a home server, the migration of video and audio from analog to digital carried over CAT5E (from ITT), touchpoint controls (from CorAccess) and a comprehensive software infrastructure based on OGSi and UPnP. We especially liked the AudioPoint 7000 digital audio receiver which decodes audio from Ethernet to standard RCA jacks; the associated software permits the selection of audio source, volume and equalization from a PC or a webpad. ( )
  • CorAccess Systems provides flat-screen touch-enabled devices and embedded software platforms for networks which don't require PC-type functionality. Craig Slawson, CEO, showed us their hand-held webpads operating over an 802.11b wireless network, and their in-wall TouchPoint units ranging from 6" to 15". Both can be used as interface devices for built-in home servers or with appropriate software can control other devices. We especially liked the look and the applications on the cute Companion 6 TouchPoint (which we unfortunately forgot to photograph). CorAccess has business relationships with aggregators such as Home Director. ( )
  • Todd Sames of Premise Systems --> Click for larger picturePremise Systems provides middleware to integrate the electronics systems in the home. At the Genesis Homes model home on the show floor, Todd Sames showed us Premise Systems middleware running on a Home Director server controlling the lighting, audio and video through both wired and wireless networking. Premise Systems aims to embed its middleware in many systems, and has announced strategic relationships with GE-SMART, Microsoft, Lutron and X-10 among others. ( )
  • Bill Thompson of Ustec --> Click for larger pictureUStec focuses mostly on the higher-end market. Bill Thompson, President of USTec, showed us their bundled quad cable (dual CAT5Es and dual RG-6s in a single jacket) and integrated systems for computer networking, entertainment, security, and automation. ( )
  • Industry pioneer SMART showed systems for networking, automation, and audio distribution. ( )

Builders Are Off To a Good Start, But More Is Needed

Industry associations such as CEBus and HANA (now part of CEA) have long preached the need for standardized structured wiring in new construction, but it has been slow to take off. US builders have started including structured wiring in the base price of new homes. ( )

Industry surveys estimate that about 25% of homes built in 2001 included some form of structured wiring. Our discussions at IBS with many of the industry leaders confirmed that most of these homes have only minimum wiring - one CAT5E and one RG-6. While the industry has convinced many builders to use "home-run" wiring instead of the "daisy chain" they used before, it has been much harder to convince them to include additional wiring as part of the base price or to invest the effort to "up-sell" the customer to pay for additional wiring or electronics.

With about 65 million US homes already equipped with a PC and 25 million of these with more than one, it would seem pretty easy to convince the home buyer to spend an extra 1% or so of the home price to install a proper network. But the industry has done a great job confusing the customer as to what is required to "future proof" the house. While the vendors at IBS were consistent in preaching the need for dual CAT5E and dual RG-6, the end user is bombarded with messages that on the one hand suggest that wireless will solve all the problems, and on the other that he should really install fiber for true future-proofing.

What's clearly needed is a clear and coherent industry message addressed to all the constituencies.

The TechHome Rating System Is a Good Focal Point

Many vendors at IBS were handing out copies of the new TechHome Rating System (THRS) form from the Consumer Electronics Association (CEA). THRS is the product of a concerted industry effort and makes it easy for a home owner, builder or buyer to assign a score to a home's "technological capabilities". The key idea is to make the THRS score as visible as the number of bedrooms and baths. ( ) ( )

The THRS form scores the home's electronics systems in five groups: home entertainment, communications, PC networking, security, and comfort and convenience. It assigns a Category Rating from 0 to 5 depending on the systems built into the home. A home with structured wiring automatically gets a 5.

Although we have a few quibbles with the details, we think THRS is a great way to get a consistent message to all the stakeholders.

Now that THRS has been rolled out, we wondered how it was being promoted. After the show, we phoned David Nash of Intel, who chaired the TechHome group and continues to be deeply involved. David's talk at IBS challenged the builders "to install these systems in all new home starts - not just high-end custom homes". He told us that TechHome's "mission this year is that 100% of home starts in all price categories go in with at least a minimal solution." TechHome is focused on getting builders to use it for new homes and on realtors to score existing homes. ( )

We think everyone in the industry should become familiar with TechHome and start promoting it to reduce all the confusion out there. The TechHome and Connecting Americas' Homes websites are a good place to learn more. ( )

Developers and Builders as Service Providers

We have written before about developers and builders playing a role in providing telephone, video and data services, and we wondered whether this would be highlighted at IBS. At the show, we attended a session on this subject and talked to a service provider. While most builders continue to leave these services to the incumbent telephone and cable companies, a few have gotten involved and more are thinking about it.

Optical Solutions

We attended the session "What Every Developer Should Know About Telecommunications." Ian Thomsen, Director of Marketing for Optical Solutions Inc., talked about "The Case for Broadband Networks in New Housing Developments." OSI is a major provider of fiber to the home (FTTH) solutions based on passive optical networking (PON), and has announced technology rollouts in both new and existing communities in the US.

Ian's talk argued that buyers would increasingly demand "broadband converged services" in new developments and that developers should become services providers to "gain a lifetime annuity based on recurring monthly fees" he estimated at more than $100 a month. His key point was that depending on incumbents for broadband services provided no competitive differentiation and the likelihood that incumbents would not provide new services in a timely way, putting the developer at a competitive disadvantage. He presented several business models for converged networks, with the highest reward and risk for the developer acting as owner, operator and service provider. Partnering or subcontracting operations and service would reduce the risk.

The session was well attended and Ian's talk seemed well received. From their questions, it appeared that many of the attendees were surprised by the complex technical, legal, operational and marketing issues in a business offering converged voice, video and data services, and did not want to get involved at this time. But they seemed interested in learning more and further exploring the opportunity.

( )

GateHouse Networks

At the show, we had a very interesting conversation with Mike Rahimi, VP Sales and Marketing at Lamont Digital Systems. Lamont's Campus Televideo division provides telecommunication services for colleges and universities, and currently supports 350,000 subscribers on over 150 campuses; all receive video services from Lamont and many receive high-speed data as well.

Lamont has established a GateHouse Networks division to provide telecommunications services to new communities. GateHouse is flexible in the way in partners with developers. Since it has years of experience in operating networks, it prefers to have an ongoing operational role. It is willing to bear the upfront "first mile" cost itself, but prefers to share the risk with developers and builders. Since it sees its core skills in video and data, but not voice, GateHouse likes to include telephone companies in its partnerships; it announced a partnership with Sprint at the show (see Heard on the Net above).

While its earlier systems were based on traditional cable hybrid fiber-coax (HFC) infrastructure, GateHouse now prefers to use all fiber.

Mike told us that GateHouse now has agreements with 11 communities totalling 30,000 homes; about 600 of these homes have been built and are in service. He invited us to visit one of its communities; we'll do so soon and report on it in a future issue.

( ) ( )

Home appliances and how they fit

Intelligent appliances are one of the areas invariably associated with bringing technology into the home. We're talking here about white goods like refrigerators, washers and dryers, not the Internet appliances like Audrey and the i-Opener that have not found traction in the market. The refrigerator is often the first example given.

In past articles we've indicated a healthy skepticism about the practical aspects of these appliances. Our concerns include:

  • the gap between the price a user will need to pay to get these capabilities vs. the value perceived by the user
  • the very different useful lives of something like a refrigerator (perhaps 12 years) compared with that of integrated sophisticated computing and networking technology (perhaps 18 months),
  • the slow development and acceptance of networking standards which allow these intelligent appliances to interconnect with the environment in which they sit and with the outside world
  • behavioral and cultural factors, including real behavioral understanding of users, attitudes toward acceptance of technology and cultural differences between groups and countries.

LG Refrigerator --> Click for larger pictureSo perhaps it was not with an entirely unbiased view that we visited several purveyors of such appliances. Our first visit was with LG Electronics. They featured a "Living Network System" centered around their "Internet refrigerator" which acts as the residential gateway. Their press release describes the unit: 26-cubic-foot refrigerator, high quality 15.1 inch TFT-LCD, its own LAN port, a digital camera mounted on top of the LCD, touch screens. This refrigerator does more than chill food and dispense ice-cubes. "Consumers can use the Internet refrigerator as a TV, radio, Web appliance, videophone, bulletin board, calendar and digital camera." But do you want to? If you can't wait to get yours, they'll be available in the US in the 4th quarter of 2002 and will cost $9,999. ( )

Randy Voss with Whirlpool's Tablet --> Click for larger pictureOur concerns having been re-enforced by the LG visit, we next visited with Whirlpool. We were delighted to learn that Whirlpool's views are more closely linked to ours. Their emphasis for Internet-enabled appliances are applications which "can offer the greatest consumer benefits". You don't need to buy a new refrigerator to get their tablet: rather than making it an integral part of the refrigerator, their portable Web Tablet can be purchased separately and mounted to the refrigerator to serve as a central control station. Although the pricing has not yet been finalized, we were assured that the total tab will be very significantly less than LGs.

Whirlpool's design and technical elements are centered on assuming the house will be broadband-connected and thus always-on, using an OSGi (Open Services Gateway Initiative) gateway connecting to a Wi-Fi (wireless 802.11b) hub, which can in turn wirelessly communicate with the Web pad(s). Information on the Web Tablet can be accessed through any Internet connected PC outside the home.

In our conversation with Randy Voss, Retail Brand Manager for Whirlpool's Integrated Home Solutions, we got thoughtful answers to many of the issues we raised. Whirlpool is leveraging established networking standards and protocols like Wi-Fi, OSGi and UPnP. They have done extensive behavioral studies and are still refining their assumptions and knowledge on how the i-enabled aspects of these appliances will be used. Although the consumer will be the ultimate judge when these appliances are released, we walked away with the cautious conclusion that their efforts really support their corporate vision of creating "home appliances, which make life easier and more enjoyable" for people. ( )