Home is where the heart is

As the home area network evolves, service providers must learn how to deliver customized services on a massive scale

Focus or perish: watchwords for all players in communications. Let yourself be distracted by the myriad, tantalizing possibilities and you risk being flattened.

The restructuring under way in telecom finally will put to rest the traditional telco focus on the mythical "average customer." There will be no average; customers will have such varied demands that specialized providers will package customized sets of services to meet these demands. The era of the full-service, unitary telco is over. No one company can do it all. Worldwide, the telecom monoliths that grew to prominence in a geocentric, network-defined, product-driven era simply are not suited to survive in a virtual, customer-defined, solutions-driven one.

Existing telcos will need to unbundle themselves. It's time for providers to decide which customer sets they want to own and determine how to extract maximum short-term shareholder value from those they either can't or don't want to serve. To do this, communications businesses should work at understanding their own futures, employing modeling techniques and asking what-if questions to help them identify the right value propositions and develop the capabilities required.

The forces of change can be divided into three distinct segments - the corporate network, the household and the surrounding mobile world - each of which will require its own skills, resources and approaches. This article focuses on the evolving household communications market.

The household becomes networked

The term household is used here instead of residential because communications needs will vary among households and services will differ from the relatively limited phone services offered to the home user in the past. Home consumption of communications services increasingly will require and take the shape of a network. The so-called "home area network" will serve the individual communications needs of the inhabitants and also will provide entertainment services and carry out home management functions.

The various appliances that serve these needs will be networked together and with external agents to provide interoperability and control, allowing the consumer to always be connected. The home area network may start as a set of multiple stand-alone networks supporting small numbers of discrete appliances, but it eventually will morph into a single network supporting a set of integrated appliances connected to multiple access networks outside the home. Integration will occur inside the home, either within appliances themselves or, more likely, through the home area network that provides connectivity and intelligence through a central control mechanism.

The home network will:

- Automate previously manual functions such as turning out lights or starting appliances

- Improve the management of household functions such as utility usage or diagnosis of appliance failure

- Introduce mobility, perhaps in the form of Web pads to surf the Web or answer e-mail remotely

- Provide connectivity outside the home to other networks and to information sources. For example, this would enable medical monitoring of a family member or remote tracking of children or the family dog.

Consumer products such as TVs, DVDs, cameras, radios, printers and kitchen appliances will be embedded with processors that enable self-installation, self-organization, self-configuration and self-diagnosis. Existing and new terrestrial wireless networks and possibly wireless LANs will play a part in the household.

The insatiable consumer

Does demand really exist for this complex household networking? Recent research conducted by PricewaterhouseCoopers provides a resounding yes. First, the evidence puts to rest the longtime notion of telecom as a utility, for which customers seek to minimize expenditures. In the U.S., consumer spending on core telecommunications services has outstripped underlying economic growth by a factor of two, three and sometimes four. Since 1978, wireline telephony service revenues have grown nearly 6% annually; spending on multichannel TV services has grown more than 14% per year. European markets have seen even faster spending growth with the recent availability of satellite and cable services.

The patterns of end-user spending also reveal increased diversification of spending on new products and services. A significant share of the rise in spending can be attributed to the introduction of new services within business and consumer markets. In the 1970s and 1980s, the rapid adoption of multichannel TV services turned a free or cheap product - broadcast TV - into a $20 to $30 per month revenue stream. Next came the mobility revolution. With almost exclusively incremental spending, consumers bought mobile phones at an entirely unexpected pace (Figure 1). Then the Internet created a whole new category of household communications expenditure. By 2003, more than 500 million people worldwide will be accessing the World Wide Web, at least a third of whom will be conducting transactions.

But has this spending spree run its course? Not likely. In addition to the growth potential that remains for the services mentioned above (wireless voice and Internet penetration are nowhere near peak levels), there will be several new waves of residential spending:

- Applications will emerge that will make use of connectivity, and these will divert expenditure from non-communications services such as household management.

- The growth of digital media will draw more consumer spending away from traditional channels. The result could be the monthly bill shown in Figure 2, in which the communications portion is an insignificant portion of total expenditure.

- The digitization of TV will give rise to new ancillary services, such as multicasting, and increase content consumption.

- As mobile data applications become more robust and widespread, average revenues from multiple mobile user categories will increase.

Getting at the value

The competitive pressures in today's market are sufficient to drive service providers to provision some form of broadband to each home. In high-income neighborhoods, three or four choices may exist; in remote areas, digital TV may be the only option. Whichever form of access device dominates, the home area network will have at its heart a home communications center that will serve as the gateway between the access networks and the home appliances. It also will act as a service manager, orchestrating network-level commands, integrating services and storing network intelligence and function as a server providing local caching of downloaded content.

Home communications centers already are being developed in various forms by set-top box manufacturers and consumer electronics companies. Eventually, such solutions are likely to combine wireless connections, existing wireline connections and new wireline technologies. Personal communications, which value mobility, and smart home management appliances, of which there may be too many to hardwire, will require or at least prefer a wireless network solution.

Entertainment services, on the other hand, may rely on whatever wireline connections are used to deliver downstream broadband services to the home. The appropriate type of connection will depend on where storage capacity sits in this new value chain. In view of the declining prices for storage, it is beginning to look as though storage eventually could reside in the home or at a nearby center from which regular downloading could occur.

In the household marketplace, the unbundling of the value chain leads to two main positions for companies:

- As service providers to the home or individual, providing customer service and billing, packaging services, aggregating content and developing new products, with the intent to create, deepen and maintain stronger customer relationships.

- As access providers to the home, individuals and possibly small and medium-sized enterprises, this primarily will be a wholesale focus and is likely to incorporate a range of access technologies, such as copper, DSL, fiber, satellite, mobile and fixed wireless.

Implications for the players

Providing global solutions to a multinational corporation is one thing. Operating as a household service company delivering customized services on a massive scale is quite another. Each of these giant sectors requires a different scale and organizational culture and varying technical facilities, core competencies, management capabilities and operating procedures. Furthermore, the risks and rewards facing players in these segments are fundamentally different. Shareholders will invest in each for different reasons. They will, in fact, be different shareholders. Integrated operators that do not give their shareholders this opportunity to invest in unbundled assets will suffer a holding company discount.

For today's incumbents, the extreme scenario is that they will eventually find themselves broken up into businesses focusing on specific positions in a reconfigured marketplace. Moving early could reward shareholders by allowing them to extract a premium from their assets currently hidden within the bundled incumbents. But such a breakup is a radical step, one that few incumbents are well-positioned to take in one move.

The challenge, then, is to orchestrate a series of plays that together move the business quickly into the positions it wishes to dominate. Necessarily, this movement also will entail choices about which value chain positions and customer segments to exit. The alternative is to search for an organizational model that permits different entities to coexist and which maximizes scarce management resources. Providers have three main strategic options:

- Focusing vertically within a segment

- Focusing on a particular value chain position spanning multiple segments

- Focusing on one value chain position within a specific segment.

Moving backwards - into content creation - is neither necessary nor realistic. Many telcos don't have the skills needed to add value to the content creation business. Moreover, it is not clear that "ownership" of content confers strategic advantage. Telcos that want to focus on this component of the consumer value proposition should try to become content packagers instead.

No doubt, when regulators permit, some telcos will try to bundle content with their access facilities. But it is more likely that telcos will unbundle their access networks and provide access on a wholesale basis to service-based competitors. Some incumbents will choose to operate this network at arm's length with their content-to-service provision activities. Others, recognizing that the competencies needed to own the customer at the retail level differ fundamentally from those of what is essentially a construction and maintenance company, simply will focus on running the access business as a regulated utility. They will invest in substantial network upgrades in return for guaranteed rates of return.

Are these the limits of ambition for access operators? Not necessarily. Pushing further into the home area network is a logical extension, consistent with the core competenciesand assets of access companies. Success, however, requires a different web of commercial relationships than has underpinned the industry in the past. Telcos need to forge commercial alliances with consumer technology suppliers - hardware and software - that will sit alongside the more traditional network supplier/telecom operator relationships.

For the others

Cable TV operators, telcos, satellite providers, new backbone providers and ISPs already have a clear focus on one or two market spaces. The challenge for them is to move quickly to secure their positions and to assemble the facilities and capabilities required to compete in their chosen spaces. Recent consolidation in the U.K. and U.S. cable industries is one example of such activity; the creation of KPNQwest - the joint venture between KPN and Qwest Communications - is another. Companies will need to evaluate, in detail, the possible business models, the alliances needed to operate with maximum leverage in the value proposition and the economics that will result. The successful service provider will resist the temptation to broaden its customer reach.