Catching up on home networks

Pay attention service providers, because your customers are sending you a clear message: they want home networks, and they're not going to wait for you to provide them. While telcos and their equipment vendors continue to go through a rough period, vendors of home networking gear are among the few bright lights in the tech industry. Vendors like Netgear and Linksys are selling just about as many home networking boxes as they can make. These companies (and their competitors) are selling the vast majority of their products directly to consumers (through retail channels and direct Web sales), bypassing the service provider - so there's no added revenue to the SP. Parks Associates has estimated that 3.2 million residential gateways will ship in 2002, and 90% to 95% of these are sold directly to consumers rather than through service providers.

So what's happening in the home networking world these days (besides relatively massive consumer uptake)? The biggest trend has been the growing sophistication and corresponding affordability of residential gateways. The residential gateways on the market today are not necessarily the all-services-in-one-box-wonders that we've envisioned, but within their data networking niche they are very powerful. For about $100 (and sometimes much less), consumers can buy broadband home routers that connect their cable or DSL modem to all the computers in the home. The most sophisticated home routers can pass various VPN protocols, and many of the routers announced in the past few months have full stateful packet inspection firewalls built-in - all for under $200.

The number of networkable IP devices on the LAN side of these routers is growing as well. For example, video game consoles can be networked for online gaming (already a huge phenomenon in Asia). The Microsoft Xbox comes with a built-in Ethernet port, and Sony and Nintendo are in the process of releasing add-on Ethernet for their consoles. Each of these manufacturers is working with various partners to create broadband-enabled gaming networks.

Another interesting home networking application is online audio distribution. We all know the story of Napster and its other "free music" cousins, and their ultimate demise; but legal, for-pay music services like Listen.com are making market inroads.

The crux of the issue is this - as long as consumers look to retail outlets instead of their service providers for their home networking needs, the service providers will be relegated to commodity transport providers instead of providers of revenue-enhancing value-adds. While some value-added services are being offered through service provider channels, these same services are also being offered directly to the consumer.

The opportunity for service providers is to make home networking easy. Even though new PC operating systems like Windows XP or Mac OS X have been vastly improved over older versions in terms of setting up networks, the process is not always intuitive or painless to the customer. "Plug and Play" gets closer every day, but it's not here yet. Some broadband service providers realize this and are successfully shipping inexpensive home networking products. For example DirecTV DSL ships a residential gateway-capable modem to every one of its DSL customers, and provides a managed home networking/firewall service to customers for $10/month. This "Connect and Protect" service has been very successful for the company, with a take rate upwards of 20% of the customer base.

Instead of continuing their half-hearted home networking efforts, other service providers should look at this success, and the success of the retail residential gateway providers, and begin to offer their customers a truly easy-to-use managed home networking service. Perhaps the best place to start is to examine partnering with the most innovative home router vendors. The demand for home networking is real, but providers must move quickly, or become afterthoughts in the customers' minds when it comes to home networks.

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