If home is where the network is, who pays?

Ever since the Internet entered the popular culture, futurists and technophiles have been telling the world that the new medium would transform homes into information-rich hubs of activity.

Refrigerators, they predicted, would someday monitor the expiration dates on milk cartons. The family room would double as a videoconferencing theater. The toaster and the microwave would engage in endless Socratic debate.

Three or four years on, none of this has happened, and some of it may never happen, since consumers are likely to see many gee-whiz applications as more trouble than they are worth. Yet home networking is far from dead: In the past three years, the underlying technology has undergone its own quiet revolution. Big interests are at stake, and companies such as Intel, Microsoft, and 3Com have been diligently working out the bugs; others, including Cisco Systems, Ericsson and Pace, have been testing the new technology in homes to see how consumers react.

Such companies have found that although talking toasters may remain a fantasy, people would even now be willing to use more prosaic applications that make it possible for them to communicate more easily, to find a broader range of entertainment options, and to assume greater control over their homes. Clearly, the major broadband providers--of both cable and digital subscriber line services--should be extremely interested in home networking.

Indeed, the current demand for simple, nuts-and-bolts applications may already be strong enough for broadband providers to think not only about including home-networking hardware in their installation packages but also about doing so free of charge. And if companies in a major industry have an economic incentive to supply the consumer with this equipment at their own expense, any business with an interest in the technology should be formulating plans right now.

Running the numbers
The hardware and software that enable devices in a home to share voice, video and data can reside in a stand-alone unit or be incorporated into DSL modems, cable set-top boxes, PCs and other devices. The equipment either broadcasts short-range radio signals or sends data over telephone or electrical wires, thus reaching appliances and computer peripherals throughout the customer's home.

Software developers, including Microsoft and Sun Microsystems, have created protocols that make it possible for devices ranging from refrigerators to laser printers to recognize and understand one another. Meanwhile, during the past two years, semiconductor companies such as Broadcom, Intel and Lucent Technologies have introduced new integrated circuits that provide for this type of network, using only radio frequencies already allocated for such purposes or the wires already installed in the walls of homes. The capabilities of these chips have made giant increases: Current models can move 10 megabits of data a second through telephone lines or the air, and fairly soon, top speeds are expected to reach 32 megabits or more--enough to deliver several DVD-quality audio and video signals simultaneously. Most manufacturers of computing devices and home appliances plan to start putting home-networking chips into their products this year.

If the trend continues, in three to five years the inhabitants of the developed world will wake up one day to find their homes network enabled, much as they found their television sets equipped with remote controls a decade ago.

To understand the strength of the economic case for unleashing home-networking equipment free of charge to consumers, consider only the most basic, nuts-and-bolts applications: services that people pay for today even without home networks but that become much less costly delivered through them. For example, a home network could easily link two or more computers in a home--a job that would otherwise require a technician to go there and install an Ethernet card and a local area network.

When all the computers in a home talk with one another, they can share printers, scanners and a single Internet connection, thereby realizing big cost savings in homes with a number of systems. Similarly, a home network allows a single set-top box to bring cable service to several TV sets, eliminating the cost of extra boxes. A third basic service is the installation of extra phone lines in homes that have at least one. Home networking makes the job much less costly by allowing new phone jacks to plug in to standard electrical outlets and by creating virtual fax numbers or second phone lines on demand.

Assuming current levels of demand, we estimate that in the United States alone, home networking would cut $14.7 billion from the cost of hardware, installation, and upkeep if it were applied only to in-home computer networks, cable service to additional TVs, additional telephone lines and home security systems. And that figure is merely the average cost savings multiplied by current demand; it makes no allowance for the higher demand that would likely result if prices fell. Even so, the savings amount to at least $140 a year per U.S. household, on average.

In fact, any consumer can enjoy some of the benefits of home networking right now, for a one-time cost of $300 to $400, by purchasing a stand-alone home-networking box. But home owners are reluctant to spend such large sums for benefits they still consider highly speculative.

Broadband companies have the edge
Cable and DSL companies, however, are in a particularly good position to provide those benefits on their own. For them, adding the appropriate hardware to new cable set-top boxes or DSL modems would involve a one-time cost of only $40 and $108, respectively. In view of the possibility of saving $140 per household, installation clearly makes sense from the perspective of overall economic efficiency. In most developed countries, both cable and DSL providers are just beginning to increase new hardware installations. Over the next five years, roughly 40 percent of U.S. homes will acquire digital set-top boxes or DSL modems.

To unveil home networks, cable and DSL providers could include the necessary chips in their new set-top boxes and modems and then continue to install the equipment exactly as they plan to do now. Broadband providers might therefore make an ideal conduit for bringing home networks to the mass market.

Of course, not every product that creates efficiencies comes to market. To finance the installation of home-networking gear, the broadband companies will have to find a way to capture at least some of the money it saves. If all of the money goes into the pockets of consumers, the deployment of home networking may have to wait until they are willing to pay for it--and that probably won't happen for several years.

With this in mind, we asked ourselves how broadband companies could benefit from providing home-networking hardware to consumers free of charge. The first way might be higher average revenue per customer.