FEATURED IN: CE Pro, May 2001
                by: Kurt Scherf, Parks Associates

From its early days when it was conceived as a "black box" to be mounted on the side of the home primarily serve the interests of energy utility companies, the concept of the residential gateway has grown by leaps and bounds. By the end of 2000, for example, Parks Associates estimates that well over 30 companies were involved in the development of reference designs for hardware platforms alone. A host of companies are also working behind the scenes, providing software solutions that tie end-user devices to the Internet (and presumably service providers mining this data) via residential gateway solutions.

The opportunities in the residential gateway marketplace are immense, as recent research indicates. Parks Associates, for example, projects that as many as 33 million residential gateways will be installed in U.S. residences by the end of 2005. Furthermore, the market value of these devices will grow from $1.7 billion this year to nearly $3 billion by the end of 2005 (Figure 1).

Opportunities exist for a variety of players in this market; however, there appears to be just as much confusion about how the market will evolve. The most important questions concerning the subject are: What is a residential gateway, and what does (should) it provide in the way of service capabilities?

Other questions that further probe the subject are: Is there any indication as to what services consumers even want (need)? Some of the secondary questions revolve around the different types of residential gateways now (or soon to be) available. Are there different models for rolling them out? What will be the role of the service provider in distributing both the hardware platforms and associated services to the end user?

These questions will be sorted out in due time.

Residential Gateway Definitions and Classifications
Although the argument of "What is a residential gateway" may never be settled, Parks Associates has settled on a definition that includes: an embedded broadband modem, routing capabilities, and some kind of security and/or firewall protection. Admittedly, this definition does leave out a class of devices that Parks Associates has classified as "Thin Server Gateways," devices traditionally tied to energy utility service and enable telemetry applications. To leave these devices out of the discussion - because they do not necessarily rely on broadband Internet connections - does a disservice to a class of solutions that will be increasingly important in coming years. Therefore, they are left in the discussion.

Parks Associates breaks the RG space into classifications, as noted in Figure 2. The categories include:

Virtual Gateways: What Parks Associates defines as a "two-box" solution, it's the combination of a broadband modem and a routing/firewall device.

Web-Centric RGs: A "one-box" solution that brings the broadband modem, routing, and firewall features into one unit.

Set-Top RGs: An evolution from the set-top boxes familiar to most users of cable or satellite television services, next generation devices will include routing and other advanced features to enable multiple services.

Multi-Service RGs: A "one-box" solution that includes a number of technologies that enable the delivery of numerous services - including voice, video, and data - to multiple devices in the home.

Thin Server Gateways: As mentioned earlier, devices that will first and foremost enable energy utilities to monitor and manage energy consumption over a two-way connection, and provide real-time data to both the consumer and the service provider.

Whole-House RGs: Leveraging a structured wiring solution, these systems can tie together all low-voltage subsystems (communications, data, control, security, etc.) to manage and control nearly all of a home's functions.

Early Rollout
At this point, it's nearly cliché to remark that broadband Internet access drives home networking; this point has been made repeatedly. Parks Associates' own early-market research finds that households with broadband Internet access are seven times more likely than dial-up households to have a PC network.

So, what does this mean for the early rollout of residential gateways - particularly those aimed at the broadband side? Early indications are that - as in the case of other home networking solutions currently being marketed - that fairly simple applications will drive RG growth over the next one to two years.

"The most compelling application for consumers today is just basic shared high-speed access," avers John Marshall, Director of Product Management for 2Wire Inc. (San Jose, CA), that develops solutions in the Virtual, Web-Centric, and Multi-Service RG categories. 2Wire's approach - over the short-term - therefore is to simplify the installation and set-up of basic broadband Internet access. Other players agree that this is the short-term value proposition for RG deployment.

"I think finding ways to have consumers be able to install modems and RGs themselves is the key," said Steffan Truvé, CEO and President of Gatespace AB (Göteborg, Sweden and Menlo Park, CA), a company that focuses on Internet connectivity between end-user devices and service providers via software-enabled residential gateways. Truvé iterates that, once broadband connections reach a critical mass of households, that other applications - home control, distributed entertainment, and others - will follow. Anticipating that a variety of service providers will want to be the operators that provide these applications, Gatespace is heavily involved with work in the Open Services Gateway Initiative (OSGi), a consortium-led effort to standardize software solutions for multi-service RGs.

The RG Extends into Other Applications
As much buzz as the broadband RGs have created, other RGs are not necessarily dependent on high-speed connections to the home (at least in first-generation solutions) to fuel their growth. These RGs, falling under Parks Associates' categories of Thin Server Gateways, are aimed squarely at meeting the power and cost savings needs of the energy utility industry. So, having gone from the energy utilities' "black box" concept of the early and mid-1990s which raised interest, but then all but disappeared from the headlines. So, why is the industry now revisiting the concept of a telemetry-based RG?

"The United States is becoming peak-power short," argues Tim Vail, Director of Products and Services for The New Power Company (Purchase, NY), a national provider of electricity and natural gas to residential and small commercial customers in the United States, which specializes in serving deregulated areas. Vail avers that, as deregulation moves forward, it will be critical to provide consumers with real-time information about the fluctuating prices that are inherent in energy provision so they can make better choices concerning electricity usage. "We've got to put in tools where consumers can see these price signals; otherwise it's going to spiral out of control," he says.

For these and other reasons, NewPower has joined forces with Coactive Networks (Sausalito, CA) to implement Coactive's "e-services gateway" for energy management solutions. On March 14, 2001, the Companies announced a strategic alliance that will include outfitting households with telemetry e-services, including energy management and home control. NewPower plans to launch a pilot project this year, turning existing homes in the eastern U.S. into Internet-enabled, smart homes.

According to Coactive’s Adam Marsh, the Company’s Chief Strategy Office and co-founder, the relationship formed with NewPower goes beyond simply selling a technology solution. "We will help NewPower to define the services and integrate the system as a whole with the gateway," he said. "Rather than just be a box vendor, we’re going to work actively with them to ensure that the applications take advantage of the platform."

The companies indicate that this summer’s pilot program will go a long way to answering the question of what additional services consumers will want from the service provider via the RG. Perhaps more importantly, it will also help determine how much a service provider can charge for those additional applications.

Companies such as GateSpace have also concerned themselves with such questions, according to Truvé. Because, as the CEO argues, the entry of service providers will be critical in deploying residential gateways in larger numbers, any partnership with them cannot stop with simply the provisioning of technology solutions. Truvé argues that his company must extend the service provider’s value proposition by identifying "what consumers are willing to pay for."

Another critical aspect of the RG business model is the question of whether the device is subsidized up front by the service provider.

Vail addressed this, by indicating that – at least in his opinion – it may make more sense for an energy provider to go ahead and fully subsidize the RG solution. "The great thing about energy management above the other solutions is that it creates value in and of itself," said Vail. "That creates a savings opportunity, unlike the other solutions that require some sort of revenue uplift."

Coactive’s Marsh believes that the government – either at the federal or state level – may also play a key role in providing funding for such projects, given the widescale attention that California’s energy crisis in the winter of 2000-2001 brought. NewPower’s Vail said that he is also hopeful that the government would step in to help these programs. "We’re on the right side of this issue," he argued. "It’s the right thing for business, and it’s the right thing for the environment."

What does all of this mean to the installer?
As much importance as is placed on high-level discussions about "revenue streams," "business models," and "rollout strategies" in certain circles, these deliberations are ethereal to the installing dealer community, unless some concrete value can be proven. According to the players in the RG space, dealers and installers have at least two opportunities to ride the expected growth in residential gateway deployment.

"Most of the DSL or telco providers are talking about some way of owning the platform," said John Barr, President of OSGi and Director of Architecture and Technology Strategy for Personal Area Networks for Motorola Inc. (Schaumburg, IL). "They want to provide value-added services as a base, such as voice or video distribution. They need people to get out there an install and turn those things on. I see that as a good business model."

This model for residential gateway installation and maintenance may very well emerge through partnerships with service providers. On the other hand, unique solutions are also emerging that enable dealer installers to distribute and install gateway solutions directly. TII Network Technologies (Copiague, NY), for example, is offering a product called Digital Closet™ that can be installed in the estimated 104 million existing U.S. households. The solution acts as the hub of a home network that employs existing phone lines to distribute data, network PCs, and connect peripherals. The product does this by including a 2Wire residential gateway inside its box.

According to Tom Guzek, TII Network Technologies’ Chief Marketing Officer, the installing dealer’s presence in the value chain of residential gateway deployment is win/win for both the consumer and that dealer. "What’s missing for the consumer is a very simple turnkey approach to getting high-speed networking in the home," he asserts.

"If you go out to a retailer today and attempt to buy a network, you’re going to run into a lot of obstacles, including unfamiliarity with the technology. Nine times out of then, a sales associate can’t convey all the things that it can do.

"The professional installation community sees it as an enormous opportunity, because they couldn’t go after this market before," Gruzek continued. "What we perceive as our marketing plan is to develop a national network of trained digital repairmen of the future, and these are people who install products and also become the go-to people if the consumer has a problem."

Barr sees this value proposition in much the same light, adding that the RG provides the installer with a great deal more flexibility in the kinds of systems that can be installed in a home. The needs of consumers in terms of the applications they want will be varied, Barr argues, which has typically meant that the installer has provided solutions that adhere to different networking technologies that have traditionally not coexisted. This, both Barr and Gatespace’s Truvé asset, will change via the implementation of open services gateways, which can bridge disparate solutions and create more flexibility for the end-user – and the installer – in selecting the kinds of systems and end-user devices that connect to the network.

Marshall notes that the installer provides a multi-faceted value chain in the RG space. "The dealer can play a prime role in enabling the consumer not only to know how to get access to the high-speed network, but also how to take advantage of it," he argues. "It’s kind of like the next step in informing consumers that there’s something else beyond the router."

Marshall says that, thanks to increased rollout of multi-service RGs down the road, the installer’s product line could expand to include MP3 "jukeboxes," unified messaging devices, and video A/V receivers that stream content from the Internet. ""In either instance," Marshall says, "there’s a strong opportunity in finding the additional products to extend the value of the home network. There’s almost a systems integration play for the home."

This is certainly the case in the realm of whole-house gateways, which are riding the success of structured wiring installations to offer benefits above and beyond that of broadband connectivity. According to David Hurley, Vice President of Marketing for SMARTAmerica (Scotts Valley, CA). Depending on a consumer’s needs, the whole-house RG, Hurley asserts, is uniquely positioned to "handle all low voltage sub-systems in the home in one location. By utilizing the proximity of sub-systems to each other, we are able to add automation and connection between systems to create more intelligent actions."

The value extends beyond the consumer and the installer, however. "We are working with developers to provide them recurring revenues from the broadband connections they provide in their communities," said Hurley. Just as 2Wire’s Marshall argues that the dealer can assist customers in finding broadband Internet solutions, Hurley avers that a whole-house RG provider is well-positioned to establish partnerships on their own. In this manner, the value chain extends from the service provider, through the RG developer, the dealer, and ultimately the consumer.