Being Everything to Everyone
It’s imperative that operators modify their strategies targeting the connected home. This is based on two simple but powerful facts. By the end of 2012, approximately 71% of all U.S. households will have broadband. Operators’ revenue and subscriber growth rates are down as a result of this near saturation in developed countries. That makes service providers anxious to compensate.
Providers need to leverage their established infrastructure, including installation technicians, customer connections, and the strength of their brands, to offer new value-added services.
Money Talks Loudly
Opportunities for value-added services span such categories as entertainment, technical support, home management, energy services, and healthcare. Each one offers a unique value proposition, and service companies view these services as a means to retain customers and as platforms for future revenue growth.
Video is often the cornerstone of bundling strategies and service plans; however, this article focuses on the other value-added service opportunities, including music, gaming, energy, security, and health.* This article explores the potential for those areas.
Opportunity: Entertainment / Music
While use of music download services remains substantial, Internet radio and subscription-based music services have been increasing in popularity. Pandora has 125 million registered users for its streaming music services. Spotify’s U.S. user base is about 2.4 million users, and globally, the service has 10-12 million registered users.
Subscription service is not a new business model for the music industry, but the presence of big-name competition, notably iTunes, has made it challenging to successfully launch new music offerings. More recently, momentum for these service offerings is building due to several key trends:
• Growing adoption of mobile devices capable of streaming and accessing music services.
• More effective discovery mechanisms.
• Use of social networking tools for users to share music and related information.
• Increase in number of connected CE devices.
• Growing consumer acceptance of the cloud delivery and access model.
• Willingness of diverse industry players such as ISPs, mobile carriers, OEMs, and car makers to partner with music service providers in order to enhance their offerings.
The number of gamers in the U.S. increased from 56 million in 2008 to 135 million in 2011. The majority of these new gamers are in the “casual gamer” category. Typically, they use new platforms such as smartphones and tablets to play low-commitment titles.
This territory is familiar to many providers, with companies including AT&T, Verizon, Orange, and Telstra offering casual games as a core element of their offerings. There are many benefits to providers to offer gaming. The service has broad appeal, with an opportunity for bundling and as an enhancement to established business models.
The gaming market also comes with its share of challenges. There is ample competition from a variety of sources, and the associated costs in acquiring content keep revenues relatively low.
Opportunity: Connected Home/Management Services
Home systems and home management products are evolving to become connected home systems and products, and these IP services are going mainstream as players such as Verizon, Comcast, AT&T, and ADT Security pursue their own IP-based connected home strategies.
Broadband providers in particular recognize a nearly unprecedented opportunity to establish a dominant role for IP connected home management bundles at home. They bring superb billing systems, marketing clout, and millions of customers as a target base. They also know how to run complex networks.
Even beyond these strengths, broadband providers perceive unexplored bundled service options in new categories such as energy management and lighting control.
The promised long-term growth of IP connected home management services can also help broadband providers defend their current businesses and fill the gaps of slowing growth.
In fact, the CAGR for connected home system bundles including just home security systems and home control systems, without including single product offerings with fee-based services, exceeds 25% from 2011-2015.
Opportunity: Energy and Security/Value in Bundling
The 3 categories for home management services that score the highest interest among U.S. broadband householders are security, energy management, and control. That said, the value propositions for each service have unique challenges. Therefore, bundling these energy management and security services is an important strategy to increase consumer interest in these services.
Though energy management is not valued as intensely as security, its span across broadband households is broader. As a result, the U.S. target market for residential energy management and home security technologies deployed by service providers, utilities, or retailers will exceed a combined 60% of all households by 2022.
The combination of IP proliferation and smart meters provides electric utilities more options to expand their services and create new relationships with their customers. Smart meters, which will be deployed in 56 million households by 2015, create a variety of new service opportunities, many of which may reach inside the home (e.g., appliance control). However, many utilities see the meter as their line of demarcation, and while new market conditions and the promise of cost savings may prompt them to expand their offerings, they are likely to seek partnerships for new IP-based service offerings.
However, for energy monitoring as well as energy management alone, the potential for incremental monthly revenue from these services is limited. Consumers exhibit high price sensitivity to energy services overall, and there is no consensus for preferred pricing plans among those interested.
For utilities, appliance and CE manufacturers, and service providers to improve consumer engagement for their energy-related offerings, they must enhance their value proposition while managing costs relative to consumers’ high price sensitivity.
As a result, there are several viable paths to the market -- but the top strategies bundle energy management with complementary services.
In a complementary area, the security provider industry has remained at 15%-19% of U.S. households with monitoring services for nearly a decade, with indications that the percentage of households with fee-based monitoring has declined slightly. Most of the factors for this slight but significant decline tie back to the recession, including reductions in consumer spending, low to nonexistent numbers of new starts, and a rash of foreclosures in the housing market.
With so much of the market underserved, and IP lowering entry costs, the number of players seeking to capitalize on the security market is increasing. Security monitoring services generate $30-$50 per month. They can increase average revenue per user (ARPU) for service providers, and players are employing a variety of strategies, including price competition, bundling, and extending alerts to mobile and connected platforms.
In the U.S., about 20 million households are caring for 1 or multiple family members with age-related problems. An additional 8 million households anticipate looking after an elderly parent with either age-related problems or chronic ailments.
Parks Associates’ research shows consumers have considerable interest in home health monitoring solutions overall:
• 42% of U.S. broadband households surveyed found the independent living service concept appealing.
• 37% found a vital-sign monitoring service appealing.
Market interest in independent living and health monitoring services is increasing in tandem with the expansion of IP as the backbone of all service delivery platforms for the home. Broadband/telecom service providers have been eyeing the home health monitoring market for more than 5 years. Early trials fared poorly with end users, including SaskTel’s LifeStat™ service, Orange France’s GPS tracking service (enabled by Medical Intelligence), and Comcast’s home monitoring service using BL Healthcare’s solution.
These high-profile failures highlight the challenges faced by broadband service providers. They lack (or are perceived to lack) brand power, consumer trust, and established expertise in distributing health-related devices and services. These early disappointments have not deterred service providers; however, they have been playing more of an integrator role enabling service delivery than directly selling services to consumers. For example, AT&T partnered with WellDoc, and Verizon is collaborating with BL Healthcare in developing and deploying digital health offerings.
This approach, although offering smaller and less immediate revenue opportunity, reduces service providers’ business risks, helps them gain expertise, and enables them to build broad partnerships with health monitoring technology providers and healthcare service providers along the way.
From an application perspective, broadband service providers’ interest crosses all major service categories in digital health, with a strong focus on chronic disease management and senior independent living service. In these 2 areas, they actively pursue partnerships with solution providers, platform enablers, and service renderers. In other areas, such as GPS location tracking, medication monitoring, and chronic condition diagnostics, they are currently content in the role of backend infrastructure providers, collecting revenues from their partners for use of their network on a per-device basis.
The Future: Interoperability
A key driver for all these services is the proliferation of connected CE and mobile platforms. Consumers are buying tablets, smartphones, and smart TVs, and these devices are removing barriers that once stood between different service categories. Whole-home systems that once had to supply their own controllers now must connect to platforms already in the home.
Consumers will have CE, appliances, home systems, and energy management components from multiple manufacturers in their homes, and they will expect, rightfully, all these disparate devices to communicate and share data.
Industry efforts to establish and test standards for the variety of systems in the home are critical as consumers adopt more and more new technologies and products. Failure to achieve interoperability would quite simply be a failure to realize the vision of the connected home.
* Parks Associates has addressed and analyzed the opportunities in video services in multiple other publications, including the recent white papers Getting Over-the-Top Video Right and The Data-driven Video Discovery Evolution. More information about the topics covered in this article can be found in the white paper Expanding Role of the Service Provider -- from Music to Games to the Connected Home. Visit www.parksassociates.com for more information.
Tom Kerber is Director, Research, Home Controls & Energy, with Parks Associates. Tom was a client of Parks Associates' energy management service (2010) while serving Lennox Industries as Corporate Director, Advanced Engineering and as Director of Product Management. Tom previously worked in the utilities industry, the consumer goods industry, and for Motorola in the telecom industry. He holds a MS in Software Engineering from the University of Texas and a BS in Systems Engineering from the United States Naval Academy.
Pietro Macchiarella, Research Analyst, joined Parks Associates following an international career in the wireless industry. He has worked in management-level positions throughout Europe and the U.S. In his role as a research analyst, Pietro covers home entertainment media with specific focus on video gaming, digital music, 3DTV, and connected CE devices. Pietro's research interests also include global residential energy management, with a particular focus on international deployments. He earned his degree in business administration from Università Commerciale Luigi Bocconi in Milan, Italy. He also has an MBA from Iona College in New Rochelle, NY.
Tricia Parks is the founder and CEO of Parks Associates. She presents worldwide on consumer trends, market requirements, and industry structure, with an eye to meshing visionary and progressive ideas to consumer needs and wants. Tricia also developed the Relevancy Theory, a forecasting model for sales across a broad range of digital electronic products and services. Tricia has served on a variety of industry boards including CEA's Home Networking and Information Technology division, the National Research Council's Committee for a Partnership to Assess Technology for Housing (PATH), the AMD Board of Global Consumer Advocacy, and CABA. She has a BA from Sweet Briar College and graduate studies from the University of Texas.
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