Our little industry grows up

Recent events begin to shape home networking’s next phase

After years of suspicion among the popular press and everyday folk as to why anyone would want a home network, all of a sudden it seems like everyone either has one or is asking someone who does how to install an access point.

But with big-time end-user adoption comes industry change. In the past year, three major events have underscored the home network industry’s significance:

Microsoft launches a line of networking gear. At first many wondered why a company with obscene gross margins from its software business would enter the low-margin, highly competitive hardware business. But when you consider Microsoft’s plans to dominate the whole home — not just the home office — it makes sense. Microsoft knows it can’t have the PC as home server, the Xbox connected to the Web and wireless devices running its software scattered about unless it gains control of the physical network. Efforts around Universal Plug and Play and .Net have established the software foundation; the hardware gives Microsoft a way to package the plumbing for its expanding family of home products.

Cisco acquires Linksys. At first, another head-scratcher: The network big fish with gravity defying price tags picks up the scrappy SOHO network king. But as Cisco’s traditional markets remained sluggish in 2002 and early 2003, and service providers became serious about supporting home networks, Cisco knew the time was right. Linksys was the perfect choice for tackling this high-growth segment, possessing the right mix of a low-cost operating model (which Cisco has kept intact) and the best-known brand. Cisco also hopes the buy will ease pricing pressure from below by Netgear and D-Link, as well as provide its service provider customers an end-to-end package.

Netgear goes public. The event marks the end of a long road for the former network division of Bay Networks (which Nortel acquired in 1996, becoming Nortel Networks). Netgear pulled off what many thought impossible, a successful technology company IPO. The doubters were many, especially after the company withdrew its first attempt back in 2001.

As the first SOHO network pure play validated by the public financial markets, Netgear’s IPO best represents the maturation of the market. But while a major accomplishment, the IPO also marks the start of a much tougher road for SOHO network companies. Continued pressure on margins (wireless routers are selling for less than $40 in some cases), the commoditization of hardware, and the trend toward wireless integration (i.e., Intel’s Centrino), as well as the inevitable market saturation for basic broadband sharing will be the big challenges for the Netgears of the world. Even residential gateways, once seen as one of the most promising growth areas, has become a commodity market before it ever reaching mass deployment.

Recognizing these challenges, Linksys and Netgear have moved heartily into the emerging entertainment network market. Microsoft is moving this way, too, as it pushes to expand the connection options for its consumer products, Xbox and Media Center PC. With their newfound resources, Linksys and Netgear are also expanding internationally, where SOHO hardware saturation is less.