The hidden value of home networks

Why are Intel and Microsoft investing in such a puny market?

In-Stat/MDR forecasts the home network equipment market to reach $5.3 billion worldwide by 2007. While $5-billion-plus in annual revenue sound like a lot of money, those familiar with other segments of the communications and technology industry know it’s really small potatoes. 

Consider the digital TV market. Its value in North America alone will be $7.3 billion in 2003 and more than $23 billion by 2007. And the LAN switching market was worth more than $3 billion by the fourth quarter of 2002, about one and a half times that of the entire home network market last year (just over $2.1 billion). Even when factoring in the sexy stuff such as media network adapters, the overall number of connections is far from proportionate to the amount of attention paid to home network equipment by industry and press. 

So why the focus? Why have companies like Microsoft and Intel devoted entire business units to home networking? Certainly not because they’re salivating over that $2.1 billion generated last year.  

The answer is simple. The home network is a strategic platform. Its value lies in what it can bring to the whole home in the form of new applications, services and technologies. 

I call it the home networking multiplier effect.  The idea is basically an offshoot of the main tenet of networking, Metcalfe’s Law. Developed by Bob Metcalfe, the inventor of Ethernet and founder of 3Com, Metcalfe’s Law holds that the value of the network is the square of the number of users. In simple terms, the law says that a node — be it a PC, printer or other device — is limited in value on its own, but becomes exponentially more valuable when connected to other devices.

Not only does Metcalfe’s Law apply to the users of a network, it also has implications for the vendors of services and content that runs over it. And this is where I see the multiplying effect apply here. The opportunities for software, broadband connections and services running over the connections and to end devices — are all multiplied once a network comes into the home. That $80 wireless access point and router may, over its life, deliver thousands of dollars of paid services that go into the pocket of the service provider. Services such as voice over IP, network security, online gaming, music and video downloads to different networked end points — are all revenue opportunities.  They mean more “soft” products such as services and software, and more hardware such as the wireless-LAN-connected stereo receiver, that can be sold to the you, the consumer.

Next time we’ll look at why service providers are getting in on home networking.