> Detecon Executive Briefing

Christoph Eikmeier Erwin Weber

Christoph.Eikmeier@detecon.com Erwin.Weber@detecon.com

Capture the home!

How carriers can benefit
from the Smart Home now
Today’s homes are getting more and more connected. Internet access
and telephony represent just the beginning of home digitalization.
Carriers should use their existing customer base and their presence
on customer premises to capture innovative markets such as
entertainment or home automation. Alongside new revenue potential,
greater customer loyalty can be the result. Whereas the success of
the Smart Home idea has lagged behind expectations to date, there
are now several promising business opportunities which have the
potential to change this trend.

www.detecon.com
 Capture the home!
> Detecon Executive Briefing

The Smart Home’s time has come – finally

Carriers in today’s saturated markets have three strategic options to counter stagnating
revenues: Firstly, they can stick to the existing business model and reduce costs; secondly,
they can expand into new markets; or lastly, they can diversify their existing business model.
For carriers taking the third option, the upcoming market of Smart Home solutions represents
a promising business opportunity.

Smart Home solutions are electronic installations intended to increase the automation of
household appliances and to integrate new entertainment or security features into residential
dwellings. The concept of the Smart Home emerged decades ago but to date the mass
market has not been reached. Despite the spread of broadband Internet and home networks,
consumers remain deeply skeptical about Smart Home technology.

Nevertheless, there are certain key trends which will be driving the Smart Home market in
the coming years. The recent global attention on environmental issues and the
accompanying interest in energy efficient products for example has led to innovative Smart
Home appliances. Researchers expect the global market for Smart Home products and
services to reach USD 6 billion by 2012. The drivers of the Smart Home market will be the
services offered and will vary according to the geographic region in question.

The Home Gateway – a “Command Bridge” for the Smart

Home
Telco operators already have a foot in the door of the developing Smart Home market as, in
a Smart Home, a control center is required to regulate the communication between
appliances and other products. This requirement can be fulfilled by a Home Gateway – a
device that is often sold or rented out at a subsidy by telco operators when a customer
subscribes to a mobile or fixed Internet connection.

Detecon International GmbH z 10/2009 2 www.detecon.com

 Capture the home!
> Detecon Executive Briefing

The Home Gateway acts as a hub between the home environment and the public network. It
routes data, audio and video signals via wired or wireless connections to the required client
device, such as a telephone, PC or TV. Basically, a Home Gateway is a small computer
which is always on and always connected to the Internet, making it an ideal hub for a Smart
Home environment. In the coming years, a further differentiation and specialization of Home
Gateways according to their business purposes is to be expected:

Home Gateway Development

Home
High

automation /
energy Focus on advanced
Home Gateway
Device features / complexity

efficiency
3G services, hardware
router and service
(mobile) Entertainment, differentiation
video-on-
VoIP demand
features
(fixed)
xDSL modem / Focus on basic
WLAN router communication
functionalities
Dial-up (telephony,
modem Internet access)
Low

< 2002 2003 - 2005 2006 - 2009 > 2010

Figure 1: The technical evolution of Home Gateways

Instead of just buying the devices from manufacturers and reselling them to the customers,
carriers should enrich their Home Gateway devices to serve as enabling platforms for further
services. Home Gateways can be used as “Multi Device Servers”, connecting appliances
such as television, power meters or central heating in the customer’s home, while enabling
third parties to also connect their products and services to the same server.

This concept works for both fixed-line and mobile operators: It makes no difference to the
customer whether the appliances are connected via an xDSL or a 2G/3G connection.
Integrated carriers have the opportunity to combine both aspects: home devices can be
connected to the web via fixed-line, and remote control features can be integrated into
mobile handsets. In doing so, carriers can offer their customers an integrated fixed/mobile
value proposition for the Smart Home.

Detecon International GmbH z 10/2009 3 www.detecon.com

 Capture the home!
> Detecon Executive Briefing

Worldwide Smart Home trends

The idea of the Smart Home covers three main categories: communication, entertainment
and home automation. Communication features like telephony and Internet access are base
line functionalities of Home Gateways. Entertainment covers IPTV, video-on-demand and
gaming. Home automation is anything that gives a user remote or automatic control of
devices around the home, e.g. security and health features, appliance automation, or energy
efficiency.

The categories entertainment and home automation in particular offer carriers the chance to
unlock new business opportunities. The strategic imperative is: Maintain your market share
in the core business (i.e. communication) and grow in upcoming areas like entertainment
and home automation!

In these two categories, certain trends will drive Smart Home market growth in the coming
years:
Q Home entertainment trends: In many regions of the world television over the Internet
(IPTV) is gaining ground. Along with this comes a closer relationship between Internet
and TV: many televisions can already access the Internet and display small programs
(widgets) or entire websites. This gives consumers more interactivity – and operators the
ability to track consumers’ viewing habits. Another entertainment trend is online film
rental: Detecon expects the global revenues from video-on-demand to double in coming
years, from EUR 6.8 billion in 2009 to EUR 13.7 billion in 2011.1
Q Home automation trends: In Western Europe and the USA, where the population is
aging more and more, health features for the elderly such as automatic medical alerts are
of increasing importance (“Ambient Assisted Living”). Another trend is the use of energy
efficient technologies. Climatic change and the economic crisis are drivers for a
worldwide change in energy policy – leading to the question of energy efficiency gaining
huge momentum in the last 12 months. Researchers expect worldwide 100 million
“smart” meters, which allow customers to digitally track their energy consumption on a
daily basis, to be rolled out over the next five years.

Right now, many device manufacturers and software companies are developing products
and services in line with these trends. For example, the TV manufacturers Samsung and
Sony have integrated Yahoo’s widget platform into their newest models. This allows
customers to check the weather forecast, view photo galleries and much more. Carriers have
to watch these competitors carefully – or they may miss the window of opportunity.

1
Source: Introducing strategies and business models based on the VOD services example, Detecon, May 2008

Detecon International GmbH z 10/2009 4 www.detecon.com

 Capture the home!
> Detecon Executive Briefing

Business opportunities for carriers

Carriers can position their Home Gateways as a “command bridge” for the Smart Home (see
figure 2). They have the great advantage of already having an established customer care
and billing relationship and therefore have a strong starting position to enrich Home
Gateways with services which go beyond pure connectivity. The Home Gateway can work as
a “Multi Device Server” and connect public and home environments.

For home entertainment solutions, carriers can extend their Home Gateways to provide their
own digital entertainment. In many regions of the world, heavy investments in mobile and
fixed broadband networks (3G, FTTx) offer carriers the opportunity to deliver high quality
entertainment services which can be used to increase revenues and to reduce customer
churn.

In regions where energy savings and energy efficiency are topical, operators should offer
integrated solutions for advanced meter management by entering into strategic partnerships
with utility companies. South Korea’s largest mobile carrier SK Telecom has already set
course: SKT is currently reviewing a possible cooperation with state-run power monopoly
KEPCO. According to a company representative, the smart grid system, which utilizes
telecommunication networks to make electricity distribution more efficient, is one of several
business areas SK Telecom is looking at for future growth.

Advanced Home Gateway Value Chain

Home environment Public network

Smart Home services:

Television
Game console Wireless Multi Device Third Party
Service Platform Services
Power meter
Home
Washing machine
Gateway
Air conditioning (“command
bridge”)
PC / notebook
IP/PSTN

Multi Device Aggregation /

Home Devices Connectivity Services
Server Hosting

Carrier’s domain

Figure 2: Advanced Home Gateway value chain

Detecon International GmbH z 10/2009 5 www.detecon.com

 Recommendation
> Detecon Executive Briefing

Recommendations for carriers

Former Smart Home solutions mainly failed for two reasons: Firstly, they were only driven by
technological progress and not by customer needs. Secondly, each manufacturer had their
own proprietary communication standard which made the use of communication devices
from different producers impossible.

Today, many of these problems are solved and the Smart Home market is gathering speed.
Carriers can benefit from this development by extending their value chain: Home Gateways
can work as a “command bridge” by providing a platform which ensures efficient
communication between several devices and services. In order to reap the benefits carriers
have to consider a number of factors which are critical to success:
Q The right balance must be found between the carrier’s ability to control the platform and
its openness to other service providers and manufacturers.
Q Manufacturer-independent interoperability of the attached devices and services is vital.
Third parties must be able to develop and run their own products and services on the
platform. Strategic partnerships and an engagement in standardization initiatives are
important steps towards this goal.
Q The Home Gateways should be sold at an affordable price to ease the customer’s
purchase decision. Most of the revenues are to be expected from the fees paid by third
parties to run their services on the Home Gateway platform.

Worldwide trends indicate that the Smart Home market will now take off. For example, real
estate developers in the UAE have been quick to realize the value-add smart home
automation provides their tenants and have already wired in the technology to make Smart
Home come to life. If carriers do not take the opportunity to position themselves in this
market, they run the risk of leaving the field open to their competitors and of missing these
upcoming business opportunities.

Detecon International GmbH z 10/2009 6 www.detecon.com