As president of Netgear, Patrick Lo has a vested interest in promoting the digitally connected home. He shared his thoughts during a recent visit to Australia.
Where is the US digital home market at now? What kind of things can we expect to see coming this way?
We can see four applications. One is very dominant - primarily connecting PCs to share high-speed broadband Internet and most of that is done through wireless. There is still a lot of movement in terms of speeds and feeds as well as security.
For example, at our [CeBit] booth over here [Australia] we were demonstrating our partnership with Trend Micro. What Trend Micro does is provide not only parental control but also all the threat management systems such as anti-spam and antivirus. On the speeds and feeds side in the US we have gone from 11Mbps to 108Mbps and 200Mbps is coming this Christmas. From a range perspective, we have gone from 100ft to 300ft and our latest introduction of RangeMax extends coverage to about 400-500ft.
The second application that started to become popular was multimedia integration. Today, it is still primarily driven by audio because there is enough audio content. We provide an adapter that connects the stereo to the Internet and the home network.
At Christmas last year we also introduced an audio visual version that can connect a TV to the Internet and the home network. We sell thousands of them each month but the major hindrance of the multimedia application is still the consolidation onto a single standard. There are multiple formats from Apple, Microsoft, Real and Sony - they don't play across the platform and that is really impeding the proliferation and ease of use of all these devices.
If you talk to Intel, they are pushing hard for everybody to come together. We have a lot of confidence that this will happen in the next 12-18 months. Ahead of that, we will be introducing our second generation of audio-video integration devices in the second half of this year.
The next application there is a lot of talk about is VoIP. Today, the value proposition to a customer is much lower call rates than traditional telephone companies. It also offers you a lot of additional features that used to be nickel and dimed by existing telephone companies like caller ID, blocking, conference call and voicemail.
The biggest attraction is low long-distance call rates - the Internet means the price is the same whether you call next door or the US. We see a lot of interest but the pickup rate is still much lower than people would like it to be.
The biggest hurdle in the US is the emergency call because with a landline they know where you are but with an Internet phone there's no way for them to know that. It is the biggest hurdle the VoIP guys need to overcome before this technology is widely adopted. Then the VoIP people have to offer a really compelling story to the customer in terms of price, features and security.
The cable operators have a lot of staying power against the telephone companies because they have already built cable into the house and don't have to lean on the telephone companies for the transport of the call.
Another force on the VoIP side is Skype, which is totally free. VoIP is cheap but free is better than cheap. That again will give another angle in this whole thing.
The biggest VoIP provider in the US claims it has 650,000 subscribers but Skype already has 23 million.
The other application we are working on is a storage application. People have so much multimedia content - photos, music, homemade videos - so they need more disk and they need the content to be shareable among everybody in the house.
Our first generation external, shareable disk is based on USB technology, which is slower and doesn't give you the security of fail safe. We are [now] introducing the second generation, which we are calling storage central. It significantly ups the speed because we are using an IP-based format that plugs straight into our router's Ethernet jack so that disk is given an IP address as if you are writing to a router or a computer.
We also have two slots so you can plug in two disks and that, because of the IP nature, means you could send a packet to both addresses and all data is duplicated automatically and you have the security. The chance of both disks crashing at the same time is probably one in a billion.
What technologies are exciting you at the moment?
Looking beyond the next 18 months we have things such as WiMax, EvDO [Evolution Data Optimised] and UMTS [Universal Mobile Telecommunications System]. They are trying to duplicate the four static applications I spoke about in a mobile environment. It is just like phones - they used to be stationary but now they are mobile.
All those applications could be used on the phone or in a car so that the kids in the back can play Internet games with their cousins as we drive over to see them. Instead of listening to music from your limited repertory on the CD changer you could listen to millions of songs from Napster through the Internet. Your GPS will also be real time on this new platform.
Another topic people talk about is environmental control for the house so you have security surveillance, temperature and lighting control. All of that will be possible. Today, the technology is there - it's just whether we can get it to an ease of use level and price band where most consumers are willing to take the plunge.
All of those new applications excite us a lot because they change the old paradigms, create significant benefit to our customers and will generate a lot of revenue. We have gone from analogue to digital and now we are moving to IP. Today we can put data into packets on an IP address that can be mirrored to a remote location without the data even knowing it. That is very exciting and there's still a lot of room for innovation.
Looking at the rise of home networking in the US, how important have companies like the Geek Squad been?
Every single retail outlet has something like a Geek Squad by a different name. What they want to do is help the penetration of home networking get beyond 20 per cent. Usually, the first 20 per cent are affluent, technically savvy and younger people. To go beyond that you have to be able to address all strata of society and provide help for installation. There are multiple ways of doing that. For example, in the US right now about 10 per cent of home networks are delivered through the Internet service providers. The other people, who buy from retail stores, want help and that is where these Geek Squad people come in and charge $100-200 to come in and install the network for you. That helps accelerate penetration for home networks.
We currently have mass merchants, consumer electronics outlets and traditional IT shops selling this digital home networking kit. How do you see that playing out? Is there room for everybody?
We believe that as long as penetration continues to increase then there is room for everybody. It is just like the PC. Back in 1995, not many homes could afford one or knew how to use it. PCs were sold primarily in specialised computer stores but not in consumer electronics stores or mass merchants. But then PCs became much easier to use - with Windows 95 and preloaded software - and they became much cheaper to buy. PC penetration in US, European and Australian homes is now more than 60 per cent and it is clear that you need a multi-channel strategy because customers want to chose where they buy from. Even supermarkets are selling them now.
We expect the same thing to happen in the home networking market. Once the penetration rate gets beyond 20 per cent you will see the kit sold outside of mass merchant, consumer electronic and computer stores. We are seeing that in some places already in the US. We are not beyond 20 per cent yet - it is about 15 per cent - but we are seeing home networking being sold in general merchandise stores such as Target. Soon we will see office stores, supermarkets and home improvement stores carrying it. From a Netgear perspective, we will go through any channel where there is customer demand.
How far is the Australian market behind the US in terms of broadband and home networking take-up?
I have been talking to the [Internet] service providers in Australia and it's pretty encouraging. Last time I was here was just over a year ago. At that time broadband penetration was still a single digit. This time they assure me it is 13-14 per cent - that is a significant take-up. Generally, the rule of thumb is that home network penetration is about half of broadband penetration so that's about seven per cent. That is about two years behind the US.
Currently, in the US, broadband penetration is about 35-40 per cent and home networking is about 15-20 per cent. But the good thing I get from talking to [Australian] service providers is that they are predicting this will be a big year and next year will be even bigger. They want to catch up to the US in the next 18 months. It is realistic that they can hit 40 per cent penetration within that time. It's like the mobile phone - once you have it you don't want to give it up.
The first climb is the price hike. My daughter lives here and says the rate is pretty steep. She pays $29.95 a month and that limits her to 400MB of downloads. Even though I'm talking to her on Skype she wants to get off the phone quickly because it's counting her megabits. In the US, it is $US29.95 per month with unlimited downloads - in fact, there's a teaser rate of $US19.95 for the first 12 months.
Price is a very important barrier and from what I've heard service providers in Australia are now willing to use price to get people willing to play. The download limit has to go because every time people go on the Internet they are worried about busting their limit. Once that changes the pickup rate will be significantly higher.
Are you finding VoIP take-up at consumer level in the US?
The pickup in the US is still relatively small. About 15,000 people switching over each week from landlines to VoIP. It's still a drop in the bucket in the overall scheme of things but you have to start somewhere. It is pretty encouraging. It's cruising to about 800,000 new users a year. Of course, it will take many years at that rate but if it doubles and triples in a few years it will soon reach a 25 per cent market share of the overall phone service. Australians are generally more open than the US to trying new stuff as long as the price is right.
Do you see service providers playing an ever bigger role in terms of content delivery?
That is certainly what everybody is thinking about in terms of triple play. The phone companies want to be that triple play supplier, as do the cable companies and the mobile companies. Everybody is trying to eat into everybody else's turf.
Who do you see winning?
I don't care because I am a mercenary. We will supply the triple play boxes to any one of them. But I don't think consumers prefer triple play, I really don't. I have always had a pretty lousy experience with multi-purpose offerings. For many years consumer electronics guys wanted to provide a multi-purpose box combining a TV with a DVD player or a video player - it never works.
Even today, the market for phones with email and PDA functions isn't huge. It's limited to a small group of people. People still carry dedicated, specific-purpose boxes around. Cable guys are known for video, telephone guys are known for voice and that's imprinted. It would be very hard for the cable guys to come in and sell video together with voice and data. Consumers would not opt for that convenience of billing to give up the best of breed.
If you look at the hardware side, Samsung has recently announced a phone with a 7-megapixel camera and Nokia has designed a phone that can record 12 hours of music. Before long we might have iPods with a built-in camera or telephony.
But no matter how much R&D Nokia has put into phones, trying to come up with a gaming play to unseat Nintendo or PlayStation, or Samsung with its built-in 7-megapixel camera, the dedicated little camera is still trumping everything. I think consumers have been trained to this single-purpose box and that is still the mainstream. There will always be people that want the multi-purpose stuff, but that has certainly never been the main volume driver. We have been selling to the consumers long enough and know what they are like - they would rather pay $99 five times over than pay $299 in one shot to get all those five functions. They just don't do it.
How much of the Netgear business is consumer sales and what proportion is business?
It varies from quarter to quarter. Consumer sales make up about 58 per cent of the business at Christmas time but in Q2 it's closer to 55 per cent consumer and 45 per cent small business. It also varies country to country - consumer is still limited in Australia so about 80 per cent of our sales are to small business. In China, it's 100 per cent business. Overall, we try to work on a balance between the two.
You were painting a picture earlier of kids sitting in the back of a car playing online games. When you think of this digital nirvana, how far away are we?
I think we are just three years away from that in the US. UMTS2 is being deployed, EvDO is being deployed. UMTS2 is a variation of 3G for data transmission - the second generation can get you up to about 1.5Mbps even if you are travelling at 60-70mph with very little latency. So that will be able to beam broadband into your travelling car and we already have an experimental platform that is working in certain areas of the US that will accept those signals and retransmit it through iPod inside a car.
What is the next disruptive technology?
Intel is putting a lot of energy into the WiMax platform because it knows this is the way for it to get back into the mobile phone. They have missed out entirely on that and they figure WiMax will get them back in there. Once you can get 1.5Mbps or 2Mbps mobile into whatever device, you can superimpose VoIP on it and the traditional mobile network is over. That is a disruptive technology.
People paid billions of dollars to build 3G networks to transmit voice and data separately but once you can use WiMax to beam just data, you superimpose VoIP on it and you don't need to have two networks. Intel is at it, so are another couple of start-ups and it's going to be very interesting. There's a big question mark against those 3G investments.