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Narad Networks Inc.
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The Personal Information Technology Report

May 7, 2002

In this issue:

The Accidental Broadband Players

Narad Networks: Gig-E meets HFC

The accidental broadband players

The story in brief: Cable television companies appear to be as surprised as anyone at their emergence, almost by default, as leaders in U.S. broadband deployment. Can they leverage this superiority and become all-in-one suppliers of personal information technology to consumers?

As they gather this week at the National Cable Television Association's Cable 2002 convention in New Orleans, multiple system operators (MSOs) find themselves poised to be major players in personal information technology for consumers.

In his remarks opening the show, Robert Sachs, president and CEO of NCTA, said as of the end of the first quarter, 8 million households use cable modems, representing about 17 percent of all U.S. households with PCs. Further, 1.7 million households purchase phone service from their cable company. In total, broadband capability from MSOs is within reach of 75 million households.

Even though individual players have been affected by the industry recession, the cable industry as a whole shows growth while the incumbent local exchange providers are contracting. All four Baby Bells have recently reported declines in lines in service. Worse, the U.S. has fallen to tenth place worldwide in terms of digital subscriber line (DSL) penetration-1.6 lines per 100, according to a report issued last month by U.K. research firm point-topic.com. While the phone companies scaled back investment and channeled what little purchasing they did into bolstering aging narrowband networks, the cable MSOs spent $14 billion last year on infrastructure upgrades, according to NCTA figures.

The Bells are also falling behind technologically. With $60 billion invested over the last six years, the MSOs have largely transformed their one-way, all-coaxial analog networks into two-way digital hybrid fiber-coax (HFC) platforms. The Bells still face relatively difficult issues such as copper plant optimization, line conditioning and costly digital loop carrier conversion. Cable companies have much simpler issues, such as how to configure bandwidth connections effectively with 500 homes on a node, how to optimize the DOCSIS 1.1 standard for cable and VoIP and how to exploit unused bandwidth capacity for services such as Gig-E (see Narad Networks profile below). These are narrowly defined problems with known paths to cost-effective solutions.

Further, MSOs are making exploratory steps in voice over IP and more sophisticated integration of voice and data networking for consumers, which, when added to their growing base of cable modem usage, could further strengthen their hand as all-in-one suppliers of residential broadband and networking services.

Kings of the hill, sorta

The next six to twelve months will be critical for the MSOs. If they move forward aggressively with VoIP, their high-capacity HFC networks would then become a single platform for delivering telephone, Internet and entertainment services. This would establish an insurmountable lead for MSOs as wireline broadband service providers.

The odd thing is that the MSOs really didn't plan this. It was the CLEC collapse and the ensuing Bell retreat on broadband that left them standing alone on the top of the broadband hill.

That's why, despite their current position of relative competitive strength, the cable companies seem unable to articulate any real strategy behind VoIP deployment or how integration of consumer voice and data services might further transform their companies. The current attitude seems to be "roll it out and see what happens."

Like the incumbent phone companies, MSOs are still provisioning voice over Class 5-based TDM architectures. Unlike the ILECs, migrating to VoIP involves less upheaval because the IP platform is already there in the form of HFC networks. In addition, there's no entrenched service to protect. For the MSOs, migration is an accounting issue--getting the most from the circuit switches bought and paid for.

But the steady improvement of VoIP quality, plus the potential revenues from enhanced services such as unified messaging and videoconferencing that can be offered cheaply from an integrated voice/data platform, make a compelling argument to accelerate migration.

Yet the largest MSOs seem to be of two minds about VoIP. Comcast is trialing switched VoIP in Detroit using equipment from Motorola, TollBridge Technologies and Cedar Point Communications. It also stands to inherit some 1 million telephony customers if its proposed merger with AT&T Broadband goes through. All of those customers, however, are served by Class 5 switches. Brian Roberts, Comcast CEO, has remained circumspect about how quickly he would migrate those customers to VoIP.

Cox Communications last month said it reached 500,000 cable telephony subscribers, all served by TDM. The company also has voiced intentions of adopting VoIP, but has disclosed no specifics.

Small company, big ideas

RCN Corp. is one of the few companies that does talk specifics. With $536 million in revenues and small footprints in seven of the top ten markets, RCN doesn't always show up on the radar. But small size also means tight focus. The company considers itself foremost an integrated network services provider. Unlike larger MSOs, it owns no programming or content interests. Its corporate strategy sits squarely on the three-legged stool of cable TV, Internet and phone service.

As is the case with other MSOs, RCN telephony customers are served by a separate circuit switched network. That will begin to change later this year, according to Toby Weber, RCN's manager of research and development, as the company begins to adopt VoIP.

A number of factors play into RCN's schedule. The first is completion of the DOCSIS 1.1 standard, which will define the interconnect specifications for cable modems that will carry voice. That will not be done, Weber believes, until the third quarter. That in turn will unleash volume manufacturing of the new generation of cable modems.

Second, for telephony to remain a "lifeline" service, which most localities require, the modems--or at least their parts that support voice calling--must be network-powered so phone service remains up during a power outage. A similar issue plagues voice over DSL. This problem also should be ironed out by the end of the year, says Weber.

Ultimately, RCN expects to be offering commercial integrated voice and data services in as little as a year.

Moreover, of the seven MSOs contacted for this article, only RCN specifically saw itself as a future provider of integrated network services for consumers. "That's been our strategy from the beginning," says Weber. "We want to deliver voice and data at the same outlet."

The first RCN service off VoIP will likely be unified messaging. This will give consumers the ability to retrieve voicemail messages though email, or email through the phone. "That's going to be an early application," he says. And once the voice/data network termination is established on the side of the house, Weber says, home LANs "are a natural progression."

That said, RCN is not without problems of its own. The company reported a net loss of $836 million for 2001. It is carrying $1.9 billion in debt.

But RCN does have a strategy, which is more than can be said for some of its bigger comrades who are seeing better numbers.

Do MSOs appreciate their position?

And therein lies the frustration for broadband supporters. Cable companies are rebounding. But Wall Street remains skeptical, maybe because it senses the MSOs' broadband myopia. The cable industry still thinks of itself as part of the entertainment business. Plus, just one generation removed from their Mom-and-Pop origins, MSOs are also more accustomed to favorable backroom deals as heavy players in local business and politics. When they contemplate a role as nationwide power players in broadband technology, a massive inferiority complex rears up. When faced with criticism or calls for limits from regulators or groups such as the Consumers Union, their natural reaction is fall on the defensive. Just once I'd like to see an MSO fire back with a simple question as to why these groups believe $30 a month for phone, $40 a month for cable, and $30 a month for dial-up modem service, all paid to different providers, is a better deal for consumers than paying $50 to one company for all three.

Neither does it help when the biggest and most visible players botch it. AOL Time Warner should be a leader in a class by itself. Here's a company that owns diverse publishing and media holdings, the world's largest internet service provider and one of the world's largest MSOs. Yet, because of an unfocused strategy and competing internal agendas, it managed to lose a staggering $154 billion in the most recent quarter. It also has the unfortunate distinction of being the only cable company to have an unsuccessful cable modem rollout.

Other disadvantages include the large amount of debt that has already begun to hurt Adelphia and AT&T and threaten RCN and others. In addition, MSOs still suffer from a perception of poor customer service, even though most have substantially upgraded their customer care systems in the past three years and have gotten measurably better at quality and responsiveness.

It's the federal government's stated goal to increase broadband penetration. As the broadband penetration numbers increasingly tilt toward cable's side, the industry will need to become more comfortable and pro-active in communicating its role as a personal information technology leader. As the Bells fall further behind in deploying DSL, it will become much more difficult for Congress and the FCC to justify legislation to protect their traditional turf. But it won't be an easy battle: Congress is the only place where the Bells seem capable of competing well, and the cable companies' legacy of poor service and monopoly pricing tactics makes them politically vulnerable.

Meanwhile, in their own markets, the cable companies must begin to synthesize their businesses around their HFC networks. They can accomplish much simply by creating innovative service packages and aggressively marketing them.

Integrated networking must be the message. Companies can then package value such as entertainment, home security, Internet filtering, videoconferencing, and home networking around that core, tiered for different household needs and budgets. Cable companies always have known how to do this. Consumer confidence can be lifted through marketing partnerships with retailers such as Home Depot and Wal-Mart, names associated with quality household products. Past history doesn't count for much when you've converted yesterday's angry ratepayers into today's willing buyers.

Cable companies may be where they are by accident. But capitalizing on this position will require an outright decision to use the network as a foundation to provide turnkey information services. With a focused commitment, MSOs can be instrumental not just in demystifying personal information technology, but in democratizing it.

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Narad Networks: Gig-E meets HFC

The story in brief: Hybrid fiber-coax solution opens enterprise market to MSOs

If small and medium-sized businesses are an untapped gold mine for cable companies, Narad Networks Inc. has the heavy digging equipment they'll need to tap that vein.

Narad Networks, founded in July 2000, is the first company to offer a complete hardware and software system that adapts the hybrid fiber-coax (HFC) platforms that most cable companies use to deliver television into a suitable infrastructure for meeting the networking needs of small businesses.

Its solution, called True Broadband, is currently being trialed by at least six multiple system operators (MSOs) in the U.S. and Asia, says Chuck Kaplan, vice president of marketing, although he declined to disclose their identities.

The company, still working with its Series A funding of $64 million, has begun to expand, recently opening offices in Guildford, U.K. to handle marketing to Europe, the Middle East and Africa. In late April the company announced a partnership with creaTa Software of Germany, which makes network and planning design software for European cable operators.

MSOs eye SMB

Narad, Kaplan says, hopes to be pivotal in giving MSOs an edge in making the transition from distributors of entertainment to providers of integrated network services. MSOs are in an enviable position in that they own metropolitan fiber networks that pass 5.6 million of the 8 million small and medium-sized businesses (SMBs) in the U.S., according to the Gartner Group and Narad's own research. The only thing missing, Kaplan says, is the physical coax drop and data networking services that would make a broadband connection appealing to the storefront merchant.

"If you can offer customers unconstrained symmetrical bandwidth and service creation and management tools, then you are in true networking business," Kaplan says.

For both Narad and its prospective cable customers, timing could not be better. Small and medium sized businesses, typically defined as those that have between 1 and 100 employees, are beginning to see the value of broadband. Yet, at the same time, this segment remains largely underserved. Incumbent telephone companies have viewed them as good for maybe a handful of phone lines and, at the upper end, a small PBX and a T1 (1.5 Mb/s) line.

Meanwhile, the competitive local exchange carriers (CLECs) focused on large business customers with the call and data volume to justify the large capital expenditures needed for greenfield buildouts.

Those CLECs that have survived can no longer afford to lay new fiber to anyone. And, no longer spurred by competition, the incumbents have slowed DSL rollout. That leaves the cable MSOs as the only alternative for small businesses seeking broadband alternatives. Drawing on research from Gartner, IDC, Dun & Bradstreet and other sources, Narad estimates potential broadband revenues of $62 billion in 2002 from SMB market. All the MSOs have to do, says Kaplan, is demonstrate they can be cheaper and better than T1. _________________________________________________
Broadband apps for SMBs

Make no mistake, SMBs are indeed looking for alternatives. Some bandwidth intensive applications small businesses increasingly want include:

Internet access--Merchants and businesses increasingly must deal with suppliers and customers via the Web, as well as manage their own Web sites. Few can do this, plus handle standard telecommunications needs, with a single T1, let alone a dial-up connection. Yet many balk at the $5000 to $8000 a month cost for an additional T-1.

VPN--This takes Internet access one better. Chains and franchises may want to connect their outlets via secure, optimized connections with IP tunneling and guaranteed quality of service levels. As the Web brings businesses closer together, vendor-supplier co-ops are going to form with the same security and quality requirements.

Network Attached Storage-For redundancy and data back-up, small businesses are turning to applications service providers and storage service providers to manage and house network applications and databases at remote sites. Again, secure, managed connections are critical here.

Wi-Fi hotspots-All those coffee shops, copy centers and mailbox outlets that potentially stand to become public wireless Internet access points will still need an economical connection that can handle multiple 11 Mb/s connections.
_________________________________________________

How it works

At the fiber node, Narad places an optical network distribution switch (ONDS) that multiplexes switched Gigabit Ethernet traffic from fiber onto the same physical coaxial cable that carries cable TV and consumer traffic. On coax, Gig-E traffic is handled at the currently unused frequencies above 860 MHz (see diagram below).

Narad then places a network distribution switch where existing distribution amplifiers are located. The distribution switch essentially layers the functions of a digital Ethernet switch atop those of a standard amplifier. Asymmetrical CATV signals pass through as normal while symmetrical switched Ethernet traffic is managed.

The actual on/off ramp function is handled by a subscriber access switch, which is located at a standard cable tap and drops a 100 Mb/s coax connection to a business customer, and a broadband interface unit, which acts as an Ethernet modem and hub on the customer premises.

Source: Narad Networks

Narad also supplies a software suite for service creation, provisioning assurance and management. For example, a business customer may use Narad's Web-based management software to carve 100 Mb/s of bandwidth into smaller chunks, each with its own quality of service (QoS) level, says Kaplan. The customer may choose to have 40 Mb/s handled at a higher priced committed bit rate (CBR) and the balance at variable bit rate (VBR). Or the customer may want to make specific QoS adjustments for traffic at particular times of day.

It's not just that it can supply an immediate and expandable solution to get a cable company into the business market that makes Narad notable. Its real distinction is that it provides the critical combination that service providers need right now: a solution that offers a way to offer value-added, revenue rich services at an incremental cost.

MSOs can project only minimal growth from their traditional television services, just like telephone companies see only token increases in dial-tone revenues. However, the low price of bandwidth makes it difficult to balance the cost of network upgrades against projected payback. Narad Networks gives cable companies a way to use the bulk of their existing facilities to tap a large, nearly virgin market with only incremental investment.

As the industry moves into an environment where cable and telephone networks will be platforms for inexpensive personal information technology, vendors are going to find that pure innovation is not enough. Narad's products, from a technology perspective, are quite basic. What's significant is that they come with a strong ROI story. Buzzwords like Gigabit Ethernet, VPNs and IP QoS attract service provider attention, but dollars and cents prompt them to sign on the dotted line.

Contrary to those who say the industry as a whole isn't buying broadband, Narad's initial success, completely due to the interest from cable companies, points instead to the dollars and cents approach the next generation of service providers will have. It demonstrates when broadband infrastructure is grounded in sensible economics, service providers will respond. It appears the cable MSOs are ready. Are there any other takers?

-- Steven Titch

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