The rarest of all Major League Baseball feats is the unassisted triple play -- accomplished only 12 times in 130 years. Fortunately for builders, providing bundled triple-play service to homebuyers is not so rare, nor does it have to be unassisted.
In fact, if it is structured properly -- either on your own or with partners -- the ability to offer the triple play of a bundled package of highspeed Internet, phone and cable/satellite TV can be very lucrative. Builders bene- fit from high lot prices, boosted revenues from additional low-voltage services piggybacked on the fiber infrastructure, and payments from utilities. However, all this can be for naught if builders don't take the step to trench for fiber in their green- field developments. Asking your service provider whether it offers Fiber to the Home (FTTH) versus Fiber to the Curb (FTTC) is also vital.
6 Ways The Triple Play Can Make You Money
In the end, builders offer bundled communication services to boost customer satisfaction and to make money. Here are six ways to make money from them:
1. Higher Lot Sales Prices
If you are a developer selling parcels to individual builders, it can boost your per-lot-sales price because the land will be more desirable. A developer in rural northern Virginia who didn't want to be named recently added $3,000 to the price of each lot because he could guarantee builders that an affordable triple-play service was being provided by a national phone company.
2. Marketing Fees from Utilities
Phone companies and cable/satellite TV providers are setting up deals with developers to pay them one-time marketing fees for the right to include literature on their bundled services to homes in new developments. According to one industry consultant, the average one-time marketing fee is $200 per home. Marketing fees are even more lucrative in gated communities, where builders (based on local laws) may have the ability to exclude other utility companies from even providing service.
3. Recurring Monthly Revenue (RMR) from Utilities
Some builders are able to structure deals with utilities that provide them a cut of the ongoing monthly revenue stream, in addition to or instead of a one-time marketing fee. One Mountain-region builder was able to negotiate a 16 percent cut of the RMR from the triple-play service provider. Builders looking to receive a cut of the RMR will likely have to fork out money to help pay for the initial trenching for the fiber optic network and the construction of the headend (the physical location on-site where the satellite dishes and receivers are located).
4. Creating Your Own Recurring Revenue Stream
While professional homebuilders discourage homeowners from becoming do-it-yourself general contractors, being a do-it-yourself tripleplay service provider offers some potentially lucrative benefits. You get to keep 100 percent of the RMR from inhabitants' phone, high-speed Internet and cable/satellite TV. Of course, it also means you must have the ability to service those systems, which includes not only responding with service trucks, but also having someone available to answer customer service phone calls. In condos or private communities, builders can cover some of their service costs by including a fee in the homeowners' association (HOA) dues.
5. Selling Your Triple-Play Assets to Utilities
When a builder either partners with a service provider or builds his own headend, he then has a tangible asset that can potentially be sold to the local phone company or cable TV company. If you are offering security monitoring in your bundle, that RMR is also sellable. When RMR is purchased by utilities, they typically pay a multiple of the recurring revenue. That multiple is based on factors such as attrition rate, consistency of equipment that is installed from home to home, and the overall demographics of the neighborhood. Historically, multiples have ranged as high as 60 times the RMR, but usually range in the 20- to 40- times range. In other words, if you have 100 homes paying $100 per month, you could sell those accounts for a one-time fee of $10,000.
6. Home Technology Upgrades
The final piece of the money pie from offering a triple-play bundle is the potential added revenue from selling upgrades. Once you have constructed a fiber infrastructure to support high-speed Internet, telephone and cable/satellite TV, your low-voltage integrator should be able to parlay it into increased sales of electronic home amenities. Based upon how you have that deal structured with your contractor, it could mean thousands of additional dollars per home. According to an informal study of builders conducted by TecHome Builder, production builders average a 50 percent markup on the equipment and services offered by their low-voltage contractor, while custom builders' markups range from 15 percent to 35 percent.
Triple-Play Market Grows
How can a builder prepare to make money from a fiber infrastructure? You don't have to look too far to see how hot this part of the communications business has become. Recent research reveals:
By 2010, more than half of broadband households are expected to subscribe to a triple-play or quadruple-play bundled service, according to Parks Associates, a Dallas-based research firm. The study anticipates the market for bundled services will be $119.5 billion in four years for a package of services combining landline voice, high-speed Internet, television or wireless voice.
"In this age of IP convergence, service providers have realized the importance of bundled services for the long-term viability of their business models," says Deepa Iyer, a Parks research analyst. "Although bundled services are at an early stage, service providers are beginning to experience increased customer retention."
Voice over IP (VoIP) services are expected to grow from 2.2 million subscribers in 2005 to 19.8 million by 2009, according to research company IDC. Cable-based VoIP provides homeowners with the ability to have telephone services using the less-expensive coax cable that is already in the home for cable TV. The researcher who authored the study characterized the situation as "fierce competition" between cable companies and phone companies (referred to as incumbent local exchange carriers or ILECs). The ferocity of the competition means these utilities will be hot to cut deals with builders that can offer them homeowners/ new customers, especially ones with fiber infrastructures.
EchoStar Communications and DirecTV are looking to join forces to roll out high-speed wireless Internet access in order to be able to offer a triple-play bundle. The high-speed Internet would be combined with the companies' existing VoIP phone and satellite TV services to their more than 27 million subscribers.
The Push Is On
"Triple play is the hot button right now," says Sonny Esposito, president of Pin Oak Group in Centreville, Va. "It's all about the subscribers with Verizon, Comcast, SBC, Cox and others. They are losing landlines left and right and they need to capture as many subscribers as they can."
Pin Oak specializes in negotiating agreements between developers/builders and cable or phone companies. The company recently negotiated deals with Verizon for D.R. Horton's communities in Drees, Va., Hazel Land Company in King George County, Va., K. Hovnanian Enterprises' communities in New Jersey and Virginia, and Ryland Homes. The specifics of the deals are private, but Esposito is able to get more for the individual builders by aggregating communities from multiple builders during negotiation. For example, if he is representing a 400-home development and a 500- home development, he can approach the utility with the potential to capture 900 homes.
Typically, the deals involve getting a one-time marketing fee paid to the builder by the utility. For that fee, the cable or phone company gets the exclusive opportunity to include literature on their services to new homebuyers in the community. Esposito says he has brokered deals for as much as $675 per home, but he averages $200 per home. Pin Oak takes a cut on every deal. He also sets up split-revenue deals, but adds that "cable companies more than phone companies are willing to share revenue from bundled services," he says. "Ninety-five percent of the major builders do not have anyone on staff with the knowledge about fiber backbones to be able to negotiate with utilities."
Often the biggest roadblock to these deals is in the purchasing department of the builder, according to Esposito. "Builders are still cheap. The purchasing agents beat up all their subcontractors [who end up doing pared-down installations in order to keep their costs down]. Meanwhile, the marketing department is crying because they are trying to sell a $500,000 house that has only three phone jacks and two cable jacks in it. There are two separate agendas within the homebuilding company."
That split agenda was recently personified in a Fredericksburg, Va., community in which Pin Oak negotiated for the installation of a fiber infrastructure by the phone company only to find that the homebuilder standardized on an electricianinstalled system of three phone jacks, two cable jacks in a daisy-chain configuration, which greatly reduces video quality.
On the flip side, a recent 50-home development in Warrenton, Va., put in a fiber backbone with six jacks per home and was able to add an extra $2,300 per home in revenue.
Key Questions
Before setting up relationships with a phone company or cable company, there are some basic questions to ask. Obviously, dealing with a large national provider or local carrier is safer than working with small providers who may be new at building headends.
"You should find out if the service provider plans to run cable or fiber in the ground," says David Foote, CTO at Hitachi Telecom. "The great aspect of fiber is that the technology can change, but the fiber doesn't have to be upgraded. The changes occur in the electronics, not in the fiber. Unless a builder wants to have the latest and greatest, he should stick with the standard fiber manufacturers, like Corning or OFS. There are some new fibers, such as plastic optical fiber (POF), but in general you will not need cuttingedge products." Foote says only mixed-use commercial/ residential environments with large commercial facilities would require new fiber technology, which offers up to 20-times improvement in speed over existing fiber.
Foote also advises builders to ask if the carrier plans to offer Fiber to the Curb (FTTC) or Fiber to the Home (FTTH). FTTC systems bring fiber to a street-side pedestal serving eight to 10 houses. From the pedestal, copper is run to each home's Optical Network Unit (ONU) mounted on the side of the house. FTTH systems bring the fiber all the way to the Optical Network Terminal (ONT) on the side of each home.
"FTTH will always offer greater capacity than FTTC systems," says Foote. "People can't imagine that higher bandwidth is needed, but history shows that an application will eventually be invented to fill it. Copper is a bandwidth chokepoint from a technical standpoint." That is especially true of twisted-pair plain-old-telephone wire. Coax in the home can carry up to 2GB, while Cat 5 wiring can carry 100MB and Cat 6 carries up to 1GB.
Recent data from the Fiber Optic Communities of the United States shows a large delta between homes "passed" with fiber versus those actually connected. There are 2.7 million houses with fiber running in front of the house, but only 322,000 of them are connected. Why? "The last 100 feet is expensive," says Foote. "Plus, builders don't have the mentality of wanting to be in the networking business, so they don't sell the corresponding services."
Foote recommends that builders deploy a fiber network on their own, then go out and find a service provider. "If you can't find a service provider, build it yourself and run it. With no competition, it's a slam dunk business-wise," he says, because eventually a service provider is going to want to capture your homebuyers as customers.
Once you get into the home, the copper chokepoint must be avoided. One solution is a new development from Winegard. Its Home Run Bundle technology can stack HDTV, high-speed Internet and phone signals all on a single coax cable. The system requires a specific type of antenna said to resolve digital reception issues. The system is designed for retrofit environments, but can also be used in greenfield situations.
Service Subscriber Forecasts 2006 vs. 2010
Cable TV:
2006 - 68.4 M
2010 - 68.4 M
High-speed Internet:
2006 - 50 M
2010 - 77 M
Cable VoIP:
2006 - 5.9 M
2010 - 18.5 M
Satellite TV:
2006 - 29 M
2009 - 31 M
Sources: Bank of America Securities, Strategy Analytics, Bernstein Research, The Bridge Weekly Newsletter
Individually, the growth rates for broadband and VoIP are still rapid, while satellite TV and cable TV are already mature markets. These services bundled together make up the market for a potential triple-play service offering from builders.
Triple Play By The Numbers
$200 - Average one-time fee per home paid by utilities to builders for the right to market to the homeowners.
100 - Minimum number of homes in a development in which a fiber infrastructure makes sense.
$1,500 - Per home cost to construct a headend and trench for fiber.
80% - Percentage of total infrastructure cost devoted to trenching for fiber.
Sources: Pin Oak Group, Hitachi Telecom