By Jason Marcheck, The Strategis Group
Usually the first question I’m asked when I get a call is, “How big is the market?” Cable Modem, DSL, Video on Demand, MDU, MTU... take your pick, the one piece of information that people seem to want me to tell them right off the bat is how big “is” the pie they are attempting to carve. MDUs are a hot topic because there is a consensus that this space offers the same advantages that made CLECs and competitive cable operators first decide to begin offering service, without many of the hurdles that serving the entire market entails. So, here’s the skinny: Go ahead and ring that dinner triangle. Residents of MDUs constitute roughly 1/3 of the U.S. population. Thus, talking sheer numbers, this market is not Thanksgiving dinner with all the trimmings, however when considering all factors, it does have the makings of one rockin Fourth of July picnic.
The Census Bureau provides very good data relating to MDUs in the U.S. At The Strategis Group (www.StrategisGroup.com), we estimate that there are currently 21.4 million MDU units in the U.S and that the number will grow to 23.3 million units by the year 2005. This does not necessarily mean that all of these units are considered viable options for a provider seeking to deliver broadband services. When making the decision to ‘light’ a building, two considerations rank very highly, and if not met, can disqualify an MDU for high-tech services. Those factors are: 1) building size and 2) building demographics.
As some DLECs will tell you, customers who pay the bills are much better than ones who don’t. Thus, there are some MDUs that are simply considered unattractive to serve because of the income level of the residents. Likewise, there are other MDUs where it may be reasonably predicted that interest in broadband services will not take hold. Buildings that include public-assisted housing and nursing homes are counted in census data as multi-dwelling units, and thus, for all practical purposes should be discounted from any potential market projections.
There is some disagreement as to how big a building has to be in order to make it attractive to serve. Ideally, all buildings would have 500 units and be full of tech-savvy telecommuters. However, the reality is that quite a few buildings have 10 units or less. If these buildings are part of a garden-style community, then the economics generally become favorable. If, however, those buildings are not part of a fraternity of other such buildings, they generally will not be touched by a provider other than the area’s RBOC and MSO. (It should be noted that Tut Systems manufactures a product called the “MDU Lite”, which, they say, makes it cost effective to provide broadband access to buildings with as few as 4 or 5 units.) In general, it seems that 100 units per building (or garden-style community) is the magic number among providers who seek to make MDUs the focus of their business.
As was the case with DLECs in their initial deployment of DSL facilities, MDU service providers have chosen to focus their efforts on a select few major cities throughout the U.S. While this strategy certainly makes sense, it is also good news for providers (both fledgling and established) who wish to tap into several markets that are currently under-served. Analysis shows that several major markets, such as Dallas, Houston and Miami, where MDUs make up a significant portion of the housing units are still largely up for grabs. In addition, several smaller cities, such as Pittsburgh, Cleveland and Austin, offer the same type of opportunity for the provider wishing to get in on the ground floor of an under-served market.
By gaining access to a MDU, a service provider has the opportunity to gain (and lose) a large number of subscribers in a relatively short time. In serving many customers who reside in the same building or garden-style apartment community, a provider is able to overcome several of the challenges that have constrained the deployment of high-tech data offerings such as DSL and cable modem service. Serving a MDU offers the provider the opportunity to realize efficiencies in the following ways:
l Maximize Marketing Expenditures – Defining the target market is one of the principle challenges facing any marketing team. In an MDU environment that task is already accomplished as soon as the right of entry agreement is signed. While it may not be much cheaper to advertise to the residents of an MDU, the case can certainly be made that the efforts are more focused, and therefore the dollars associated with marketing to an MDU are maximized. Banners, and service kick-off parties, which providers usually hold during the first few days of service availability, and other forms of advertising incur the same costs as if advertising to the general market. However, due to the rather captive audience that an MDU offers, the provider may enjoy more concentrated exposure for their advertising dollar.
l
Assure Service Capability – One of the biggest problems facing DSL right now is
the fact that often times, even if a DSLAM is deployed in a service area, there
is no guarantee that all the customers living in that area will be able to
receive service. In a MDU
environment, many of the reach issues and condition of the copper issues that
plague DSL are easily overcome.
Thus, when a service provider turns up a building for service, they can
be quite comfortable with the fact that they will not have to turn any
potential customer away due to technology constraints.
l Reduce Service Provisioning Time From the Customer’s Perspective – In addition to physically not being able to serve customers, another problem that has plagued broadband service is the fact that, in many cases, it is taking the providers too long to get a customer up and running after they place an order. In a MDU, the physical provisioning times may not be shorter, (in reality they may be slightly longer because a provider must enable all units whether that tenant wants service or not) however, they may appear shorter to the subscriber. Once a building is wired, service can be turned on in a matter of hours rather than weeks. Thus, while the initial installation may be labor intensive, the ability to instantly turn a customer on when service is requested will generate goodwill.
Real estate owners recognize the value of offering broadband services in their buildings. As a result, more owners are not only open to the idea of allowing access to their buildings, but are actively seeking to secure agreements with broadband providers. There are four main issues that a building owner can address by offering broadband services.
l
Increase Property Value – The main objective of any investment is growth. So, it is somewhat obvious that one of
the main concerns of a building owner, especially if that owner is a REIT, is
increasing the value of their portfolio of assets.
l
Increase Revenue/Profits – In an environment where the chief source of income,
rents, inflate at largely the same rate as expenses (except in situations where
the housing supply is severely constrained), one of the major challenges facing
real estate owners is to find additional sources of revenue.
l Reduce Churn – The churn rate in an MDU can average up to 60% per year. Thus, as a real estate owner, one of the biggest challenges facing their business is how to attract and retain tenants.
l Maintain Occupancy Rate – In addition to high churn rates, vacancy rates are a hard reality that many building owners must address on a monthly basis.
As with any marriage, the courtship is crucial to getting both parties to the altar. One of the most critical elements in the contract negotiation process is the time that it takes to secure an agreement. The ability to target a building or community and quickly roll out service is crucial to not only a provider who is attempting to compete with a large ILEC, but also to the ILECs and MSOs who are attempting to compete with each other. In general, building owners, along with the time it takes to secure an agreement, may be classified based on the following categories:
l
Large National REIT - 7 to 12 Month Sales Cycle
l Regional/Local REIT - 3 to 6 Month Sales Cycle
l
Private Building Owners - As little as 1 Week Sales
Cycle
The name of the game with REITs is who you know (or maybe better yet, who they know). It is relatively difficult for an unknown player in the MDU space to knock on a REITs door and have them respond, if they have not heard of you. That is one of the reasons why broadband providers (such as VelocityHSI, and others whose names were embargoed at the time of this writing) founded by real estate companies are beginning to arrive on the scene. Having a foot in the door by way of name recognition (be it brand or personal contact) goes a long way in earning the REITs trust. Private building owners tend to be the most flexible in terms of contract negotiations. As one would expect, sales cycles become shorter according to the number of check points that must be traversed.
High-speed Internet is the dominant high-tech service that MDU building owners are looking to provide for their tenants. However, as bandwidth hungry applications become prevalent and bandwidth becomes commoditized, the profit margins from providing high-speed Internet alone will begin to shrink. That said, it is clear that large ILECs and MSOs will profit greatly from offering DSL or cable modem service to their customers. This is primarily because they can deliver established, cash-cow services in tandem with their high-speed product. In order for the private provider to survive, it will become imperative that they incorporate voice and video into their service offerings. VoDSL and cable telephony provides the technology to allow private providers to gain access to the lucrative voice market.
While voice revenues are clearly significant, offering high-quality, cutting edge video services is the key to succeeding in the residential market. A Strategis Group survey has found that over half of the customers contacted are interested in receiving Video on Demand services. Cable operators have a natural advantage because their technology and delivery medium is quite obviously geared towards the delivery of video based products. This is not to say however, that both voice and data LECs will be unable to compete in this arena. DSL technology has the ability to deliver the data rates required for DVD quality video. Companies such as mPhase Technologies manufacture a product that uses rate-adaptive DSL to facilitate the delivery of voice, video and data over the same phone line, simultaneously. And since, in an MDU environment, the DSLAM equipment is located on premise, the loop lengths are well within the 4,000-6,000 foot range at which high data rate transmission is possible. These conditions make the MDU an ideal place for video to be delivered over copper phone lines.
Broadband is telecom’s shining city on the hill. The promise of Video on Demand and personalized content delivered directly to our TV’s is very exciting indeed. However, will we be allowed in this city of light? That remains to be seen. Distance limitations, shared bandwidth, cash flow positive... all phrases that strike fear into the hearts of broadband providers, threaten the notion that we will all be E-mailing our stove telling it to start cooking dinner so it is ready when we get home from work.
MDUs offer the ideal environment for service providers to blaze the trail towards the fully interactive residence. If ever a service provider had the inclination to offer Video over DSL, wouldn’t a place where several hundred customers, each with loop lengths of under 1,000 feet, all resided within a few acres of each other be reason enough to act? I say the answer to that question is yes. For the provider willing to serve MDUs, they may very well find that this market is the ideal place to launch an array of exciting high-tech services.
About the
Author
Jason Marcheck is a Broadband Analyst with The Stategis Group and author of
the recently released report Multi-Dwelling Units: The Residential Market (www.strategisgroup.com)
upon which this article was based. The Strategis Group publishes in-depth
market research reports, provides customized consulting services and continuous
information solutions to cable TV, satellite, Internet, competitive telephony,
broadband and wireless communications industries. The author may be reached
with questions or comments at jmarcheck@strategisgroup.com or via phone at 202-530-7512.