Articles and whitepapers

Whitepaper: Europe's Home Networking Boom (6/11/2007)

By John Barrett, Parks Associates

1.0 The Difference Two Years Can Make

At the end of 2004, it appeared the home networking phenomenon was bypassing Europe. Penetration rates were far behind North America and Asia, and only a few households (<5%) were interested in a home network. Broadband adoption was likewise lackluster. In many of Europe's leading markets, just one-fifth of all households had high-speed access, and without broadband, home networks are of limited utility.

Today we see a different picture. Between 2004 and 2006, home network adoption boomed across Europe, with growth rates surpassing Asia and North America. France and the U.K. both trebled the number of households with a home network, putting them slightly ahead of the U.S. Italy and Germany still lagged behind but posted notable growth nonetheless.

Broadband adoption exhibited similar patterns. Penetration rates in France and the U.K. roughly doubled, putting the total number of broadband households on par with the U.S. and only slightly behind Canada. In Germany and Italy, broadband penetration showed notable growth although not enough to bring them up to the adoption levels in North America and Asia.

Figure 1 Home Network & Broadband Penetration Rates (YE2006)

2.0 Anatomy of a Boom

What triggered such impressive gains in home network adoption? The answer is in the patterns of growth. The number of households gaining a home network between 2004 and 2006 far exceeded the number stating an intention to do so at the beginning of 2005. This was true not only in Europe but across the world. For most people, home network adoption is not a premeditated decision, and quick examination of purchase intentions reinforces this assertion. Roughly two-thirds of the households who intend to purchase a home network already own a home network. In other words, the majority of network acquisitions are unanticipated, and the people who do anticipate an acquisition are not first-time home network buyers. Growth is almost exclusively coming from unanticipated acquisitions.

Figure 2 Home Network Purchase Intentions vs. Actual Growth

Evidence points to broadband adoption as the trigger for these purchases. The percentage increase in broadband adoption closely mirrors the increase in home network adoption. Such a relationship is naturally intuitive. Sharing a broadband connection is one of the primary uses of a home network, so the latter is of little use without the former. Moreover, broadband providers often play a key role in educating and encouraging adoption by offering home networks, sometimes at a subsidized price.

The participation of broadband providers is significant because in some European countries, broadband adoption is dramatically growing thanks to regulatory reforms that permit more competition. In the U.K., for example, local-loop unbundling provisions have allowed new competitors to challenge BT, including many companies with deep pockets such as Sky, Tiscali, and Orange, a subsidiary of France's incumbent telco. In France, Illiad entered the market through unbundling provisions and dramatically shook up the country's broadband sector. Intense competition led to deeper penetration, and home network adoption naturally grew in the process.

3.0 Waiting for the Next Round

As noted earlier, the U.K. and France have caught up with international adoption levels while Spain, Germany, and Italy are still lagging behind. What accounts for the difference?

Competition is the key variable. In Italy, the entry of FastWeb has spurred broadband adoption, but the country lacks the variety of players seen in the U.K. and France. In Spain, only now is there a significant challenge to Telefonica's dominance thanks to the consolidation of the country's main cable TV providers (ONO & Auna) and the growing presence of Orange. Germany presents another interesting case. Regulatory provisions there have been less friendly toward new entrants than in France and the U.K. Deutsche Telekom, the incumbent telco, controlled the country's main cable provider until recently, and the German government is resisting pressure from the European Union to enact additional unbundling measures.

All this is to say that home networking still has room to grow in Europe. Spain, Italy, and Germany remain laggards by international standards, but they will not be so indefinitely. Once competition heats up, adoption levels should rise as they have in the U.K. and France. Home network providers would benefit by keeping an eye on the changing competitive dynamics in these countries and by positioning themselves to exploit demand once competition unlocks it.

4.0 Unintended Consequences

The parallel growth of broadband and home networks also correlates with an increase in multi- PC households. All three, in effect, rise together. Broadband and home networks enhance the value of multiple PCs and vice versa. Digging deeper into the data, Parks Associates found that in every country surveyed, a majority of those planning to purchase an additional PC already own a home network. In other words, the lion's share of additional PC purchases occurs after the adoption of a home network. Broadband leads to home networks which in turn lead to the purchase of additional computers. This dynamic presents intriguing possibilities for companies from all three sectors. By working together, they can offer discounts and bundles to consumers when they subscribe to a broadband service in order to smooth the complete adoption path. This tactic is already done with respect to home networks. Adding computers would not only benefit PC makers but also provide consumers with a complete digital makeover and transform them from a single-PC, dial-up household to a multi-PC, broadband home. This base of customers would be fertile ground for additional services and hardware.

Figure 3 Adoption of PCs, Broadband, and Home Networks (2004 vs. 2006)

5.0 Conclusions

Europe is in the midst of a home networking boom thanks to an increasingly competitive market for broadband services. France and the U.K. have been at the forefront, and Germany, Spain, and Italy have been bringing up the rear. These three markets could keep the boom going, however, provided that regulators foster greater competition. The rise in home networking is also driving demand for additional PCs - a fact that the industry should encourage and exploit. Multi-PC broadband homes clearly have significant potential for new products and services. The quicker the transition, the better off all in the industry will be.

Notes on Methodology

The figures presented within this white paper are estimates based on Parks Associates' primary and secondary research. In the case of the former, survey data are not necessarily drawn from the exact point in time represented within the graphs. For example, surveys fielded in Q1 of 2005 have been used as a proxy for year-end 2004 data. In many places, Parks Associates has derived household figures using primary data which, by nature, have a degree of statistical variance. This variance, while small in percentage terms, can have a large impact once it is used to project an absolute number of households. This is particularly true in the case of China where surveys represent a large population base.

John Barrett is Director of Research for Parks Associates. Parks Associates is a market research firm focused on all product and service segments that are 'digital' or provide connectivity within the home, including entertainment, home networking, home controls, wireless networking, broadband, and on-demand services.

www.parksassociates.com