Opportunity

There exists a huge business opportunity for networking within residences. There are many companies who covet this market, and are working hard to capture it with their customary techniques of proprietary technology, more/less standard interfaces, customer lock-in, and rapid obsolescence.

The open source software movement suggests an alternative approach, which is to build systems based on standard components and free source code, and to build businesses based on common knowledge and good service. This approach promises lower costs, greater reliability, trustworthinesss, in sum much more value. We believe that this approach will not only dominate the market, it will liberate it.

Product Proposition

Residential networking systems need to be tailored to meet the specific needs of their users. As such, it is impossible to craft a single system description to meet all, or even most, needs. However, we do believe that most systems will include some or all of the following:

• A broadband (cable, DSL) Internet connection.
• A server computer, which will act as gateway, router, controller, and nerve center for the system.
• Networks, which include structured wiring and/or wireless communications.
• System interfaces, such as audio, video, HVAC.
• Sensors and controls.
• AC power management.
• Software that gives the user effective, dependable control over the whole system.

The key feature of this system is that there is an Internet-connected server computer which runs a robust suite of open source software, which provides the user with a consistent, flexible, powerful command of the system. How the house itself is connected into this system will vary considerably.

However, describing this system merely shows the tangible product that the end-user sees. What makes this system work is the support infrastructure that designs, installs, troubleshoots, upgrades, and maintains the system. XC's mission is to build this support infrastructure, and in doing so to move the industry from the drawing board to everyday life.

Market

The potential end-user market for XC services includes virtually all residential housing units in the US (115M, of which 68M are detached single-family residences). One indication of how rapidly this market may be penetrated is the projection of growth for broadband Internet connections: one such projection is that by 2002, 16M US households (1-in-4 on-line homes) will use broadband connections. The strongest target market will be residences with a broadband Internet connection that want to connect more than one computer to the Internet. Such residences will need, at minimum, a firewall/router appliance, which we can provide service for as an entry-level product. We believe that, as the software matures, and as new wireless networking technologies become viable, we will see significant business in this sector.

However, the preferred solution for networking in residences is structured wiring (in-wall cable bundles, connected to a switch box in an equipment closet), and structured wiring is an important part of high-end, full-blown home networking and automation systems. We believe that such systems will become very common in new single-family housing, and ubiquitous in higher end houses. Recent figures show that the rate of house starts is 1,249,000/year, and that the median price for new house sales is $165K (mean $203K). Several factors make new single-family houses very attractive as an initial target market:

• The ability to integrate the system design into the house, including the option of burying cables in walls, makes it cost effective to install full-featured, high end systems.
• Houses are financed over long terms, at favorable interest. The system, including warranty, can be bundled into this.
• Houses are seen as long-term investments, so there is a strong argument that not installing at least the infrastructure for a system whose absence might lower resale value.
• While the new house construction industry is very large and diverse (over 128K general contractors in the US), it is a good fit for our service model. General contractors currently subcontract most skilled tradeswork, so our affiliate program complements and builds on existing business patterns.

The general system that we propose for single-family new houses can easily be adapted to existing houses (perhaps more emphasis on wireless, less on structured wiring), new and existing multi-family residences (apartments, condominiums), temporary residences (hotels), even mobile homes. Small businesses also share some subset of interests, especially those that are home-based.

Another way of subdividing the market would be by consumer interests and skillsets. For example, access to downloaded music is one driving interest in broadband adoption. The logical next step would be to pipe downloaded music throughout a whole home audio system. This combination of fast Internet access and home networking opens up numerous possibilities for specific features that appeal to specific customers.

One market niche of special interest is the DIY (Do It Yourself) market. At present, home automation systems are either very expensive, or require a lot of specialized knowledge (and a dollop of forbearance). Our goal with regard to DIY is not to sell to them. Rather, we hope to recruit them into making significant contributions to our cumulative expertise, much as technically savvy users contribute to open source software projects.

Competition

Real and potential competition for this market reads like a who's who of the high tech world: Microsoft, IBM, Intel, Lucent, Honeywell, Cisco, phone companies (Qwest, AmeriTech, AT&T), cable companies (AOL/Time-Warner), consumer electronics companies, and so forth; plus there are many small companies. The common thread of all these companies is that they base their product propositions on more/less proprietary technology. We can compete effectively with any such approach.

There are also quite a few retailers, and we have noted varying degree of interest from major chains like Home Depot, Radio Shack, and Sears.

We are not aware of any company which is pursuing this market as we are: as a vendor-independent, open source, services provider. However, there are several industry associations which provide somewhat similar services for affiliates (CEDIA, HANA), and there is at least one small company that is attempting to build a franchise organization.

It would be appropriate to divide these competitors into several groups:

• Integrated system vendors: The most comprehensive competitors, mostly small companies, but some (IBM, Qwest) are large and already target new house construction.
• Partial system vendors: Most evident in home security systems, which usually have a monitoring (service) component. To some extent these systems can co-exist with ours, with or without integration.
• Utility prooviders: Phone company, cable, companies whose main business is outside the home, but which have tentacles reaching inside.
• Technology/component providers: Potential allies, since we will open markets for them (at least the ones with good, cost-effective products).
• Microsoft: Seeks to control the house through embedded technology, proprietary interfaces, and extensive deals with utility providers. They are tried and true, a lovely villain.

How We Will Succeed

We will succeed because we will represent the interests of the market. End-users will be attracted to us because our open source strategy and non-proprietary knowledge base will assure them that through us they will get the most value for their money.

Trades people and general contractors will be attracted to us because we will build the end-user market for them, and because we will assure them that they will always have access to the most cost-effective, best value components and systems know how available.

Technology providers will be attracted to us because we will in due course be able to deliver the market to them at much less cost than they would incur in building their own end-user marketing organizations.

We should also find support from anyone who worries about incomprehensible secretive technology, owned by private interests, taking over our lives. XC seeks to empower the market to take command over technology that affects our everyday lives. This empowerment is a force which proprietary interests may very well adapt to, but which they damn sure cannot compete with.

Risks

Any organization, especially early in its formation, is critically dependent on the skills and integrity of its founders. Failure to execute is always a risk.

There is a substantial critical mass of technical information and expertise which must be garnered before XC becomes a credible force in the industry. This knowledge base does not currently exist, so there is a bootstrapping period where we have to recruit help based on the faith that we will attain critical mass. Failure to deliver on that good faith would undermine the company.

This is a highly unorthodox business plan, which is likely to make it a tough sell, especially to venture capitalists. However, we believe that the synergy XC promises to franchises and affiliates will encourage them to be a sufficient source of capital.

There are risks that some exclusive lock-in strategy (e.g., a killer patent) might give a vendor an edge which might allow them to compete with us. While we do expect to see many patented devices at the periphery of the network, we cannot imagine how such a lock-in strategy would undermine the network itself.

• The terms open source software and free software are competitive names for much the same software. In this business plan, we tend to use open source, not out of ideological commitment (or weakness), but to avoid confusion: in the business world, we note that most frequently the true meaning of free is watch your back.
• The market described here is limited to the USA. In general, we doubt that XC should have an international focus. (Canada may be an exception to this.) The reason for this is that as a non-proprietary service business, XC would have little leverage over local efforts to provide similar services, and local efforts would have the advantage of being able to better concentrate on local conditions. We suspect that Japan and much of Europe should be prime markets for similar service industries. We also believe that international cooperation and association would be mutually beneficial to anyone entering this market.
• The synergy between the DIY user base and the community that built such open source powerhouses as Linux is not just a relevant principle: it is a lesson for how to bootstrap the expert knowledge base that XC as a business and the industry as a whole depends on. Attempting to build such a knowledge base in private would be expensive and instantly obsolescent; in public, it is dirt cheap and sustainable. The price we pay for this approach is that the knowledge is public -- we cannot constrain it for our advantage. The only thing we can do with this knowledge is to use it more effectively than others. This keeps us honest, keeps us working hard, which is what assures value to our business associates and end-users.
• An amusing story on competition comes to mind, as Caterpillar was getting started: "Gentlemen, we propose to enter the construction equipment industry. Our competition is: (a) General Motors, (b) Ford Motors, (c) Chrysler Motors, (d) International Harvester, (e) Allis Chalmers, (f) J.I. Case and approximately 20 other lesser sized companies. Because of the quality of competition, it will take us 18 months to lead the industry in sales and another 5 years to sell more than all of our competitors combined." [Quoted in Richard M. White, Jr., The Entrepreneur's Manual] The obvious point is that Caterpillar just did construction equipment, while everybody else mostly did something else, but there were other factors which Caterpillar understood and believed that would make them successful. Our factors are different from theirs, but the principle is the same. The who's who list of competitors basically means that: (a) the market is huge, and (b) it is totally up for grabs.