MOMENTUM IS BUILDING FOR THE DIGITAL home. Led by technology bellwether Intel, which projects a PC-centric image of the digital home that features interconnected PCs and laptops, handhelds, digital video recorders, and video cameras, techies have a cause once again. Silicon Valley hasn't been this jazzed about new technology since Netscape went public in 1994.

Data from the Consumer Electronics Association (CEA) supports digital home optimism further. The CEA reports that nearly three out of five new homes—roughly 59 percent—are now built with structured wiring. CEA research also found that 52 percent of new homes come equipped with some kind of high-speed Internet connection, up from 36 percent a year ago, and nearly 37 percent of new homes feature home offices, up from 29 percent a year ago.

But there's a disconnect: Only 19 percent of builders in the CEA's 2004 survey say the installation of home technologies has increased their company's revenues in the past two years—down from the 49 percent of builders in the CEA's 2003 survey who said home technologies help them make money.

What's Wrong? Steve Koenig, senior manager of industry analysis at CEA, says it boils down to economies of scale. He notes that apart from structured wiring, demand for other home technology products is limited, especially in the first-time and move-up markets.

“Home technology in the starter market is likely sparse and isolated—not enough to impact the overall bottom line,” Koenig says, explaining that roughly one-third of builders in the luxury home market say the addition of home technologies has increased their revenues, versus 15 percent in the starter market.

Jeff Simon, vice president of operations for Veridian Homes in Madison, Wis., points to at least three problems. First, home technology changes so fast it's hard for builders to package it in a box with prepriced options. Second, customer preferences are so different that each system has to be customized—something the average builder is not set up to do. The third problem is that many of the systems are still difficult to use.

“A lot of these systems have three or four remotes and multiple wall switches with sensors,” says Simon. “It's very difficult to preprogram these audio offerings,” he says.

“Too often, people don't know which end is up, and when the technology malfunctions, the typical customer doesn't know how to repair it,” Simon continues. “People are away from their homes a lot—they want their lives to be simple, so we need a simple device.”

The result is that builders such as Veridian don't make money on home technology; most offer the gear through local integrators as a service to their customers.

Weak Demand Even in technology-driven regions such as the San Francisco Bay area, builder Jay Ryder, president of Ryder Homes, in Walnut Creek, Calif., says demand is still weak. “There really is a disconnect,” he says.

“We are in the Bay area, which is the ground zero area for technology, but we don't really see a whole lot of calling in our price ranges for tech upgrades,” says Ryder, who builds first-time, move-up homes in the $400,000 to $600,000 price range. “People want high-speed Internet, good wiring for phone lines, and digital cable, but beyond that there's not much demand.”

Thomas Doucette, president of Frontiers Community Builders in Stockton, Calif., looks at home technology as an evolution. He says a year or two ago, structured wiring was an option at Frontiers, but now it's standard. He feels the same will hold true for many of the audio, video, and home control systems available today.

“Everything we're dealing with in the houses is based on decisions we made a year ago,” says Doucette. “It will take another year or so to incorporate the new technology into our models,” he adds, noting that home technology will become more standard in new homes over the next two to five years.

Price Sensitivity Builders are very sensitive to any option or feature that adds to the sales price of the house. For many, home technology is seen as an added cost that can price their homes out of the market. But what if home technology could be a profit center?

Builders looking to modernize their communities might want to study The Pinehills in Plymouth, Mass., a planned community that will build 2,983 homes over the next seven to 10 years at prices ranging from $300,000 to well over $2 million. By investing in the infrastructure to be its own service provider, The Pinehills now benefits from a recurring revenue stream from home buyers who purchase the company's video and data services.

John Judge, president of The Pinehills, says the company's tech arm, The Pinehills Connection, manages the network and installs the fiber infrastructure and optical networking units that deliver video and data services to the community's homeowners and bring fiber links into each neighborhood. A local network in each neighborhood connects to 32 homes. Builders are required to install structured wiring, which they factor into the selling price of the house. A typical panel runs about $1,500.

Judge says The Pinehills invests about $1,500 of its own money to get a home up and running with the fiber network. “We make the investment, but we get a customer for life,” he says, adding that the average homeowner spends about $85 a month for video and data services and has the advantage of a fiber network that now delivers Internet bandwidth in increments of up to 1.5 megabits-per-second (Mbps) with an eye toward 3 Mbps. One big advantage of fiber is that it can potentially handle well in excess of 100 Mbps as bandwidth capabilities expand.

Although the 10 builders who work with Judge at The Pinehills don't directly benefit from the sale of the data and video services, there's a lesson here for the industry.

“There's no reason that a builder couldn't partner with a local cable company to build houses in such a way that would make it possible to set up a recurring revenue stream,” says Judge. “The possibilities are there, the builders just need a little bit of creativity and the ability to handle the front-end expense. It's a great opportunity.”

Don't Give Up Judge makes a strong case, but Larry Hall, director of new products at OnQ Technologies, says builders can still make money selling infrastructure products from manufacturers such as OnQ.

“Everybody loves the service model because of recurring revenue. It always looks like the cash cow you'll be able to jump in to,” says Hall, who points out that selling services is very price competitive, which makes it tough to sustain profitability.

Hall says OnQ aims to work with builders to make selling infrastructure products easier. The company made a big splash at the International Builders' Show last January with its OnQ Home program, a new marketing campaign that streamlines home technology into three categories: communications, comfort, and entertainment. The company's strategy is to demystify home technology for builders and home buyers as a means to pave the way to increase upgrade sales.

Some examples of the upgrades OnQ is talking about include a phone system that can call extensions within the home; pre-wiring for a wireless network by installing a wireless access point; building homes with more energy management features; and putting in whole-house audio and lighting controls.

Hall says the presence of digital video recorders and TiVo has made a big difference. “With TiVo, people can make the quantum leap—they now understand streaming video and what a personal video recorder means,” he says. “The timing is getting better and people are willing to think about bigger pipes to the home.”

To be fair, some consumer electronics companies are working more closely with builders to make selling home technology products easier and more affordable. This past spring, Sony Electronics started shipping a turnkey home entertainment system that comes with a television screen, a DVD/CD changer, a VCR, and a receiver/tuner in the $10,000 to $25,000 price range. The goal is to offer a single integrated system at a price point that makes sense to builders selling $200,000 to $500,000 homes.

And Leviton Manufacturing is teaming up with the Bose Corp. to offer the home building market a product Bose dubbed Leviton/Sound. The system will integrate Leviton's Decora SoundShaper volume controls with Bose's Acoustimass home theater speaker system. Home buyers will be able to opt for the new products as part of the home's structured wiring package.

Builders such as Veridian Homes understand that the landscape is changing. The company just formed a Home IT Team to research and develop a standard product and installation method for its homes. Veridian should have a technology strategy solidified by the fall.

But Ryder is more typical of the average builder. His company builds about 300 homes a year, which is small when compared to the national builders. He prefers to wait it out.

“Let the larger builders spend the [research and development] money,” he says. “Once it becomes something a large amount of buyers want, we'll be there.”

Until then, expect the digital disconnect to continue for at least another few years.