Broadband Over Power Lines Finally Poised To Take Off; Telkonet Main Beneficiary

Implications: 1.The Broadband over Power Lines (BPL) market has taken an awfully long time to really emerge. 2.In general, people have been afraid of the technology -- to do something that it out of the norm. 3.Of the several suppliers that are striving to play in the BPL commercial space, Telkonet seems to have the best products.

Analysis: Without a doubt, the initial powerline devices had their fair share of inherent problems. Over four years ago, all the X10 type of gear could affect baby alarms and electrical noise (including from vacuum cleaners) could be picked up and transferred all over the place – just to name a couple. Telkonet has apparently done an excellent job of perfecting the technology including achieving adequate quality of service. When the supplier came out with its commercial line of equipment, just about all of the other issues were resolved as well.

One real estate firm is so comfortable with BPL that it now has it included on six to eight projects – and all of them are the highest end developments. Evidently, there is very little difference in terms of QoS in running a 100-foot CAT 5 line or placing Telkonet devices over the power lines from point A to point B.

The supplier has also achieved (and continues to improve upon) the security systems getting to a 256-bit AES encryption for the government. This capability needed to be reach in order for EDS to sign off on the product – resulting in use by the Navy, the Marines, etc. Apparently, the Secret Service is using Telkonet for communications purposes in sites to be visited in the future by the president because it is easy and quick to deploy. Homeland Security is evidently looking at the supplier as a part of another service offering – such as from one of the big carriers. It is not believed at this time that Telkonet has a good shot of getting business just working independently at that department. Building further relationships with other companies might facilitate inroads there. Yet, all in all, Telkonet has a solid reputation with the U.S. federal government, especially with the military branches, such as for use of its technology in barracks.

In terms of negative attributes, the Telkonet solution is not as user friendly as wireless. Obviously, with wireless, one is completely removed from any data jack or source – essentially can just wander around with the service. In the case of powerline, the subscriber needs to be near some sort of electrical outlet to access the Internet – and so there is less freedom.

However, it can be argued that not too many people walk around their apartments just strolling on their laptop – and how long is it before they have to plug their laptop back in the wall because they are operating their antenna, surfing, and opening up documents. On average within a half hour, many people will shut down or plug in anyway. (Not to mention all of the wireless dead spots within a structure.) In addition, the connection speeds are superior over wireless – and every electrical outlet becomes an access point. Consequently, apartment builders can look at something on the order of savings of $1,200 a unit to avoid installing a wired infrastructure throughout a new structure. Instead with that amount of money, the construction company can put in crown molding, chair molding, three-tone paint, and some other options – providing the clear potential to generate more rent revenue.

Certainly one current limitation of the Telkonet offering is the amount of bandwidth provided. For Internet it is more than sufficient, providing easily five to ten megabits to every unit. With advanced chip technology that it will introduce, the actual throughput will increase to as much as 40 to 50 megs.

In DirecTV’s testing of IPTV on one-off units using the Telkonet solution it seems to work very well. The problem is that when an entire building is turned on, there is an inadequate amount of bandwidth for the application. Telkonet is working on figuring out how its product can integrate DirecTV’s IP system to supposedly allow for 50 to 100 users. Yet, even a plan with Telkonet going to 200-meg chips, and even in overlaying two or three of its systems in a building, one has to be skeptical about the ability to provide adequate quality for advanced television services.

Over the years, Telkonet has also been actively adjusting its installation techniques and

they have apparently been improving along the way. Yet, there is a tendency for the vendor along with the ISPs to get a little sloppy in hooking up. The building owners really need to make certain that everything is checked completely before they leave the

premises. For example, while the installation is happening, they should go to all of the extremities of the building to make certain that they are getting the correct throughput all the way to the very end. Obviously, this problem gets exacerbated if there are tenants already living there.

It is certainly a tall order for such a small company to have to be in the equipment business and to also be responsible for installation and maintenance. There are positive aspects to doing both with getting recurring revenue. Yet, Telkonet would probably love the luxury of just being in the hardware business – just concentrating on technology development. If a sufficient market develops, then large service providers might want to get into the game.

One piece of advice to Telkonet would be to expand its board of directors with some really prominent people in the telecom industry. The supplier appears to be weak in this area.

General Electric is definitely a potential buyer of Telkonet. The two are already

collaborating on joint development and sales efforts. Actually, it raises the interesting question of whether GE will look to further diversify its business in more of a telecommunications direction.