Despite slow US take-up of wired offices, UK property companies will forgo profits if they miss connectivity opportunities. By Bob Thompson
It is too early to judge whether connectivity can directly benefit landlords’ yields, tenants’ productivity or property values, but offices with high-bandwidth telecoms capacity is becoming an important area of growth.
The growth of wired property has, by technology standards, a long history. About five years ago, it became clear in the US that companies riding the internet tiger would require substantial telecommunications capacity. Improved internet function such as the ability to deliver richer images further increased the need for capacity. The scene was set for exponential growth in demand for bandwidth in office buildings.
Initially, companies would negotiate directly with a telecommunications service provider to obtain such services. However, the growth in demand for bandwidth presented an opportunity to the controllers of the physical space. Landlords could sit between the telecommunications utility and the building occupiers, buy in bandwidth at wholesale rates and sell it on to their tenants.
Capacity available to each tenant
Because the provision would generally be underused, the whole capacity could be available to each tenant most of the time. Consequently, tenants would get big bandwidth at low prices. Everyone could win – even the telecoms provider, which would benefit from the tariff charges on the increased throughput that would result.
This model seized the US about three years ago, and there was a rapid growth in hybrid companies created as communications providers to property. The building owner would sign up with one of these providers, which would install the necessary cabling and routing hardware in the building, sell broadband services to the occupiers and return a proportion of the revenue to the owner.
Though this model is still thriving in the US, it has failed to realise its full potential. Specialist providers, despite signing up for connection tens of millions of square metres of primarily office space, have failed to sell the service to most occupiers. Typically only between 25% and 30% of occupiers have signed up for the service so far.
Still a new idea
However, this is still a fairly new idea and there are several reasons that it has proved slightly more difficult to sell than expected. The model works best in a particular type of building – one let to a large number of occupiers and substantial in size (more than 10,000m2 in the US). The end sale is targeted at small and medium-sized enterprises, a notoriously fickle market.
In addition, many of the service’s potential users have existing contracts for telecoms, which may prove difficult to unravel. Finally, the main benefit to the occupier – more productive use of time – is hard both to visualise and to encapsulate contractually, and consequently difficult to sell.
As a result of this shortfall of end-users, the second wave of connectivity – the delivery of building-specific services to owners and occupiers – is proving slow to come. The selling point of these secondary services is keen prices achieved through demand aggregation, but fewer customers means less attractive prices and reduced benefits. Critical mass has yet to be achieved.
The UK has been slow to adopt the US model, although the rate at which occupiers here are connecting to the internet is growing exponentially.
Research undertaken by King Sturge and H+H Marketing over the past four years has revealed an increase of 230% in the rate of connection between 1999 and 2000 (see connectivity graph). Preliminary results of the 2001 connectivity survey indicate that this rate may have increased in the past year.
Unlike in the US, where occupiers have been slow to adopt the idea, in the UK it is landlords that have failed to take the initiative. British landlords, steeped in a bricks-and-mortar culture, see telecoms as a technology, not a business, opportunity.
The UK situation is also complicated by the legacy of monopolistic control over telecoms. The problem will be alleviated by the unbundling this year of the local loop – that part of the public network running from the trunk routes to individual buildings. BT is to relinquish control over this by the middle of 2001.
Another problem is the refusal of UK telecoms operators to publish details of their networks, which is akin to expecting drivers to use motorways but concealing the entrances and exits. This hampers any reasoned analysis of the suitability of particular buildings for connected uses.
As connectivity becomes increasingly important, it might seem that physical space is being superseded by its virtual counterpart. However, far from being a relic of the old economy, physical space is on course to become the ultimate portal.
Exploit customer traffic
Connectivity enables bricks-and-mortar companies to exploit customer traffic through physical space under their control and form useful digital relationships with customers. These companies can use their physical access to customers to deliver precisely targeted information in the form of either their own messages, or messages from those renting the point of contact.
For instance, airlines have a captive audience in the plane – the physical space there is under their control – but they can also gain access to their customers in the departure lounge, by negotiation with the airport operator that controls that space. They exploit this advantage to offer relevant services to their customers.
Connectivity allows businesses such as parking garages and shopping centres to create digital relationships with the customers passing through their space and generating additional revenue from this.
In general, these digital relationships are still limited by the restrictions of physical cabling. Even where high capacity is provided, it is usually still static – it can reach only fixed facilities such as information kiosks or point-of-sale terminals. Add the wings of mobile communications, however, and the idea begins to take off.
Mobile connectivity delivers a truly ubiquitous facility called an omninet. One example of this is found in Swedish car parks. Some car parks in Sweden now accept payment from a Sonera cell phone, which contains information about the customers of this physical space, including their names and when and how often they park. Car park owners can use the data to turn frequent visitors into monthly customers and to engage in dynamic pricing, charging more when the car park is nearly full and less when business is slow. Such a regime applied to serviced offices could be a neat idea.
For shopping centre operators, an omninet creates an opportunity to take over customer relationships previously owned by individual retail tenants.
Simon Properties, the largest retail mall developer in the US, gives some shoppers mobile devices that they can use to generate electronic wish lists or to order products for home delivery. Eventually, Simon will be able to track shoppers as they move through its space, feeding tenant retailers the purchase data they need.
In Europe, Unilever, for example, is developing a mobile recipe book that will be available on digital phones. Intended for use while shopping, the mobile tool suggests recipes and breaks them down into their component ingredients – showing their Unilever brand name, of course. This concept could be extended to interface with a space controller’s local network and provide personalised incentives based on preferences, location and proximity to the point of sale.
Bob Thompson is head of e-business at King Sturge
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US productivity |
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The 1995-2000 internet revolution has increased productivity substantially |
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Source:King Sturge |
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Connectivity index |
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By 2001 a thirteen-fold rise in the amount of connected office space is expected |
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Source:King Sturge |
