The document discusses Telkonet, Inc. (TKO), a company developing power line communication technology to deliver high-speed internet access. It provides an overview of the company's history and technology, forecasts significant revenue potential from partnerships with Anteon, Leviton, and Hughes/DirectTV that give access to new markets. It also analyzes Telkonet's competitive advantages in the hospitality industry and provides financial forecasts and valuation estimates.
1. Telkonet, Inc.
TKO (AMEX)
$4.12
April 19, 2004
BUY
Intermediate Term Target Price Estimates
Price Target Vs. LT Growth
Scenario 18 20 23
Optimistic $28.27 $31.05 $35.23
Base $17.81 $19.58 $22.23
Pessimistic $8.73 $9.62 $10.95
Quarterly and Annual EPS Reported and Estimated EPS
2002 2003 2004 2005
Mar -0.06 -0.08 -0.04 E -0.02 E
Jun -0.05 -0.12 -0.04 E 0.03 E
Sep -0.05 -0.09 -0.04 E 0.04 E
Dec -0.04 -0.06 -0.03 E 0.06 E
FY -0.22 -0.37 -0.15 E 0.12 E
FY 2006 2007 2008
EPS $0.43 $0.83 $1.46
(This report may not be reproduced.)
2. Cohen Independent Research Group, Inc.
VALUATION MEASURES Cash Flow Statement
Market Cap (intraday): 159.44M From Operations (ttm): -5.60M
Enterprise Value (18-Apr-04): 164.01M Free Cash flow (ttm): -5.73M
Trailing P/E (ttm, intraday): N/A TRADING INFORMATION
Forward P/E (fye 31-Dec-04): 0 Stock Price History
PEG Ratio (5 yr expected)¹: N/A Beta: N/A
Price/Sales (ttm): 1770.5 52-Week Change: N/A
Price/Book (mrq): 55.1 52-Week Change (relative to
S&P500): N/A
Enterprise Value/EBITDA (ttm): N/A
52-Week High : 5.74
FINANCIAL HIGHLIGHTS
52-Week Low 1.55
Fiscal Year
50-Day Moving Average: N/A
Fiscal Year Ends: 31-Dec
200-Day Moving Average: N/A
Most Recent Quarter (mrq): 31-Dec-03
Share Statistics
Profitability
Average Volume (3 month): 450,000
Profit Margin (ttm): N/A
Average Volume (10 day): 324,000
Operating Margin (ttm): N/A
Shares Outstanding: (pro forma) 38.70
Management Effectiveness
Float: 31.40M
Return on Assets (ttm): -183.65%
% Held by Insiders: 18.87%
Return on Equity (ttm): -2219.71%
% Held by Institutions: 0.08%
Income Statement
Shares Short (as of 8-Mar-04): 455.00K
Revenue (ttm): 94.00K
Daily Volume (as of 8-Mar-04): N/A
Revenue Per Share (ttm): 0.005
Short Ratio (as of 8-Mar-04): 0.779
Revenue Growth (lfy): N/A
Short % of Float (as of 8-Mar-04): 1.45%
Gross Profit (ttm): -11.00K
Shares Short (prior month): 101.00K
EBITDA (ttm): --6.45M
Dividends & Splits
Net Income Avl to Common (ttm): -7.66M
Annual Dividend: N/A
Diluted EPS (ttm): -0.388
Dividend Yield: 0.00%
Earnings Growth (lfy): N/A
Dividend Date: N/A
Balance Sheet
Ex-Dividend Date: N/A
Total Cash (pro forma): 18M
Last Split Factor (new per old)²: N/A
Total Cash Per Share (pro forma): 0.47
Last Split Date: N
Total Debt (pro forma): 0.45M
Total Debt/Total Cap (pro forma): 2.4%
Current Ratio (pro forma): 28.5
Book Value Per Share (pro forma): 0.46
3. Cohen Independent Research Group, Inc.
TABLE OF CONTENTS
THE COMPANY .......................................................................................................................................3
Company History ..................................................................................................................................3
Investment Highlights............................................................................................................................3
Recent News.........................................................................................................................................4
Wed, March 31, 2004........................................................................................................................................ 4
Mon, March 29, 2004 ........................................................................................................................................ 4
Tue, March 23, 2004......................................................................................................................................... 4
Fri, March 19, 2004........................................................................................................................................... 4
Tue, March 9, 2004........................................................................................................................................... 4
Thu, March 4, 2004........................................................................................................................................... 4
Mon, Feb 23, 2004............................................................................................................................................ 4
Wed, Feb 18, 2004 ........................................................................................................................................... 4
Tue, Feb 17, 2004............................................................................................................................................. 5
Mon, Feb 9, 2004.............................................................................................................................................. 5
Wed, Feb 4, 2004 ............................................................................................................................................. 5
Mon, Jan 26, 2004 ............................................................................................................................................ 5
Wed, Jan 14, 2004............................................................................................................................................ 5
Wed, Jan 7, 2004.............................................................................................................................................. 5
Mon, Jan 5, 2004 .............................................................................................................................................. 5
Mon, Dec 15, 2003............................................................................................................................................ 5
Marketing Telkonet Products – Recent News Announcements............................................................5
Two Huge Additional Markets Propel Telkonet to another Level ..........................................................6
The Products.........................................................................................................................................6
SCHEMATIC OF THE PLUGPLUSINTERNET™ SYSTEM ....................................................................7
THREE COMPONENTS OF THE PLUGPLUSINTERNET™ SYSTEM...................................................9
Government Regulations ....................................................................................................................10
Intellectual Property ............................................................................................................................10
Business Development in a $26 Billion Market...................................................................................10
Cost of Service....................................................................................................................................11
Home versus Commercial Use ...........................................................................................................11
Competition in the Commercial Marketplace ......................................................................................12
Competing in the Commercial Marketplace - The Hospitality Industry........................ 12
History of HSIA in the Hospitality Industry ...................................................................................................... 13
Wireless in the Hospitality Industry................................................................................................................. 13
Security in the Hospitality Industry......................................................................................................14
Usage of HSIA in the Hospitality Industry....................................................................................................... 15
Support Provided to the Hospitality Industry................................................................................................... 15
Business Models for Addressing the Hospitality Industry............................................................................... 15
Marketing to the Hospitality Industry............................................................................................................... 16
Market Size of the Hospitality Industry ........................................................................................................... 16
Primary Competitors in the Hospitality Industry.............................................................................................. 17
STSN............................................................................................................................................................... 17
Wayport........................................................................................................................................................... 17
Golden Tree Communications ........................................................................................................................ 18
How Telkonet Compares to Incumbents......................................................................................................... 19
Telkonet Installation ........................................................................................................................................ 19
Telkonet’s Initial Customers................................................................................................................20
Marketing to the Hospitality Industry...................................................................................................21
Management Team.............................................................................................................................21
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GROWTH ASSUMPTIONS ....................................................................................................................24
CASH FLOW ANALYSIS .......................................................................................................................24
LIQUIDITY AND LEVERAGE.................................................................................................................25
CAPITALIZATION...............................................................................................................................26
Capitalization – Debt....................................................................................................................................... 26
Capitalization – Equity .................................................................................................................................... 27
FORECASTS AND VALUATION ...........................................................................................................29
Bull Case.............................................................................................................................................36
Bear Case ...........................................................................................................................................36
CONCLUSION........................................................................................................................................36
ANNUAL BALANCE SHEET: TELKONET, INC. (TKO) .......................................................................39
ANNUAL BALANCE SHEET: TELKONET, INC. (TKO) .......................................................................40
QUARTERLY BALANCE SHEET ..........................................................................................................41
STATEMENT OF CHANGES IN CASH .................................................................................................42
STATEMENT OF CHANGES IN CASH .................................................................................................43
DISCLAIMER: ........................................................................................................................................43
DISCLAIMER: ........................................................................................................................................44
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5. Cohen Independent Research Group, Inc.
TELKONET, INC.
TKO $4.12 AMEX
April 19, 2004
We have re-issued our April 10th report and increased estimated earnings per share due to positive prospects in the
MDU and military markets.
THE COMPANY
Company History After extensive research and product testing for
three years, in January 2002, the company shifted its
Telkonet (TKO) has primarily been a development management emphasis from R&D to commercial
stage company, but has begun the transition to a development. The company has since demonstrated
revenue producing business armed with exciting the product’s robust capacity and decided to focus
disruptive technology. TKO is at an inflection point on marketing the company’s initial proprietary
of becoming a profitable growth company in the products.
intermediate future. The company has moved into
exciting giant sized market opportunities completing Investment Highlights
important strategic ventures with Hughes/Direct TV
- (DPV), Anteon and Leviton. TKO has developed a 1. The Company has developed a potentially
system that utilizes the existing electrical wiring disruptive technology for High Speed Internet
infrastructure in residential and commercial Access, using the existing electrical wiring in a
buildings to deliver Internet and telephony building for Internet access.
connectivity. The Company posted its initial
2. The Company’s technology can be applied to
revenues in the September 2003 quarter.
hotels, multiple dwelling units, commercial
In 1999, Telkonet Communications, Inc, was formed buildings, ships, using either 110V or 220V and
to develop applications for the emerging power line other industries. The technology can be applied
carrier technologies. In July 2001, TKO announced on a worldwide, international basis.
the completion of the initial product development
3. The thrust of the story is this: Telkonet has
phase of its proprietary communications system.
recently signed agreements with Anteon,
In August 2001, the company announced the Leviton and is in the process of finalizing its
performance of successful system tests in the agreement with Hughes/Direct TV. All three
Washington DC area. The Telkonet PlugPlus™ companies give TKO access to enormous new
Internet connectivity solutions were demonstrated in markets. Anteon provides access to the
a 28 unit residential apartment building and a 5-story military and government markets. Leviton
commercial office building. High-speed data provides access to the multiple dwelling unit
connections were successful whether measuring the (MDU) market. Hughes/Direct TV provides
basement outlets or the farthest receptacle on top access to the satellite-to-internet market
floors. worldwide. Separate from the hotel industry,
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we believe these additional markets can margins in the purchase business model will
generate $40 million in real revenues going offset the initial negative margins in the lease
forward. business model of the MDU and hospitality
markets.
4. The hospitality industry is installing High Speed
Internet Access (HSIA) for guest usage at an Recent News
increasing rate. We estimate that 20,000 of a
total of 45,000 hotels in the U.S. will offer HSIA Wed, March 31, 2004
to guests in five years. TKO does not charge an • Telkonet announces discussion of recent
installation fee. agreements with Anteon and Leviton in webcast.
5. The Telkonet system competes very favorably Mon, March 29, 2004
on price basis. Competitors all require an
• Telkonet and Leviton form strategic partnership
upfront installation fee. TKO requires none.
to deliver broadband internet access
Competitors charge $9,000 to $23,000 for a 100
room hotel for HSIA system installation, Tue, March 23, 2004
excluding the cost of rewiring.
• Telkonet and Anteon to provide power line
6. Standard installation time for the Telkonet communications solutions for the US Navy.
system is typically less than a day.
Fri, March 19, 2004
7. The Telkonet system competes favorably on an • Daniel L McGinnis resigns from Board of
on-going cost basis. Directors of Telkonet.
8. The Telkonet system allows a hotel guest using Tue, March 9, 2004
the Internet to move a laptop to any location • Telkonet listed by Broadband Properties
near an electrical outlet. Magazine as one of the ‘Companies to Watch in
2004.’
9. In the MDU market, we forecast a conservative
1.8% market share of the 2 million buildings Thu, March 4, 2004
with over 100 units in five years.
• Telkonet CEO Ronald Pickett discusses the
10. Our US government/military and satellite to Hughes VAR agreement, the AMEX listing and
internet industry projections are very private stock offering.
conservative. However, the company is
Mon, Feb 23, 2004
currently engaged in tests with the U.S. Navy
that if successful, could yield significant • Telkonet Chairman Pete Musser To Ring
revenues. These two markets are forecast to AMEX Opening Bell February 24, 2004
purchase equipment rather than lease.
Wed, Feb 18, 2004
11. Any improvement in the forecast for the • Telkonet, Inc. & UTEK Corporation Form
government/military and satellite to internet Strategic Technology Alliance
markets in the next two years will positively
impact earnings and cash flows. Positive
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• Telkonet On-Track with FCC's Broadband Over Mon, Jan 5, 2004
Power Line Initiative • Telkonet Deploys Test System Onboard U.S.
Naval Research Vessel
Tue, Feb 17, 2004
Mon, Jan 5 - 8:32am ET - Business Wire
• Telkonet Completes Private Placement for $12.8
million. Mon, Dec 15, 2003
• Telkonet's 'Outlet to the Internet' Total Service • Telkonet Ships Next Generation Of Product
Soon to Be Available Everywhere! Mon, Dec 15 - 9:00am
Mon, Feb 9, 2004
Marketing Telkonet Products –
Recent News Announcements
• Telkonet & Anteon Team-Up On High-Speed
Internet Pilot Program at Chicago Housing Telkonet is also negotiating with Value Added
Authority Resellers (VAR) that will market the PlugPlus™
system and manage the installation at the local level.
Wed, Feb 4, 2004 In February 2004, Telkonet announced a relationship
• Telkonet Now 'TKO' on Amex with Hughes whereby Telkonet will become an
authorized reseller of Hughes. Included in this
• American Stock Exchange Lists Common Stock
agreement is the co-marketing relationship with
of Telkonet, Inc.
1000 VAR’s that are approved by Hughes. These
Thu, Jan 29, 2004 VARS will be able to resell Telkonet solutions with
minimal training.
• Telkonet's President Makes Featured
Presentation At Friedland Capital's Undervalued The scope of this agreement is global in nature and
Equities Conference enables the VARS around the world to offer a HSIA
• Telkonet Moving to Amex solution with a satellite connection. The global
reach will primarily be in three regions, North
Mon, Jan 26, 2004 America, Europe (Spain to Ukraine) and India.
• Telkonet Announces Senior Noteholders Elect to
Telkonet has also formed a relationship with
Convert $2.5M to Equity
Leviton, the largest electric component manufacturer
Wed, Jan 14, 2004 in North America. The Leviton agreement provides
for the future development of manufacturing
• Telkonet Patents 'Power Line Telephony
processes to lower the cost of the Telkonet products,
Exchange
and provide Telkonet with access to 7,000 licensed
electrical contractors. These electrical contractors
Wed, Jan 7, 2004
will be the VAR that installs and services the
• Telkonet Appoints Albert Diehl as Vice Telkonet solutions. Leviton intends to manufacture
President and ship Telkonet products to their network of
• Wed, Jan 7 - 1:03pm ET - Business Wire electrical contractors for installation. A division of
Leviton, the Leviton Integrated Networks (LIN)
focuses on the multi-dwelling units (MDU)
marketplace. LIN has 120 sales people who will
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market Telkonet technology products into major with Anteon is very valuable in addressing a
urban areas. potentially large market for Telkonet. The Telkonet
equipment displayed its capabilities in a live setting,
The relationship with Anteon for bringing HSIA to by providing a viable low-cost solution to the
public housing is in its initial stages. Anteon is challenges of retrofitting a secure HSIA by using a
currently working with the Chicago Housing ships existing electrical infrastructure. We
Authority to install Telkonet technology in public anticipate that orders for TKO equipment on US
housing structures in the Chicago area. Anteon is Navy ships are forthcoming. Aircraft carriers are
also a major electronics contractor with the US floating cities of 5,000 plus personnel. Middle level
Military. After testing Telkonet’s products on Navy officers and all of the lower level personnel currently
vessels, Anteon has entered into an agreement to share access with many others due to wiring
offer Telkonet solutions to the military. Anteon constraints onboard. Anteon will be addressing
currently has a large contract to provide ongoing networking solutions for onshore facilities.
support for network services for the US Navy.
The agreement with Hughes opens up the
Two Huge Additional Markets international marketplace by allowing internet
Propel Telkonet to another Level access into a building’s electronic infrastructure via
satellite access. The ProductTelkonet has developed
The recent marketing agreements with Leviton, a revolutionary method for consumers and
Anteon and Hughes open up large markets for businesses to access the Internet. The power line
Telkonet. We believe the combination of these communications (PLC) technology utilizes the
markets will add approximately $40 million in real existing electrical wiring in a building to bring
revenues during the intermediate period of time. Internet access throughout the building. This
patented technology is a unique system that delivers
The LIN sales force will focus on the MDU market
broadband Internet access without any re-wiring.
for Telkonet products. This sales force has sold the
The PlugPlus™ system converts every power outlet
CAT5 wiring option and is knowledgeable of the
in every room to an access port of a high-speed data
market. In the US there are over 30 million
network. It creates a transport system that allows all
apartment units, of which 10 million have 100 units
Internet functions including email, browsing, access
or more. LIN salespeople will initially address the
to company networks via the Internet and creation of
large unit market place first. The Company
Virtual Private Networks. The data and high-speed
anticipates launching marketing efforts in two major
Internet access is reliable and secure.
metropolitan areas. In this market, TKO will
provide the Gateway™ and Coupler™ products
The Products
without charge and collect a $200 per month
building fee along with a monthly fee for the iBridge There are three components to Telkonet’s
modems. The building or the ISP providing the PlugPlus™ system that create an Internet delivery
service will only have to pay for the electricians time system. They are the PlugPlus™ Gateway, the
to install the equipment in order to offer HSIA to all PlugPlus™ Coupler and the iBridge. The
tenants. PlugPlus™ Gateway connects to an existing
hardwire network using an embedded 10/100
The military market is very large and demands those Ethernet port and distributes the data to the
who are experienced in it to succeed. The agreement
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PlugPlus™ Coupler via the powerline carrier (PLC) The PLC communication between the Telkonet
interface. The PlugPlus™ Coupler distributes the Gateway and the Telkonet iBridge is based on a set
PLC signal into the electrical circuit breaker of the of proprietary protocols. The Ethernet
building. The iBridge is plugged into an electrical communication protocol leading into the Gateway
outlet and takes the PLC signal and converts it to an and out of the iBridge are standard communication
Ethernet signal for each computer throughout the protocols.
building.
SCHEMATIC OF THE PLUGPLUSINTERNET™ SYSTEM
The Gateway is a self-contained unit that accepts The backbone of the Gateway is a fast
data from an existing network on one port and communications processor running a series of
distributes it via the second port. The most proprietary applications under Linux. Other
common configuration is the 10BaseT Ethernet on Gateway/Coupler configurations have a PLC to PLC
one side and power line carrier PLC on the other. component where more than one coupler is required.
This configuration provides bridge data around a
physical block to the signal that commonly occurs
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when an old section of a building does not share the is far less than the space required by a server and a
common wiring of a new section. A third Gateway router. A coaxial cable connects the two and may be
configuration is a PLC to wireless access point very long since there is virtually no attenuation on it.
(WAP). This configuration provides immediate
line-of-sight wireless access in an open space such The iBridge-to-Gateway architecture is encrypted
as a large office or hotel lobby. for security. The default security does not allow one
Internet user in the same building to see other users
The PLC signal generated by the Gateway can be on the network. Communication to other users via
directly coupled into low voltage wiring via the the Internet, i.e. email, is always available. A
power cord of the Gateway. The PLC signal may network in a building may also be configured to
also be routed to a remote injection point via a allow each user to see other users without going
coaxial cable. This allows the Telkonet solution to through the Internet. This essentially creates a
address the medium voltage and multi-phase virtual LAN or VLAN. There are over 1000 options
environments found in commercial buildings. in configuring VLANs. This customization allows
for the security required when more than one entity
Large hotels or office buildings typically have exists within a building and each desires their own
several electrical panels. One Coupler is required LAN.
for each electrical panel, and each Gateway can
drive six couplers. Recent tests indicate that one A suite of software applications on the Gateway
Gateway and one Coupler were able to deliver performs communications and system management
Internet access to all outlets spanning 26 stories of functions. The firmware of the Gateway and the
an office building. iBridge can be remotely updated and managed.
This allows for integrity of a VLAN while the
The PlugPlus system is designed to operate in internal configuration of a building may change.
commercial environments that experience electrical That is, as one office tenant expands and requires
noise, electrical load imbalances, transformer more space, the integrity of their VLAN can be
interference and unpredictable changes in maintained without additional wiring.
attenuation conditions (signal strength). The
PlugPlus system implements frequency division The Gateway can network with dozens of
multiplexing over a spectrum of 77 communication PlugPlusInternet Modems and provides a scalable,
channels. Interference and noise that could cause a robust solution for the commercial marketplace. The
loss of data are continuously monitored. When PlugPlusInternet Modem is the iBridge. This
interference is detected on a channel, that channel is modem has a standard 110V plug on one side and an
shut down until interference is eliminated. Internet Ethernet RJ-45 connector on the other. Once the
Access is continuous, reliable and seamless. Typical Gateway and Coupler are installed, a new Internet
noise sources include fluorescent and halogen lamps, user needs only to plug the iBridge into an outlet and
brush motors (garbage disposal) and dimmer connect the computer to the Ethernet port on the
switches. Additionally, amateur band radio iBridge for an Internet connection.
transmitters and switching power supplies can create
electrical interference. The Gateway is The current generation of Telkonet PlugPlusInternet
approximately the size of a cigar box, only thinner, system delivers data at speeds in excess of 7 mega
and the Coupler is approximately 4” x 4” x 3”. The bits per second (Mbps), with burst speeds of 12.6
small size poses minimal installation difficulty, and Mbps. This compares to dial up speed of 56 Kbps, a
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typical DSL line of 200 Kbps to 500 Kbps and a determining factor is the speed provided from the
typical cable modem at 300 Kbps to 1Mbps. T1 Internet Service Provider (ISP).
lines typically operate at 1.5 Mbps. The
PlugPlusInternet™ system can sufficiently deliver
Internet access at any required speed. The
THREE COMPONENTS OF THE PLUGPLUSINTERNET™ SYSTEM
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The incoming broadband signal (DSL, T1, Satellite hardware developed by Telkonet along with other
and Cable Modem) connects to the Gateway. The associated equipment.
Gateway then connects to the building’s electrical
Additional patents have been applied for the past
panel, and distributes access to the Internet provided
several years for different product components of the
by the ISP throughout the existing network of
PlugPlusInternet™ system. We expect that several
electrical wires within the building. Moving the
additional patents will be granted to Telkonet over
location of a PC, server or printer is accomplished
the course of the next two years. The Coupler is
by simply moving the PlugPlusInternet Modem to
designated as ‘patent-pending.’
another electrical outlet. No additional wiring is
required.
Business Development in a $26
Government Regulations Billion Market
The Federal Communications Commission (FCC) The Company’s products are designed to deliver
permits the operation of unlicensed digital devices high-speed Internet connections for minimal costs in
that radiate radio frequency emissions if the commercial, hospitality and multi-dwelling building
manufacturer complies with certain equipment markets. Typical customers will include office
authorization procedures, technical requirements buildings, hotels, schools, shopping malls, the
marketing restrictions and product labeling. military, condominiums and apartment buildings.
Telkonet’s Gateway PLC products have been The demand for broadband Internet access from the
verified to meet FCC requirements for Class A business traveler and multi-dwelling market
digital devices from an independent FCC-certified continues to grow. According to industry analysts,
lab. The device may be marketed for commercial the market for home and building networks will
use. Any future products will require testing. represent a $26 billion market worldwide for the
next four years.
The FCC has also been fielding public comments
regarding allowing Internet access over the Management is initially focusing on the commercial
electricity power grid. We expect more markets, targeting the hospitality and MDU markets
announcements will be forthcoming this year. with a direct sales force that currently numbers
twelve. Telkonet has formed relationships with a
Intellectual Property select few national value added resellers (VAR) to
market the PlugPlusInternet™ system. Such
The company has applied for patents to cover the relationships have already extended Telkonet’s reach
intellectual property embedded in the Company’s into the multi-unit dwelling, government, and
products. Telkonet recently received its first patent commercial markets.
that covers the ability to transmit and distribute high
speed digital data and voice over existing electrical As an unknown company with a potentially
power lines of the premises. This patent is very disruptive technology, Telkonet has begun an
significant in that it covers the comprehensive advertising and telemarketing campaign to spread
system invention. This patent utilizes PLC and awareness of its products and services. Articles
Internet protocol in conjunction with Voice-Over- have appeared in certain select trade magazines
Internet-Protocol (VOIP). The patent covers the covering the hospitality and MDU markets. These
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articles describe initial users’ success with the including ongoing maintenance and support. The
Telkonet system. hotel may elect to include the ISP service for an
additional $200 per month. The slightly higher fees
International markets are a large opportunity. for the hospitality industry are justified by the
Access to the Internet is restricted in some continually changing guests that may require
developing countries by the limitation of the support. The iBridge modems are priced at $173
infrastructure of the basic Public Service Telephone each or $8/month for 24 months.
Network. Antiquated pricing mechanisms for per-
minute usage on phone lines, creates an opportunity For a hotel, MDU or business tenant in a
for Telkonet products. The end user bypasses the commercial building, there is no disruption in
per-minute charge when Telkonet products are business activity during the installation process.
implemented in conjunction with a 2-way satellite Implementation is quick and is far less expensive
link, dedicated landline or fixed wireless access. than adding dedicated wiring or installing wireless
Additional opportunities exist in Europe, South systems.
America, Asia and the Pacific Rim where the
Internet is available. Home vs. Commercial Use
Another large market possibility for Telkonet is the A few companies offer PLC based service for the
initiation to offer broadband over power lines (BPL). home. Linksys and Netgear have planned or
The FCC is taking steps to allow electricity utility announced Powerline Communications products that
vendors to offer BPL service. Telkonet’s proprietary are compliant with the HomePlug Alliance. The
solutions can bring high speed Internet access to HomePlug Alliance was formed to form standards
many users who require the “last mile” connection and develop a chipset that enables PLC products for
from a high speed line. the home. Both Linksys and Netgear are focusing
on products for the home and residential
Cost of Service marketplace. The presence of Linksys and Netgear
in the residential marketplace provides a validation
The Company has experimented with different of the viability of the powerline communications
revenue plans and has settled on a total solution plan market.
where the customer pays nothing up front and incurs
a monthly fee for a minimum of three years. Telkonet is focused on the commercial marketplace.
Telkonet incurs the cost of installing the equipment. Commercial needs differ from residential in that
Most standard installations can be completed in less commercial users require heightened security, the
than a day. More difficult ones may take a full day ability to connect a large number of users, support
or slightly more due to a difficult configuration. In for greater distances and enhanced work
the MDU industry, the customer pays $195 monthly management. In the residential PLC solution, all
maintenance and support fee with a minimum three nodes communicate with each other. In commercial
year contract. The per modem monthly fee is $6.75 applications, software provides the isolation and
in the first year, $5.75 in the second and $4.75 in the security in the network. The driver power and
third year. receiver sensitivity are also improved to increase
bandwidth throughput performance for commercial
In the hospitality industry, the minimum three year users.
contract provides for a $295 per month service fee,
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14. Cohen Independent Research Group, Inc.
In a commercial setting, a more powerful Gateway coverage. Wireless also is inherently less secure
manages all the traffic to the Telkonet iBridges. The since other users can intercept the radio frequency
PlugPlusInternet™ system is scaleable to hundreds used. Telkonet’s PlugPlusInternet™ system can
of users. Proprietary software enhancements have interface with a wireless system and drive the
extended the Telkonet system reach to meet the backbone of the wireless installation.
needs of a broad array of building configurations.
The PlugPlusInternet™ system offers a robust Competing in the Commercial
solution that allows the formation and alteration of Marketplace - the Hospitality
several virtual private networks (VPN) within the Industry
same building.
Of the several markets the Company is addressing,
Competition in the Commercial we have analyzed the hospitality market for several
Marketplace reasons. The hospitality industry is less fragmented
than the commercial or MDU market. Secondly,
The markets Telkonet is targeting, hospitality, there is data available that assist in assessing
MDU, commercial and government all have Telkonet’s prospects for revenue growth. Most
incumbent competitors. The competitive landscape important, industry participants are eager for high
is very fragmented with numerous ISPs. Value speed Internet access (HSIA). Several companies
added resellers (VAR) service the diversity of have already established themselves as the leaders in
buildings that exist across the U.S. Regardless of offering HSIA to the hospitality industry. The
the specific market, Telkonet’s methodology to following discussion of the hospitality industry,
distribute Internet access throughout a building however, does not diminish the enormous potential
competes with the incumbent separately wired of the Military, MDU, satellite and internet markets
network technology. worldwide.
Traditional high speed wiring, known as CAT5, is The hospitality industry is unique in that there are
the coaxial cable that is a separate network within a frequent connection problems due to the constant
building. It can be expensive and time consuming to turnover of users (new hotel guests daily), which
install. It is certainly disruptive to the buildings creates servicing issues. Users also require secure
tenants and guests. After installation, Internet access access to external corporate networks. Network
is physically limited to areas served by the wall jack. configurations do not require much flexibility after
Electrical outlet access to the Internet provided by installation, since VPNs will not be established
Telkonet improves flexibility for furniture among guests. Hotel management functions,
reconfigurations over time. however may desire a VPN.
Wireless solutions also may be a competitive threat. These requirements place less demand on Telkonet’s
Wireless Internet connections require a wireline product features than a commercial building with
connection point to the network, which can be time tenants whose changing business demands create the
consuming to install. Wireless solutions must also need to alter a VPN. Customer servicing
be engineered to address the unique characteristics requirements, however, is high due to guest
of the building, such as footprint and construction turnover.
material. Steel and concrete demand a high
concentration of access points to ensure adequate
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15. Cohen Independent Research Group, Inc.
History of HSIA in the Hospitality Industry all of Wayports’s customers are charging for HSIA.
Wayport focuses on the high end of the hospitality
The history of offering HSIA in the hospitality
industry. Golden Tree Communications, which
industry provides insight into user demand and
focuses on both the high end and the middle level
business models that have worked. Five years ago,
hotels, indicates a different trend. Rein Norma, VP
HSIA had been considered an amenity for hotel
of Sales for Green Tree indicates that more hotels
guests that would compete with entertainment
overall are moving towards offering HSIA at no
services such as Video on Demand (VoD) and Pay
charge, while some hotels have a minimal additional
per View movies (PPV). More business travelers
charge.
are now demanding HSIA services because HSIA
provides more content and access to corporate Business travelers have been specifying they will
networks. The strongest players in the VoD and only stay at hotels with HSIA since their more
PPV market had the opportunity to become complex applications (CRM, PowerPoint, VPNs)
dominant in offering reliable HSIA, but the focus on require high speed connections. Generally, HSIA is
VoD and PPV allowed others to dominate in the becoming a free amenity in the Limited Service and
HSIA market for the hospitality industry. The Extended Stay type hotels. HSIA has been built into
market leaders in the HSIA market have a focus on the price of the room. The full service hotels cater to
HSIA exclusive of VoD and PPV. a less price sensitive guest and HSIA is typically
treated as an amenity, similar to local telephone
The original players in the HSIA market within the
calls.
hospitality industry were Case Internet (CAIS),
Sweet Technology (now STSN) and Wayport. There are three general products available to the
CAIS was a Washington based ISP which resold T1 hospitality industry. Those hotels with CAT5
lines to office buildings, multiple dwelling units and (coaxial cable) wiring can offer the highest access
hotels. During the dotcom era, each of these firms speeds generally available, the T1 line. All new
were able to raise significant funds. The business Marriott and Hilton hotels were built with T1
models for each were similar: install the equipment capability in the past few years. Guests plug the
at cost and share in the revenues. In 2001, CAIS Ethernet connector directly into the wall and turn on
was bankrupt and Wayport purchased its hotel their browser. Older hotels use CAT3 wiring, the
equipment. two twisted pairs for plain old telephone service
(POTS). CAT3 wiring is limited to offering DSL
The primary flaw in the similar business models was
service. For the DSL over CAT3 wiring, a modem
the long term trend for the hospitality industry to
is required in each room to separate out the high
offer amenities for free to attract guests. According
frequency DSL from the low frequency telephone
to Dwight Kling, Manager of Business Development
service. The third offering is wireless.
at Wayport, the largest HSIA provider offering
amenities for free changes with the competitive Wireless in the Hospitality Industry
structure of the hospitality industry. After 9/11/01,
occupancy rates in the hospitality industry declined Many hotels are interested in wireless service. The
dramatically. This heightened competitive initial impression is that wireless installation is
pressures, causing HSIA offerings to be given away. inexpensive since no wires need to be installed. The
With occupancy rates now back to the level of pre- reality is that many access points need to be wired.
9/11, fewer hotels are giving HSIA away. Virtually
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16. Cohen Independent Research Group, Inc.
A typical old hotel with much concrete and steel in wireless access points may be so large due to the
its structure will require many access points. architecture, that the cost is prohibitive.
The number of Wi-Fi enabled laptops is low. It is In a combination setting, wireless is available to
estimated that 5% of all laptops and 15% of frequent hotel guests in the lobby and conference areas,
business travelers have Wi-Fi enabled laptops. This whereas wireline is available in the guest rooms and
is rapidly changing, however. Most laptops conference rooms. This mixture of services is more
currently sold are Wi-Fi enabled. common in high end hotels and enables the non-
guest visitor or conference attendee to have HSIA.
Advertising by Intel has brought the public attention Billing for the non-guest wireless user varies by
to recognizing the possibility of wireless vendor. The common theme is to have a daily
connections to the Internet. Service quality is charge that can be prepaid at a discount. For hotel
another matter. Just as digital cellular phones are guests, wireless access is free when the wireline
less reliable than wireline phones, wireless Internet service is used in the guest room.
connections can leave the user frustrated by data
transmission interruptions. Nonetheless, hoteliers are Security in the Hospitality Industry
interested and according to Green Tree,
approximately half of new installations are wireless. Security is a primary issue in installing HSIA. Port
80% to 90% of new installations contain wireless as level security is that level of security that maintains
a component. the integrity of each individual computer connected
to the building’s network. This means that someone
The high incident of wireless installations for Green in room 101 is secure from a hacker in room 102.
Tree may be due to their business model. Green Wireless access inherently compromises this.
Tree does not focus on revenue sharing, but allows Another security level occurs when a guest desires
the hotel to keep all ongoing revenues from hotel access into their company’s VPN. At this level, the
guests utilizing HSIA. The trade-off for the hotel is network provider needs to understand the different
a higher installation cost. The installation cost for VPNs that allow secure access. For VPN access, the
wireless is typically half that for a CAT3 based DSL hotel also needs to have IP addresses available.
installation. The low entry cost may be very These are provided by the Internet Service Provider
attractive for a hotel uncertain of usage rates. (ISP) and can be managed by the vendor managing
the HSIA network in the hotel. This can be an
Wireless is primarily viable in open spaces since important consideration for the hotel since the hotel
building structures can limit the wireless connection. will pay the ISP for a bank of IP addresses. When a
Numerous wireless receptors are required to make group of HSIA users comes to the hotel, it is
all spaces accessible to Wi-Fi Internet access, and imperative that the hotel has enough IP addresses
may be cost prohibitive in older buildings. Steel and available. Otherwise, guests will complain about the
concrete are barriers to the wireless radio signal. HSIA that does not perform as it should.
Adding Wi-Fi to public areas allows the hotel to
enable Internet access to visitors attending Wireless access presents additional security issues
conferences during the day at the hotel. In newer that may not be apparent to the user. The wireless
buildings the cost of installing wireless is far less connection uses radio waves that are easily
expensive than a CAT5 T1 speed installation. In intercepted by a hacker. Some corporate VPNs will
some hotels, primarily older ones, the number of
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17. Cohen Independent Research Group, Inc.
not allow a user in that is using a wireless but may not be available everywhere. T1 lines are
connection. typically $600 - $700 per month but may be up to
$1000 per month. A fractional T1, which is close in
Usage of HSIA in the Hospitality Industry speed to a DSL, can cost $500 per month. An
annual software license fee may be an additional
HSIA usage rates have increased dramatically in the
$300 to $400 per year for the hotel regardless of
past few years. In 2002, a 3% to 5% usage rate was
size.
typical with a peak usage up to 20% of occupied
rooms. All vendors quote a 10% usage rate or
Business Models for Addressing the
higher. Green Tree quoted a 15%-20% usage rate in Hospitality Industry
hotels that have a high concentration of business
travelers. A few hotels average 30% to 40% per day There are two general business models that are
and peak at 50% to 70% usage. As occupancy rates employed. The most frequently implemented model
improve and the economy continues to expand, it is is a revenue share model. The vendor installs the
clear that the business traveler is demanding an equipment at close to cost and participates in the
HSIA connection. In the past year, surveys of revenues generated by HSIA usage. Revenue
business travelers have indicated that HSIA was the sharing is negotiable but averages a 50:50 split of
most preferred amenity at a hotel. Now that it is revenues between hotel and network vendor. Most
becoming more widely available, the business revenue share agreements specify a range for the
traveler is using the HSIA more extensively with daily HSIA charge to the guest. Cost to the guest is
CRM and PowerPoint applications and to access typically $9.95 per day.
their company’s VPN.
Maintenance and on-going technical support is an
Support Provided to the Hospitality Industry additional expense for the hotel, which can total $5
to $10 per room per month. In the revenue sharing
Hoteliers are in the hospitality industry. They are model, the hotel can make a small profit while
not in the Internet connection business. Technical providing a service that more guests require. If the
Internet connection problems for a late arriving hotel decides not to charge the guest, the hotel is still
guest needs to be addressed. Frustrating computer liable for a minimum payment to the network
problems attributed to the hotel’s connection can vendor. The revenue share business model provides
cause the customer to search for other hotel options incentive for the hotel to charge guests for HSIA
on return visits. The top three vendors offer service.
24/7/365 service by phone for hotel guests. The top
three vendors charge $3 to more than $7 per room Another business model requires higher upfront
per month for this service. installation costs. The hotel pays for the equipment
installation which would include a profit to the
A local Value Added Reseller (VAR) is typically vendor. The hotel does not share any revenues with
used for on-site hardware service. This will cost the vendor. This provides the hotel with flexibility
from $100 to $300 based on the type of response the in offering amenity discounts to groups without
hotel wishes to have. The cost of the ISP line can incurring an additional cost to the HSIA provider.
vary. For a hypothetical 100 room hotel, this will Maintenance and support fees are required as quoted
range from $250 to $1000 per month for the ISP above, combined with the monthly charge to the
connection. DSL lines can cost $250 per month, ISP. The network vendor may also manage the ISP
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18. Cohen Independent Research Group, Inc.
vendor relationship for a fee, which transfers all Market Size of the Hospitality Industry
network problem-solving to the vendor.
There are approximately 45,000 hotels in the U.S.
Marketing to the Hospitality Industry The vast majority of these, approximately 70%, are
120 rooms or less. The top three HSIA vendors
Marketing to the hospitality industry can be a long claim a total of 2,000 hotels as customers, and it is
sales cycle. For the chain hotels, the vendor must estimated that smaller players may add another 500
first receive approval from the holder of the Brand to at most 1,000 more hotels with HSIA.
name. This may take some time and does not ensure Competitive forces are requiring the HSIA
that any hotel will purchase the equipment. Once installation to increase dramatically.
approved by the brand name parent, the franchisee is
free to select from the approved list of vendors. Rein Norma of Golden Tree Communications
believes that 20% of current installations are “good
Most chain hotels are owned by franchisees and may to stay” with current vendors and another 20% will
be managed by a separate management company. be replaced. The remaining 60% are not up for
The owners and managers must agree on the vendor renewal for another year or more. Although this
selected. Once approved by the brand parent, it may data is somewhat speculative, it originates from the
be several months to a year before a hotel decides on V.P. of Sales of the fastest growing HSIA service
a particular vendor. Long term relationships are provider who has been with two of the top three
very important, and a franchisee may decide to use vendors in the industry during the past several years.
the service that a competitor is using because of the Assuming that a total of 3000 hotels have HSIA
vendors reputation. Cost is not always the deciding capabilities, this means that 600 hotels will most
factor. Service and a good guest experience are likely change vendors in the next 18 months.
vital. A lower cost service that causes some
customers grief is not acceptable. Over the next two years, the market is expected to
grow at a rapid pace. The technology has now been
Since many hotels have tried to implement HSIA proven to be profitable for the hospitality industry
service over the past several years and have had and HSIA is in demand by business travelers. Of the
varying degrees of success, the hoteliers’ level of 45,000 hotels in the U.S., it is estimated that 30,000
sophistication is increasing. The initial three to five may eventually install HSIA. Some hotel chains are
year contracts are going through their renewal phase mandating their owners to implement HSIA in a
in the next few years. Hotel management has relatively short time frame. Competition for guests
generally created a set of criteria necessary for the will cause other hotel chains and independents to
next contract period. Security, guest satisfaction and install HSIA. If it takes five years for 30,000 hotels
service will be more closely monitored. to install HSIA from a base of 3,000 already
installed today, the industry will experience a 58.5%
Most companies market with a two tier approach.
compound annual growth rate. If it takes 10 years,
The small direct sales force services the national
HSIA adoption will grow at a 25.9% rate. Taking
accounts and the indirect value added resellers
into consideration the 20% of current installations
(VARS) work directly with the hotels when
that will be replaced, the growth rate for new HSIA
installing or providing day to day assistance.
installations becomes 65.7% and 28.7% over a five
and ten year timeframe, respectively. We believe a
25% to 30% growth rate for HSIA adoption during
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19. Cohen Independent Research Group, Inc.
the next five plus years is conservative. We expect helpful in an environment where firms may hold the
the growth to be much higher in the next three years. local network operator liable for significant
problems.
Primary Competitors in the Hospitality
Industry STSN has account managers in all first tier and
many second tier cities. These account managers
There are three main competitors in the HSIA
can train the General Managers and Sales and
hospitality industry. Wayport, STSN and Green
Catering staff in handling Group Event questions
Tree Communications. The three are profiled as
involving technology. The local Account Manager
follows.
is the single point of contact for the hotel, whose
STSN purpose is to drive awareness of the hotel’s HSIA.
Marketing materials are available for the front desk,
STSN currently has 600 hotels installed and/or under the elevators and the in-guest rooms.
contract, ranging from 150 rooms to 1100 room
hotels. STSN has a CAT3, a CAT5 and wireless Wayport
solution. STSN claims to have the best security,
Wayport, Inc is currently the largest provider of
best diagnostics and support. STSN can
HSIA to the lodging industry, with 740 hotels
troubleshoot the hotel’s switches and routers
installed or under contract. Wayport is also one of
remotely.
the largest providers of Wi-Fi in public areas,
STSN has received funding from APV Technology focusing on airports. Usage rates for HSIA are
Partners, BankOne, First Media ST Holdings, Intel, increasing from 3% in mid 2002 to 10% to 12%
Marriott International, Third Coast Capital, Thom recently.
Vest, TransAmerica Technology Finance,
Wayport is a private firm with venture capital
VantagePoint Venture and Communication Partners,
investments from INVESCO Private Capital, Stevin
and Venture Frogs Fund.
Rosen Funds, New Enterprise Associates, BA
Most guests using HSIA are business travelers for Venture Partners, Lucent Venture Partners, Trellis
whom security is a big issue. STSN has considerable Partners, GC Technology Fund, Sanders Morris
experience working with VPN managers and Harris and Star Ventures.
providing customer support. Guests find the system
Wayport offers three types of HSIA systems: A
easy to use. Technical support is 24/7 for both the
fully digital system that requires CAT5 wires and
guest and hotel staff. The network easily interfaces
supplies a T1 connection, a VDSL system which
with corporate Virtual Private Networks (VPN).
runs over CAT3 wires and requires a modem in each
Gwen Cudero explained how STSN’s experience room, and a wireless option. Wayport indicates the
indicates that security is a critical issue. It is wireless Wi-Fi system receives a lot of press but is
rumored that Starwood Properties had to compensate not frequently deployed in hotels. Despite being one
KPMG for the impact of a virus that attacked the of the leaders in Wi-Fi, Wayport believes issues
laptops of consultants and caused significant around the construction materials, billing and the
downtime. STSN has had their system cost of the “Wireless Bridge” make Wi-Fi a good
independently tested for hackers, viruses and other choice only for certain architectural types of hotels.
security issues. The A+ grade received is very
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20. Cohen Independent Research Group, Inc.
Wayport uses the Revenue Share business model Golden Tree uses the investment business model
where equipment installation is done at cost. where the hotel invests in the equipment and keeps
Wayport collects a fee of $7 to $7.50 per room per all revenue generated from the HSIA service. An
month for repair, training and technical support. average installation costs for a hypothetical 100
Maintenance is additional. The revenue share is room hotel is $23,000 without re-wiring. A wireless
typically a 50:50 split with the hotel with a solution would on average cost $12,000 assuming
recommended price of $9.95 per day. Installation the building configuration does not require an
costs range from $90 to $180 per room or $9,000 to enormous amount of receptors. On an ongoing
$18,000 for a 100 room hotel. Dwight Kling of basis, hotel operators pay for the ISP line, which is
Wayport quoted that a typical hotel will have 65% standard for any business model. Green Tree will
occupancy and a 10% to 12% usage rate. manage the ISP along with IP addresses for
approximately $1,000 per month, which would
Hotel employees who market to conferences include the cost for the ISP service. Support is
typically need training to sell high speed Internet and $3/room/month and software license fee is $360 per
video conferencing. Wayport trains hotel year. Contracts for support, ISP management and
employees, creates marketing materials and can help software license may be separate and are 1 to 5 years
hotels close deals. Wayport has been performing in length. Maintenance and support are typically one
this function for its client hotels and has 30 people year contracts while ISP management is typically
on staff dedicated to assisting hotel employee gain one year contracts. Green Tree offerings are a full
more conference business. Wayport has service turnkey services with 24/7/365 service and onsite
personnel in major cities for service. repair.
Golden Tree Communications Green Tree attributes their phenomenal growth rate
to how their business model makes more sense for
Golden Tree Communications (GTC) has over 600
the hotel. The hotel can manage its revenue stream
hotels installed with HSIA. Two years ago, GTC
with more flexibility when there is no revenue share
had only 50 installations. In the past two years,
requirement. It may offer free HSIA to some guests,
GTC has been the fastest grower of the top three
or choose to make it free to all guests and raise room
HSIA providers. GTC is a privately held company
rate across the board to compensate for the
that previously was a subsidiary of BCM Advanced
additional amenity. When usage rates were in the
Research, a private company that manufactures
mid to low single digits, the revenue share model
printed circuit boards. Golden Tree has three
made more sense to hotel operators. Now that usage
product offerings, T1 line speed access, DSL and
rates are consistently in the 15%+ range for Green
Wireless.
Tree clients, hotels benefit financially by not sharing
The GTC solutions are based on Cisco routers and HSIA based revenues. The risk of installing
switches with GTC proprietary software interfacing equipment has decreased with the increase in usage
with the router and switch software. Solutions to from guests. The payback for the investment is
software problems are downloaded to all hotels. easily achieved in 14 months. This assumes a $10
Green Tree has marketing agreements with Intel and guest fee for HSIA, 65% occupancy, and a 12.3%
the Centrino chip. average usage rate. The hotel will collect $29,200 in
the first year for a hypothetical 100 room hotel.
Expenses would be $23,000 for installation, and
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21. Cohen Independent Research Group, Inc.
$700 to $1100 per month for maintenance, support, The revenue share program could be more beneficial
ISP service, and software license. to the hotelier if they consistently charged for the
amenity. This is typically done only at the high-end
Green Tree markets through 8 sales people calling hotels, where guests are willing to pay extra for
on large national accounts and through many value additional amenities. In the vast majority of hotels,
added resellers (VAR). The installation force of 30 where customers exhibit some price sensitivity,
people works with the local VAR. A smaller hotel HSIA will most likely be offered for free due to
of 100 rooms can be installed in a day. The current competitive pressures. Hotel rates may increase as a
installation team can install up to 60 hotels per result. Below the high-end hotels, revenue share
month. programs will most likely become less attractive to
hoteliers. Green Tree’s recent strong growth
How Telkonet Compares to Incumbents
testifies to this general trend. Of the top three,
The least expensive installation of the top three Green Tree addresses more of the middle range
incumbent providers of HSIA is in the range of hotel. Telkonet’s initial targeted market segment is
$9,000 to $10,000 for a 100 room hotel for a low this middle range hotel.
speed DSL or minimal wireless system. The cost
Of the top three incumbent competitors, Green Tree
could rise to $20,000 based on a faster line speed
has had the fastest growth in the past two years.
and the hotel configuration. With this lower up front
Green Tree charges more than the others for
cost, the hotel must share revenues from HSIA with
installation, but does not receive any revenue
the vendor in addition to paying ongoing support
sharing. Its on-going fees are among the lowest.
fees.
Telkonet Installation
For a non-revenue share option, a 100 room hotel is
required to make an upfront investment of $20,000 The no-cost installation from Telkonet for the
to $25,000, which may be higher for a faster line PlugPlusInternet™ system is extremely attractive.
speed or difficult hotel configurations. Most hotels will install an HSIA system for
competitive or mandated reasons. No up front costs
For a 100 room hotel, on-going maintenance and
is a major competitive advantage whether the hotel
support from the incumbents are approximately $300
charges for the service or not.
to $750 per month. Lower on-going fees are
typically associated with the higher installation costs The time for installation is also attractive. The top
and the higher on-going fees are associated with three HSIA providers indicate a one day to one week
lower installation costs and a revenue share installation timeframe. It can take up to three
requirement. months to get the ISP vendor to deliver the HSIA to
the hotel. Since the PlugPlusInternet™ system only
For a 100 room hotel with a 65% occupancy and a
requires an experienced electrician for standard
10% usage rate, the revenue share program would
installation, it can be installed in less than a day,
create a $975 payment to the vendor and income to
typically costing the hotel less than $1,000.
the hotel of $975 if all users were charged the
Difficult installations that take Telkonet a full day
standard $10 per day fee. However, hotels are
would take several days to a week or longer for other
moving away from charging for HSIA in favor of
vendors. The installation time quoted does not
giving it away.
include time taken to rewire a building, which is
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22. Cohen Independent Research Group, Inc.
very time-consuming. The top HSIA providers A Telkonet PlugPlus system installed in a Newark,
indicate this is rarely done. Delaware Comfort Suite hotel has been sited as the
reason for a 5% - 10% increase in sales. Customer
Telkonet’s ongoing fee is lower than that of satisfaction is high and people are delighted to plug
Wayport, which employs the revenue sharing model, the modem in outlets that are close to the sofa, bed
and slightly higher than Green Tree ($500 vs. $330). or desk.
Additional modem charges for Telkonet customers
will either create a nominal upfront cost or raise the A WyteStone Suite hotel in Fredericksburg, Virginia
monthly cost. For a 100 room hotel, seven modems had been built in 1995 with the standard CAT-3
would cover an expected 10% usage rate at 65% wiring throughout the 85 unit hotel. Although
occupancy. Purchasing seven modems at $173 each sufficient at that time for the hotels phone system, it
would incur a total upfront cost of $1,211. If paid is inadequate for high-speed Internet signals. After
for monthly at $8/month, seven modems would cost considering installing new wires, installing a
the hotel $56/month for 24 months. As usage wireless system or a PLC system, Telkonet installed
increases, the hotel would need to purchase more the PlugPlusInternet™ system. This installation
modems. required five Couplers and lasted a full day. With
iBridge modems in the rooms the following day, the
Hotels consider three additional criteria beyond hotel was offering free Internet access. The hotel
price. First, the quality of support can make or break claims the cost was one third that of a wireless
a sale. TKO has a minimal track record at this time. solution. The hotel has encouraged groups that have
Second, the big three offer marketing services to filled half of the hotel to challenge the Internet
hotels seeking conference business that may be very system. No speed degradation has been reported.
attractive to the larger hotels. Third, higher line No on-site technical assistance has been required.
speed typically requires higher initial costs and may
incur higher monthly costs to the vendor. For The Quality Inn in Surprise, Arizona installed a
Telkonet, a higher line speed does not alter the Telkonet system using the T-1 line coming into the
Telkonet fee. The higher the percentage of business property. The Helmsley in Manhattan is also a
travelers at a hotel, the more the higher line speed client of Telkonet. Several hotels operated by
will be required. Universal Hospitality, Inc. have installed the
PlugPlus™ system through the integration of high-
Telkonet’s Initial Customers quality, two-way satellite service.
Since the end of FY 2002, the Company has Telkonet has a few apartment buildings using the
installed the PlugPlusInternet™ system in 80 hotels, PlugPlusInternet™ system. The 154 unit Hunters
and has 100+ hotels under contract in 30 states. Glen in Upper Marlboro, Maryland has installed the
Currently there are 37 hotels that are waiting for an Telkonet system. Feedback from management and
installation date. In December, 2002, the Company tenants using the system is very favorable. The
announced the installation of a product field trial at Whitney, a 250 unit luxury apartment complex in
the Marriott Residence Inn-Landfall in Wilmington, Bethesda, Maryland, has the Telkonet system.
NC. The PLC system provides Internet connectivity
to 90 guest rooms, meeting rooms, common areas The Chicago Housing Authority (CHA) has decided
and a lobby kiosk. to deploy Telkonet’s system on a trial basis in its
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23. Cohen Independent Research Group, Inc.
public housing. As the CHA modernizes its 25,000 Telkonet is providing support on a 24/7/365 basis
apartments, high speed Internet access is desired. for the three-year service agreement at $495 per
month fee. This includes the ISP fee and the 24/7
Marketing to the Hospitality support. Recent results at the support call center
Industry indicate that most problems have occurred because
the hotel guest does not have an Ethernet card or the
In March 2003, the Company announced a strategic Ethernet cable is not correctly attached. The
alliance with Choice Hotels International (CHH). Company installs a router next to the Gateway which
Choice Hotels is one of the largest hotel franchise allow software technicians to remotely determine if
companies in the world with more than 4,500 hotels, a problem is associated with the ISP vendor
inns, all-suite hotels and resorts in 46 countries. The
franchise companies include Comfort Inn, Comfort Telkonet also offers a satellite connection to the
Suites, Quality, Clarion, Sleep Inn, Roadway Inn, Internet that enables more remote hotels to offer
EconoLodge and Mainstay suites. Additionally, HSIA. Six hotels currently use the
there are 8,000 to 10,000 more hotels under the PlugPlusInternet™ system with a satellite hookup.
Choice network. The two year agreement identifies Telkonet appears to be the only vendor offering a
Telkonet as the Endorsed Vendor for the PLC satellite solution.
product offerings. Telkonet and Choice will
cooperatively market, advertise and promote The company has 12 direct sales people. Telkonet is
Telkonet’s Internet access solution to the building momentum in the hospitality market. Once
franchisees. This agreement is very significant since more traction is gained during FY04, the company
CHH covers close to one third of all hotels in the will address the international hospitality market.
U.S.
Management Team
Comfort Suites, a 400 hotel chain, has recently
mandated that all hotels must have HSIA by May Warren V. “Pete” Musser
Chairman of the Board and Co-CEO
31, 2004. With 80 hotels currently installed and
100+ under contract in 30 states, Telkonet has a Warren V. “Pete” Musser, 76, has served as
footprint that spans the ten geographic regions Telkonet’s chairman of the board since January
defined by Choice Hotels International. Advertising, 2003. Musser has taken more than 50 companies
telemarketing and direct marketing is bringing name public during his distinguished and successful career
recognition to members of CHH. as an entrepreneur. He is currently the managing
director of The Musser Group and chairman
The total solution package for the
emeritus of Safeguard Scientifics, Inc. Mr. Musser's
PlugPlusInternet™ system is very price competitive.
distinguished affiliations also included: director of
Relative to the competition discussed, Telkonet
CompuCom Systems, Inc., director of Internet
offers the least expensive solution. For the 70% of
Capital Group, Inc., vice chairman and director of
hotels in the country that have 120 rooms or less, a
Nutri/System, Inc., vice chairman and director of the
low cost option is very attractive. Of the top three
Eastern Technology Council, chairman and director
vendors to the hospitality industry, none offer a “no-
of Economics PA, and vice president of
cost” installation. Whether a hotel decides to charge
development at Cradle of Liberty Council, Boy
guests for HSIA or not, the lower ongoing cost
Scouts of America. Mr. Musser received a BS
structure is beneficial to the hotel.
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