Digital Home Convergence Essay

This essay has a total of 3480 words and 18 pages.

Digital Home Convergence

Digital Home Convergence


As technology and entertainment converge inside the home, major players in various
industries are taking different strategies in planning for the future. The concept of the
"digital home" will likely take one of two forms: a closed wired entertainment network
(PVRs, OnDemand) or an open wireless data network (web, email, VOIP, IPTV). The closed
model is already being offered in many homes across the country, but as technology
advances, the open model will become the standard. It is important to understand how both
technology and entertainment are companies are strategizing to control the "digital home".

Based on research in this report, it appears that four things are likely to occur. First,
convergence of technology will create the need for standards in the digital home network.
Much in the way it took some time before the Wintel model became standard, we will have to
wait and see which model takes hold in home entertainment. Once a model is chosen as
standard, there will be an explosion of products and services catering to that model in
the market. Second, increasing competition will lead to alliances between companies in
different industries. PC technology companies that have no presence in home entertainment
might look to deal their way into the "digital home". For example, Microsoft is currently
striking deals with several major phone companies to provide the platform for IPTV. Many
people also suspect that Apple might acquire TiVo in order to gain a presence in TV and
create a service platform for video-on-demand. Third, the successful companies in the
battle for the digital home will be the ones who earn customer loyalty. Consumers are
reluctant to change their behaviors, especially ones like TV watching that are so
entrenched. Companies need to deliver products and services reliably in order to
facilitate a consumer shift to the "digital home". Finally, major content providers will
hold up the process until they see digital distribution as a way to increase their
long-term profits. Home video divisions of entertainment companies are extremely
profitable. They do not want to jeopardize this profitability just to be at the front of
the technology curve. The infrastructure behind the "digital home" will have to be in
place before the major studios choose to participate.

Hardware - PCs

Companies in the personal computer space will be looking to form new relationships with
other companies in order to gain an advantage.

Microsoft is taking several approaches to its "digital home" strategy. The first thing it
did was to release the Media PC Center in 2002. HP was the first to build a PC set-top box
to run this software. Other hardware companies have been working to make the box look more
like a television companion than a PC. Microsoft's goal is to train consumers to consider
buying a PC set-top box when they are upgrading their entertainment system. The current
problem with this strategy is that the boxes are priced too high ($1900). In addition,
Microsoft is going to incur significant pioneering costs in creating a market for these
new "entertainment PCs".

In the event that this set-top PC does not become the standard, Microsoft is also creating
strategic alliances with other hardware and broadband companies. They are developing
software for Comcast PVRs and LG DVD recorders. They will receive $400M from SBC for the
use of Microsoft TV Internet Protocol Television Edition. Basically, they are placing bets
hoping that one system will standardize. In the words of a marketing manager at Microsoft,
"There is no one size fits all choice".

Apple is currently repositioning itself as a media software and consumer electronics
company due to the success of iTunes and the iPod. They were the first company to develop
a successful synergy between consumer electronics and media delivery software. It is not
unrealistic to expect some form of this strategy to emerge with other media. Apple will
try and leverage their ability to simplify the product and market it to the
early-adopters. Apple is notoriously quiet about their strategy, so we can only speculate
at this time.

Hardware - Consumer Electronics

Consumer electronics have a challenge ahead as boundaries are blurred between traditional
CEs and commoditized computer hardware. Differentiation will be difficult as consumers
continue to be price conscious.

Samsung offers a great variety of products and devices for the home that communicate with
each other using Samsung software. They have been able to make critical advancements in
technology due to the infrastructure in South Korea. They are also leaving themselves open
to forming relationships with any and all content providers. The question about Samsung's
strategy is will their proprietary products sell in America with giants like Microsoft

Sony's plan is to create blockbuster products that marry their tech-strengths with their
media offerings. Sony owns a movie studio and they are hoping to use the films to
encourage people to buy their hardware products. Currently, their best opportunity is
through the Play Station 3 because it has an established customer base. Play Station 3,
along with the portable PSP might end up being be Sony's only products in the "digital
home" market.

HP was planning to push HP products into the living room until they fired their CEO and
lost their strategy. Dell and Gateway are trying to build a presence through LCD and
plasma screens while taking advantage of low cost manufacturing opportunities in Asia.
Intel is looking to build a chip that will become the "brain" of the "digital home".

Digital music players are one of the fastest selling consumer electronics products in
history. Jupiter Research has estimated that the sale of portable digital music players
will increase at an annual compound rate of 10% over the next five years. By 2010, 56.1
million Americans are expected to own a digital player, and 34.5 million households will
have them.

Software - Content on Demand

Media conglomerates are adopting the concept of "anytime, anywhere" in their effort to
provide customers real-time access to content, and to support the increasing convergence
of home entertainment. Distributors are dependent on content to drive broadband and mobile
usage, while hardware manufacturers rely on content to drive the proliferation of
next-generation devices.

Record labels have reluctantly embraced digital formats due to the success of music
services like iTunes and Napster and the explosive growth of portable digital music
devices. Major movie studios have been slower to change. The ancillary DVD business
typically represents 60% of filmed entertainment revenues and is the cash cow for the film
industry. Mass-market retailers such as Wal-mart, Target, and Best Buy sell DVDs as a loss
leader to drive foot traffic to their stores. DVD's are produced for $2 and sold for
around $17, which represents a 750% margin. Movie studios are fearful that alternative
distribution formats to the home may potentially cannibalize their sales, and hurt their
relationships with powerful mass-market retailers. Piracy is another major concern across
the board because of the relative ease of copying and mass distributing digital movies,
music, and other content. Digital rights management (DRM) is a hotbed of discussion as it
represents a sophisticated encryption system designed to protect usage rights granted to
the end customer. However, DRM systems can be hacked into, and illegal decryption is a
real concern that threats the copyright protection of distributed content. A final hurdle
that movie studios and record labels share is entrenched marketing behavior. Many
executives staunchly believe that digital downloadable formats cannot fully replace hard
formats such as DVDs and CDs because of their collectible nature.

Analysts point out that while North American revenue from online video entertainment is
expected to increase by 40% to $1.3 billion this year; however, DVD revenue is thirty
times that size. So, the concern over piracy, the majority of profits realized from DVD
sales, the leverage of mass-market retailers, and studios' entrenched marketing behavior
have collectively slowed the adoption of more advanced digital formats for distribution
and consumption.

Consumption patterns are noticeably shifting as digital technology and content become
integrated into our everyday lives. Increasingly, people are utilizing home entertainment
products to manage and organize their photos, music, movie collection, television
programming, finances, and their one-on-one interactions with friends and family.
Distribution portals such as AOL, Yahoo, and MSN are taking advantage of the shift in
consumption patterns by offering a variety of online content including music videos,
adapted television newscasts, and clips of popular television programming. CNN, Yahoo
Music, and the anticipated MTV Overdrive are offering value-added content that can be
streamed or downloaded.

Another trend is the increasing availability of specialized content over the Internet.
Niche programs can find their audiences by providing streaming and downloadable content.
Such content exposure can develop into other ancillary revenue streams if niche programs
grab broader audience appeal. As consumers become more attuned to hunting and gathering of
information and content, consumers may change the way they select content. For example,
people nowadays rely on their remote control to channel surf and choose what they want to
watch. The next generation of content may be filtered in a more dynamic fashion, as
consumers become more intelligent about the ways and means of selecting content to view in
the digital space.

Media conglomerates are still experimenting to determine successful business models for
video on demand (VOD). Currently, the market for PC movies is largely limited to "road
warriors" who watch film and TV content on laptop PCs while they are traveling. CinemaNow
and Movielink are services that are gambling on VOD. Movielink is a joint venture of MGM,
Sony, Paramount, Warner Bros., and Universal. Using an a la carte rental business model,
Movielink offers about 1,500 movies at a price point of $2.99-$4.99 per movie. CinemaNow
has around 1,500 movies and utilizes three different business models (pay-per-view, rent,
and subscription). A la carte rentals are $2.99-$3.99 per movie, download to own costs
around $14.99 per movie, and the monthly subscription based services cost $9.95 per month
or $49.95 per year. While companies like Movielink and CinemaNow experiment with rental,
sell-through, and subscription based models, VOD is still in its nascent phase of
adoption. High quality content, faster broadband connections and more sophisticated
content delivery mechanisms will contribute to higher adoption rates of VOD and other
forms of content on demand.

Software - Gaming

In 2004, game software sales reached $7.5 billion. According to a recent report by Nielsen
Entertainment, about 40% of American households own at least one game system (PC, console,
or hand-held), 23% of game users own all three types of devices, 89% of gamers own a
console, and among owners of consoles (e.g. Playstation 2, Xbox, and GameCube). Gamers
spend about 8.2 hours per week on video games. About 5.2 hours of that time is spent
playing solo, while the remaining three hours are dedicated to multi-player gaming. The
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