Monday, April 16, 2007

Digital Home war goes mobile. Review of the actors.

Microsoft just announced that it will be making Live Messenger available through the xBox 360 game console. This move is a reflection of the long ongoing battle which started more than 10 years ago to control the Digital Home market.

This announcement indicates that though the battle for the Digital Home continues, it has moved from the living room to the mobility sector and new weapons introduced.

In previous time, similar industries, for example PC or Consumer Electronics, would be fighting a ‘war’ among themselves. Then a decade ago, people started talking about convergence. This was essentially a declaration of war by the PC manufacturers who decided to invade the living room territory controlled by CE manufacturers.

10 years on, there are still no winners. However, two companies Apple and Sony have clearly taken the lead even though they hail from opposing sides. One from the computer industry whilst the other from the Consumer Electronic industry.

Apple is promoting itself from the ‘Digital Hub’ angle. For Apple, the lifestyle centers around the computer and all your digital peripherals are connected through it. The computer is used as a central storage location. Progressively, Apple is adding components to its digital hub and moving towards the Multimedia entertainment.
It has made numerous announcements over the years but there are 6 very important ones:
1st : Easy connection through all your digital peripherals.
2nd : Release of the iPod, to manage your digital music collection on the go.
3rd : Release of iLife, to manage your digital life (pictures, movies, DVDs) easily.
4th , : Release of the iPod new generation with Pictures, Movies support.
5th : Release of the iTV, to centrally control your digital life from your TV set.
6th : Announcement of the iPhone, to allow interoperability between communication and mobility

Sony is coming from the consumer electronic universe. Computerized technologies are integrated in order to contain the consumer in the Sony Ecosystem.
1st : Integration of a unique interface (iLink) with HiFi components
2nd : Creation of new media to facilitate easy to share between devices. The DAT and MD failed. The UMD and Blue Ray Disc are their new bets.
3rd : Creation of the Memorystick, a uniformed media storage for digital elements across Sony products
4th : Release of the first Playstation, that revolutionized the gaming industry (from both a technology and business point of view)
5th : Release of the PSP, the ultimate technological portable entertainment system.
6th : Release of the PlayStation 3, bonding video games with HD / Home Cinema.
7th : Announcement of Sony Home, a central storage place where you can share all your digital life through the Playstation 3.

Companies continue tofight this battle but none are emerging as a clear winner yet. Most of them lag behind Sony and Apple. However, some of them are extremely strong in technologies (Philips for example) and some of them have good products (Samsung for example). Nevertheless, they fail to share the same success as Sony and Apple. Sony and Apple managed to find that extra ‘little something’ which made the difference. They understood how consumers needs and how they interacted. Other companies either attempted to copy this success or flooded the market with product imitations to gain market shares.

What about Microsoft? In this battle field, Microsoft has the most powerful army but at times failed to launch a coordinated and timeline attack.

The Windows Media Center seemed to be the right move to try to convince the consumers to setup a computer in the living room. However, the complexity and the lack of services at that time contributed to its failure. WMC is now embedded in Windows Vista OS and will hopefully be more successful.It is also surprising to see Microsoft late arrival to the digital music battle.

Zune was Microsoft’s response to Apple’s iPod. It is even more surprising to witness their inability to create sustainable technology. Last year, Urge, supported by PlayForSure technology, was created with the support of famous artists (i.e. Justin Timberlake) and MTV. MTV was supposed to be the ‘cool’ version of iTunes and create a new way to download and share digital music. PlaysForSure technology was intended to be shared among all manufacturers and music stores to allow interoperability among consumers. It failed to materialize. One can probably attribute it to a lack of communication and marketing support from Microsoft. PlaysForSure was promoted through retail stores in USA and manufactures who tried to create a new label similar to ‘Intel inside’. There was also a lack of direct communication from Microsoft to consumers, convincing them to go in the stores and ask for a ‘PlaysForSure’ product. Ironically, Zune does not support PlayForSure.

So, what should we think about the latest announcement from Microsoft on Live Messenger?

This is a clever strategic move that may propel its future success in the digital home battle.Most major companies are now linking mobility to entertainment and digital home. PSP can be hooked up to PS3 and ‘Sony Home’ to allow digital gaming transfer and upload of content. Nintendo DS is linked to Nintendo Wii and can share mini games. So far, these moves do not have strategic or financial impact but will help cement its position as a leader in the digital home battle.

By linking xBox users to windows live messenger, Microsoft is moving in the right direction :
- Connecting users from various databases
- Providing mobility at home in order to increase the consumer experience
- linking games with chat

This is a right move and consistent with its other major initiatives. One was to allow consumer to connect its iPod to xBox 360 and play his own music while playing video games. The second was to create a new label Game for windows and allow consumer to interact between video games and PC.In this digital home battle, the various actors are fighting for the control of the Digital Home and the mobility. Any initiatives to merge technologies and bind consumer is a good move and Microsoft proved they can overcome internal challenges to create future winning platforms.

Let’s see how consumers will react .

Monday, April 9, 2007

Mobility needs drive sales, not the technology

The rising sales of notebook (out performing desktop figures for the first time) and growing at a rate of 25% this year, is expected to be sustained over time (Source: Consumer Electronics Association).

The important consideration here is not merely technology but what consumer need is being answered.

Notebook sales continue to grow and it extends to both the consumer and business segments.
Most of businesses will continue to use laptops primarily because of its mobility needs. Generally, only backroom operation personnel, interns, administration staff and designers require desktops.
Businesses tend to restrict notebooks purchases from selected vendors to ensure cost savings and IT support. In that respect, the selection of future laptops for businesses is much easier compared to consumers’.
Depending on the type of business and level of mobility required, you would typically base you purchase decision on criterions such as screen size, weight and the battery life. These criteria directly answer their mobility needs. Other factors such as CPU speed, HDD size, memory are still important but are merely supporting the technology needed for your needs. In some instances, you may decide to upgrade the memory and/or hard disk capacity. However, the decision to upgrade is generally fuelled by the requirements of the OS and software applications.
As long as business mobility needs continue to grow, laptops sales supersede desktop figures. Manufacturers will continue to add more technologies into their laptops to differentiate their products as businesses will look for more security, more connections, and greater mobility than ever before.

However, some new product concepts will continue to serve a niche markets as it doesn’t completely answer the audience's needs. For example, UMPC is a great technology to showcase, but do you really need it? It is too small to allow anyone to type long emails and too big to be carried in your pocket. Tablet laptops are great but the system often hangs and is definitely not as flexible as your traditional pen and paper. Finally, ultra light notebooks may be ideal for heavy business travelers but the high cost remains a major obstacle. Nevertheless, these niche segments provide a good opportunity to showcase good technology and eventually some may succeed.

In the consumer market, purchase criterias are slightly different.

It is still a real challenge for consumers’ to choose which laptop to purchase. Besides the number of brands, decision making is made harder by the fact that new models are being introduced and older ones discontinued almost every three to six months.

We can probably identify 3 key segments in the market :
1) Undecided consumer who may be a first time buyerThis person will go for price. They are usually not brand sensitive, and will be attracted by special offers. They may look for a end of life or secondhand product with limited mobility.

2) Decided consumer who may be a first time buyer laptopThese group tend to have specific needs. They may want a notebook for studying, for working at home, for their kids, for sharing pictures., games, multimedia, etc. They generally will seek recommendations from sales personnel or experts.They will go for the model that directly answer their needs

3) Decided consumer but not first time buyerThis group of consumers’ usually has an existing laptop or desktop. Through the years of usage, they tend to have some knowledge and experience on personal computers. Brand loyalty and sensitivity are common traits. This is a primary target audience for laptop manufacturers, they are loyal to the brand.

What is the trade off?
What are you willing to sacrifice when you choose a laptop over desktop to gain mobility? Everything comes at a cost. Manufacturers who can segment their offer and their product range will continue to win. However, they should not overlook the fact that the needs drive the sales, not the technology.

Wednesday, April 4, 2007

Digital Video for free, not for now.

Steve Jobs commented yesterday that 'he would not hold a parallel at all between the video industry and the music industry'. It is not surprising that there is no rush to open DRM for video.

In our earlier article, we mentioned that the music revolution phase II has started .
It is true we can question what will happen about the video. Let's now be realistic and reasonable.

We can always debate on the illusion and wish to live in a society where products such as videos and audio are free. Will such a debate be of any consequence? We are living in a world driven by rules, economics, constraints, both financial and technical. It is amazing to see so much debate arising as a result of internet and the new digital revolution.

Regardless of whether the audio or video is produced on tape, DVD, broadcasted on radio or made available online, the content remains the same. The only difference is the medium that is used to allow the consumer to access it. In the past, (the hardware time versus the internet time), you needed to go to a shop and buy a movie. If you decided to give a free copy to your friend, you would have to find a way copy it. Most were aware that making copies for reasons other personal backup, was illegal . These restrictions make sense, as the artists and the record companies need to protect themselves against free distribution.

In my opinion, Steve Jobs is absolutely right in his statement that the concept of DRM-free audio cannot be completely applied to video. There are just too many differences from technology to business, including from consumers’ point of view that videos can now be freely distributed.

New distribution systems are now being introduced. Various factors will influence the type of system developed to deliver audio and video. Some factors may include the type of content (e.g. movie, music video, audio book, etc), and length (e.g. trailer vs full length). Another important consideration is how the content will be consumed. For example, will it be used primarily at home through devices such as the home theater system, computer, etc or if it is mean to be used while mobile ? Consumption while being mobile may also vary, as it depends on how and where will be used.

Video on Demand (VOD) is already available to consumers and newer ways to distribute content are being explored. What is the ultimate goal ? Definitely to generate additional revenue for companies and also to satisfy the consumers’ need mobility and virtualization. This goal is not necessarily by choice, because traditional channels of content distributions are suffering.

Consumers needs will only increase.They want more and faster access to unrestricted content.Providers will want to cash in on these needs.The bottom line is that everything comes at a cost and requires time for technology to be developed. We can either continue to live in a dream world or face the reality we need to accommodate current standards.The industry and professional are working on answering ‘our’ needs. In the meantime, let's be patient and take one step at a time.

I am sure that in time, the lines between that dream world and reality will be blurred.

Tuesday, April 3, 2007

Digital music revolution Phase II

Are we entering the phase II of the Digital Music revolution ?After releasing the iPod, launching the iTunes Music Store and capturing almost 80% of the digital market, Apple(NMS:AAPL) is now answering some specialists scepticism on digital music by releasing free DRM music on iTMS (iTunes Music Store). Is it just an evolution or the era of a new revolution ?

EMI just announced they will be releasing a major part of their catalog through a free DRM system on iTunes Music Store from May. The songs will be sold at a more expensive price ($1.29 instead of $0.99) but will be encoded at 256kpps AAC instead of the regular 128kbps for the other songs.

Is it the start of the Digital Music revolution, phase II ?The first wave started in November 2001 when Apple introduced the iPod. It was the first time a company really understood consumer needs and introduced a music player, made for consumer by 'people-thinking consumer' to answer one need : listen music seamlessly without reading a 10 pages owner's manual.

However, it is only in April 2003 when iTunes introduced for the first time a seamless approach for digital music download that the 'in depth' revolution has started.This ecosystem mastered not only the software (iTunes), the hardware (iPod), the OS (Mac OS X) and the content (the music). Consumer were finally offered a viable choice to download digital music without violating the law and the artist rights.

April 2007, almost 4 years after releasing the iTunes Music Store, the consumer will now be able to pay for 'free music' without protection. What are we talking about ? From a technical point of view, the DRM is a digital locker, requested by record companies, to protect the song from being copied between multiple computers and multiple devices.

One could argue the system does not make sense, that the music is free when it is posted on internet and we should not pay for it. We must not overlook the fact that without the DRM system, consumers may not have add the opportunity to enjoy legal on line music.This DRM system does not differ from any other locking system that is applied from industry on various formats or technologies.All music store have unique DRM and for the inconvenience of the consumer, they do not share the same lock. Music bought on a specific store is not compatible with another store and same goes with the player. Even the latest released Zune player for Microsoft(NMS:MSFT) is not compatible with the in house initiative 'Playsforsure' that tried to unify the DRM around one camp (digital player manufacturers + music content + Microsoft) against the iPod-iTunes alliance.By removing this DRM, consumers will be able to share content with anyone else, regardless of platform or devices. It means people will be able to buy music on an iPod and, play that same song on another device (but not through iTunes).

Is Apple taking a risk ? No, Apple is again leading the revolution. This move could see increased revenue for the company while its competitors continue a price war. Most importantly, it will benefits the market, the consumer and the investors. This abolishes the views of many critics on the closed Apple - iPod - iTunes ecosystem.

Now, there will be questions that still need to be answered.

1) Will it be available to other regions ? When ?We can expect this to be introduced to US market first. Music rights are usually managed locally, so how will the other regions be impacted and at what cost ? Let's not forget that there are still many regions not covered by the iTunes Music Store to date. At the same time, there are some regions which do not have the full service (for example video download).

2) Other labels ?EMI has opened a hole in the DRM fortress, we can bet that other labels will follow. They will not only see the opportunity for additional revenue, but the ability to be closer to their audience. Most probably, they might not have other choice than to follow the others in that battle.

3) Consumer reaction ?What now will be the consumer reaction ? Is he going to spend more money for having a free DRM ? iPod - iTunes users are divided in two categories. The first one are the 'Apple fans'. Whatever happens, they will remain loyal to the brand. They will probably upgrade some of their songs, to try the system, promote it and listen to the sound quality difference. Not only AAC is already more qualitative than MP3, but doubling the bit rate to 512kbps will definitively make a difference.The second category is the mass market. Progressively, they will prefer to buy non protected songs because they will like the freedom.4) Video impactWill this system be adopted by the video industry ? Probably yes but not in the short term. The video market download is really immature today. Consumer have a different attitude compared to audio. You normally listen to music multiple times whilst you hardly watch a video as often. Secondly, listening to music can be a passive activity while watching a movie requires full focus.There are more reasons that will prevent to movie industry to follow the same system immediately. For example, the size of the file and the financial impacts related to Cinema, DVD, Blue Ray Disc and HD DVD are many hurdles that need to be overcome.

The above points are not part of a natural evolution of the digital market. A complete new revolution is now happening. Selling free DRM songs a couple of years ago was just not possible. Let's not underestimate the impact it will have on the market, on the industry and the consumer.

The revolution of the digital market phase II is on and is not over.