Digital Home Convergence

Digital Home Convergence

Overview

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

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

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

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 looming?

Sony

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.

Others

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".

Music

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"