Via “The Economist”

Technology firms are pushing a futuristic vision of home entertainment not because consumers are desperate for it but because they themselves are
RECENTLY, at one of the fast-proliferating conferences devoted to the “digital home”, John Burke, an executive at Motorola, a maker of mobile phones and digital gadgets, showed a video that presented his company’s version of this vision. In the clip, a youngish man wakes up to a rock video that automatically starts playing on a screen next to his bed. He gets up to have breakfast and the rock video follows him to a screen in the kitchen. He moves into the living room and up pops the rock video on yet another screen. When he leaves his flat and gets into his car, the video starts playing on a screen in the steering wheel.

To ordinary humans this sort of thing must seem like silly—or downright frightening—marketing claptrap. In fact, even Mr Burke’s audience of self-selected technophiles seemed sceptical. “Did you notice that the guy was a bachelor,” said Tim Dowling, the boss of Pure Networks, a software firm in Seattle that helps users to set up and troubleshoot home-computer networks. “That alone tells you that they’re out of touch. I thought: How dumb.” Real people do not want to be hounded through their home and their life by some video stream, he argues; they just want help with basic headaches, such as getting the kids’ laptop, mom’s Apple Macintosh and dad’s Windows machine to share the family’s printer.

Whether or not computer, software, consumer-electronics, telecoms, cable and internet companies are in fact out of touch with consumers may be the biggest question facing these industries today. That is because the “digital home”, a concept and category hugely hyped in executive circles but still rarely heard in discussions among consumers, represents their greatest hope for revenue growth. Demand from corporate buyers of technology has barely recovered from the dotcom bust and is widely expected to be unimpressive for years. By contrast, the homes of consumers appear to technology vendors as a barely tamed analogue wilderness. Darcy Travlos, an analyst at CreditSights, a research firm, estimates the market opportunity of the digital home at $250 billion in America alone and $1 trillion worldwide in three to seven years.

“We view the digital home as critically important,” says Craig Mundie, one of three chief technology officers at Microsoft, the world’s largest software company. “The home is much more exciting than the workplace.” Computers have already led to small revolutions in boosting productivity in the office and helping people to communicate and to be creative, he says, so “we’re pretty confident” that computers will have a similar effect on the way people consume entertainment. Intel, the world’s largest semiconductor maker, recently reorganised itself into new business divisions including, prominently, one called “digital home”. Last week it formally launched Viiv, a bundle of chips intended for use in digital-home PCs. Consumer-electronics firms such as Sony, computer-makers such as Hewlett-Packard (HP) and Apple, telecoms giants such as Verizon or SBC, cable companies such as Comcast, internet firms such as Yahoo!, networking-equipment companies such as Cisco—all agree that the digital home is where the action will be and are investing furiously to make sure they have a good chance of playing a leading role.

Their first challenge in stimulating any sort of consumer interest is the difficulty of merely explaining what the digital home is supposed to be. You might think, for instance, that the term refers to the long-established trend away from analogue and towards digital media. In music, most people have completed their migration from vinyl records and tapes to digital CDs. In films, the trend from videotapes to DVDs is not far behind. In photography, traditional film is fast being replaced by digital cameras and pictures. TV and radio broadcasters are also shifting to digital transmissions, with Britain leading the way.

Confusingly, however, that is not what vendors mean when they talk about the digital home. Instead, they invariably mean a home in which all sorts of electronic devices—from the personal computer (PC) to the TV set-top box, the stereo, the game console and, in some versions, even the garage door and refrigerator—are connected, both to one another and to the internet. Hence the Motorola marketing video that Mr Burke was showing. Its purpose was to illustrate what Motorola, like Microsoft, calls “seamlessness”, as digital content hops automatically between various devices and screens. The excitement, therefore, is not so much about content being digital, but about its delivery switching from physical things (such as CDs) to photons (such as wireless downloads or streaming), because this requires consumers to buy new gadgets.

Believers in this future point to encouraging statistics. Parks Associates, a research firm in Texas that specialises in the digital home (and which organised the conference at which Mr Burke gave his keynote address) surveyed a group of internet users and found that 84% of them use their PCs to store digital photos, 59% to store music, 36% for video clips and 26% for personal videos. If one includes devices other than PCs—such as TiVo, a popular digital video recorder—17% also store movies and TV shows. In theory, these people could soon avail themselves of new wireless-networking technologies, such as an emerging standard called “ultrawideband”, to pipe all this content from their collections to electronic picture frames, screens and portable devices.

Joined-up thinking
That is not at all what they want to do today, however. Another study by Parks Associates found that 89% of people with a home-computer network felt that the relatively modest goal of sharing internet access is its most important function, with printer-sharing the second priority. Worse, 27% of people who bought network gear said that they ran into problems during configuration, leading many to call the help desk of their internet service provider (who may or may not be responsible for the problem) at an estimated annual cost of $1.4 billion to that industry. Even downloading entertainment, as opposed to buying it on discs, appears over-hyped. According to a study by the OECD, there were over 230 websites offering 1m tracks in America and Europe at the end of 2004. But these online sales accounted for less than 2% of total music revenues; even with fast growth, they are projected to rise only by 5-10% by 2008.

All this points to a huge problem with the digital-home vision: the lack, among most consumers, of any sense of crisis about the status quo in entertainment. “We don’t think many folks are looking for an electronic nerve centre in their homes,” says Pip Coburn, who runs Coburn Ventures, a technology-consulting and investment firm. After all, popping in a DVD, say, is so easy and works so well. By contrast, getting a digital home up and running promises several lost weekends of fiddling with manuals and settings, and hefty expenses in new gear. According to Mr Coburn’s formula for evaluating new technologies, whereby adoption is a function of the users’ sense of crisis (ie, motivation to change) outweighing their perceived pain of switching, the digital home ranks as a clear “loser”.

This miscalculation—if that is what it is—by the large vendors stems from their history of catering to companies rather than people, says Pure Networks’ Mr Dowling (who used to be at Intel and who hired some 40 of his 60 employees from Microsoft). During the information-technology boom, the industry sold its wares mostly to chief information officers or chief technology officers with big budgets. These are customers who tend to be receptive toward buying “solutions” rather than products, and often hire consultants such as IBM Global Services to pull together hardware and software from various vendors. But “consumers don’t buy as an IT manager does,” says Mr Dowling. “They buy spur-of-the-moment and hodge podge; they buy things, not systems.” To the extent that the digital home is not a thing but a solution, he thinks, “the vendors are all fooling themselves.”

The vendors, naturally, disagree vehemently. “When you ask customers what they want, they will never tell you. You have to show them first,” says Microsoft’s Mr Mundie. That is why Microsoft has, since 1994, had an impressive (or, to some people, intimidating) mock digital home on its campus in Redmond, Washington State, which it updates with the latest gadgets. Intel, NETGEAR, HP and most other self-respecting technology firms have similar mock-ups for display. There is, argues Motorola’s Mr Burke, a huge “need to educate consumers about the value of a connected home and lifestyle.”

Talking the same language
Outside the controlled environment of a mock home or conference demonstration, however, educating consumers tends to backfire. That is because real-world digital homes usually do not work very well. The premise of the entire vision, remember, is that heterogeneous devices talk to one another and readily transfer content to wherever the consumer wants to access it. This requires compatibility—“interoperability” in the jargon—among vendors involved in two technological categories.

The first is file formats and codecs (short for coder-decoders), which encode digital information—such as a picture, song or film—compress it for transmission and storage, and decompress it again for viewing and listening. The second is digital-rights management software, or DRM, which protects such content against piracy and unauthorised copying. DRM allows the copyright holders of content—film studios and record companies, in essence—to define such parameters as when a film or song that is downloaded “expires”, or how many times it can be copied to another device, such as a portable player.

The trouble starts here, with a bewildering list of acronyms that no ordinary consumer should ever have to know, but currently needs to know, to set up a digital home. The Moving Picture Experts Group (MPEG) is an industry body that defines widely used codecs such as MPEG-2 for video and MP3 for audio. But the big vendors prefer their own codecs—Microsoft its WM9 (short for Windows-Media-9), Apple, the market leader in online music sales, its AAC, and so on.

In DRM, the situation is even more chaotic. Microsoft pushes its Windows DRM; RealNetworks, which makes rival media software, has Helix; Sony has OpenMG; Apple likes FairPlay, and so on. The upshot is that consumers cannot mix online services, gadgets and software from different vendors and be sure that the content they have paid for actually works. Music bought online from Microsoft’s MSN or Yahoo!, for instance, does not work on Apple’s iTunes or iPod, and vice versa.

This challenge is daunting because DRM technologies should not only be compatible today, but for all eternity. Otherwise, consumers will be afraid to pay for content, and will stick with CDs and DVDs, which seem painless and safe by comparison. “If consumers even know there’s a DRM, what it is, and how it works, we’ve already failed,” says Peter Lee, an executive at Disney. The same goes for codecs. “The user shouldn’t know or care what format they’re using,” says James Poder, an engineer at Comcast, America’s largest cable company and broadband internet service provider, because “consumers don’t want to be IT administrators for their own home.”

Prisoner’s dilemma
It may seem ironic, therefore, that vendors are refusing to make their technologies interoperable, thus potentially killing their own vision. On the other hand, it makes sense for each to try to make its own proprietary technology the winner, in order later to grab a disproportionate share of the market. The starting point of cable and telecoms companies, for instance, is as providers of broadband pipes into the home. So they are investing in IPTV (internet-protocol television), a vision in which content resides on the network and is pulled into the home on demand. Thus, says Cyrus Mewawalla, an analyst at Westhall Capital, a broker in London, America’s Verizon and SBC and others are investing hugely in laying fibre-optic cables to homes (at a cost of about $1,000 per household), hoping that IPTV and the necessary set-top box could “evolve into the primary gateway to the digital home.” By controlling this gateway, they could offer a bundle of telephony, internet and entertainment, in effect “owning” the customer.

This would at the same time help them to parry their biggest threat: Microsoft. Microsoft has itself invested in IPTV, ostensibly in partnership with telecoms and cable companies. Like its loss-making investment in game consoles (called Xbox), however, Microsoft intends this as a purely defensive hedge, says Matt Rosoff, an analyst at Directions on Microsoft, an independent research outfit near Seattle. Instead, thinks Mr Rosoff, Microsoft’s strategy is to establish the Windows-run PC as the uncontested hub of the digital home. Hence its all-out push to establish its codecs and DRM as the standard. This would allow Microsoft to keep selling Windows upgrades and to earn royalties from hardware and from consumer-electronics companies that make “spokes” for the Windows hub, such as portable music and video players, screens and online services.

Microsoft’s most explicit attempt so far is a version of its current operating system called Windows Media Centre Edition (MCE), which puts a simplified menu on top of the desktop screen for use with a remote control from the sofa. The MCE was first launched in October 2002, and has been upgraded several times since, but it has so far been mostly a dud, running fewer than 1% of all PCs sold last year. Microsoft now hopes to make MCE more relevant by selling “extenders”, little devices that can hook on to a TV set or stereo and communicate with the PC over a wireless network. Its biggest hope, however, is for Vista (previously known by the code name of Longhorn), the next version of Windows, which is due to be released late next year (after several delays).

According to Microsoft’s Mr Mundie, there is no question that the Windows PC will win this fight to become the central repository for all digital content, for a simple reason. The cable and telecoms companies, he says, are hampered by their business model, in which the set-top boxes sit on their own balance sheet and are leased, at subsidised rates, to consumers. This means that their incentive will always be to make the boxes cheaper. By contrast, Microsoft’s incentive is to make its operating system more sophisticated, in everything from parental controls to usability. By the same logic, Microsoft will beat the consumer-electronics companies (such as Sony and Samsung). Their business model relies on selling devices rather than on recurring licence revenues. This leads to clutter in the home, without organisation of the content.

Tom Berquist, an industry analyst at Citigroup, broadly agrees that the PC is likely to win. The on-demand world on offer from, say, Comcast, is simply not portable enough, he thinks. By contrast, he says, moving content to PCs potentially “liberates you from proprietary technology and lets you use content on any device.” In this sense, the only real competition to Microsoft is Apple, whose Macintosh operating system is widely considered to be more elegant and user-friendly than Windows, and which has a considerable headstart with the huge popularity of its iTunes music service and iPod player.

Apple’s problem, however, is that it has only 2.6% of the world market for PCs, whereas Windows runs on almost all the rest. Apple also differs from Microsoft in that it simultaneously wants to be the main portable-device maker. It is, in other words, a software, hardware and consumer-electronics company all at once, and that does not leave much room for alliances with other industries to manufacture spokes for an Apple hub. There are signs that Apple is becoming more agnostic in order to compete with Microsoft. It has a deal with HP, traditionally a Microsoft ally (HP was, for instance, the first computer maker to ship Windows Media Centre Edition), under which HP bundles Apple’s iTunes software on to PCs running Microsoft Windows. In a surprising announcement in June, Apple also said that it would start using microprocessors from Intel, another traditional Microsoft ally.

Winner takes all?
For the foreseeable future, the only certainty is that all these mighty companies will continue to preach interoperability while pursuing proprietary hegemony. This could lead to several scenarios. One is that one company, or camp, wins. The digital home, unified by the winner’s standards, might then become a reality in the mass market. For this to happen, however, several companies and industries would first have to make huge strategic mistakes, and consumers would have to accede, in effect, to a repeat of the “Wintel” (Windows and Intel) near monopoly in the PC industry today.

Another possibility is that the technology wars end with a truce, perhaps brokered by industry consortia that push open standards. This would be infinitely preferable for consumers and would probably make the digital home a reality much sooner, since it would mean that consumers could shop incrementally for new gadgets, all of which will fit with the others. The catch for providers is that this is much less exciting for their own bottom lines.

There is a third possibility. This is that the wars continue, but consumers continue not to care. As John Barrett, research director at Parks Associates, says, “it seems that we’ve concocted a new variant of the ‘paperless’ office.” This, you recall, was the consensus a decade or so ago among technophiles (but almost nobody else), that computer technology would save our forests by freeing us from having to read and write on paper. Today’s variant, says Mr Barrett, is “no more tapes, CDs, DVDs, discs.” In other words, expect them to be around for a very long time to come.