We don’t do this very often folks, but as a seasonal gift we have made our 2011 Digital Home Predictions report available to everyone, whether a Strategy Analytics client or not. You can download the full report here. A lot of the talk at the moment is about Google’s troubles with its TV offer: there will be little to see at CES after all, much to the annoyance of Google’s many partners no doubt. But this setback should not be seen as a a sign of general malaise in the connected TV industry: Apple has just reported that its TV solution is finally gaining some traction, and we expect continued progress from other key players in the rollout of internet TV to the big screen during 2011. We may even see Facebook moving into this space. Headline number of the year will be tablet revenues, which we predict will exceed netbooks. We also think Apple needs to revamp iTunes to take account of the connected device era, and Nintendo may have to take the plunge and launch the successor to the Wii. We’ll see further innovations in the TV control arena, with touchscreens, phone apps and motion control all featuring more widely. But 3DTV is likely to see only slow progress: sure, people will be buying 3D-enabled sets, but less than 20% will be watching 3D content on them. And one more stat to whet your appetite: more than one billion people worldwide will be using social networks for the first time during 2011. And since you are one of them, please go ahead and read the full report, and any comments and feedback are always appreciated. Best wishes for a peaceful holiday season. David Mercer Client Reading: Profiling the Connected Media Consumer - UK

Having tested Microsoft’s Xbox Kinect for the last few days I can confirm that it has the elusive wow factor. Controlling on-screen icons and menus with a wave of the hand is the first sign that this stuff is definitely not of the old generation. Seeing your own avatar mirror your movements introduces the real sense of spookiness which only comes with genuinely ground-breaking technology. And when you are first signed into the service simply by entering the room, the realisation dawns that the age of intelligent technology may finally be upon us. My other conclusion is that if you are not physically fit before you buy Kinect, you certainly will be after a few sessions of gameplay. Microsoft is very clear that the initial raft of Kinect games titles are aimed at its “non-traditional” audience (implying, not entirely accurately, spotty teenagers shooting each other from the comfort of oversized armchairs) and involve varying levels of energy expenditure from a standing position. You may or may not be relieved to know that there is at least one application which does not require you to abandon the sofa: VideoKinect is the built-in video communications service, allowing Kinect games players to take a break to share their exhausting exploits with friends and relatives around the world. As for the games themselves, we found the bowling and track and field in Kinect Sports a lot of fun. Bowling illustrates the strengths of gesture-based gaming because the system appears to recognise genuine bowling actions which are impossible for any controller system to replicate. Track and field includes a variety of athletics events, and, yes, the 100m dash involves running on the spot as fast as you can. Microsoft told me that an elderly 80-year old lady in Australia had enjoyed some of these sports. I would like to see this. Children will love Kinectimals, the classic cutsey furry animal petting game. Choose your favourite cub, cuddle it with your virtual hands, and watch it mimic your actions and learn tricks. Parents of young children should avoid installing this game on their main TV as they will never get to watch TV again. Kinect Joy Ride didn’t work as well for me. This is the main racing game available at launch, and, yes, you have to pretend to hold a steering wheel. I would love this to have worked more effectively, but this is the point at which virtualisation just doesn’t seem to make any sense. Try it at home: See how long you can keep your hands spaced the same distance apart while moving them around in a circle, changing direction frequently, and leaning your body one way or the other to perform tricks. Sorry, but holding a real steering wheel has just got to be a better experience. Microsoft hope that Kinect will help it to “more than double” the number of Xbox 360s sold worldwide so far, which is more than 42 million. Our own core scenario forecast is that Microsoft will fall slightly short of this objective, selling a cumulative 79 million 360s by 2015. Our analysis did allow for further upside to 360 sales as a result of a successful Kinect launch, so we will be tracking its near term progress and impact on core console sales before updating our scenario models. We should also be clear that Microsoft, along with other platform vendors, tends to talk in terms of cumulative sales. Our analysis also takes account of console retirement and replacement, and this could be a critical issue as we begin to understand Kinect’s impact on wider 360 ownership. It is, after all, being offered for sale as a peripheral to existing 360 owners, as well as packaged with a complete 360 console system. Again, the mix between these two packaging options will be important in determining the real impact on the 360’s overall performance. Sales to existing 360 owners may extend the life of the system in those households but will not help to widen the audience. Microsoft’s primary interest will be to increase sales of the 360 itself to new owners. Will Kinect succeed? As always, it will depend on how we define success. Kinect is certainly innovative, and as such it will appeal to existing 360 owners who want to explore the new technology for its own sake or find the new games appealing. Kinect should also bring the 360 more forcefully to the minds of existing owners of other consoles who may be tiring of their current platform. The obvious target is Nintendo’s Wii, global sales of which, as we predicted, are declining by more than 20% this year. While Nintendo works out its post-Wii strategy, Kinect has a window of opportunity of maybe a year to tap into demand from lapsed Wii users. In spite of the enthusiasm indicated above, Kinect is not without its challenges. The biggest concern for many potential buyers will be the space required in front of the TV. Our system is installed in a traditionally small English cottage, and there is just about enough space to use Kinect for the few games we have tried. Demonstrations of some games I have seen suggest that Kinect owners will need clutter-free floor space of three feet by six feet (1m x 2m) at a minimum distance of six feet (2m) from the sensor in order to get the maximum benefit. Xbox actually recommends a distance of 8-10 feet (c. 3m) from the sensor. It goes without saying that this space must be free of all obstacles, alive or dead, if minor injuries are to be avoided. Other commentators have noted the potential for lag in motion sensing. The movements in the self-image window or the avatar certainly appear some fractions of a second behind actual motion. The critical question is whether this has an impact on usability, and so far, in an admittedly short series of tests, I have not noticed any significant negative impact on gameplay. There have been occasions when voice recognition and motion sensing do not appear to function perfectly, but I would not draw any conclusions regarding weaknesses in the technology versus the need for familiarisation. Only time will tell whether these are persistent issues which need to be resolved by further technology enhancements. Kinect’s success will hinge on whether “really clever stuff” is good enough to drive sales, and whether its integration into games is perceived as ground-breaking. Xbox is also taking a risk in focusing Kinect purely on the “active gaming” sector. Nintendo did break new ground with motion control, but Wii games did not always require players to stand up or indeed move around. Microsoft says that developers can deploy Kinect in more “subtle” ways, supporting sit-back gaming. Until such games appear the first titles risk being positioned as a niche market. But overall Kinect is an impressive attempt to take the TV games console industry in a new direction and we believe it will have the initial positive impact on the 360 business which we predicted earlier this year. Judgment on its longer term success will have to wait a few more months once the novelty has begun to wear off, but it would be very surprising if Kinect’s arrival does not push development of games and other TV-based applications in directions we can today only barely imagine. Client Reading: Taming the Waves: Games Console Life Cycles and Platform Competition

Is it a sign of Trouble at’ Mill? Or just another corporate shake-up while business goes on as usual? Microsoft yesterday announced the departure of leading Entertainment and Devices executives Robbie Bach and J. Allard. Microsoft CEO Steve Ballmer will take charge of the division, with Don Mattrick running the Xbox side and Andy Lees the mobile business. There are clearly problems for Microsoft in its mobile business. All the various iterations of its mobile phone software over the years have failed to make significant market impact as Apple and, now, Google, make the running. Microsoft’s biggest problem is that consumer is still a relatively small and fragmented part of its overall business. It’s losing out to Apple, and others, in the consumer market because its primary corporate focus continues to be business users of Windows. Apple, which, not through lack of effort, never achieved prominence in business markets, has been able to focus its strategy on the consumer space without the hindrance of adhering to a corporate software strategy. From Microsoft’s perspective it might seem logical to group Xbox, music players and mobile phones under one roof, but this makes less obvious sense to the outside world. Xbox has been successful largely because it has been left alone to formulate its own strategy focused on games, entertainment and the digital home. Dan Mattrick, whom I met last summer to discuss Xbox strategy, should now try to persuade Ballmer that the Xbox team needs to remain a discrete unit with liberty to forge its own direction, and if necessary outside of the demands of the corporate Windows strategy if necessary. With the launch of Natal imminent, the continued ramping up of online services based around the Xbox 360, and the plateauing of Xbox 360 sales, Microsoft can ill afford a dilution in focus because of this disruption to the senior management team. David Mercer Other Blog Posts Of Interest: PS3 Global Market Share Reached 31% in Q1 2010 Sony’s PS3 to Win Current Games Console Battle; SA Forecasts 47.5 Million Global Console Market in 2010 Sky Player Finally Arrives Where It Belongs, But Work Still to be Done TV or Videogame? 1 vs 100 on Xbox Live Offers Lifeline To Appointment Viewing Client Reading: Taming the Waves: Games Console Life Cycles and Platform Competition

Sony’s newest home console gained market share in terms of global sales in the first quarter of 2010. PS3 sales reached 2.2 million units, out of a total for the three main rivals of 7.2 million, giving it a 31% share. This compares to an 18% share a year earlier, and 28% in the previous quarter, Q409. In spite of declining sales, the Wii actually maintained its market share in Q1, with 49% of sales. It was the Xbox 360 which lost share compared to the previous quarter, selling 1.5 million and giving it 21% of global sales. This was, however, an increase in a year ago, when the 360 had 19% of the market. The companies’ data remain pretty much in line with Strategy Analytics’ own projections for full year 2010 performance, as published in March 2010 in our report, “Taming the Waves: Games Console Life Cycles and Platform Competition”. There are three major uncertainties for 2010 sales: the extent of the decline in sales of the Wii; whether system enhancements can improve the performance of the Xbox 360 in the second half; and whether improvements in the PS3’s sales can be sustained through the rest of the year. For the moment we continue to predict global PS3 sales of 14.0 million in 2010, compared to 17.5 million Wiis and 10.5 million Xbox 360s. This will represent an overall decline in current generation console sales of 9%. David Mercer Client Reading: Taming the Waves: Games Console Life Cycles and Platform Competition

As promised, a quick preview of our games console forecast which will be published early next week. No surprise that Nintendo’s Wii stands in the lead at the moment, within the current generation of systems, in terms of global installed base. We estimate that there will be nearly 76 million Wiis in use worldwide by the end of 2010. But the signs are that the Wii has peaked in terms of console sales, and its installed base will begin to decline after 2011. Meanwhile, Sony’s PS3 and Microsoft’s Xbox 360 will continue to grow, so that the PS3 will become the largest platform globally by 2013. In terms of cumulative lifetime sales we expect the PS3 to hit 127 million units, compared to 103 million Wiis. These estimates are derived from our core forecast scenario, but we have developed various scenarios for each platform. Uncertainties clearly surround each of the major platforms, particularly relating to the new services and upgrades planned by Sony and Microsoft. Natal on the Xbox could be more beneficial to 360 sales than expected, and Sony’s own motion controller, together with its plans to upgrade all PS3s to 3D capabilitiy, also represent potential for upside to our core forecasts. This year’s global market for consoles is likely to fall again, after a 6% decline last year. For 2010 we are predicting global console sales of 47.5 million, a 9% decline.The Wii will account for most of that decline: sales of the PS3 and Xbox 360 are predicted to increase. David Mercer Client Reading: Global Video Game Market Forecast

The rapid re-emergence of 3D in the television and video industries is beginning to reach “real” consumers. I was tempted into the Sony Style store in Boston’s Copley Mall recently by a window poster offering the chance to “see 3D in action”. After circling the store with no sign of said “3D in action”, a sales consultant pointed me, with slight embarrassment, to a PS3 connected to an LCD TV. “This should be showing 3D, but we were sent the wrong box.” Further inquiry revealed that “Singapore”, whatever might be there, had shipped a faulty hard disk drive for installation in the PS3, and the store was awaiting a new module, presumably along with the sort of firmware upgrade to be offered to all PS3 owners later this year to enable 3D Blu-ray playback. Personally I have seen enough 3D demos to last a lifetime, so this disappointment represented no great loss. But Sony will clearly have to avoid such problems for US-based customers interested in 3D Blu-ray players and TVs once they are offered for sale. Effective in-store technology demonstrations have always been one of the major obstacles to commercial success, and 3D will be no different. Minor issues such as these will be overcome as the technology matures, but they will be replaced by other practical questions such as how 3D glasses are stored, demonstrated and secured. Retailers will have other headaches too, as an excellent article in specialist trade publication, CE Daily, revealed last week. The incompatibility of passive (side-by-side) and active (eg Blu-ray) 3D systems is one of the major faultlines in the realm of 3D standards. The Blu-ray 3D standard specifies only the active approach, which is generally accepted to offer the best quality available today, and will be compatible with TVs with active displays and the transmitter necessary to communicate with active shutter 3D glasses. Panasonic recently became one of the first major companies to announce sales of new, active 3D TVs. It will sell 50” and 54” plasma sets in Japan, starting at around $4800. One pair of glasses will be included in the bundle; additional pairs will retail at around $112 each. But, as CE Daily’s Barry Fox reports, it seems, as long suspected, that some TVs will be launched which will only support passive 3D technologies, from vendors such as Hyundai and JVC. These TVs, which are likely to cost considerably less than the first active 3D sets, will be suitable for broadcast 3D services from Sky, which are only using the passive approach. But they will apparently not be compatible with 3D Blu-ray players (including the PS3), at least not without some modification or add-on transmitter device. They will also apparently not incorporate the latest HDMI 1.4 ports required for 3D Blu-ray and other potential active 3D systems. We wrote nearly a year ago that BSkyB, which had just announced its intention to launch a 3D service, was unconcerned by 3D standards issues. But that narrow perspective ignored the dilemma which now apparently faces retailers anxious to push sales of new 3D devices and software. Sky’s 3D customers will need new TV sets; but will retailers tell them (will they even know) that some of those TVs may not play 3D from Blu-ray discs? Buyer, as always, beware. Client Reading: Consumer Imperatives for Digital TV Media Browsers

We met with Sony Playstation's senior European executives today for a performance update and to hear plans for 2010 and beyond. After what the company described as a challenging 2009 the PS3 nevertheless appears to be in a strong position as we enter 2010. I can't release any detailed European market data yet, but we will be publishing our own estimates and forecast for console sales very shortly. But the general global outlook for the current generation of home consoles appears to be clear. In terms of annual sales volumes Nintendo's Wii is entering a period of decline, although its global performance in 2009 held up well. The Xbox 360 has peaked in terms of annual sales, while sales of the PS3 are still on an upward trajectory. So while the PS3 still ranks third globally in terms of installed base, this situation may not last much longer. Much depends on assumptions about the longevity of these platforms. As we have always argued, the PS3 was designed with longest term vision in mind, and that is now being demonstrated by global sales patterns. However the uncertainty surrounds the impact of system upgrades such as Natal and Sony's motion controller. These are likely to give renewed impetus to both platforms. We'll release our conclusions together with market data projections in the next week or so. Client Reading: Consumer Imperatives for Digital TV Media Browsers

Things certainly didn't run according to the slick rollout plan Sky and Microsoft had promised us. In the grand scheme of things that is unlikely to have any major impact on tomorrow's world of connected TV. But the fact that two well financed global players can stumble so badly at the first hurdle demonstrates the severity of the challenges that lie ahead in the race to bring online TV to the big screen. The day after the official service launch Xbox posted the following message: “due to the unprecedented levels of simultaneous demand, we did not have the capacity to satisfy all service requests”. Xbox indicates that “many tens of thousands” of users tried to use the service. We, on the other hand, are surprised that this level of demand was not predicted in advance for such a high profile launch. The service will certainly have to cope with much higher volumes if Sky’s expectations are realised. The current status as far as we can tell (neither Sky nor Xbox have admitted to a more detailed analysis of the problems so far) is that some Xbox owners are successfully using Sky Player, some have downloaded it and been unable to use it, and others have yet to be offered the service. After the furore of the first day, when the application was withdrawn within hours of its launch, Xbox admitted that there were issues with some servers and that the service would instead be rolled out gradually to ensure that quality was not compromised. My own experience has veered from the excellent to the frustrating. I can say that we have managed to watch an on-demand streamed movie from beginning to end without a single glitch, and the video quality was quite acceptable. By contrast an on-demand sports game yesterday refused to play for more than a few minutes without buffering. I am currently still encoutering many buffering problems and Sky Player disconnections. I have also noted a few minor niggles with the user experience. The Xbox controller switches itself off after a few minutes of non-use, which is inevitable during the viewing of any TV show or movie. So live pause or any other functions cannot be selected until the controller has connected with the console, a process which usually takes 10 seconds or so. The aspect ratio on a number of shows, notably in Sky World News, are incorrectly set, so that tops of heads and captions are chopped off. News tickers are affected by jerky motion. The release dates of some programmes are not indicated in the programme description, which can be especially frustrating in the news genre. Most of these issues will surely be resolved over time. Both Sky and Xbox may be surprised (although they really have no excuses) at the initial demands put on their software and network systems and have to make further investments in order to maintain quality levels. One further point to note is that fast forward during advertisements during on demand shows has been disabled, which should certainly please advertisers. Assumign that these early problems can be solved quickly, it is clear, as we indicated before, that Sky on Xbox has the potential to shake up the UK's online TV market just as the BBC's iPlayer did two years ago. When it works, Sky on Xbox offers an entirely new way of selecting and watching TV on the big screen. The Sky Movies channel experience alone is transformed by the ability to choose instant start from a selection of hundreds of films. On-demand movies in our view will be one of the most used services, at least until Sky and its broadcast partners populate the libraries of television shows, which currently are somewhat restricted. We remain to be convinced that the streaming platform is yet sufficiently robust to support the expectations of subscribers who choose to get Sky for the first time using the Xbox platform. Given the monthly premium of up to £41 which Sky on Xbox customers will be paying there will be no room for the quality problems which are apparent at this early stage. We are also doubtful that many existing Sky customers will opt to pay an additional £9.75 a month to use the Xbox for live television on an additional TV set. The appeal of on-demand TV is immediately apparent, however, and we expect this to be a key selling point. It could be enough to tempt existing Sky customers to buy an Xbox 360. Xbox had better make the most of this window of opportunity: the rumours are already circulating that the PS3 will also offer Sky Player before too long. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

The UK’s 1.3m Sky TV subscribers who own Xbox 360s are about to get a real treat. Instead of putting up with Sky’s archaic EPG they will soon be surfing Sky’s content using the slick Xbox Live interface. We were given a live demonstration of the service today and everything (well, almost everything) is looking good for the commercial rollout on October 27th. Let’s get the slight caveat out of the way first of all: today’s demonstration from a central London location used a broadband connection to the production servers which will support the commercial service rollout. However, during live IP “broadcasts” one of Sky’s sports channels the picture was not 100% reliable, and occasional freezing and jerkiness was noticeable on several occasions. This would not perhaps be significant on a normal streamed video service to a PC, but it seems doubtful if TV viewers will be quite so forgiving. I’m sure Xbox and Sky will ensure that the commercial service is not plagued by these slight problems. Sky’s Griff Parry, who heads the Sky Player group, and Microsoft’s Jerry Johnson, head of Xbox Live in Europe, offered a united front to the partnership, claiming that, after initial and understandable caution, both teams had worked together extremely well and with considerable mutual respect. Of course we have seen previous apparently rosy partnerships involving Xbox fail to deliver, but this is clearly different. Sky would not be putting its substantial reputation for quality and reliability on the line if it was not convinced that the Xbox Live platform was robust, and the evidence so far (subject to the earlier qualification) is looking extremely promising. As expected the Sky programming sits behind one of the Xbox Live menu items in the Video Marketplace tab. As soon as the Sky option is selected the background and colour scheme become blue, reflecting Sky’s corporate image. The Sky menu items closely reflect the standard Sky TV EPG, down to channel and genre options. For relevant options there is the choice to watch on demand or live. In my view the biggest benefit of Sky on Xbox will be for Sky Movies subscribers to have access to a considerable library of true VOD movies on their TV set. Sky believes there are two major opportunities from this initiative: first, to secure loyalty from existing customers; and second, to tap into a lucrative 20-30 demographic for which its traditional satellite-based distribution may not be appropriate. Sky is thinking here particularly of young males who have yet to “put down roots”, who may move home frequently, and who inhabit apartments where satellite dishes are prohibited. This segment is seen as prime Xbox owning territory and therefore ripe for upgrade to premium TV services. Besides increasing the overall customer base, the Xbox Live platform offers Sky a new avenue towards advanced services. The early example of avatars sitting in front of a big home cinema screen watching live football together may or may not prove to be a gimmick. But a real opportunity for Sky certainly lies around integrating communications and content into exciting new services. Parry admitted that he sees headset-based voice chat during programmes as one of the most compelling opportunities in the early days of the Xbox Live venture. We can only imagine the possibilities as Xbox continues to add peripherals such as the set-top camera/microphone – the crowd noise during live sports could soon become the sound of a million home-based viewers shouting at the TV screen . Given what has been possible before, it would seem that Sky and Xbox together really can take the TV experience to a completely new level. If anything disrupts progress it will be corporate disagreements, rather than technology failings. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

Lots of excitement in the press over the weekend about the availability of Canvas set-top boxes in the UK by Christmas 2010. For non-UK readers, Canvas is the BBC’s initiative to bring television over the internet to big screens, ie TV sets. The BBC Trust’s consultation on Canvas is here. The Christmas 2010 “announcement” was made by Richard Halton, the BBC’s IPTV project director. BT, ITV and (channel) Five are also partners in the project. Halton was quoted as saying that set-top boxes built to Canvas specifications would be available to UK homes by Christmas 2010. We should be careful not to read too much into any such precise prediction of events more than 12 months in advance, especially when they are made by an organisation that has little control over when they will happen. The BBC is of course the driving force behind Canvas, but as well as having to overcome the BBC Trust’s objections to the project, it also has to win the technical and marketing support of device manufacturers. The latter have been extremely frustrated at the Canvas delays and several have found other ways to get iPlayer onto TVs. As we have often said the games console is likely to be a key platform for online TV. iPlayer has been available on both the Wii and the PS3 for a year or so but only with limited capabilities and effectiveness. The BBC has now upgraded its PS3 iPlayer application and since its launch it has already become the second most popular way to watch iPlayer after Virgin Media's VOD service. According to Anthony Rose, the BBC’s Controller, Online Media Group and Vision, PS3 was catapulted to 10% of all iPlayer viewing in the week following the update. Early reports confirm that PS3 owners using a 1.5Mbps iPlayer stream are now seeing close to SDTV quality on large screen TVs. Since the PS3's price drop to £250 (€299 in rest of Europe) it is one of the cheapest and easiest ways of watching online TV from the BBC on the TV. Even though they will offer additional channels the possible arrival of Canvas set-top boxes late next year is unlikely to dent enthusiasm for the many alternatives which are sure to emerge in the meantime. Twitter: twitter.com/DavidMercer_SA Client Reading: Digital Media Devices Global Market Report