Returning to temperate climes after my first “summer” visit to Las Vegas, I am more amazed than ever at Nevada residents’ ability to withstand daily temperatures of 40 degrees plus and practically zero humidity. At least I now know what 108 Fahrenheit feels like. The contrast between this and a proper British summer (a few days of 25C followed by cool cloud and rain) could not be more stark. Las Vegas’ Mandalay Bay was the venue for Cisco’s annual customer gathering, which this year also brought together a hundred or so analysts for in-depth discussion of product and commercial strategy. The highlight product announcement was the Cius, as reported by my colleague, Susan Welsh de Grimaldo. While the company has not officially announced pricing, I expect it to be closer to $1000 than $500. Cisco is quite clear that the Cius is positioned as an enterprise solution, and these prices are likely to prevent much leakage towards “unofficial” consumer markets. What was most interesting, perhaps, is the genesis of the Cius within the Cisco organisation. It was obvious from many conversations that few people were aware of its development until very shortly before its unveiling. Even John Chambers himself claims to have been unaware of it until two months ago. If the product proves successful it will be further justification of Cisco’s innovation in organisation and management which allows dynamic cross-fertilisation of ideas across multiple teams. The other news centered on home energy management, where Cisco is launching a “Home Energy Controller” allied to Cisco Energy Management Services, which will be offered by utility companies to help consumers understand and control their energy consumption. The Controller uses Zigbee, WiFi and other home networking technologies to exchange data with and, potentially, control a variety of home devices. Much of our discussion with Cisco execs centered on the challenges and opportunities for service providers offered by OTT video, as well as the potential for telepresence in the home environment. Telepresence has a been a success for Cisco in the corporate market, and it is still on track to bring a consumer solution to the market by the end of 2010. It still strikes many people, both in the industry and consumers, as odd that Cisco should have a serious consumer strategy. While its brand presence is growing, not many would consider it as a competitor to the Sonys, Samsungs and Apples of the world. And there is no doubt that the company’s financial power is built on its core network switching and routing market dominance. Cisco does have key positions in home networking and set-top boxes, as well as the TV and broadband service provider space, but the jury is still out on whether Cisco itself will become an overall leader in consumer markets over the next decade. But consumer players cannot ignore Cisco as an influence on market direction. Its innovation processes, as demonstrated by Cius, will combine with its financial strength to create a wave of consumer innovations over the coming years. Many may fail, but it will only take a few to be successful for rivals to feel the heat. Client Reading: Chasing the Elusive IPTV Business Model: NDS, Cisco and Comcast to the Rescue?

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!

It’s what Interactive TV always should have been. Endemol’s smash hit quiz show, 1 vs 100, is now available as a scheduled, interactive show to Gold members of Xbox Live in the UK. Although in beta phase, the service appears to be working well. I suffered one connection dropout during Friday evening’s show, but otherwise was able to participate fully, first as a member of “The Crowd”, and later as one of the hundred members of “The Mob”. Unfortunately, or perhaps not, I was not selected as “The One”. My personal background: I’m not a quiz show fan. I used to keep up with “Who Wants to be a Millionaire” in its early years, and I enjoy satirical “quiz shows” like “Have I Got News For You”, but they hardly count as the same genre. I do not go out of my way to find shows in which I can answer the questions, and had not even heard of “1 vs 100” until Microsoft told the press about its launch on Xbox Live. Some years ago, when red button services were first being rolled out across the UK’s digital TV services, early attempts were made to add interactive audience participation to quiz shows, including “Millionaire”. It was an obvious genre to target, with audiences already sitting at home shouting out answers to questions in frustration at the presumed ignorance of the on-stage participants. But the limitations of the technology, not least through the absence of broadband connectivity, meant that these early attempts were soon abandoned. It’s ironic, but perhaps not surprising, that it has taken a games console, rather than a digital television platform, to demonstrate what interactive television could eventually become. Tens of thousands of people are now participating, live and in real time, in the same scheduled “programme”, responding to questions through their games controller, seeing themselves (well, their avator at least) on the screen, and accumulating points in competition with their remotely connected opponents. The operation of the Xbox Live show is clearly heavily automated, and a few kinks need to be ironed out: the various warning notices and texts were barely legible on my museum piece of a 32” CRT TV, for example. I hope Microsoft is not assuming that every single 360-owner has their console HDMI-wired to a 1080p-capable 50” LCD. The pauses between “rounds” and their accompanying messages can also prove a little tiresome. But generally this is an extremely impressive implementation, as with so many things on the Xbox Live platform. Considering this is a beta test, we can only imagine what further refinements will be made as the show evolves. Our excitement over the technology should not cloud the inevitable doubts over business models and commercial viability. That Endemol, one of the world’s most successful independent developers, has signed up as a partner should be taken as a positive sign, although it has no doubt been suitably rewarded for its risk at this early stage. The trick, as always, will now be to get independent advertisers to recognise the value of targeting 70,000 people (a typical number of simultaneous participants in the US version) whose profiles are well known and whose attention is as guaranteed as it ever can be by scheduled programming. No fast forwarding through these ads… It’s time to reconsider the term “games console”: if Live’s current progress is anything to go by, few other gadgets will deserve the term “home entertainment centre”. Twitter: twitter.com/DavidMercer_SA Client Reading: Global Digital Media Growth Slows to 2.7% in Q4 2008

At the IPTV World Forum today, I chaired a panel during a session on IPTV ARPUs. The preceding presentations had demonstrated how difficult it is to stay focused on the topic of user revenues without drifting into the complexities of network architecture or exciting new service concepts (that users may or may not actually want to pay for). So I asked the panel contributors to focus on the revenue issue and I thought they did a good job. Joao Pedro Mendes represented Portugal’s Sonaecom, which has operated an IPTV service for the past year. In spite of my hopeful prompting he was unwilling to divulge precise details on the company’s ARPUs, but he did indicate strongly that on-demand content was one of the main tools Sonaecom has to get users to increase their spending, and the company considers its VOD service to be successful. Joao’s main point, however, was that introducing new services is as much as a way of differentiating the IPTV provider from competitors in the market, serving as a customer acquisition driver, as much as increasing revenues directly. Gudjon Mar Gudjonsson, CEO of the Icelandic solutions provider Industria, believes that one of main opportunities for IPTV providers to increase ARPUs is to offer users a much higher degree of flexibility in their ability to choose only the channels and programming that they want to pay for. This point was supported by a questionner from the audience, although he also admitted that he would also like to pay less to watch those channels. This is an long-standing debate in the pay TV industry: the battle between users wanting to pay for only the content they want to watch and the content providers who, it is claimed, have to subsidise the vast amount of content that would never get produced if it had to be profitable in its own right. Both ANT Software’s founder, Simon Woodward, and Jonathan Wilson of Red Bee Media recommended that IPTV providers should focus on changing the relatinoship with subscribers and viewers. For example, the provider needs to become a trusted partner in guiding each user towards content he or she will like. It is IPTV’s inherent interactive capabilities that should allow providers to improve the service and increase its value. Whether customers are willing to pay more for these capabilities still remains doubtful, however. My own conclusion of the panel was that IPTV service providers should be very cautious before assuming that ARPUs will increase with every additional new product or service. Client Reading: US IPTV Forecast and Outlook: $13.7 Billion by 2012

We spent some time yesterday with Hillcrest Labs's Andy Addis. Hillcrest has been working on improving the TV control experience since the beginning of the decade. The company’s founding principle is that navigation through a world of effectively unlimited television and video content cannot function effectively with the classic remote control/electronic programme guide model. It believes that television interfaces will eventually move towards a pointer-based system. A key challenge was to create a pointing device that works effectively in the standard TV lean-back, 10-ft scenario, where a firm, flat surface is typically unavailable. This led to the “air mouse” concept that is available through Logitech and is the company’s first commercial product. It has also now been extended into the “loop” television control device concept. TV viewers have become used to sitting back on the sofa and controlling channel selection and, more recently, interactive features, over the past 30 years or so. It is worth recalling just what impact the wireless remote control had on TV viewing and usage when it began to penetrate the TV market in the 1970s and 80s. Most people have forgotten the time (if they ever experienced it) when changing channels meant getting up out of the seat and flicking switches on the TV. It’s no wonder that TV channels of that era concentrated on winning eyeballs early in the evening with their best programming, safe in the knowledge that many viewers would stay with whatever shows followed on the same channel, not to say the advertising that funded them. Once viewers were able to control what was on the screen more easily, viewing habits began to change beyond recognition, and channel surfing became the norm. On-screen programme guides have helped viewers cope with the digital era, when hundreds of channels are available. But there’s no question that they are being pushed to their limits by the traditional remote control/EPG combination. Navigating through Sky Digital’s endless channels is a time-consuming and frustrating process. It’s no wonder most viewers spend most time with the channels they know best. Hillcrest’s approach combines the principle of pointing at the screen with a highly visual presentation approach. In demonstrations, the viewer can move the cursor around the screen very rapidly. On-demand movies begin with a wide selection of titles, presented as though they were DVD covers. The details on each title are barely legible at the top level of the menu but they are grouped into genres, and the viewer can easily zoom in to each genre or a specific title that may be of interest. The CES demonstration was shown on a PC as well as a set-top box based on a Sigma Design chipset. On the PC, navigation is very rapid. It slows down somewhat on the set-top box, but is still faster than most of today’s commercial digital TV platforms. The navigation experience is as close to selecting DVDs in a video rental store as I have seen. Hillcrest has integrated most of the usual “digital home” options into its reference guide, including TV channels, music libraries, games and photos. “The Loop” control takes some getting used to, but is easily learnt. There are two buttons, select and back, and sensors and proprietary algorithms mean that the pointer works whatever angle the control is held at. Hillcrest is working with CE manufacturers with a view to licensing its technologies. It has also had interest from digital TV service providers. The company is encouraged by the rapid success of Nintendo’s Wii, which appears to confirm that games players are willing to embrace new control concepts. Persuading several billion TV remote control users to overcome the inevitable inertia and switch to a new concept may take rather longer, so we will look for commercial deals with major CE players and service provider industries for evidence that the lean-back audience is ready for another radical change to their viewing habits. Client Reading: Digital Home Entertainment Devices: Global Market Forecast Q407

Well, after day one at C-Scape I'm not much the wiser. The consumer tech vision is clear, but then it's not new either. What surprises me is that no Cisco exec has given me the same answer regarding the company's biggest challenge as it seeks growth in consumer media markets. The bulk of Cisco's revenues today comes from service providers, ie companies that depend on the end user relationship for a direct revenue stream. Scientific Atlanta, which is the company's major consumer technology division, depends on a similar relationship - consumers paying cable companies for TV and broadband service, and getting an SA set-top box for free as part of the deal. So much is transparent. Then Dan Scheinman, Cisco's SVP Media Solutions, described how Cisco is approaching media companies to help them distribute media to connected home devices, something we have talked about for many years at Strategy Analytics. Earlier in the day, as I mentioned previously, Cisco had invited the BBC's Erik Huggers to describe how the Beeb was offering full-length TV shows streamed over the web. So we naturally assumed Dan was talking about the same thing. But when I mentioned to Dan that what he was offering seemed to conflict with the SciAtl model of supporting managed delivery via network providers, he seemed taken aback. And he then suggested that he had been referring only to "short-form" video in his presentation, rather than full-length TV shows or movies. Longer-form video was apparently not quite ready for primetime, partly because it was not being distributed to TV sets yet. But then, I thought that's what Linksys was all about. Earlier in the day I spent time with Steve Silva, who joined Cisco from Comcast earlier this year. Steve is focusing on the home network device segment, and recognised the fact that the needs of service providers to manage devices across the home network could be in conflict with the needs of device manufacturers to develop products independently of service providers. In other words, Cisco's Linksys division sells products in the open retail market, but SciAtl sells devices to service providers. If Linksys sells a device that lets consumers stream video direct to the TV without the user having to subscribe to cable TV, it is competing with a set-top box provided by the cable operator (assuming the available content is similar, which is admittedly a big assumption). I am getting the impression that Cisco has just not given enough thought to managing the conflicting business relationships that are creating turmoil across the digital media and technology value chain. The company seems to expect, probably with good reason, that, whatever the outcome, it will do very nicely, thank you. After all, all content and devices will all be IP-based, one way or another. But it seems to have a blind spot about the impact all this could have on its existing customer base, and that should be cause for concern. I know Skip MacAskill, Cisco's AR man, is busy with managing the event, but these issues do seem to have been put left off the agenda. Perhaps we'll get more insight tomorrow. Client Reading: Digital Disruption: Imminent and Long Term Threats to the Audiovisual Industry Online HD: Disney’s ABC Throws Down Gauntlet To Competitors, and Access Providers

Italy's Telecommunications minister, Paolo Gentiloni, has announced that the country's analogue switch-off date will now be 2012. This compares to the current official plan to complete the digital transition by next year, which was always highly improbable. Back in 2000 we wrote: "Italy continues to bemuse outsiders. Decision-making is still geared towards satisfying ever-changing political priorities, rather than developing coherent long-term strategies. ...There has even been a suggestion (by the Communications Minister) that analogue switch-off could occur as early as 2003. To describe such ideas as pure fantasy would be polite." In fact, in 2000 the official "switch-off" date was announced as 2006, which remained the objective until 2006 loomed too close for comfort, and was then revised to 2008. So Italy has an impressive track record of tearing up its old digital TV plans; now realism finally appears to have taken hold. The 2012 objective should be realistic, assuming the proposal for mandated DTT tuners is formally adopted, although there is still a long way to go - half of Italian households still rely solely on analogue terrestrial TV signals. As we predicted, France's new DTT strategy has already had an impact on the rest of Europe. We will watch the details of Italy's transition plan with interest.

I'm not sure which is more frightening - the fact that I started my analyst career 20 years ago today, July 6th 1987, or the fact that I remember the date so clearly. I learnt my first industry jargon that day: "CTV" meant "Colour TV" at a time when it still mattered that TV sets were not just black and white. I won't bore readers with the usual "this is how things used to be" retrospective. My colleagues and clients are probably fed up with hearing the phrase "I remember when" during our numerous debates on new technologies and digital content - goodness only knows what I'll be like in another 20 years, assuming there's still a role for me as an analyst. I will just say that this job only gets harder, and certainly more interesting, if only because change is so much more rapid. A five-year forecast used to be a pretty straightforward task - we even got some of them right occasionally... Nowadays it can seem that looking ahead 5 years is like trying to find life in a distant galaxy. Anyway, to celebrate the occasion, here are just a few of my oft-repeated analyst lessons to reflect on: 1. Distinguish between open and closed technology markets. 2. If you're dealing with an open one, never underestimate the rate at which technology hardware prices can fall. 3. Never forecast on the basis of growth rate alone. 4. Understand what a company's core business is - and asking them once may not give you the answer 5. Content is king, but technology is queen, and believe me, you don't want a divorce if they ever fall out...

Good job I'm not a gambling man... Virgin Media's cable subscribers lost access to Sky's News, Sports News, Sky One and Sky Two channels this morning. Sky is banking on 10s of thousands of them cancelling their cable deals and installing dishes as a result. Virgin Media is hoping it can reinvigorate its VOD service (Virgin Central) by putting it on the same channel as the one vacated by Sky One. The good news for outside observers is that this heavyweight battle is likely to continue for many more months, if not years. Sky has taken a markedly more aggressive stance on a whole set of competitive issues in recent months, presumably as the threat of competition has increased. Virgin Media is clearly a major opponent, and has strong positions in broadband, telephony and mobile to fall back on. Its weakness lies in being restricted to its cable network for TV services, although that is likely to change as it rolls out "off-net" TV using IPTV. FreeView, BT Vision and other providers are also putting pressure on Sky. It's tempting to want to call an outcome to the whole saga, but there really doesn't seem to be one. The UK's competitive environment is likely to encourage increased polarisation between vertical providers looking to bundle their customers into multi-service broadband/TV/mobile deals. Assuming the regulators stand back and let it happen, the battle to win and retain customers is only likely to get more intense.