As the year approaches the end, let’s look back and review some of the impactful events in the digital media business in 2010. Many of those events generated substantial buzz when they just happened, but quickly people forget about them and move their attention on to new things. As a year-end review, this summery is intended to help us relearn these events and gauge their impact on the industry and companies in the future. Events about Google:

Google claimed it was threatened by cyber attacks originated from China in January. Following the event, Google decided to stop censoring search results in China, which put themselves in a direct confronting position with the Chinese government. As the conflict between Google and the Chinese government deepened, Google had to redirect the traffic on its China site to the Hong Kong homepage. Google had not only lost market share to its competitors in China but also lost plenty of talent due to the uncertainty of its business in China. With only a constrained access to the largest Internet market in terms of users, now Google’s growth solely relies on the expansion to other business lines, such as display advertising, Android platform and TV business.

Google’s social network initiatives remained unsuccessful. Google Buzz was introduced in the year, but even with the Gmail integration the service has been forgotten by the public. The once highly buzzed Google Wave was terminated by Google, as most people cannot figure out how to use the innovative service. Despite the popularity of Gmail, the dominant Facebook and the growing Twittier and LinkedIn will only make Google’s future in social media gloomier.

Google unveiled Google TV with its partners Sony, Intel and Logitech. While Google had depicted a splendid picture for the Google TV when it introduced the product, its lack of premium content support and the severe competition from Apple, Microsoft and Amazon already led many to question the feasibility of the product. Sony’s slash on the price in the holiday season for Google TV-embedded TVs magnified the concerns on the product’s outlook. 2011 will be the key year for Google TV’s success. And if Google could build healthy relationship with Hollywood studios for the platform, it would still gain some ground in the new TV business.

Events about Apple:

Apple’s introduction of iPad has clearly changed many aspects of digital media consumption. Publishing and news industry has found a new and more versatile content distribution platform, which seems could further offset the decline of traditional revenue streams. With a bigger screen compared to smart phones, iPad is a better device for mobile video consumption. Movie studios and pay TV companies started to put strong focus on distributing their content through iPads. We expect the iPad to continue its robust growth in the next year, along with its importance to premium content distribution.

Games have always been top-selling apps in Apple’s app store. The introduction of Game Center on iPhones and iPads makes Apple a formidable player in the social game distribution business. Going forward, the gaming piece will continue to augment the appeal of Apple’s platform.

Events about others:

Microsoft’s Kinect has shown signs of good reception in the holiday season. With the tremendous investment put in the project, it finally delivered quality gaming experience to casual gamers, dwarfing Wii’s motion censor device. Although Xbox only accounts for a relatively small portion of Microsoft’s total revenue, the success of the device could pave the way for its home entertainment strategy if implemented correctly. The solid experience of Kinect also counters the argument that Microsoft has lost the innovation capability. In addition, Microsoft struck a deal with ESPN to provide ESPN programs to Xbox Live users.

Netflix keeps up its growth and now has 16 million subscription members. Given its expansion to other devices and other countries, we expect the service to maintain the growth momentum in the coming year. On the other hand, Hulu also adopted a paid revenue model with the introduction of Hulu Plus. But given the limited content catalog, Hulu Plus faces challenges to grow its paid users.

Facebook keeps the ball rolling by introducing a number of new features and services on the platform. Meanwhile, social games gained attraction with their virtual currency revenue model. Games from Zynga and Playdom have gained millions of users, most of which are based on social networks. As the ad rates on social networks remain low, the social gaming business could help Facebook break through its profitability challenge. And the social gaming companies will surely benefit from the secular growth of social networks.

Online advertising has become an old-fashioned category among all types of Internet businesses. The growth, however, is not going to stagnate anytime soon. According to Strategy Analytics recent published Online Advertising Index, Google, the bellwether of online ad business, is now 43% of the industry globally in Q3 2010. And its growth rate is like that of any emerging country in the world. Given its growth momentum in mobile and display ads, we believe in the near future that the online ad business is half Google, half the others. In the US, Yahoo and Microsoft are not doing much to challenge Google's position, with their quarterly revenue growth far slower than Google's. AOL is on the way to reinvent itself, or its falling trend will continue until the last day of the business. Outside the US, we are seeing strong expansion from Asian and European companies. Baidu has been beefing up its revenues rapidly for years, and its ad revenue has exceeded that of AOL in Q3. If we look at the search ad market, Baidu is now the second largest company only on the heels of Google, albeit it's still very distant from Google's almost $4 billion quarterly search revenue. Axel Springer is also showing a remarkable surge in Europe, with its online revenue growing by 81% in the quarter over the same quarter last year. Its investment in online media across Europe is bearing fruit right now. In addition, Korea's NHN and Norway's Schibsted are both catching up in the online ad business. The global online ad market is on the track to finish up $65 billion dollar by the end of this year. We believe the story of half Google, half the others in the online ad market will continue. Client Reading: Online Advertising Index Q3 2010

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

The Chinese PC maker Lenovo has founded a video game console company Eedoo, which was announced last month. The company will sell an Xbox-like game console, if not a ripoff, called eBox next year in China. Although the technology introduced by eedoo is nothing groundbreaking, there could be further implication behind the scene. Given that the Chinese video game console market has been highly regulated and the import of console has been prohibited for a long time by the government, we believe Lenovo's action, combined with Microsoft's recent publicly expressed interest in the Chinese video game market, indicates a potential opening-up for the market. Our recent insight Lenovo founds Eedoo: a Signal for a Potential Opening-up of the Chinese Video Game Console Market provides an in-depth analysis on the scenarios which the Chinese video game market might potentially head to. We believe that the Chinese video game market will become a new growth engine for the stagnating industry in the foreseeable future, and materially expand the size of the total market. - Jia Wu

Microsoft Xbox is at the moment very focused on reigniting stagnating sales of Xbox 360 consoles and elongating the 360’s lifespan. It is pursuing a two part strategy to accomplishing this; 1) launching an updated Xbox 360 “Slim” console, and 2) expanding the Xbox footprint by focusing on the “social gamer” segment with its controller free motion capture platform Kinect for Xbox 360.  Early sale trends from the US and UK markets suggest that the new Xbox 360 Slim has indeed accelerated console sales and now Xbox is turning its attention to the second part of the strategy – expanding its footprint into the social gamer segment. As we wrote in our recent report on Kinect, we believe that one of the key factors that will make or break Kinect will be if Xbox can get the pricing and bundle strategy correct for the price sensitive social gamer segment. We suggested at the time that Xbox need to have an entry level bundle (e.g. Xbox Arcade, Kinect, Dance Central game) starting at below $300 to succeed in breaking into this segment. Well it seems as Xbox may have listened to us as they today officially announced an estimated retail price (ERP) bundle of $299 (€299/£249) for an entry level Xbox console which will come with 4GB storage (compared to the current 256MB Arcade version), Kinect hardware and the “Kinect Adventures” game. The standalone Kinect hardware will get an ERP of $149 (€149/£129) as has been widely rumored for some time. While we think this latter price point is likely too high to entice most existing Xbox owners to upgrade to the Kinect platform, we believe it makes sense for Xbox to focus on the entry bundles for now, in order to accelerate console sales, and keep the standalone Kinect price high until a larger catalog of Kinect games has been launched. All in all, we think Xbox has skilfully negotiated the first major hurdle for Kinect – getting the price point for an attractive bundle correct. It now needs to focus on getting third party developers to embrace the Kinect platform and quickly build up an attractive catalogue of Kinect compatible games.  Martin Olausson

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

Yesterday, Google reported its earning for the first quarter of 2010. Its revenue for the quarter was up 23% compared to the same period last year, with total advertising revenue increasing by 21%. Google's US revenue grew by 22%, slightly lower than its overall growth rate. This is clearly a robust performance delivered by Google. In the meantime, comScore released US Search Engine ranking for March 2010 four days ago, indicating a 65.1% search market share from Google in the US, which was only up 1.4% comparing to the same quarter 2009. It is reasonable to assume that the revenue share in the search market is somewhat proportionate to search traffic share, although different search engines could have different cost-per-click and other factors. Surprisingly, we see that now Google's 1.4% increase in the US traffic share has led to a 22% growth in revenue. It isn't that proportionate, is it? Well, it's still proportionate as the overall search market or online advertising market is bouncing back. We've already seen a strong fourth quarter rebound in 2009 in the online ad market mainly owing to the holiday season. Now Google's strong performance has shown that the search ad market is back to rapid growth track. In light of Google's performance, we anticipate that Yahoo!, Microsoft, Ask and AOL will all see their search revenues expanding in Q1 2010. Interesting, Google's stock was trading down massively for 5% after Google's strong earning release. Some analysis say the stock price decline attributes to Google's increasing cost on R&D and hiring, but I'd rather believe that investors's expectations on Google was just too high. They wanted even better results than this impressive one. With all the huge investment in innovation, Google is now under pressure to deliver the results of those innovation faster. Jia Wu Client Reading: Digital Media Index (DMI): Q4 2009

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

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!