The imminent release of Google’s first digital media adapator (DMA) in the Nexus Q, the first Google tablet in the Nexus 7 alongside improvements in the Google Play application and content delivery platform signal a step change in the wider war to establish the most desirable super-platform ecosystem marrying content, devices and cloud-based content storage and distribution. Apple has long held a seemingly unassailable lead with a high end, intensely focussed and design-led approach which has driven the most successful device sales strategy in business history. With the latest building blocks in Google’s ecosystem there is at last a danger that Apple will face some meaningful competition.

Previously Google relied on other device manufacturers for Android-based tablets and devices addressing the main screen in the household: Amazon riffed on the OS to create the Kindle platform, Samsung and others commoditised the Android-tablet experience into something meaningless and barely distinguishable from the others while Google TV has suffered the indignity of a relaunch. Although Asus is manufacturing the Nexus 7 the hardware and software is controlled by Google (similar to the dynamic with Samsung manufacturing Google’ handsets). In addition Google TV’s reception, sales and industry impact (crucial for driving interest from App developers and content owners) have been way below the levels a company of Google’ standing should routinely demand. Taking tighter control of the reins of the hardware aspect of their ecosystem is an acknowledgment that a single entity has to control all the components of the platform (software, hardware, content, distribution) in order to compete with Apple’s blue riband experience. Microsoft’s entry into the tablet manufacturing reflects the Redmond giants’ recognition of this reality.

To make an ecosystem meaningful, the progenitor has to reward customers for owning, buying and using multiple aspects  it. Again the benchmark is Apple which has expertly leveraged multiple aspects of its ecosystem to feather, embellish and improve the functionality of Apple devices, iOS, iTunes and iCloud in its now characteristic and seamless manner. Google is now trying to ensure inhabitants of its ecosystem will start enjoying similar benefits:

• Google Play, Google’s App and content store and the default content retailer for Google devices has been improved. Movies may now be purchased (previously TVOD only) and TV content has been added. Heavyweight content owners partnering Google Play include NBC Universal, Sony Pictures, Disney, Bravo, Paramount, Virgil Films, and Sundance. Electronic magazine subscriptions have been added to the store with Conde Nast and Hearst the first announced partners. Currently this US only but a territorial rollout is a given.
  

• the digital media adaptor Nexus Q plugs into a TV and enables owners of Android-based handsets and tablets to stream music and video. Intriguingly Nexus Q will download and stream a separate copy of the media itself – this is different to Apple’s Airplay where the content is streamed from an iPad or iPhone to Apple TV for playback on the main screen. It begs the question whether the functionality works for media not acquired from Google Play.

• ecosystem inhabitants who store their digital media in Google’s cloud have another two devices controlled by Google to browse, buy, store and stream media to including, crucially, one targeting the main screen in a household. Google’s ownership of the media locker, hardware and OS should reassure the market that investments made in acquiring and storing content on the platform will be safe for the long term: there are no other companies in the ecosystem whose commercial priorities will diverge from Google’s cf, Ultraviolet, Samsung, Nokia.

However issues which need addressing for Google’s strategy to thrive include:

• How aware is the audience of the cloud-based storage and distribution functionality offered by the major platforms? Do customers even care about cloud-based media storage and distribution and to what extent does it drive content sales? These remain largely unresolved questions which the digital media team at SA will address in the next digital consumer survey. It is seemingly a given that easy access to content (both purchased and, crucially, owned content including pirated content) adds to the value proposition of a device which is why this is becoming a key pillar of device and content ecosystem strategies. Apple’s approach has been to drive iCloud usage for personal data as an unobtrusive way of backing up personal data and photos in what looks like a Trojan horse to drive eventual usage for content. With 125m users of iCloud announced at WWDC Apple has made a flying start. Content rights deals for full cloud-based storage and distribution are still an issue and may hamper territorial rollout.

• The pricing for Nexus Q is too high at $299 when an Apple TV is $99: the device does not exist in a bubble and the value proposition is simply not competitive at $299 against what is close to impulse purchase pricing. And at some point Apple will raise the bar for targeting the main screen (starting with Airplay Mirroring): Google should have aimed at surpassing the Apple TV rather than catching up with it, which it has failed to achieve anyway.

• While the presumably not huge constituency of existing Android handset and tablet owners who want a DMA will be pleased, Google has limited the sales potential of Nexus Q by requiring ownership of an Android device for basic functionality.

• The dearth of other content options apart from Google Play and Youtube is an absurdity we can only assume will be addressed shortly. Third party services with significant audiences who will expect their connected living room devices to enable access in the US include Netflix, Hulu, and Pandora amongst many others. Availability of the most common content streaming services has become a negative differentiator for connected devices.
  

• The absence of any mention of Google TV is puzzling: using Nexus Q to deliver Google TV to non-enabled TVs seems like a natural fit. Perhaps this is how the product will evolve.

At this point it is worth asking what the endgame is for each of the ecosystem progenitors. It used to be so simple: Apple did all this to sell devices, Google to sell advertising, Microsoft to sell software, Amazon to drive retail sales. While worrying about giants such as these generally calls for us to pull out our smallest violins, the prospects for more specialist companies looks bleaker in a world of tightly controlled ecosystems. Specialists like Nintendo risk being forced into ever shrinking niches: will we ever see Wii and DS level volumes again? Nokia’s trajectory is firmly established while ecosystem evolution lags at Sony, Samsung and LG however at least the jury is still in discussion. Telco’s risk being forced into their long dreaded fate of providing the dumb pipes delivering the value which drives someone else’s profitability.

And with increasing complexity and multiplying commercial imperatives for each component of an ecosystem the route to the consumer becomes ever more complex and circuitous for content owners: rights deals today bear no resemblance to a much simpler world of content distribution even five years ago. Content owners must avoid commoditisation in such an environment as the music industry discovered long ago and undifferentiated news providers are discovering today: fungibility is death for content. Movie and TV content owners are fighting the good fight by creating artificial scarcity through windowing and controlled broadcast distribution networks and while the model is under pressure at the margins, the core remains rock solid, built upon the love only hundreds of billions of dollars of box office, DVD, retrans and advertising revenue can confer.

Standalone content providers will be marginalised, the role of device vendors will be diminished, and entry barriers will be raised to “historically unimaginable levels” according to our 2012 Predictions report, which is now available for complimentary download. According to my colleague, Ed Barton: “Now it is no longer enough to ‘just’ be a multibillion dollar market leader to play this game: bring an addressable market of more than a hundred million devices, global territorial coverage, tier one content relationships across all entertainment formats and tens of billions of dollars to invest over the next decade, or go home.”

The report also addresses Apple’s iTV, Smart TV platforms, second screen apps, broadband speeds, Android@Home, Amazon’s tablet strategy, voice control, new wireless home technologies, the next generation of games console platforms, and the multiscreen impact of the London Olympics.

Enjoy the report. We welcome feedback and wish everyone a peaceful and relaxing holiday.

David Mercer

The keynote presentation by Google TV’s Head of International, Suveer Kathari, at last week’s Informa OTT TV conference said very little about Google TV, even though it did present some useful insights on future market trends. For the record, Google’s key predictions include:

1. TV will become more personal and social

2. TV will become more engaging, especially through improved discovery

3. there will be more “glocal” content: local content delivered to global audiences

Not too many surprises there. The concern has been that Google, like so many PC- and mobile-centric players, still sees the TV as an extension of those legacy models. We’ve heard it so many times, but just to confirm: Google believes smart TV will follow the smartphone path, including the apps and store models. It was this limited vision that helped to create the disaster that was Google TV 1.0, and resulted in a $50m black hole for its partner, Logitech.

So what are Google’s plans for recovery? Well, it has already launched the second version of its Google TV platform, which has been downloaded to Sony Google TV devices and will upgrade the Logitech Revue devices over the coming weeks. Google TV 2.0 is essentially Android 3.1, according to Kathari, and includes Android Market. Kathari claims that apps developers are “very interested” in the big screen opportunity. Google TV market can accommodate all Android apps which do not rely on specific personal and mobile device capabilities, such as touch screen and GPS. In fact there are very few Android apps designed specifically for Google TV today: one example includes Plugplayer, a UPnP media streaming app which has accumulated between 10 and 50 downloads during the past month.

In response to my question, Kathari confirmed that Google TV will be an “open operating system” able to be modified by its device partners. However, during a one-to-one discussion, a senior industry executive cast doubt on this notion of openness, noting that Microsoft was receiving many millions of dollars in licensing fees from the Android platform. Regular readers will be familiar with my own issues with the notion of “openness” in any technology domain, which seems to be very much in they eye of the beholder.

Nevertheless, Google does finally seem to be appreciating the magnitude of its earlier mistakes and adjusting to the unique requirements of the TV model. Interfaces and user experience are one thing, and we will certainly see excited crowds flocking to see the latest LG, Samsung and other Google TV devices at CES in January.

Business models are very much another matter. Never say never, but our research so far suggests people, yes, even early adopters, want to watch TV on their TVs, not browse lecture schedules or check their email. As Google’s latest partner, Samsung, noted, the TV apps space is going to evolve very differently to those on smartphones.

I’m sure that a handful of apps, especially in games, will emerge as star performers from the efforts of Google, Apple and CE manufacturers, but there is a strong consensus that the opportunity in TV relative to the smartphone and tablet spaces is somewhat limited. Rather than broadcasters, it may be PlayStation, Xbox and Nintendo which should feel more threatened by the dawning of the TV apps era.

(Visit Apps World next week in London where you'll hear from key speakers about the TV apps industry.)

David Mercer

 

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

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

First, I would like to correct our recent press release on global MMORPG market. The press release says Global MMORPG Market will hit $8 billion in 2010, but actually it should be in 2014. In 2010, the market will be in excess of $6 billion. Yet it is still an exciting growth in the context of falling video game market in general, and we expect the MMORPG growth story to continue. While a lot of the traction in the gaming sector recently has been drawn to social games, where Zynga, Playdom and Playfish all had stunning valuations, we believe MMORPGs are still a steadily growing segment. For serious gamers, it is not something replaceable. Despite that there are now tens of companies playing in this field, the future growth of MMORPG, to a greater extent, still hinges on the handful of major companies. In the West, Blizzard Entertainment with the unmatched World of Warcraft (WoW) determines the general trend of the market. WoW's new expansion pack Catalysm is in beta test and it is going to be one of the driving forces for MMORPG growth in the next few years. Besides, the revenue model transition from subscription to virtual item sales will help some stagnating MMORPGs to revitalize. In Asia, Shanda and Netease will lead the Chinese market, whereas Nexon and NCsoft will remain the prevailing MMORPG companies in South Korea. Certainly, new players, such as Tencent and Perfect World, should not be neglected either. These players make up the bulk of total MMORPG market. 2009 Global MMORPG Market Share by Company Source: Strategy Analytics It is also noteworthy that some of the Asian companies are expanding significantly in the Western market. Recent news reveal that EA is considering to take stake in the Chinese firm Perfect World, which is now generating about $100 a year from online games in overseas market. And Korean game developers are expected to continue their expansion in Europe and the US. -Jia Wu Client Reading: The World of MMORPG: a Tale of Two Regions

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

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