Digital Consumer

Pace’s agreement to acquire Philips’ set-top box business seems to make sense for both parties. Pace acquires significant market share, and particularly in the IPTV space where it has been absent for some time. Philips meanwhile divests another non-core activity, while acquiring a 22.5% share in Pace. This follows the hint it gave at its recent analyst day that it was “exploring strategic options” for its home networks unit, the code sign that a deal is in the works.

Besides bolstering Pace’s recent recovery, the deal (which is unlikely to be finally approved until March next year) gives the company access to the Philips brand. This could prove to be the most significant aspect of the new relationship. Pace is known to be examining retail market opportunities, which would be a departure from its core service provider business relationships. But Pace is little known as a consumer brand, so a partnership with Philips makes good sense.

Pace will also need to work some magic on the Philips business, which lost €39.3m in 2006 on sales of €357.2m. It reckons it can excise some costs from the operations and there should be some natural efficencies resulting from the creation of a $1bn stb vendor.

A key challenge as always will be for Philips and Pace to work together to the benefit of each other’s interests. Pace’s use of the Philips brand should be watched particularly closely as Philips has made great strides in recent years in improving its brand position. The long-term branding plan remains unclear - the deal covers the first three years, after which presumably it could be extended or Pace will have to push its own brand alone. Both companies will be hoping this is a problem worth serious debate in three years’ time as it will demonstrate that Pace’s retailing strategy has had some success.

Client Reading:
Digital Home Entertainment Devices: Quarterly Report Q307

Sony in the US has confirmed that it will stop selling rear projection TVs (RPTV) based on LCoS and LCD technology once its current inventory is exhausted. Given that the company still has a quarter of the 1.5 million unit market, this would seem to be a significant sacrifice in revenues, but in fact it is a useful indication of the sales volume (~400,000 units) below which major vendors cannot afford to participate in consumer electronics markets.

Sony’s decision, which is justified by the need to focus on flat panel technologies, seems to confirm the inevitable eventual disappearance of projection-based TVs from the consumer market. For the last couple of decades, RPTVs had been selling relatively well in the US, with sales typically above the 2 million a year level (sales in Europe and elsewhere have never approached these levels). Only in the last couple of years has the decline accelerated, just as flat panels - both plasma and LCD - have begun to provide serious competition in the largest display sizes.

Year after year at CES we are presented with new approaches that could save projection technology. Given that Hitachi also withdrew from RPTV earlier this year, one of the last major suppliers is Mitsubishi, and, sure enough, this company is planning a major announcement in Las Vegas. The new approach is based on lasers, and we are sure to be blown away by very big displays and even bigger sound (any demo of a new video technology is always accompanied by sound systems that would put most sports arenas to shame, never mind the average home - cynics might wonder if our attention is being drawn deliberately to the sound rather than the picture).

The best Mitsubishi can hope for is that lasers will give RPTVs a short-term lifeline. At 60″ and below the battle is over for any display technology that is not flat and thin, and before long this will apply to 70″ and 80″ as well (we also expect the usual, meaningless race to claim the biggest flat panel at CES). Even in US homes, that is likely to be big enough for most people.

Client Reading:
Digital Home Entertainment Devices: Quarterly Report Q307

One of Cisco’s execs summed it up nicely today when he said John Chambers is extremely careful in treading the fine line between serving media companies and service providers. The company’s Media Solutions group is at the front line of what should be a major new revenue stream, for Cisco and others, as media companies seek to distribute digital content to connected devices (See Disney/Streamboat’s investment in Edgecast this week), ie, become service providers.

At the same time, the Scientific Atlanta team are focused squarely on helping today’s “service providers”, ie cablecos and telcos, to meet the challenge of digital media. Most Cisco people do a good job of arguing that media firms aren’t likely to compete directly with network access providers, at least in the near term. Either the internet isn’t ready for media prime time, or cable and telcos will fight back with QoS and QoE tactics. Or media firms don’t really want to bypass those folks, but are simply looking for new channels to supplement their existing ones.

All those things may be true, and only time will tell. The outcome is inevitably going to be a mix of the two in the marketplace. What is uncertain is how influential advertisers can become in deciding the future. Cisco, like other tech firms, now needs to demonstrate to those companies just how much more effective the internet can be in maximising the effectiveness of their commercial messages. If they do a good job on that score, new business models around content will certainly emerge to take away some of the pain resulting from the inevitable downward pressure on paid content distribution models. The long term direction is unlikely to become clear for the next 2-3 years at least.

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

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

At Cisco’s C-Scape event today John Chambers confirmed the company’s plan to become a $10-20bn player in the consumer electronics market. Cisco has made a number of consumer acquisitions in recent years, the major one being Scientific Atlanta, but multiplying its revenues from today’s $3.5bn by five times or more is a tremendous challenge, and will require the mass adoption of IP connected devices that has yet to emerge.

I am concerned over the next day or so to hear how Cisco plans to manage its customer relationships as the connected consumer market expands. An illustration of the difficulties that lie ahead is that its Media Solutions Group is supporting content players keen to distribute digital content to connected devices. That’s fine, but what wasn’t said is that media companies also want to cut Cisco’s traditional customers, service providers, out of the loop.

We also heard from Eric Huggers, now of the BBC and for many years at Microsoft, through telepresence from London. Eric gave us some fascinating data on how the Internet is transforming one of the world’s leading public broadcasters. Today all online activity accounts for around 1.3PB (petabytes) a month, and 2/3 of this is audio streaming and podcast downloads. Huggers expects this to increase by 500TB a month on 25th December when the upgraded iPlayer is launched. By the end of next year he expected all BBC content to be driving 5PB a month.

In spite of the web 2.0 hype, I remain cautious about some of the supposed benefits being suggested. Today’s classic was from the opening video, when a user announced her delight at being able to turn on the car radio and having her her emails read to her. Clearly she doesn’t get some of the emails I receive. Well, maybe it just won’t be a car radio in the future, but when I turn on the car radio I want to hear radio, and that’s enough of a challenge here in the US, even with digital satellite. The car is one of the last refuges from intrusive communications, and long may it stay that way.