Most consumers don’t consider watching TV from their PC to be an essential part of the digital home yet. It is the ability to move photos and music from PC to TV and to stereo and vice versa that is driving sales of Media Center products.

A Look at the Digital Home Market

Stan Schatt | Current Analysis

A Look at the Digital Home Market
By Stan Schatt, Director of Research
Computing, Printing & Consumer Electronics
 

Most consumers don't consider watching TV from their PC to be an essential part of the digital home yet. It is the ability to move photos and music from PC to TV and to stereo and vice versa that is driving sales of Media Center products.


Not so fast, high speed wireless. The vendor battle for a leg up on the IEEE 802.11n high-speed wireless spec is heating up. Chip makers who see profits dwindling while networking vendors posture for position have formed the Enhanced Wireless Consortium. Members include Intel, Broadcom, Atheros, and Marvell Technology Group. In other words, it's the "anyone-but-Airgo-Networks" coalition. The problem, of course, is that there already are enough interoperability issues in the digital home marketplace, and the fact that these vendors intend to produce product means that there will be all kinds of backward compatibility issues when a standard finally is approved. Some companies such as Motorola have chosen to support the normal standards committee process, but these chip vendors are hungry for a bite of the home networking market as well as, obviously, the enterprise market. Assuming that Airgo and its supporters dig their heels in even more firmly on their preferred spec, this battle could start to impact network vendors' bottom line in 2006.

While there is no digital home without some kind of network connection, the same can almost be said of a media server. There was lots of activity on that front this month.

It looks like Buffalo Technologies is going to plunge into the digital home market. It recently signed an agreement with Mediabolic to license that company's Media Server and Media Player software. Buffalo will develop products that it says will be compliant with Universal Plug and Play and Digital Living Network Alliance (DLNA) standards. What is interesting about this announcement is that it comes at a time when lower priced Media Center PCs are just starting to take off. Presumably, Buffalo will develop wireless "black box" versions of Media Center at a price point that is low enough to compete with these new low-end PCs. Mediabolic sees the agreement as a way to "get a foothold in Japan." Of course the problem is that if anyone at that company actually visited a Japanese home, he'd realize that the homes are too small to really require the seamless transfer of data from one entertainment device to another. In fact, I doubt there's room for a 40" plasma TV. The real market will be in the U.S. Analyst Steve Kovsky, who just returned from the CEATEC show in Japan, saw a new digital home networking wrinkle emerging there. Panasonic parent Matsushita demonstrated its High Definition Power Line Communication (HD-PLC) networking technology, which enables a home's existing electrical wiring to transmit full HD video. The video can be displayed on any HD-PLC-equipped device plugged into an electric receptacle. The company is now shipping manufacturing samples for use by other companies that plan to release supporting devices. Sharp also showed off the powerline technology in its booth.

Analyst Toni Duboise has been tracking the Media Center market as a proxy for the entire digital home market. As the figure below shows, Media Center PCs have grown to 38% of the PC market and are likely to grow to 54% of all desktop PCs during Q4.


Source: Current Analysis Retail Panel

A major reason why Media Center PC sales have taken off is the growth of less costly TV tuner-less models as the following figure illustrates.


Source: Current Analysis Retail Panel

What Toni's analysis shows is that most consumers don't consider watching TV from their PC to be an essential part of the digital home yet. It is the ability to move photos and music from PC to TV and to stereo and vice versa that is driving sales of Media Center products.

Rather than the PC being the hub when it comes to driving digital content, Hewlett-Packard has developed a new technology that enables the TV to serve as a digital hub. It will begin shipping 32" and 37" LCD screens in mid-2006 that let consumers directly access digital entertainment content stored on their PCs. The built-in digital media receiver communicates with a primary PC via 802.11a or 802.11g wireless networks. If HP can ever get its act together, the company could make a compelling case that it offers a far more integrated and seamless digital home entertainment experience than Dell. It is mystifying that the company never really has focused enough on its home grown technology as a differentiator in its digital home advertising. Because the level of complexity of using a Media Center PC as a digital hub is still much too high for many consumers, a TV-based hub with a very simple menu might be a very compelling product.

Timing is everything, and HP has had a major problem in timing the release of its digital home products. Perhaps the mid-2006 release date for its TV digital hub product will be closer to when the market wants such a product than its lack of success in timing its Digital Entertainment Center line of convergent products. HP's trio of DEC products (the z552, 555, and 557) have simply never found a real market or the right channel. It has been primarily a direct channel play with a few e-commerce partners and brief cameos in CompUSA, J&R, and a few other high-end retail outlets, according to analyst Toni Dubois. She believes that the product simply was too feature-rich to offer reasonable price points. She also felt that the product was too complex for customers and might have been released far ahead of its time, much like the Apple Newton.

Apple, of course, apparently has learned from its mistakes. Rather than be the first vendor on the block with a media center, it has bided its time and just released a video version of its iPod as well as an iMac G5 model that could serve as its media platform. The new iPod will be able to store 150 hours of video for viewing on its tiny screen (unlikely) or viewing on a television screen or monitor (likely). There are some major content questions that need to be answered. Will customers pay for downloading TV content such as a music video? Will they accept the fact that they can't burn a CD that uses that content? Will there be enough rich content or will the video iPod simply serve as Grandma's personal scrapbook for showcasing the grandkids? The new iMac permits remote control up to 30 feet away, which makes it potentially the central controller of the digital home, at least when it comes to entertainment. Apple clearly has an edge over other PC manufacturers as well as Microsoft because of its ability to design easy to use systems. Jobs demonstrated a remote control designed to look very much like its iPod Shuffle that had only six buttons, compared to 40 on a Gateway model. There are key pieces missing on Apple's first foray into the digital home platform business. It would be nice to have a video in connection as well as high speed wireless built in. Still, it's a first attempt, and ample proof that Apple will be a major player in the digital home market.

Of course there's more to the digital home and connectivity than just the Media hub or server despite what Microsoft would like to believe. Buffalo and Apple are not the only late entries to this market. Motorola has taken several different product lines and teams and reorganized to offer what it calls a Whole Home Media Solution (http://broadband.motorola.com/whms/)

Motorola capitalizes on its wireless expertise to offer a variety of devices that are more likely to gain traction when the digital home market moves from its entertainment phase into its home security and home automation phase. As part of its Whole Home Media Solution, it offers a wireless home monitoring and control system that includes a wireless camera as well as wireless door and window sensors, wireless temperature sensors, and wireless water sensors. Its Wireless Easy Start Kit is advertised as "everything you need to install a wireless, do-it-yourself homesighttm monitoring, security, and control system in just 30 minutes." The key to Motorola's success will be how well it can find the right channel partners. While the "do it yourself" kits might be successful at Home Depot, many consumers will want someone else to handle the installation and support; that means Motorola will need to partner with some home automation companies. It also means that Motorola will need to expand its product offerings to include some higher end solution kits that offer more attractive margins for partners.

The Digital Home Doesn't Automatically Mean a Wall-Sized TV

Retailers have been trying hard to sell wall-sized TVs as part of digital home entertainment centers. So far this year, according to analyst Steve Kovsky, the real demand has been in smaller sized models. The price point of plasmas keeps dropping, but as the figure below demonstrates, it is still a major purchase. One theory is that the plasma TV is serving much the same purpose that the red convertible serves in many automobile dealerships. Market researchers discovered several years ago that men were drawn into the showrooms by the flashy, expensive sports cars but often emerged driving new, far more practical family sedans. It's significant that the TV ads for most retailers including Best Buy and Circuit City display a football game on the TV screen. My theory is that a husband and wife go into a retailer and view a 50" plasma TV and then one of them asks the question that retailers hate to hear: "Dear, do we REALLY need one this big? We really don't have room for it." This scenario helps to explain why so many 30" and 36" models are sold. They offer the same flat screens and sleek design and far lower prices.

But it Might Mean Having Features with No Content

HP is likely not to be the only manufacturer who learns that timing is everything in the digital home marketplace. Recently, analyst Steve Kovsky attended the CEDIA tradeshow for the TV industry. It's clear to Steve that vendors are showcasing TVs with native 1080p resolution (1920 x1080 with progressive scanning). The problem is that there is virtually no content available in this resolution. Steve doesn't think the argument that consumers should pay more for "future proofing" what they purchase will work. That leaves vendors and retailers with the prospect of having to educate both consumers and their own salespeople as to the merits of this feature. At the same time, though, Steve anticipates that TV manufacturers who are months away from being able to offer their own plasma 1080p models will poison the well by arguing that 1080p is "overblown, underutilized, and therefore a waste of money."


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