The War for the Digital Home

Skirmishes between between PC makers and consumer-electronics outfits are already raging. Consumers will be the ultimate winners

When Sony (SNE) executives take the stage at various public events, it's de rigueur to trot out a Hollywood celeb or two to remind the audience just how glamorous the company and its products are. At this year's Consumer Electronics Show in Las Vegas, Sony Chairman Howard Stringer was no exception, cracking jokes on Jan. 5 with pal Tom Hanks and director Ron Howard, among others, about Sony's 2006 lineup of consumer-electronics gear.

Suddenly, however, titans of the PC industry are adopting the same tack to make clear that they too can be hipsters worthy of consumers' attention. A few hours after Stringer's keynote presentation, Intel (INTC) Chief Executive Paul Otellini welcomed not only Hanks to the stage, but actors Danny DeVito and Morgan Freeman to talk up the chipmaker's new Viiv entertainment PC and media server.

The night before, Microsoft (MSFT) Chairman Bill Gates was joined on stage by none other than pop star Justin Timberlake, who talked up MTV Network's Urge music-subscription service, which will be built directly into the next iteration of the Windows Media Player. "Urge offers a new way for artists like myself to specifically reach music fans with a ton of options," Timberlake said.


PC makers' message is simple. Their devices, with built-in Web connections, powerful computing capabilities, and software that discourages illegal copying, are better suited than traditional consumer-electronics gear from the likes of Sony, Samsung, Sharp, and Matsushita's (MC) Panasonic. It's computers, not TVs, that will best serve consumers' growing digital desires, delivering everything from music to first-run movies, and shuffling that content to any corner of the home, they maintain.

The long-running battle among computing and consumer-electronics heavyweights is likely to get even hotter this year. And if you're a sports fan, this contest may be more entertaining than the Olympic Games, the Super Bowl, and World Cup combined.

While Apple (AAPL) may have sewn up the music market with its hit iPod and iTunes Music Store combo, the race to dominate video is just getting under way. Each side is jockeying for position, announcing innovative partnerships with hardware makers, content suppliers, and distributors. "It's the Wild West right now," Mark Kirstein, vice president of multimedia content and services for researcher iSuppli.


The prize? The $130 billion U.S. consumer-electronics market, encompassing all those TVs, MP3 players, stereos, and other gear on offer at the local Best Buy (BBY) or Circuit City (CC) -- to say nothing of emerging opportunities in China, India, and elsewhere.

And if those stakes aren't high enough, there's also a slice of the many dollars spent each month by Americans increasingly turning to the Web not only for communications, but also entertainment. The Web is quickly emerging as a key distribution point for the gamut of programming, from Welcome Back Kotter reruns to pre-TV broadcasts of 24. U.S. Internet-connected households spend an average $214 a month on such items as phone service, movies, cable and satellite, and digital downloads, according to researcher Parks Associates. Of that, only $6.50 is spent on online music, games, and video.

Each side faces the challenge of striking a balance between expanding into new territory without ceding share to rivals on their existing products or services.


Not surprisingly, Intel (INTL) and Microsoft (MSFT) are leading the charge on the PC side.

Intel's Viiv entertainment PC platform, with its digital-rights management and instant-on technology, already has been adopted by more than 100 PC vendors. Products are due out in March. And Microsoft's Windows Media Center Edition software, now in about 6.5 million PCs worldwide, is rapidly becoming a main means of accessing such technology.

But it's not just the technology that could grab consumers' tastes and wallets. For the first time, PC-industry companies are poised to deliver the element they've lacked for years: distinguishable content. Intel at CES announced partnerships with Yahoo! (YHOO) and Time Warner's (TWX) AOL to make their growing libraries of original and Hollywood content availale for download to Viiv-branded PCs.

The chip giant also revealed a joint deal with Freeman's movie-production company, Revelations Entertainment -- forming ClickStar, which is aiming to deliver first-run movies over the Net. Another important deal: DirecTV's (DTV) content, including high-definition material, will be available on Viiv PCs, laptops, and portable devices late this year.


PC makers also are responding in kind: they're designing products that are more consumer electronics-friendly. Hewlett-Packard (HPQ), for instance, has won kudos for the seven new digital televisions it's introducing this year. They include Sound & Vision magazine's editor's choice award for a 65-inch television using Texas Instrument's (TXN) DLP technology.

Even Dell (DELL), not known for its innovative designs, wowed observers at CES with a new concept XPS-branded notebook offering a giant 20-inch screen, slot-loading DVD drive, Bluetooth keyboard, eight speakers, and an integrated subwoofer. It also boasts the ability to fold up and be carried around briefcase style, by a leather handle.

And the PC powerhouses may be the kingmakers in the brewing skirmish over the next generation of DVD technology, specifically whether Blu-ray Disc (BD) or HD DVD will become the high-definition DVD standard. Dell and Apple support Blu-ray, while HP leans toward HD DVD (see BW Online, 10/06/05, "Daggers Drawn Over DVDs").


The PC-industry onslaught is forcing consumer-electronics companies to learn some tough lessons, says HP Senior Vice-President Satjiv Chahil, a veteran of both industries. "Having been there, the challenge for all the leaders of the consumer-electronics business is understanding the software and user experience that it takes to make digital things work," says Chahil, who had stints at Sony, Palm (PALM), and Apple. "That's just not part of their culture, but companies like HP have a digital DNA heritage."

Still, consumer-electronics makers are by no means standing still. For one, they're partnering with cable companies to make sure they remain the favorites of couch potatoes. Samsung, LG, and Panasonic were among the vendors announcing deals in early January with Comcast (CMCSA), Time Warner, Charter Communications (CHTR), Cox, and other cable providers to deliver TVs and other gadgets that let consumers easily connect to digital cable and receive interactive programming such as games, videos, and music.

The technology, called OpenCable Application Program, or OCAP, is expected to begin rolling out this fall. It puts software on the devices that authenticates the device as a cable customer's and allow for seamless two-way communication.


It's really the PC-industry stalwarts who should be worried, argues Atsutoshi Nishida, CEO of Toshiba (TOSBF) (see BW Online, 12/19/05, "Why Toshiba is Clamming Up"). In his view, PC giants, excluding Apple and Toshiba, have focused on the commoditization of technology, not on adding new innovations that let companies turn a profit.

"Commodity markets grow for a few years, but then they stall," Nishida says. "To make a market healthy, you need some percentage of new, uncommoditized technologies. Otherwise, the market becomes like a bloody red ocean."

For its part, Sony is gearing up for launches later this year of Blu-ray Disc, the technology it's heavily backing with other consumer-electronics outfits (see BW Online, 1/09/06, "Hitting the Right Notes at Sony").


Sony's next-generation PlayStation 3 game console will include a Blu-ray disc drive, making it the only game console to build in such an expensive feature. The system, whose price and official launch date are hotly guarded secrets, will go head-to-head with Microsoft's Xbox 360 game machine worldwide by the next holiday-shopping season.

It's too early to tell whether PC makers or traditional electronics companies will gain the upper hand. Each company is relying on its brand reputation, sprinkled with new technology and improved customer service to deliver the winning recipe for success. The competition helps consumers because it rapidly drives prices down, even as gizmos get "smarter" and more efficient, iSuppli's Kirstein says.

But the market is loaded with players, and more are entering each year. So when it comes to the industries, the battle will likely leave a lot of casualties on both sides. It will be an epic battle -- whatever device you watch it on.

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