Battle for consumers living room.................................................
techweb.cmp.com
Who will win the battle for the living room?
by Gerry Kaufhold
Intel Corp. and Microsoft Corp., clearly the 800-pound gorillas of the PC industry, are entering the uncharted territory where PCs converge with the consumer electronics industry.
<Picture>This year, the first broadside salvos will be fired in the "battle for the living room." Observers are not only trying to predict which technologies will most successfully hold the consumer's attention, but also what companies will dominate.
How will Intel match up against RCA and Sony Corp.? How will Microsoft match up against The Walt Disney Co.? Let's take a look.
Intel appears to be in for some rough sledding against Sony and RCA. Microsoft looks to be in a pretty good position vis-a-vis Disney.
The performance, Intel can deliver. But almost everything that Santa Clara, Calif.-based Intel makes today, or is intending to make tomorrow, will have to compete head-to-head at the point of sale with products from Sony or RCA (or both). Intel's logo is being pushed in advertising on most prime-time television shows, and the company's Pentium is easily the best-recognized microprocessor name in the world.
The RCA logo and company mascot, Nipper, are icons of popular consumer electronics culture, even though RCA is now part of French-
owned Thomson Consumer Electronics. And
Tokyo-based Sony has been a highly rated brand name in worldwide consumer electronics for 30 years.
RCA and Sony manufacture color television sets surrounded in consumers' homes by like-branded camcorders, VCRs, home audio systems, CD players, and other peripherals.
RCA televisions command up to 30% of the U.S. market, while Sony's hold about 20%.
Inside consumers' living rooms, Intel's name is pretty much a no-show today. But that's changing.
Intel's flagship Pentium line of microprocessors is getting a major face-lift this year with the addition of 57 MMX instructions targeted at multimedia functionality. Multimedia PCs enabled with MMX will drive Intel's technology right into many consumers' living rooms, where the Internet is going to collide with television.
Intel-based multimedia PCs are used to provide Internet access. They also play video games.
Guess what? Sony makes WebTV for surfing the Internet from a TV set, and Sony's PlayStation is steamrolling both Sega Enterprises Ltd. and Nintendo Co. Ltd. in the video- game console wars.
RCA is partnering with Oracle Corp. and NetChannel to bring Internet connectivity to consumers in a box that is similar to WebTV. A cooperative venture between RCA and Compaq Computer Corp. will deliver later this year a combination home computer embedded in an RCA 36-in. home-theater unit. RCA is already the leader in home-theater systems, and Sony is also a strong player.
RCA is the world's leading shipper of receivers for Direct Broadcast Satellite (DBS) systems. Sony is the hands-down leader for professional television production systems, which are used to create the programs that feed out on DBS.
Intel is working with key communications OEMs to expand beyond desktop computers and become a vital part of the exploding market for high-speed digital communications equipment.
The market for corporate PCs is taking off again because businesses are migrating their enterprise-level applications onto Windows NT platforms, which need all the performance Intel can deliver. Clearly king of the hill for PC hardware, the company independently controls the design and direction of the PC motherboard business.
But Intel is vulnerable when PCs enter competition at the consumer level. For the same $2,000 consumers need to spend for a current-generation PC, they can get a 35-in. RCA ProScan TV set, a VCR, and a video game, and still have money left.
Additionally, Intel's strength may be its Achilles' heel: The performance level of the company's microprocessors doubles every three years. The result is ever-faster, ever-better PCs, but the price remains $2,000.
Sony's PlayStation, which sold at Christmas for $199, now retails for $149 and will probably fall to $99 by October. That's a 50% drop in nine months. That's also a 20:1 price ratio between an Intel-sponsored PC vs. a Sony game console.
Although Intel goes great guns producing high-performance hardware, the company doesn't own the operating system. Sony does own PlayStation's operating system, and can upgrade the game box to provide Internet Web browsing and e-mail. (Remember, Sony makes the WebTV.)
It's even possible that the somewhat generic name "PlayStation" was inspired by a plan to expand its use beyond video games. In the consumer home of the future, it's much easier to see lots of nearly disposable $99 multimedia set-top boxes and less easy to see $2,000 PCs, unless the PCs can come up with some reasons to justify their costs.
Intel's best long-term approach to winning a solid space in (or close to) consumer living rooms will be some kind of wireless home network that allows $2,000 PCs to stream multimedia video and audio to televisions throughout the house. Such a critical part of the company's future success does not appear to be a very big focus for Intel today. This may be a big mistake.
Similar to Intel, Microsoft Corp., Redmond, Wash., is a modern marvel of marketing moxie. Microsoft's Windows logo identifies all products that conform to the company's specifications. The Windows logo is Microsoft's franchise in exactly the same way that Mickey Mouse is the franchise for Disney, whose main business is creating software that expands the reach and market share of the Disney name. The Burbank, Calif.-based entertainment giant's revenue in last year's fourth quarter was three times that of Microsoft.
This year, Microsoft will blend elements of its popular Web browser, the Internet Explorer, directly into the Windows operating system to cement the company's hold on desktop computers. Microsoft is also trundling out variants of Windows that are targeted at portable computing devices and at DBS and cable-TV set-top boxes.
But Microsoft has also been taking steps to evolve from a software-only company into a content-providing company. Microsoft's recent partnership with General Electric's NBC subsidiary, Microsoft NBC, is a complete cable-TV network similar in scope to Ted Turner's CNN.
And Corbis, owned by Microsoft chief executive Bill Gates, is buying up the rights to digitize images of much of the world's most valuable artwork and photographs. (Corbis is not connected with Microsoft, which has published and distributed some Corbis software.)
How does Microsoft match up against Disney? Microsoft's business model is to provide a platform - the Windows operating system - and tools that enable third parties to develop things that run on the platform. Microsoft only makes money from the third-party developers through licensing fees for the platforms and the selling prices of the tools, books, and training services Microsoft sells. The third-party developers gain access to a huge market that is made possible by Microsoft's technology, and they are free to make as much money for themselves as they can.
The Disney studios produce movies, music, games, theme parks, and shows using a platform - movie film, videotape, CDs, real estate, and theaters - that requires as much investment capital and technical skill as developing a program that runs on Windows. Disney provides all the tools, and maintains ownership of the content produced. The key point, long term, is that Disney owns what gets produced for its platform; Microsoft generally does not.
If Microsoft is going to become content-centered, it must absorb some of the revenue currently going to the third-party developers. This gives rise to horror stories about how difficult it is to partner with Microsoft, but it is the reality of the business.
Examples of Microsoft bringing applications under its control are Microsoft Office, which is aimed at businesses, and Microsoft Works, targeted at consumers and the small-office market. WordPerfect, dBase, and QuattroPro all became victims of Microsoft's moves to reclaim ownership of what is produced for the Windows platform.
Microsoft is consolidating all strategically important aspects of what runs on Windows under the company's direct control. Why do you think it has its own Web browser?
In earlier days, third-party developers created Web browsers as communications applications. SpyGlass' Mosaic was one example. Windows utilities, application development tools, clip art, and screen savers are now the most profitable areas for third-party developers, because Microsoft doesn't care about such nibbles and crumbs.
Microsoft's Multimedia Division is cranking out best-selling CD-ROM titles and investing in specific developers so that it can recoup some of this third-party revenue. This is prudent.
Disney is in a strong position regarding its ability to control the profitable distribution of its content. More than a year ago, Disney officially took ownership of the No. 2 television network, ABC. Disney also has its own full-time cable-TV network, The Disney Channel.
Microsoft may have missed an opportunity by not purchasing CBS when it was available. Microsoft's secret weapon may be Windows NT and all the back-office Internet server software it is developing and shipping. Internet (and intranet) servers provide access to information, similar to the way broadcast transmitters and cable head ends provide access to TV signals.
If Microsoft can build up streams of recurring revenue based on the online up time of servers running Windows NT, the company will control a communications system as valuable as Disney's ABC TV network. If Microsoft is going to transform itself into a content company that, by the way, also produces the world's top-selling computer operating system, the company might be moving in the right direction.
Just like Microsoft, Sony provides a platform - the PlayStation operating system - and a suite of development tools. Sony encourages third-party developers to be creative, and then applies a PlayStation logo to titles that meet its specifications.
However, unlike the Windows software industry, the video-game industry accepts the idea of paying a fixed royalty to Sony for each game disk that ships. Sony's PlayStation publishing entity falls somewhere between the Microsoft and Disney camps. Sony, like Disney, owns big-screen theaters (in 17 states) and has a studio that makes movies and TV shows.
What Sony lacks is the merchandising genius of Disney. Nearly every film or TV show that flows from the Disney studios is followed close-on with books, audio CDs, CD-ROMs, portable games, clothing, and other merchandise. Sony needs to improve the connectivity between its hit movies and TV shows with follow-on products such as interactive games.
A partnership between Sony, Microsoft, and Disney might result in a new kind of entertainment system that leverages the strengths of all three. If that happens, the next generation of consumer entertainment products will be truly amazing.
Intel will still dominate the PC industry, which will become more business-oriented, but the company will lose out in several portions of the consumer market. Intel's growth will eventually stall, but the company's margins will remain among the world's best.
RCA and its parent, Thomson Consumer Electronics, will roll merrily along, no doubt leading the charge into emerging consumer electronics markets such as HDTV.
Gerry Kaufhold, based in Dayton, Ohio, is a senior analyst with In-Stat Inc. |
