Recent discussions of when and if the digital home will arrive raise some worthy questions about the present and future of our industry. At Parks Associates we believe that the digital home has, in part, already arrived and that we are on the threshold of some dramatic changes within a number of digital home categories.
To start, let’s get some definitions on the board. The “digital home” â€“ if defined by such requirements as two-way connectivity and communication between two or more of a residence’s subsystems â€“ exists only in a miniscule percentage of homes. However, significant growth opportunities exist within the broader notion of the digital home, each of which warrants significant attention. In tracking the digital home, we have identified at least six subcategories.
Broadband + Home Computer = Digital Home Subcategory
Households with a broadband connection and a home computer drive a significant share of digital home service and product trends at present. Although the main lure of a home broadband connection may simply be “faster e-mail,” categories of “Active Media Consumers” â€“ those heavily invested in online applications such as music, photography, and video â€“ already number in the tens of millions of households. Revenues in the U.S. for such online entertainment activities as gaming, music, and video â€“ all of which can be enjoyed with a simple broadband connection and a home computer â€“ will exceed $11 billion annually by the end of 2010. That’s no small change.
Broadband also enhances certain product categories, making it easier to find and enjoy specific content. Certainly, the iPodÂ® is the critical success story in this regard, but a host of additional accessories (speakers, cradles, etc.) will also sell quite well. The worldwide market for portable digital music player accessories will reach $1.2 billion in 2008.
Broadband + Data Network = Digital Home Subcategory
Data networking has been a success story in its own right, despite its less-than-sexy use. Penetration has grown from 2.5 million U.S. households at the end of 1998 to exceed 20 million today (and an estimated 80 million worldwide) because it solved a couple of key problems: 1) allowing multiple users to access shared resources such as broadband; and 2) liberating the home computer from the broadband modem. With broadband providers now more heavily invested in the data connectivity space, this category is still growing in importance. Key opportunities within this digital home subcategory will emerge as companies develop solutions to address remote management and diagnostics of the home network (using such industry standards as TR-069) and that simplify connectivity and resource sharing (printers, files) while enhancing security.
Broadband + Home Computer + Media Adapter = Digital Home Subcategory
The addressable market for linking a home computer to a legacy CE device is quite small at present. Furthermore, the early market for so-called digital media adapters hasn’t fared as well as many manufacturers would have hoped due to challenges such as higher prices and less-than-perfect connectivity. That being said, there’s reason to believe that a market for multimedia networks (PC-to-CE) will emerge as consumer use of digital content services (music and video) â€“ both downloading and streaming â€“ increases and as they seek ways to extend entertainment beyond the home computer. For example, from our Global Digital Living™ research, we’ve identified a global base of households in the tens of millions that are likely buyers of at least a point-to-point music distribution system. Service providers may also play a key role in driving developments in this subcategory. As IPTV providers seek differentiation, they may push set-top-to-PC links that would allow end users to display photos and video and play music that is stored on a home computer or other platform.
Beyond home networking adapters and bridges, significant growth in multimedia connectivity will come with greater availability of embedded adapter systems. Already, more than 500,000 XboxÂ® owners have linked their systems to a home computer, including the Media Center systems that are beginning to penetrate a larger base of households worldwide. Another key category of products to watch in this realm will be the networked attached storage (NAS) media servers, which will be used primary for safekeeping and backup of digital content but will also increasingly enable streaming of content to a variety of platforms inside the home.
Network-capable Consumer Electronics Platforms = Digital Home Subcategory
Competition between the main players in the United States cable market and DBS satellite providers has sped the evolution of the digital video recorder (DVR) from a solution deemed “too early for its time” to an absolute necessity in luring new consumers, keeping existing subscribers, and building average revenue per subscriber/user (ARPU). With the entry of telcos into the television-provider mix, differentiation, customer acquisition and retention, and growth of revenue per customer all become critical, and this is where home networking will play a key role. The penetration of whole-house DVR solutions â€“ and set-top box media servers â€“ will grow steadily from 2006 and beyond to meet customer demand for flexible access to time-shifted television programming throughout the home. And, as mentioned previously, we are not too far off from a market in which set-top-to-PC linkages (for distributed multimedia experiences) is a reality. Beyond the set-top box, additional CE media server platforms will grow in importance for such applications as backup and centralization of media files (music and photos initially) and for connectivity to a larger base of available video content from a host of Internet services.
Converged Communications Services = Digital Home Subcategory
Because voice services (landline and mobile) remain a critical component to the service providers’ bundled services strategies, expect to see the services extended to include converged services. From a digital home perspective, this extension will include blending of services on multiple fronts â€“ fixed and mobile as well as entertainment. An example of the fixed-to-mobile convergence are the “handoff” services some carriers are currently exploring (telecom providers such as T-Com in Germany and Korea Telecom in South Korean are two early examples of this experimentation). Although the talk of IP Multimedia Subsystems (IMS) and fixed-mobile convergence (FMC) may sound like mere “technospeak” at present, the integration of IP communications across networks and platforms does speak to the importance of convergence for many carriers.
On the communications-to-entertainment convergence front, a good deal of activity is already taking place on the IPTV side. In one example, operators are using a relatively simple Caller-ID-on-the-TV feature as a value-added service. Beyond this, the opportunities in this area are interesting, albeit at the early stages of development. Instant messaging across platforms, as well as such features as video conferencing, may be another set of valued features, particularly among the “MySpace.com Generation.”
Home Management = Digital Home Subcategory
Finally, home control and management applications remain a largely untapped market even after 30+ years of available products and solutions. Solving the issue of low-cost and reliable communications protocols has now been largely completed, thanks to the emergence of an array of low bit rate protocols. Now the key challenge will be in implementing these solutions into devices and systems that really matter for consumers. These areas will likely include lighting control and peace-of-mind applications like security, safety, and environmental monitoring devices. And, if consumers are truly seeking to “go green” (as a recent issue of Newsweek iterated), then energy management solutions may be an important home management category in their own right. As the price of oil surges, we would expect growing numbers of end users to respond, at least in some part, to option that would better manage their home’s energy consumption. Programmable and communicating thermostats may be one such step, but the energy utilities themselves may also aggressively offer network-addressable home network nodes to perform more remote functions â€“ including set-back and other load control measures to reduce costs on their end.
The Digital Lifestyle is Here: Take a Look!
Like Pandora’s Box, consumer demand for gadgetry grows with each successful introduction of a product or service that actually delivers on its promised benefits. Combine the appeal of gadgetry with “bet the farm” product strategies of service providers and many hardware companies and the result is a plethora of new entertainment, communication, and control applications offered by all classes of vendors. Of course many of these offerings will fail while others will follow the notable success of the MP3 player, the monitored alarm system, the smart phone, and DVR, to name a few. These technologies have quickly become entrenched in our lives, and we do not plan on a future without them. And, very quickly, the scope of opportunities has now become not just about the digital home but about enhancing the digital lifestyle â€“ which includes services, applications, and products for use both in and outside of the home, fixed and mobile.
Digital living is now a reality. Check your monthly budget to understand what percentage of disposable income is now earmarked for personal technology products and services. With increased adoption of digital products, however, comes increased scrutiny of products that don’t work, are excessively complex, or are difficult to install or adopt. It seems that a quiet backlash has already begun against the complexity of the products we have embraced. We suggest, judging from consumers’ increasing frustration with three or more remote controls on the coffee table, increased simplicity requires increased integration of both services and end-user platforms.
The current phase of the digital home is a land grab, with vendors aggressively competing to invent or capture brand new product categories. Shortly behind this phase is consolidation, in which revenue growth comes from conquering and acquiring another’s market share. As usual, the spoils will go to well-entrenched incumbents, as witnessed by Cisco’s acquisition of Scientific-Atlanta, Alcatel’s merger with Lucent, and AMD’s acquisition of graphics chipmaker ATI. This type of merger mania allows industry executives to speak highly of “synergizing core competencies” and “leveraging operational efficiencies,” but there are key points not to miss. One, service providers themselves are actively seeking end-to-end solutions that help them deliver converged and digital lifestyle services in a reliable and cost-effective manner. Second, although the “Swiss Army Knife” approach to end-user platforms may not fit the bill for every consumer, the integration of multiple applications and capabilities on a single device will matter to a growing base of consumers. Just ask the folks at Research in Motion. Convergence applications and the digital lifestyle are more real than ever.
As the giants of the industry, including Hewlett-Packard, Microsoft, Verizon, Intel, Cisco, Walt Disney, and Motorola, set their sights on larger portions of the digital home, the digital home will be increasingly integrated. Integration efforts through standards such as those prescribed by the Digital Living Network Alliance (DLNA) are noble yet painfully slow. Integration for the sake of market domination by a set of strong players will happen increasingly quickly as emerging technologies become mainstream. The most exciting questions to contemplate are the spheres of influence that will be held by the market leaders: service providers, set-top box manufacturers, consumer appliance manufacturers, home computer makers, network equipment manufacturers, monitoring and security equipment manufacturers, and mobile device manufacturers. The ability of one or more giants to dominate more than one segment and integrate the two (or more) will lead to significant shifts in market share. If the solution is simple, reliable, and fairly priced, the consumer wins, and the integrated digital home â€“ nay, the digital lifestyle â€“ vision becomes a reality â€“ rapidly.
About the Authors
Kurt Scherf studies market and technological developments in home networks, residential gateways, digital entertainment, the housing market, and residential and building management and controls.
Stuart Sikes is the president of Parks Associates and is responsible for providing Parks Associates’ clients with a business relationship that complements their strategic marketing activities.