This is Not Your Fathers Television For the past three years, the living room has been the center of the digital gold rush. Consumers have fueled the rush as they upgraded to large-screen TVs, audio systems that promise Dolby “surround sound,” and DVD players that deliver super-crisp images.
The living room, in fact, contains many of the highest-margin consumer electronics products. Cable, satellite, and content providers have responded with video-on-demand services. PC makers have responded with a new generation of “entertainment-center PCs” in an effort to boost their lagging sales. And, most significantly, non-traditional players have entered the home entertainment market with products that cross traditional industry boundaries.
For example, in 2002, Gateway introduced a 42-inch plasma TV priced 25 percent less than the then-going rate. In a little over a year, Gateway ? a major PC player ? became the largest seller of plasma TVs in the U.S. ? ahead of traditional consumer electronics players Pana-sonic, Sony, Pioneer, and Samsung.
We expect this digital gold rush will continue this year due to three developments that are transforming the television market as we know it:
? The proliferation of digital video recorders, or DVRs. ? The widespread availability of high-definition TV programming and video-on-demand services. ? The emergence of a wide variety of three-dimensional video displays.
We’ll discuss each of these developments and show how they are irreversibly changing the television viewing experience. Let’s start with the DVR. Like the traditional videocassette recorder, the DVR has radically altered the way many Americans watch TV.
The device enables television viewers to “time shift” by recording shows when they’re broadcast and watching them when it’s more convenient. But the sophistication and flexibility of the DVR make its potential impact far greater.
Television signals come into the DVR’s built-in tuner via an antenna, cable, or satellite link, and are stored on the device’s hard drive or on a removable DVD.
The leading DVR service, TiVo, uses a version of the Linux operating system to capture signals and store them on its hard drives. Other DVR services include ReplayTV and UltimateTV, each using a different and proprietary operating system.
Digital storage of video opens up a range of possibilities when it comes to playback and viewing. With a VCR, the program must be recorded prior to watching it. DVRs do not have this limitation. Since there is no tape to rewind, a viewer can begin watching a program 10 minutes into its recording ? but from the beginning of the show.
Or the viewer can pause a live broadcast by hitting the device’s pause button. The DVR records the live program into a memory buffer. When the viewer hits the play button, the device plays from the buffer so it appears the broadcast was only momentarily frozen.
But the true power of DVR services lies in their ability to record just what the viewer wants?or would want if he knew about it. All DVRs allow the user to instruct the device to “watch out” for programs meeting specific search criteria. For example, a viewer can ask TiVo to record any British period dramas or Jerry Lewis comedies. Or to always record the game show Jeopardy!
Although only 2 percent of American households currently have the device or service, the number of DVRs is expected to soar in the coming years. According to the Yankee Group, DVRs will be in almost 25 million homes, or 20 percent of U.S. households, by 2008.
According to a Consumer Electronic Association study, 72 percent of consumers are very, or somewhat, interested in buying a digital video recorder, and believe that the technology will edge out the VCR in the near future.
Such widespread adoption of DVRs will alter the television industry’s business model. The Yankee Group estimates that 65 to 70 percent of DVR households fast-forward through commercials. As a result, by 2007 Yankee Group projects advertisers will spend $5.5 billion on television ads that DVR owners will never watch.
For this reason, Forrester Research estimates that DVRs will cause TV advertising revenues to decline by $8 billion from 2006 to 2008.
As if that wasn’t enough to strike fear into the hearts of the networks, in 2001 ReplayTV’s then-owner, SonicBlue, released devices that came equipped with Ethernet ports enabling “peer-to-peer file exchange” via the Internet. This could amount to the equivalent of Napster for TV programs.
In addition, these boxes featured an ad-skipping feature that subscribers could pre-program to skip commercials entirely. The major television networks sued SonicBlue over this feature, and the company subsequently filed for bankruptcy. ReplayTV’s new owners don’t include that feature on current models ? although techies report still being able to find older boxes with the feature.
Phillip Swann of TVPredictions.com thinks that the remaining DVR service providers need to be part of larger media companies to guarantee long-term survival. This makes sense in light of the fact that satellite and cable companies, in a fierce battle to win subscribers, are already giving away DVR devices.
Since the cable industry and EchoStar have decided to use non-TiVo DVR services, TiVo’s future growth is uncertain, even though it has more than 1 million subscribers. Therefore, the most likely future for TiVo is to sell the company in 2004, most likely to DirecTV, its satellite-marketing partner.
The future momentum of the DVR’s growing popularity in the marketplace is wedded to the second development sweeping the television industry: the introduction of high-definition television, or HDTV, and the growing popularity of video on demand.
HDTV combines digital surround sound with digital television resolution that is six times sharper than conventional TV. Broadcasters are able to send more information on their signals to HDTV sets than to traditional devices. The FCC has mandated that all stations be capable of broadcasting HDTV signals by 2006. Digital signals, however, can also be transmitted by cable or satellite systems.
There are currently 7 million HDTV sets installed in American households. Strategy Analytics, Inc. predicts the number will grow to 33.4 million units by 2008.
Today, few DVRs are capable of recording and playing full-resolution HDTV. One of the first such units, the JVC 921, incorporates dual Dish Network HDTV tuners and a 250 GB hard drive capable of storing up to 25 hours of HDTV programming. EchoStar began shipping this on December 31, 2003. Because of their ability to support high-definition copy protection, we expect such DVRs to be the primary method of “time shifting” HDTV content.
This growing installed base of HDTV sets will further drive the roll-out of video on demand, or VOD, services. Viewers with VOD can order TV programming to watch immediately, or at a later date and time.
Dish-based satellite service providers DirecTV and EchoStar have offered HDTV programming for about two years, and have captured most of the current market for the service.
Many HDTV sets are bundled with pre-installed satellite tuners based on marketing alliances between DirecTV and the TV makers. In the second half of 2003, cable operators started to catch up by offering more HDTV channels than either of the two major dish operators. Industry analyst Phillip Swann of TVPredictions.com therefore predicts that the majority of new HDTV owners will subscribe to cable in 2004.
He also predicts that Cablevision will sell its satellite TV service called “Voom,” which is largely marketed to the HDTV audience. Voom’s lineup includes up to 39 different high-definition networks ? four or more times as many as its satellite and cable rivals.
Although the high-definition audience is growing, it is currently far too small to sustain a new satellite TV business. Plus, with Voom’s service retailing at more than $700, most high-definition dish enthusiasts will choose DirecTV or EchoStar, both of which offer less-expensive systems.
The third major development transforming the television market is the surging popularity of dramatically thinner flat displays. Flat panel displays based on Plasma and LCD technology have become increasingly popular recently, as their prices have dropped to just a fraction of what they were selling for when they were introduced three yearsago. This is the result of increased competition and larger economies of scale.
Flat-panel sales, now at 1 million units a year in North America, are predicted to grow to 13 million in 2007, according to electronics consultant iSuppli/Stanford Resources.
Currently, their market share is just 3 percent. But, assuming that their prices continue to drop by 30 percent annually, as they have for the past three years, we expect their market share to exceed that of regular CRT and rear-projection sets by the end of this decade.
At the same time that displays are becoming flatter, the images themselves are becoming three-dimensional.
For example, last August X3D Technologies sponsored a match in New York between world chess champion Garry Kasparov and the chess program “Fritz.” X3D claims it can transform any two-dimensional electronic image into a 3-D display, using proprietary software capable of performing 90 million complex calculations per second.
Last year’s chess match took place in what X3D calls “total virtual reality,” with the chess board seemingly floating in front of Kasparov’s PC monitor. Although no special monitor was used, Kasparov did wear special X3D glasses to enhance the image.
Other companies are developing 3-D television screens that don’t require viewers to wear special glasses or helmets. Consider these new products:
Sharp is already offering a notebook PC, called the Actius RD3D, that incorporates 3-D imaging for $3,000. The device uses “a switching LCD attached to a normal LCD panel [to create] a barrier that controls the direction of each pixel’s light.”
IO2 Technology is prototyping the Heliodisplay for $22,500. The device “agitates air to create a surface upon which it can project a 2-D image. Since the image does not appear on a physical object, the eye interprets it as a 3-D image.”
Perspecta is also already marketing a device ? its Spatial 3D System ? for $40,000. “One hundred ninety-eight layers of 2-D images are projected onto a rotating screen at 5,490 frames per second to create depth. The viewer’s eye merges the 100 million data points into a 3-D image that can be viewed from all sides.”
These devices are not appropriate for all uses, but potential applications include air-traffic control, medical imaging, battlefield simulation, molecular modeling, computer-aided design, and even video gaming4 ? which is the trend we will discuss next.
Before turning to the video game market, consider the following forecasts:
With a growing number of DVR owners skipping through commercials, expect a radical shift in advertising strategies among the major networks and cable stations. They will try a variety of formats, including heavier product placement and sponsorship of particular programs.
One of the most successful new formats will feature 15-minute commercial-only segments, interspersed with uninterrupted movies or shows, during evening viewing hours. These commercial segments will be comprised of lengthy ads that seem more like stories than overt pitches. At the end of each segment, viewers will be invited to vote for their favorite ads and to grade each on a series of dimensions derived from search criteria programmed into their DVRs.
Broadband access ? combined with HDTV clarity, 3-D display technology, and Voice-Over-IP telephony ? will enable “close enough to touch” communications with family members. We anticipate a surge in conference calls in which family members gather together to visit distant relatives.
As TVs become more complex, the way that they are marketed by manufacturers, sold by retailers, and shopped for by consumers will change dramatically. For example, more than ever, there will be a need for independent researchers to evaluate the various options and make recommendations of the models that offer the best combinations of the features at an affordable price.
By 2010, the enormously increased processing power of computers will be embedded in the television so that it will be able to adapt more effectively to the viewer’s needs. For example, when the viewer walks into the room, the TV will recognize that person. Knowing from prior experience the person is a Far East political junkie, it will find a relevant program it recorded at 2:00 in the morning, and play it on the screen. Alongside will be smaller images of a news report on the company he just invested in, a Web page for the eBay auction he just bid in, and the high-resolution video scene he recorded on his cell phone earlier in the day. To switch to another channel, he will merely speak up and tell the TV what he wants to see. That leads us to our final forecast.
Programming and using DVRs and TVs will become much simpler as new speech-recognition software is embedded in electronic devices. Devices that can respond to basic verbal commands are already reaching the market. But more advanced speech capabilities are on the way. According to Peter Kastner, chief researcher at the Aberdeen Group market research firm, electronic devices and appliances will be able to participate in conversations with people by the end of this decade.
References List :
1. Associated Press, January 8, 2004, "Consumer Electronics Field Gets Crowded as Computer Companies Muscle In," by May Wong. ⓒ Copyright 2004 by The Associated Press. All rights reserved.2. For information about HDTV, DVRs and VOD, visit: www.tvpredictions.com3. For information about the chess match between champion Gary Kasparov and the chess program Fritz, visit the X3D website at: www.x3dworld.com/about/news/standardpr/x3dfritz.html4. Popular Science Online, February 10, 2004, "Into the 3rd Dimension," by Suzanne Kanta Kirschner. ⓒ Copyright 2004 by Time4Media. All rights reserved.
