Consumer Electronics Gets Ready for Change How Convergence Will Drive New Business Models

Consumer electronics gets ready for change How convergence will drive new business models

A report from the Economist Intelligence Unit sponsored by Qualcomm Consumer electronics gets ready for change How convergence will drive new business models

Preface

Consumer electronics gets ready for change: How convergence will drive new business models is an Economist Intelligence Unit white paper, sponsored by Qualcomm. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit’s editorial team wrote the report, and the findings and views expressed do not necessarily reflect the views of the sponsor. Geoffrey Nairn and Pamela Whitby co-authored the report. Clint Witchalls was the editor. Mike Kenny was responsible for layout and design. Our thanks are due to all interviewees for their time and insights.

January 2008

Executive summary

wo of the top-five items on the wish list for US This report was commissioned by Qualcomm. The consumers for Christmas in 2007 were electronic key findings, emerging from extensive interviews with Tdevices. For teenagers, the figure was even key industry players, are as follows. higher: four out of five. Thanks to these free-spending consumers, global sales of consumer electronics ● Converged devices excite consumers with were forecast to reach US$600bn in 2007, with the promise of a new digital lifestyle, but mobile phones, televisions and personal computers heightened expectations bring the risk of great (PCs) accounting for nearly one-half of that figure. disappointment if devices fail to live up to the However, this boom masks uneasiness at the heart of hype. For manufacturers, convergence promises new the consumer electronics business. high-growth market opportunities, along with new Traditional economics no longer make sense. technical and business challenges. Commoditisation of products has eroded revenue and forced companies to rethink their business model. ● The idea of a digital device that does more than At the same time, digital convergence is providing one function is highly persuasive. Nevertheless, opportunities for new products and services. vendors need to clearly establish a key value Making any content available over any network on proposition in the minds of potential buyers. If not, any device is immensely appealing, and new service consumers may decide that the converged product offerings seeking to straddle these boundaries are offers no real improvement on the old way of doing starting to appear. New business models are emerging things. to better reward those innovators that make the convergence dream a reality. ● Advances in technology mean that many of the As the communications and media industries drawbacks that have hindered converged devices converge, opportunities for consumer electronics in the past are now disappearing. The falling cost of firms to serve the digital home will expand. This is digital technology makes it feasible for the first time part of a broader trend towards a digital lifestyle, to build multifunctional devices for a mass market. characterised by media on the move, digital delivery Nevertheless, the commercial payback for some of media to the home and accessible media storage convergence offerings remains elusive. within the home. Nevertheless, there remain big technical, ● As well as spawning new devices, convergence commercial and legal barriers for the industries that is happening at the service and application level, stand to make the most from digital convergence— leading to new entrants and novel business models. consumer electronics, telecommunications, content In this new world order, intellectual property rights providers and software houses—and it will be some count for more than manufacturing might, and years before all players embrace the far-sweeping legal battles over intellectual property rights are business implications of this enormous commercial increasing. These disputes will distract resources that opportunity. could otherwise be dedicated to further innovation.

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● The future of the consumer electronics a dazzling pace, throwing up new challenges in industry looks bright, albeit marked by greater areas like interoperability and user interfaces. New turbulence as established brand names fight it business models will need to emerge to cope with the out with low-cost Asian manufacturers and new complex technical and commercial challenges that entrants. Technology will continue to evolve at convergence throws up.

Introduction

he current decade has seen the convergence commercial rewards. That is unpalatable medicine for dream move closer to reality. Digital technology many of the industry’s engineers and designers, who Thas made possible multifunctional devices that would rather “innovate than imitate”. It also calls into would have had consumers awestruck just a few years question the economics of having an extensive R&D ago. But the quickening pace of innovation keeps function. After all, why spend heavily on R&D if rival raising the bar on consumers’ expectations while firms can produce “me too” products at half the price? intense competition causes the window of opportunity The biggest challenge for vendors banging the to reduce each year. Meanwhile, the blurring of convergence drum is undoubtedly that too often industry boundaries that convergence causes, leads to their offerings fail to live up to the hype. Perhaps the new business models and upstart competitors. price is too high or the product too difficult to use. The pace of technological development is such Or perhaps the consumer has decided that it offers that products that once held consumers in rapture no real improvement on the old way of doing things. can turn almost overnight into mature markets However, the potential for digital convergence is characterised by low growth, minimal pricing power still largely untapped. The difficulty is going to be and cut-throat competition—the DVD player market in finding the convergence that is truly useful— is merely one recent example of this. To avoid such a something that the customer really wants as opposed fate, companies seek to create better products and to something that the R&D lab is able to develop. applications than the competition, thereby hopefully In this report, the Economist Intelligence Unit will commanding attractive prices. Apple did just that look at the state of the consumer electronics industry with the iPhone, charging a hefty US$599 to early today, and investigate how convergence of devices, adopters, but then quickly cutting the price to pre- content, services and applications is changing the empt the copycat competition. industry. We will also look at how the telecoms, Apple, once written off as an also-ran in the PC software, media and entertainment industries are business, has emerged as one of the most influential using convergence to redraft their business models, companies in consumer electronics thanks to its and what lessons the consumer electronics industry innovative business models and ground-breaking can draw from this. products. The iPhone is not the first mobile phone that can play music, but Apple managed to convince many Games lead the way consumers that it did so better than its rivals. It is easy to forget just how rapidly consumer In the consumer electronics business, you need electronics technology has advanced in recent years. to be fast, but not necessarily first. Innovative “Just go back five years and people would be amazed companies run the risk of delivering new features at what you can do with digital devices today,” says faster than customers can absorb them, or producing Ron Schaeffer, director of multimedia at Motorola. The products that are overly complex and expensive. games console is a good example. When introduced That leaves the door open for followers to make a in the 1990s, they were dedicated to playing games. simpler or cheaper version of the product and reap the Few would have predicted that games machines would

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evolve into multifunctional entertainment centres “We asked ourselves how we could make the PSP that can connect to the Internet and play high- into a communications device, not just a gaming definition (HD) video and HiFi sound. device, and we decided that the answer was VoIP,” The portable version of the PlayStation, the PSP, says Steve Andrews, head of mobility and convergence is used by 24m people. In the UK there are more than at BT. Like other telephone companies, BT wants to 2m PSP owners and telecommunications company, BT, transform itself from a hardware-based, fixed-line hopes to harness this market. BT and Sony are poised telecoms provider into a software-based supplier of to launch a new wireless communications package telecoms and entertainment applications. that they have jointly developed for the PSP. Called Go The PSP deal benefits both parties, argues Mr Messenger, it enables PSP users to keep in touch with Andrews, as electronics manufacturers like Sony are each other using Voice over Internet Protocol (VoIP) also trying to reinvent themselves for the convergence technology, or with an optional video camera, to hold era. “Companies like Sony recognise that they can only video calls. go so far as a gaming machines manufacturer,” he says.

The digital camera market continues to grow at a rate of more than 5% sphere as it would be too costly,” says Mr [per annum] in the UK and 8% globally,” Jacobson. is not standing still says Mr Randall. So, although consumers Additionally, DSC manufacturers may may be attracted to what is advertised on well look to source wireless connectivity the handset’s box, this is rarely enough for capabilities. “You might start to see them to abandon single-purpose equipment. Bluetooth, WiFi and other types of There is no denying that the camera phone “After all, the Blackberry has not stopped connectivity become common place in high- market has been a resounding success. It is people reading e-mail on their laptops.” end cameras,” says Mr Jacobson. also true that camera phones have to some The reason is simple. “Even in the future, The camera-phone market is also likely to extent eroded the digital still camera (DSC) camera phones will be considered as low- develop further, with greater collaboration market. mid end camera devices, as their primary expected between different players, such Take handset manufacturer, Nokia. It function will always be for voice and data,” as the partnership between Kodak and is now the biggest camera manufacturer in says Mats Jacobson, chief executive officer Motorola. The success of Sony Ericsson may the world, even if that is by virtue of the fact for mobile imaging company, Scalado. encourage other handset manufacturers to that it sells the most handsets. Sony Ericsson So, the mid- to high-end DSC market will pair up with companies that have broader too has shown that the joining of phone continue to experience growth. reach in the consumer space. Sony Ericsson and camera really can work. Further proof That is not to say that all mobile-phone appears to be covering all bases; it is even comes from market research company, GfK. cameras are of poor quality. Indeed, many producing devices that are essentially According to GfK commercial director, James now extend to 5, 6 and 7 megapixels. cameras embedded in phones. The camera Randall, 70% of all handsets sold in the UK Furthermore, although pure DSC vendors phone industry is also likely to work more in August 2007 were 1 megapixel mobile are likely to extend the range to 10, the closely with traditional DSC components camera phones. Indeed, in many markets megapixel race is largely over. A higher suppliers that are experts in their field. most mobile phones now have a camera number of megapixels does not necessarily Although nothing can ever be ruled out, function. equate to higher quality. it seems unlikely, however, that mobile In spite of all of this, senior members In the light of this, how will camera phones will ever replace DSCs. “While taking from a cross-section of the technology, vendors differentiate? Increased investment snaps on the mobile is fine and even getting telecoms and media industries unanimously in lens systems with advanced optics as very good, I don’t know anybody who would agree that the single-purpose camera is here well as super-fast image processing seems say that it replaces the camera when you to stay. “Nine years after its introduction certain. “The mobile-phone vendor will need a camera,” says Tim Cull, director of as a mass-market product, the DSC still never be able to compete with DSCs in this telecoms policy for Motorola UK.

Sony recently unveiled a set-top box designed to them to a proprietary music player via infrared stream HD video and audio content from the Internet link. The device was not a great success. Since to a TV. The Bravia Internet Video Link might seem like then, technology for music players has advanced a throwback to the Web TV of yesteryear, but the box considerably and 95% of new phones have an MP3 is designed for streaming multimedia content rather player built in. than displaying web pages: a key difference. Many operators now offer over-the-air song Apple had a similar idea with its Apple TV, which download services, but the market has not grown at lets users buy videos off the web and play them on an a rapid pace. US consultancy, M:Metrics, recently did HD TV. The Slingbox, from US company, Sling Media, a survey of mobile music users in the US and Europe. takes this concept and turns it on its head. It allows It found that transferring music from a computer users to take live or recorded TV programmes from to a mobile device is significantly preferable to their home TV and “sling” them to a remote location: downloading music from carrier music stores in all a hotel room, for example. These technologies are the countries surveyed. Jen Wu, an analyst with M: transforming the traditional concept of watching TV Metrics, says that “the perceived value in music and they show how convergence is tearing down the phones is still in the ability to make one’s personal barriers that once separated the technology, telecoms music collection portable, as opposed to a new and media businesses. acquisition point for music”. M:Metrics also found that phones designed Music over mobile specifically for music get the most usage. For example, The company that is causing the biggest stir in the 67% of UK owners of the Sony Ericsson W850i, convergence business today is Apple, first with its popularly known as the “Walkman phone”, listen iPod and now with its game-changing iPhone, which to music on the device, compared with just 28% for neatly combines a mobile phone, handheld computer music-capable phones overall. and a music player in one converged device. The iPhone has been a huge success for Apple, selling The fourth screen 1.4m units in its first four months and with a target of The idea of watching videos or even TV on the “fourth 10m in 2008. Meanwhile, Samsung recently released screen”—the other three being TV, PC and cinema—is a clutch of music-playing phones, including a top-of- gaining traction, particularly with young people. the-line model with an audio amplifier developed by According to M:Metrics, almost 10% of US mobile high-end audio specialists, Bang & Olufsen. phone owners aged 18 to 24 watch video on their Analysts have been predicting the marriage of phones, with viral videos (those sent by friends) being mobile phones and music for many years and it is a the most popular type of video content. potentially huge opportunity. There a lot more mobile To tap into this fast-growing market, Helio, a phones in the world than there are digital music youth-oriented network operator in the US, recently players. Since it was unveiled in 2001 about 88m iPods launched a phone-based application that lets users have been sold. In contrast, there are already well not only view YouTube content but also rate and share over 2bn mobile-phone users worldwide. it, giving them an experience comparable with that of Combining a mobile phone with a music player is PC-based YouTube users. hardly a new idea. In 2003 O2, a UK-based mobile The advent of faster 3.5G technologies like the EV- operator, launched a service that allowed consumers DO (Evolution-Data Optimised) network used by Helio to download tracks to their phone and then transfer has made mobile video a reality, although operators’

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ambitions in video will remain frustrated until 3.5G broadcast technology instead. But the business case networks are more widely available. “You need very for mobile TV is still being formed. “Mobile TV is a good 3.5G coverage and even then you wouldn’t want tough nut to crack although dedicated systems for several hundred-thousand people downloading video delivering mobile video content hold promise,” says at the same time,” says Rob Lewis, chief executive Dale Ford of market research firm, iSuppli. officer (CEO) of Omniphone, a UK-based mobile content company. Not all convergence works To go beyond movie trailers and music videos and The standard ice-breaker for speakers at conferences allow people to watch TV on their phone will probably on device convergence is to empty their pockets and mean abandoning cellular technology and using reveal to the audience the assortment of single-

The connected car—just difficult,” says Steven Hearndon, director directions, such as what events are on at a of telecommunications for Intellect, a UK particular location. another node on the home consumer electronics association. BT is another company taking innovation network? Enter mobile WiMax, which proponents seriously. Jonathan Mitchener, a BT claim could deliver multi-megabyte futurologist, sees the car as just another Technological developments have solved a broadband and at a lower cost than today’s ecosystem that could be integrated with number of problems associated with travel- 3G (third generation) technologies. The other products and services used in the ling by car. Satellite navigation has taken problem, however, is that WiMax networks home. For example, planning a route using most of the frustration out of road naviga- are still being built, performance and Multimap, which automatically updates the tion, screens embedded in rear seats mean deployment costs are not fully known, satellite navigation device, is one possibility. that children need no longer be bored on and that anything could happen in four Like many other equipment makers long journeys and collision-avoidance sys- to five years. For proponents of next- that have forged relationships to advance tems make travelling safer. generation GSM (global system for mobile the cause of Internet Protocol Television Indeed new technologies are being communications) technologies (High-Speed (IPTV), this is an area that Ericsson is introduced to market all the time. Research Packet Access—HSPA—and its path to Long- actively pursuing. “Our vision is that you from the Consumer Electronics Association Term Evolution) the answer is here today. will be able to consume the same type of (CEA) indicates that from 2008, 70% of cars “With HSPA today you can get effective media independently of the device,” says sold in North America will offer a voice- data rates of up to 4-5 mbps,” says Jorgen Mr Lantto; for example, getting the same TV activated Bluetooth interface for hands-free Lantto, Ericsson’s vice-president of systems subscription at home and in the car. phone operation. A number of vehicles will management in the multimedia unit of the However, not everybody is convinced offer iPod connectivity and support flash company. “Of course it depends on coverage, that there is a mass market for in-car media, and driver assistant systems that but the technology is here today to deliver entertainment. Problems include: the vast use ultrasonic technologies are becoming a multimedia experience in the car. We just number of add-on options already available; widespread. need to put everything in place.” disparate standards; and technology moving That said, device integration in the Market opportunities exist, therefore, too quickly for the car manufacturers. vehicle remains an opportunity. One piece and many are actively seeking to make “But so many alternatives for mobile that has not quite been realised yet is the money from these technologies. Information broadband are already here for those who car as a mobile hotspot. Although the technology (IT) company, Hewlett Packard, want it,” says Pang Chiang a principal at technologies exist, broadband connectivity for example, has been developing a Greenwich Consulting. “How much more will to cars is much more expensive than getting technology that allows travellers to create people need if they already have phones broadband to the home and coverage location-based experiences. Using the with them? That said, when you have a remains a problem. “At the moment global positioning system (GPS) sensors subscription for TV services that covers both downloading 2 mbps while travelling at already widespread in vehicles, travellers mobile and home, then you might drive 70 mph on the motorway is going to be could be given much more than simple market opportunity.”

function devices that they still carry: pass cards, credit digital set-top boxes, which promote the convergence cards, mobile phone, iPod, Blackberry and maybe philosophy by letting people use their TVs to surf the even a paper diary. Converged devices, by definition, web. This idea was pioneered by WebTV Networks back combine more than one function, and while there is a in 1997, at the beginning of the Internet boom. certain intuitive appeal in carrying one device instead Microsoft bought the company and rebranded the of two or three, the reality is that people will choose WebTV offering as MSN TV. It continues to promote and the most appropriate tool for the job. develop the service, but ten years on and despite the According to Infotrends, a US consultancy, only backing of Microsoft, surfing the web on TV remains a 15% of consumers consider their camera phone to be minority sport. their main picture-taking device. “A mobile phone is Converged devices, as well as costing more, have bought primarily to make phone calls and that is what usually had limitations when compared with their it’s used for 80% of the time,” says Éric Vallet, chief dedicated counterparts. That is particularly the case marketing officer of Paris-based T&A Mobile Phones, for portable devices, where design compromises often the handset maker previously known as Alcatel. have to be made. “If you want to watch a full-length “Nevertheless, that has not prevented phones from movie, you need something with a big screen, although having more and more capabilities.” it does not necessarily have to be a TV—a PC screen The risk of making devices ever more is fine,” says David Perlmutter, general manager of multifunctional is that manufacturers fail to identify the Mobility group at Intel. Nevertheless, advances in the key value proposition and so confuse potential technology mean that many of the drawbacks that have buyers. A good example is the new generation of hindered converged devices are now disappearing.

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Convergence issues

Legal tangles huge loss of revenue from pirate compact discs and illegal downloads from file-sharing websites. “It is As the stakes rise in the convergence business, the too late to start worrying about the loss of CD sales,” skirmishes fought over intellectual property are says Gavin Mann, lead partner for digital media at turning into full-blown battles. Vonage, the US Accenture, the management consultancy. He argues Internet telephony firm, has been locked in patent that the music business is as healthy as it has ever disputes with US phone companies. Meanwhile, been. However, its traditional distribution model—CD Skype, a pioneer of commercial IP telephony, has sales—is in a critical condition and unlikely to recover. seen its business suffer in Europe because of an Nonetheless, legal downloads are on the rise. In the uncertain legal framework for Internet telephony. UK revenue from legal music and video downloads Another dispute, involving navigation solution soared by 80% in 2007, albeit from a small base, providers, TomTom (the Netherlands), and Garmin and yet the music industry’s business model is still (US), concerned the “ease of use” of GPS location- devoted to the CD. finding technology. While the number of devices “In the past, the only way to monetise music was to that incorporate GPS technology is currently small, sell a physical item that enabled the music to be played. analyst firm, iSuppli, predicts that 444m GPS-enabled With digital music, that item is no longer necessary and handsets will be shipped in 2011, four times the figure consumers still want to discover new music and share for 2006. A lot is at stake for suppliers that can make it. Unfortunately, they mostly do it illegally,” says Mr GPS technology easy to use, as that will encourage Lewis of Omniphone. Unlike Apple’s iTunes, which sells more people to use location-based services, thereby digital tracks, Omniphone’s MusicStation service uses hopefully generating revenue for the operators. a rental model: UK subscribers pay £1.99 (US$4) per The iPhone, inevitably, has also found itself at week for unlimited access to over 1m music tracks. The the centre of legal action. Those operators that have catch is that they can only keep listening to the music signed exclusive deals for the iPhone are keen to on their mobile device as long as they keep paying their “lock in” their iPhone users by obliging them to sign MusicStation subscription. long contracts. However, mobile-phone operator, Mr Lewis says that he encountered considerable Vodafone, recently won a court injunction in Germany opposition from the music majors when he forcing T-Mobile to sell an unlocked version of the approached them with his “all-you-can-eat” pricing phone. In France, Apple is obliged by law to offer plan for music. It has taken four years and some unlocked iPhones after six months. complex behind-the-scenes security technology Undoubtedly the biggest legal battles in finally to get the majors to back the service. this business are being fought by traditional The content industry has won few friends by media industries as they struggle to contain the aggressively pursuing file-sharing sites and even encroachment of rival industries in markets that consumers, caught downloading music and films, they believe they still own. The music industry, for through the courts. It has also been quick to sue example, has been fighting a losing battle to stem the businesses that offer converged products that blur

the boundaries of the traditional content business. although the two camps have been arguing about the For example, XM Satellite Radio, a US subscription merits of the competing technologies for four years. radio service, ran into trouble with the US recording Battle lines are also drawn over mobile TV industry for a device combining a digital radio with standards. The two front runners appear to be DVB- an MP3 player, allowing the programming that XM H standard and the Telecommunications Industry broadcasts via satellite to be downloaded and listed Association’s FLO technology. There are at least four to later. In a preliminary ruling, a judge ruled that XM other contenders but these are the two front runners. only had rights to broadcast music, but because it had Makers of home entertainment systems are added a storage capability to its radios, XM needed similarly frustrated about the delay in producing an distribution rights as well. agreed standard for the wireless transmission of HD content around homes, which would help eliminate a Technical standards lot cables. An industry grouping called the WirelessHD As well as complex disputes concerning intellectual consortium has drawn up a specification, but it will property rights, the consumer electronics industry need the approval of movie studios, which are uneasy is notorious for battles over technical standards. about the prospect of films being beamed over the Thirty years after the original “Betamax war”, another airwaves. To soothe their concerns, the fledgling standards battle has broken out over HD optical disc specification includes strong encryption and controls technologies. There are two main standards, Sony’s to ensure that neighbours with similar kit cannot Blu-ray and Toshiba’s HD DVD, but still no winner, watch the latest HD movie for free.

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Where is it heading?

roduct lifecycles just keep getting shorter in the by providing private-label original equipment consumer electronics business and this trend manufacturing for global brands. For example, P will continue, forcing manufacturers to adopt Foxconn International, a Taiwanese company that more flexible design and development techniques. does its manufacturing in China, makes the iPod and Increased flexibility in the production cycle allows iPhone, as well as mobile phones for Nokia and Sony companies to deliver popular features to the market Ericsson. However, some are now expanding beyond more quickly, but it means innovative features get contract manufacturing to become brand-name commoditised faster than ever before (for example, manufacturers in their own right. many phones now sport an MP3 player). “From the Mr Ford of market research firm, iSuppli, says point of view of the phone vendor, MP3 playback is that “some of the Chinese manufacturers are moving now a must-have on all but the cheapest models,” says forward into fully fledged manufacturers with Motorola’s Mr Schaeffer. original designs. It is not just the copycat approach Perhaps the most far-reaching innovation in the of old.” The next logical step is for the upstart Asian iPhone is commercial rather than technical. Apple manufacturers to buy up established western brands, signed exclusive revenue-sharing deals with carriers and in fact this is already happening. Hong Kong- that hope that the uniqueness of the device will cause based TCL became the world’s biggest TV maker after potential customers to switch operator. Mr Vallet of forming a joint venture with Thomson of France to T&A Mobile Phones, says that “it is the first time that a build TV sets and DVD players. It also bought Alcatel’s manufacturer has been able to approach an operator handset business, now renamed T&A Mobile Phones. and say ‘give me 30% of your ARPU [average revenue Meanwhile, China’s Lenovo has risen to be the per user]’.” world’s third-largest PC maker after buying IBM’s PC Apple is coy about revealing how much it earns business in 2004. Alongside their inexorable rise as a from the revenue-sharing deals with operators. low-cost manufacturing base for the west, developing Whatever the real figure, the deals set a precedent, economies are also emerging as new markets for and a dangerous one for rival phone companies. Mr the consumer electronics industry. This trend will Vallet describes Apple as the “Easyjet of the mobile undoubtedly quicken the pace of development in phone market” because it has established a new the industry. China, for example, now has 500m business model that could potentially have as much mobile-phone users, so manufacturers can ramp up impact on the mobile-phone business as low-cost production and achieve economies of scale much more airlines had on the airline business. quickly in a consumer market like China or India. However, the acceleration of product cycles and Increased competition from globalisation leaves less room for error, and it forces emerging markets participants continually to question what their role Another important trend for the future is the is in a dynamic and cut-throat industry. Already, we emergence of new players in developing economies. have seen signs that the old all-embracing approach These manufacturers are seeking to expand overseas to consumer electronics is not sustainable. Philips,

the Dutch electronics company, once had a sprawling use semiconductor-like manufacturing processes to number of consumer electronics units; it is now trying produce tiny and highly reliable mechanical devices. to concentrate on just a few businesses where it has a No matter how functionally sophisticated devices competitive advantage. Sony Ericsson realised that it become, though, they always seem to lag in the could not compete with the likes on Nokia and smaller key area of interoperability. Consumer electronics Asian rivals in the low-cost phone market. Instead, devices were traditionally designed to do one or a it has chosen to licence technologies from France’s couple of tasks and so there was no need for them Sagem to help it make cheaper phones for this market. to communicate with other devices except at a rudimentary level. Technical challenges With every new generation of mobile device, the technical Will a digital ecosystem ever evolve? challenges increase. People expect an array of features The next few years will see consumer devices evolve on ever-smaller and easy-to-carry devices, while also from closed systems that perform a limited set of expecting battery lives to last longer than ever. functions to open systems that exploit broadband To reduce the size of portable devices —or to create access, so allowing consumers to store and play a more space for more functions—one solution is to variety of digital entertainment content from different replace some mechanical elements with smaller micro- sources. To achieve that, however, will require a electro mechanical systems (MEMS). MEMS devices radical change of mindset on the part of consumer

Power struggle has to be controlled and improved all the for manufacturers to move to the more time.” The key problem is that batteries expensive hybrids. “The reality is that have not kept pace with advances in battery life is satisfaction, but not a The impact that mobility has had on con- processor performance and the capabilities purchase criterion for devices, says Sylvain sumer electronic devices is enormous. Today of devices. “Battery power is improving by Maquet, a principal at Greenwich Consulting. 2.3bn people worldwide own mobile devices 10-15% a year, but bandwidth throughput, “Consumers are more interested in price, compared with just 575m personal comput- if you believe Moore’s law, is doubling features and design.” ers. Increasingly, too, those mobile devices approximately every nine months,” says However, poor battery performance may are embedded with power-hungry features Phil McKinney, chief technology officer for contribute to churn or diminished brand and functionality. In the developed world Hewlett Packard’s personal systems group. perception, so this could be a high-end people want longer battery life for video That is because, unlike manufacturing opportunity for manufacturers. clips or music downloads. Meanwhile, in and design, battery technology is a Without any doubt, power remains a emerging markets, a key growth area for the chemical process. Breakthroughs in the universal engineering challenge. “Even electronics original equipment manufactur- past have been incremental. “Short of if you do manage to develop a wonder ing industry, battery life is crucial because of a ‘eureka!’ moment in a lab somewhere battery, power sooner or later ends up as inconsistencies in power supply. it seems likely that this will continue in heat so there are always going to be some Just consider these facts. The US market the future”, says William Webb, author of tradeoffs,” says Mr Webb. That does not is growing in the lower single digits while Wireless Communications: The Future. In the mean that it has to be a showstopper. Chips the BRIC countries (Brazil, Russia, India and meantime, manufacturers will continue to manufacturers will get better at lower- China) are growing at a rate of about 15%. make tradeoffs between battery life and power versions, batteries will improve “The bottom line,” says Tim Cull, Motorola’s design. incrementally, power-hungry screens UK director of telecommunications policy, In spite of technological developments will become more intelligent and docking “is that the energy needed to sustain the (alkaline to Lithium-ion and now Li-ion stations to recharge mobile phones will necessary computing power for mobility polymer) there has been no real need become more widespread.

12 © The Economist Intelligence Unit 2008 Consumer electronics gets ready for change How convergence will drive new business models

electronics manufacturers, which prefer closed clicks to download a music track and two and a half systems as a way to “lock in” customers. For example, minutes for the track to download, then few people are owners of Microsoft’s Xbox 360 can buy a WiFi card going to bother,” says Mr Mann of Accenture. that allows them to stream movies from a PC running Download speeds are determined by the network. Microsoft Windows, but the adaptor will not allow As mobile operators upgrade their networks, and them to connect to other devices, even though WiFi equally importantly their customers’ handsets, first can be found in a growing range of devices these days, to 3G and then to 3.5G technologies, the problem of including cameras. slow speeds will reduce. Operators hope that advances Consumer electronics devices employ different in network speeds and handsets will encourage processor platforms and operating systems, all consumers to use mobile data services in much greater running proprietary applications written to specific numbers than they have to date. The experience of application programming interfaces. Unless fixed-line operators, however, is that revenue from electronics manufacturers agree in advance to open data usage has only partially offset the ongoing those programming interfaces to third parties, the decline in voice revenue. That is because fixed products will not be able to talk to each other. networks in effect have been reduced to “bit pipes” One US start-up, DARTdevices, sees a solution transporting data and content from third parties, but with DartPlayer software. Once installed on a digital adding no value. device, it allows other DartPlayer-equipped devices Will the operators be content simply to transport to recognise it and configure themselves accordingly. bits from one converged device to another? Probably The catch, of course, is that DARTdevices has to get not, this is why operators are starting to look at many manufacturers to factory-install its player for partnering with other players as a way to get a bigger the idea to really work. Nevertheless, Motorola sees slice of the converged-services pie. The exclusive potential in the company and has invested in it. deals that operators have struck with Apple are a clear sign of this trend, so too is Vodafone’s recent Keep it simple…and fast deal with Nokia to encourage Vodafone customers to While the right ethos does not exist yet to create access Nokia-branded services (Nokia has recently a seamless digital ecosystem, the one thing that unveiled a range of services aimed at consumers, such consumer electronics companies are starting to get as maps and music). “Operators now realise that they right is the user interface, particularly on portable cannot do everything on their own anymore and they devices. The one-to-one correspondence between are getting much more mature in their partnership functions and controls that works on simple devices strategies,” says Florian Seiche, European vice- breaks down as the device gets more complex. Buttons president for HTC, a Taiwanese maker of smartphones. have to do multiple tasks and menus grow longer and deeper, resulting in more confusion for users. Apple Advertising may be a lifeline has raised the bar of consumers’ expectations of There are, however, risks in adopting a more open usability and forced the industry to pay more attention model for services. As demonstrated by the experience to making their devices easy to use—a step that of fixed players, operators may be cut out of the value Google has clearly paid attention to with its Android chain for content delivery. One solution is advertising, mobile-phone software. “There is so much potential the potential of which has not yet been really explored for improvement in the mobile space if operators want on new channels like mobile. According to a study by consumers to really use their services. If it takes 15 Accenture, one-half of executives in the media and

The connected home deliver this sort of bandwidth and, if I were the road. Other key drivers of this market are to hazard a guess, that will take another five security and healthcare. years.” While it is currently possible to monitor The year is 2007. The place, a middle-class In the meantime, countless companies a burglar alarm via SMS (short message family home in the developed world. There are racing to win market share in what is service), something more interactive, is probably at least one high-definition (HD) being described as the silent battlefield. especially in markets with high crime rates, TV set, a video recorder and DVD player. Products are beginning to emerge that could prove attractive. Remotely accessed There is a wireless-enabled laptop or three, address today’s immediate challenges, healthcare too is potentially a big money at least one digital camera and a camcorder. namely security, automatic back-up and the spinner since governments could save The teenagers own MP3 players and every- ability to share content both in the home millions keeping patients at home. body over the age of ten has a mobile phone. and away. However, creating devices that Then there is gaming. No longer just Dad may even have two—a multi-tasker are easy to integrate, easy to use and zero the preserve of teenagers: yesterday’s for the week and a simpler version for the maintenance for the user is not simple. “We gamers are today’s home owners. “The weekend. It looks pretty hi-tech. The real- are not there today and neither is anybody demographics are shifting and we believe ity, however, is even if these devices wanted else,” says Phil Mckinney, chief technology the home is going to become increasingly to talk to each other, today this is far from officer for Hewlett Packard’s (HP) personal high definition and interactive,” says Mr straightforward. Battles that must still be systems group. To address this, HP is McKinney. Gaming is one example but fought are around bandwidth, standards, investing a significant proportion of research life-size collaboration with increasingly digital rights management and, perhaps and development (R&D) into making complex dispersed families, is another. most importantly, understanding what the things simple. In a fundamental shift, HP There are, however, still more questions consumer wants. now uses women in the design process, which than answers. What is required to support For Steve Koenig, senior manager for in engineering-type industries has typically multiple plasma screens beaming high- industry analysis at the US Consumer been dominated by men. “The problem is that definition content in the home? How much Electronics Association (CEA), the biggest men aren’t our target customer in the home,” more bandwidth can we squeeze down a challenge is bandwidth into the home. says McKinney. copper wire? What are the economics of Broadband or a better-than-broadband While there are clearly challenges ahead, supplying 20 mbps to rural areas? Will the infrastructure is needed simultaneously there are also opportunities. The remote smart home centre on the wireless router or to support things like HD video, large file home access market is one. As the world the set-top box? The jury remains out, but downloads, streaming content and online becomes smaller people increasingly want pricing at levels that the market will accept gaming. “At present we are hard-pressed to to access information and media when on will remain critical.

entertainment sectors believe that advertising could its website to cover the cost of streaming music to its grow to become the most prevalent business model in 18m monthly visitors. the industry within five years. Google’s much-publicised entry into the mobile- Text-based mobile advertising is nearly ubiquitous phone business and Nokia’s recent acquisition of in Europe, and analysts say many consumers would mobile advertising company, Enpocket, suggests welcome richer types of advertising if they got that advertising-supported business models from something in return, like free music. Imeem, a fast- the fixed Internet industry are likely to become more growing social community site, uses banner ads on commonplace in the future.

he delineations between the technology, connect with each other indoors using a fairly old media and telecommunications industries are technology: Bluetooth. Will social networks on Talready in the process of being dismantled. mobile phones be a useful service? Will Aka-Aki even Digital convergence is threatening old industries find a lucrative business model? It is hard to say. while simultaneously making new ones possible. But consumer electronics companies need to keep The firms that will survive and prosper through this experimenting, and if the new business model is not difficult transition will have several characteristics. working, firms need to “fail fast.” Speed is of the They will be good at spotting opportunities and essence in the convergence game, as is collaboration. moving quickly—although not rashly—to market. The not-invented-here syndrome has been the They will have an open mind about potential new downfall of too many electronics firms. revenue streams. Successful firms will also be led by There will be many other stumbling blocks along consumer’s needs, not by the R&D department. Firms the way, not only technical challenges, such as how need to ask what consumers really want. What will to extend battery life, but also technical standards make their lives easier or more enriched? and legal challenges. The law has yet to catch up Convergence does not have to be flashy. It could with digital convergence and many landmark legal be the melding of existing technologies and services, battles have yet to be fought. But concerns over however prosaic. Not everything needs to be created the uncertainly of the future should not prevent from scratch. For example, a German company called incumbents from taking a gamble. As American Aka-Aki saw that social networking was a growing financier, Carl Icahn, put it: “In life and business, phenomenon on the internet, yet was poorly served there are two cardinal sins: the first is to act by mobile devices (mainly because locating people precipitously without thought and the second is to not through GPS does not work well indoors). As a result, act at all.” they developed an application that lets people

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