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6/29/2006
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Apple's Next Big Thing: Home Entertainment

Sure, the company's on a roll. But does Apple have what it takes to repeat the success of the iPod in this notoriously fragmented venue?

This is going to be challenge for any company, but for Apple it will be especially difficult. The firm is famous for not playing well with others. It believes strongly in providing an integrated technology solution for customers: everything from design to distribution is carefully controlled.

This end-to-end solution has worked extraordinarily well with the iPod by providing a seamless experience for consumers that previous MP3 player manufacturers didn't deliver.

But this raises the question: In what other markets can Apple hope to replicate this end-to-end ownership model? The model ultimately failed in the PC industry, where open standards and the component model prevailed. If in the digital music space it has finally found a venue in which its tight control actually works, is that model transferable to the digital living room?

The preliminary answer appears to be no, says Schadler. To expand its horizons--to make the iPhone or the media hub a reality--Apple is going to have to partner with others. In other words, give up the integrated model that has worked so well with digital music.

"Apple's closed way of working pretty much rules out such partnerships," agrees Tim Bajarin, an analyst with Creative Strategies and a longtime Apple watcher. The issues involved in these partnerships include pricing, technology-sharing arrangements, questions about distribution support, and a lot of tradeoffs that all parties have to agree to. "Apple would bring to the table its brand and its IP, but the other players would have their very strong negotiating points as well," says Megan Graham-Hackett, a hardware analyst at Standard and Poor's. "It's unlikely that Apple would be able to call the shots the way it has in the digital music arena."

An end-to-end solution works when content choice isn't an issue, points out Michael Gartenberg, an analyst at Jupiter Research. The Mac failed largely because consumers wanted choices in their PC hardware and software. The iPod works because "users have all the choices they need," says Gartenberg. "There's simply no differentiation on the music store side of the equation--all the music stores offer the same content." But that won't be the case in a larger entertainment context.

Not surprisingly, most of the other would-be players in the digital entertainment space want to see an open component-based market much like the PC market. "What's necessary for broad adoption of these new technologies is an ecosystem of electronics players, IT players, PC makers, and so on," says Scott Smyers, chairman of the DLRA, who is also a VP at Sony. The DNLA is working to create interoperable standards for digital media devices of all ilks. "Sure, Apple is making all these compelling products, but there's also Sony and Motorola and Phillips and Microsoft and Intel, and if they can't participate, it's simply not a sustainable ecosystem. Is Apple going to make the power amplifiers? The surround sound systems? Do they expect to drive every other consumer company out of business?"

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