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?



The "Apple Death Knell Counter" is rather stagnant these days. A fixed feature on Mac enthusiast site the Mac Observer, the counter lists all the pundits who have predicted the death of Apple in some form or another. The rules are strict: It's not enough just to say that Apple sales might sag or that Steve Jobs faces major challenges. No, qualifying for a space requires a pronouncement of pretty absolute death of either the Macintosh computer or Apple the company. And only a few tenacious and infamously contrarian souls have dared to venture such opinions lately.

On Tap For The Digital Living Room

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The Complicated Web Of Content Licensing
Instead, most Apple watchers are spending their time gaping at the current runaway success of the company and speculating about what the company's Next Big Thing might be. The current odds seem to be on the much-rumored iPhone finally debuting--albeit first in Japan (see related story). But some coy remarks dropped by CEO Jobs at the annual shareholders' meeting in April, coupled with a column in early May by the Wall Street Journal's Walter Mossberg--who boldly asserted that an Apple media hub will be finally forthcoming--caused the buzz about an Apple-dominated living room to ramp up to a full throttle.

"It's fairly easy to see where Apple is going," says Charlie Wolf, an analyst at Needham & Co. "The home is the next major battleground between a diverse set of players--whether they are PC companies or consumer electronics firms--and Apple intends to be an aggressive participant."

Indeed, digital media servers for home use are starting to emerge as a significant product category, with more than 50 million units expected to be sold in 2010, according to market research firm Parks Associates. A digital media server is defined as a networked device with a hard drive and software for distributing media to various locations throughout the home--and it's a market that Apple is determined to dominate, according to analysts.

The timing of when that will happen is uncertain, however.

"Apple in the living room will be the story of 2008," says Gene Munster, managing director and a senior research analyst at Piper Jaffray. "They're very serious about making it a reality. But it won't be this year, or even the next."

The Digital Home Entertainment Ecosystem: A Snapshot

So what exactly would a digital home entertainment system look like? Although varying scenarios abound, there are some attributes that everyone agrees on. The key issue is one of interoperability: the movies or music broadcast via your satellite or cable connection must be easily and reliably captured and viewed on your TV, PC, or portable media device.

Ditto any media that you create yourself, or which you purchase and download. Content should be easily transferred between media players, no matter what type, or where they happened to be in the house. Preferably, all this will be wireless, eliminating the need for the cables and wires that currently clutter up living rooms. And--this is one of the most critical aspects--it would all be done legally (see Media Distribution Rights: Here Come The Judges (And Congress)).

Ease of use is the primary issue: consumers can't be bothered with worrying about interfaces and complicated cables and instructions. "It has to be as easy to use and as reliable as a toaster," says Munster.

"Most people are very dissatisfied with the current offerings, and for that reason would welcome Apple's contribution," says John Gruber, a prominent Apple blogger who runs the Web site Daring Fireball.

A number of major PC, consumer electronics, and software vendors already have outlined their strategy for getting to this media nirvana, notably Microsoft (via Media Center), HP (through its digital entertainment line of PCs), Intel, with its Viiv platform, and Sony and Motorola through its entire portfolios of televisions, consoles, media players, and handsets. But none have managed to circumvent the maze of interconnecting technologies or--most importantly--establish the key partnerships to making this vision a reality for the average consumer.

First, home networks are notoriously difficult to set up. Second, even though standards are being ironed out by the Digital Living Room Alliance (DLRA), network components from one vendor--TVs, digital video recorders (DVRs), set-top boxes, digital media servers, and the various types of players--still won't talk to those from others. Additionally, some vendors believe in a model in which media resides on separate components and is "discovered" while others promote a server-centric view, in which all media would be centrally located, according to Colin Dixon, an analyst at the Diffusion Group.

And then there's the fact that consumers aren't looking to replace what they already have in place. Instead, the majority of them view emerging options for content delivery as supplements, not replacements, to what they already have, according to a recent report by Ipsos Insight.

"The digital home is higher on the priority list of the vendors than on the consumers," says Gary Sasaki, president of new media consulting firm Digdia. "If you ask them, 'would you like to be able to do this?' you'd probably get them to say yes. But if you asked them what they'd been willing to put up with in terms of complexity--and what they'd be willing to pay--that's another matter."

Apple's (Un)Stated Vision For The Home

Apple is definitely behind the pack when it comes to announcing its intentions. The company has yet to define a comprehensive vision for the digital home, and so Apple watchers are--once again--forced to read between the lines. (At the company's annual meeting, when told by a shareholder that everyone was eagerly awaiting the "ultimate media center," Jobs replied only "we hear you loud and clear.")

"Back in January, when Steve Jobs announced the Mac Mini, it was the first time he talked publicly about connecting a computer to your television," points out Ross Rubin, director of industry analysis at NPD Group, which tracks shipments of new media products, including MP3 players, digital media servers, and DVRs.

Still, analysts say that the pieces are falling into place. With the introduction of the Intel-based Mac Mini in early 2006, Apple finally had a viable digital media server (the Mac Mini) that worked with a long-distance interface (Front Row), and a wireless network (AirPort). The major functionality missing at this point is the ability to directly view and record live television, according to Tim Deal, a senior analyst with Technology Business Research. "You can get that from third parties, but Apple needs it to complete its own portfolio," says Deal.

Some Apple watchers believe that Apple will introduce an IP/video set-top box that will bring the Internet and video downloads directly to the TV. Josh Bernoff, an analyst at Forrester Research, has predicted just that. He expects that current and future Apple technology will cumulate in a device he calls "AppleVision," which will include digital video recording capabilities that would make it an effective TiVo killer.

According to Bernoff, such a product would stand out from the already saturated market for DVR set-top boxes because existing devices don't have easy access to video content via the Internet. Some of them are getting close, however. TiVo just this month announced TiVoCast, which would deliver online video over a broadband connection from partners that include the National Basketball Association, the Women's National Basketball Association, and The New York Times.

Indeed, many people are betting against the PC as the hub of the digital living room. It's simply not reliably enough, for starters. In addition to all the other complexity, you've got "blue screens of death," viruses, and other malware that creeps in when PCs get involved in the hardware and software mix, says Phillip Swann, president of TVPredictions.com.

"PC-based entertainment systems have a limited appeal, and will never reach the mainstream," declares Swann. "They are too complicated and confusing and designed with excessive features."

PCs have a long way to go before they're a viable part of the digital home solution, agrees Ted Schadler, an analyst at Forrester. "Today, PCs do not plug-and-play into the digital entertainment in the living room. It's too complex."

How this will impact Apple is still anyone's guess. Although there are strong signals that Apple would push the Intel Mac Mini as a central media hub, there's also the iPod model, in which audio and video reside on the device itself, which would argue for a more distributed approach to storing and accessing content, says Dixon. "How the PC fits into Apple's vision is unclear," he adds.

Must Play Well With Others

For Apple to succeed, then, it's much more than just a question of working out the technical kinks. It involves making critical decisions that anticipate consumers' desired entertainment lifestyles--and creating the appropriate partnerships to make those lifestyles possible. And these partnerships require collaboration from a whole spectrum of notoriously hard-headed players.

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?"

In the content arena, although Apple leads the industry in forging alliances with both audio and video producers, a whole plethora of complications abound once it moves past selling 99-cent audio and $1.99 video downloads via iTunes (see The Complicated Web Of Content Licensing).

"The main reason you haven't seen [an integrated digital entertainment system] yet from Apple is that they haven't been able to design an experience that meets their standards," says Gruber.

The More Things Change

How long will Apple continue on its current winning streak--and will the success of the iPod continue to have a "halo" effect on its other ventures? Although some observers say that the company has changed--and learned from its mistakes--Apple's past management is pretty much its current management, and its core strategy of going it alone to provide consumers with a complete integrated solution--albeit a superior one--hasn't changed.

And there's no guarantee that the iPod will continue in its global domination of the digital music market. "Right now, iPod sales are very strong. However, over time we're going to see hundreds of millions of music phones distributed throughout the world, and this could certainly be a threat to the iPod business down the line," says Rubin.

There's also the competition for talent, where Apple is going up against other industry heavyweights for the best and brightest in design and engineering. "They have the team in place, the best industrial designers on the planet, but they are going to have to work hard to maintain that," says Bajarin. "Microsoft and Google are hiring like crazy, and they need significant talent to do what they are doing.

But there are others who believe Apple has turned things around in a significant way.

"Over the last few years, Apple has managed to totally reinvigorate the cachet of their brand," says Gartenberg. "They've certainly learned how to effectively get the message out to the market. They're pretty much past the beleaguered Apple computer on the desktop."

"I think Jobs is a lot wiser than he was in the early '80s. He's worked professionally in technology longer than the managers of his competitors have been alive, and there's something to be said about a battle-tested commander," says Munster.

Schadler adds that Apple has "defied conventional wisdom" in all sorts of ways and will probably continue to do so. "The main thing is that Apple listens to its customers. It has the voice of the consumer in mind, and it designs for that buyer, and as the only computer company that does that, that makes it unique."

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