Changeover:  From PC To What?

01/09/02

Five years from now, when we look back in hindsight, we may pick January, 2002 as the moment in time when we could see the PC market changing, and a new market, aimed at reaching a broader number of consumers and applications, getting seriously under way. 

Between Steve Jobs’ announcement of his new iMac, a cornucopia of announcements at CES, and IBM’s decision to once again chance its level of participation in the PC business, tectonic forces seem to be converging.

It’s useful to understand that there is a single theme song here, with some widely (and wildly) different approaches to its implementation.

Theme Song

The theme song is short and sweet.  To get to more consumers, we need a different kind of device(s).  The number of consumers who are willing to be their own systems administrators (or to pay for someone else to perform these chores) has largely reached its limits.  The rest of the market won’t be seduced by lower prices, brighter colors, or more of the same old thing.

Users want devices that do something they value (whether they knew that in advance or only recognize it once they’ve seen or tried the new technology), in a very intuitive way (consumers get to define this intuitive, not programmers), at a reasonable cost (rented for tens of dollars a month or purchased, preferably for around $300). 

Variations On A Theme

There are a remarkable number of ways to arrive at such an ending – or so the vendors think. 

Established vendors, of course, tend to think this is an extension of existing markets and platforms.  We think they will be likely to loose.

Apple believes its new iMac can be the center of a digital lifestyle.  With 5% of the installed PC base, Apple has opened 27 Apple retail stores in the last years, mainly located in upscale malls, to sell the Apple lifestyle and products.  President Steve Jobs points out that 27% of the store customers were not previously Apple owners, but we’d note that most new Macs are purchased by previous (and notoriously loyal) Apple users.

In recent years, Apple’s market has become more and more focused.  Today, most Apple buyers are professional graphics artists or other creatives, consumers, or educational buyers.  Apple had been losing share in the educational market, but has recently been doing better, based on lower prices.  New software, attracted by the move to OS X (a UNIX variant) has also helped.

Jobs has been emphasizing the Mac as a digital hub for all kinds of personal digital devices – from the Apple iPod (digital music player) to software editing and storing photos and home movies created on the increasingly popular digital cameras and video cams. 

Microsoft’s announcements at CES emphasized, once again, its reliance on the PC as the center of the universe.  Its new wireless devices Mira (a walk-around CE-based flat panel device, wirelessly attached to its PC parent, for browsing or controlling a PC and other household objects) and FreeStyle (extensions to a consumer PC which turn it into a combination media centre, jukebox and TV, presumably with a new and easier user interface).  These are in addition to the Tablet PC, a full XP-based PC which would provide another kind of portable computing experience.  For more comments on Mira (and other CES announcements) you might like to read Glenn Fleishman’s January 10 weblog at his 802.11b Networking News http://80211b.weblogger.com/2002/01/10.

(Note:  In an interesting footnote to computing history, FreeStyle is itself a recycled name.  Wang Laboratories used the name in 1987 for a PC graphical user interface designed to compete with early versions of Microsoft Windows.  It included many interesting features, but Wang Laboratories was never a major player in PC hardware or software and it disappeared from the marketplace within two years.)

Both Apple and Microsoft seem, in these cases, to overlook the fact that this expects, even requires, that the consumer use his PC as part of his entertainment/education/social interaction scheme.  But for most users, these may be separate worlds, with PC’s located in home offices or student bedrooms and entertainment centers in shared space (family or living rooms).  We’d guess a lot of consumer will, instead, opt for some of the newer, non-PC solutions for their shared spaces.  These often come from new companies.    

New vendors get to write with new ink on a clean sheet of paper.  Some of them have very interesting ideas.  You can think of these as Entertainment Centers or Home Media Servers.  Both the name and the definition are still in the works, but we’re starting to have an idea of what they’ll do.

Microsoft intends to play in this sector, too (just in case its PC-based scenario isn’t the winner), with future upgrades to its X-box.  Equipped with a version of NT and a fast processor, the X-box is fully capable of being the brains of a home media center.

Other game vendors, such as Sony (Playstation 2) also have plans to become media center providers.  Game providers, of course, having long sold their game players below cost (See Opinions December 13, 2001, Pricing the X-Box), depend on royalties from games for their profit.  A move to on-line gaming means that the box vendors must be major players in the on-line game market to maintain profitability.

Other contenders include just announced Moxi (www.moxi.com), the former Rearden Steel, when it was operating in stealth mode.  Its Moxi Media Center is priced at $400, typical for these devices, and will connect to cable or satellite, record DVD, play music and be the hub of your computer network.  It includes both a DVD drive and a large (80Gb) hard drive.  It supports cable, Ethernet, and wireless connectivity.  We expect to see Moxi distributed by both satellite TV service and cable, which could make it an instant big winner.

We’d also expect Tivo, an early entrant into the time-switched TV game, storing shows on its hard drive, to also be entering the home media center business this year.

The vendors have products.  The question now will be whether the customers are ready for the market to run – and which kinds of products they will prefer to buy.

Pricing Models For New Devices

While various kinds of handheld devices or terminals are likely to be simply sold (at relatively low prices) or bundled with services (like cable boxes or cell phones), Home Media Centers are another story. 

	They might be software for a PC (probably sold as part of a properly equipped new PC), and priced as part of a hardware purchase.  That would be the Apple or Microsoft PC Style.
	They might be priced into a cable or satellite service contract, like cable boxes.
	They might be given away “free” or at low cost (razor and razor blade model) and their cost plus profit recaptured in selling services (such as advertising to customers who use them or game usage to gamers).

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