DWR Research Reports


Digital World Research Reports

By P.J. McNealy 08 Nov, 2017

So is this it? With the launch of the PS4 Pro console last Fall and this week’s launch of the Xbox One X console, two of the biggest, fastest, strongest, -est consoles in console video gaming history, is this it for the concept of video game consoles and cycles?

The easy and quick answer is “Yes,” but the realistic, informed and more lengthy answer is “no.” The hype for an iterative console upgrade will be intense this holiday season, especially given the market dynamics that the console maker currently in third place in sales this calendar year in the U.S. is now all-in for pushing the value proposition of its new console.

But first, for just a moment, if the answer is “Yes,” then it is due to the current TV upgrade cycle of 4K-ready TV sets, which could reach 30% to 40% penetration in the U.S. through holiday 2018 given how much price points have come down on new 4K TVs. What better to pair with a 4K TV than a new video game console that enables full 4K gaming and 4K UHD Blu-Ray and 4K streaming content in the form of TV or film-length content? There is your value proposition for a new console this holiday, into 2018, and beyond...until 5K and 8K arrive next. THEN, you will need another new console, but who knows? They could be built into a TV by then. However, that’s the last you’ll read about 5K and 8K in this piece.

The more interesting answer of “No” requires a deeper dive, with a look at current trends and cycles, historical cycles, and a glimpse into future cycle scenarios.

So what is the Xbox One X and does it matter? If so, why?

The Microsoft Xbox One generation of consoles includes the original Xbox One (launched in 2013), the Xbox One S (2016), and now the Xbox One X (Nov. 7, 2017). Microsoft is launching the X in lock-step with 4K TV pricing coming

By P.J. McNealy 12 Jan, 2017

While the market is currently focused on the Xbox One and PS4 consoles, there is a case to be made that a year from now, the upcoming Nintendo Switch could be the top-selling console in CY 2017. Three factors:

1.     What is the case for the Switch?

2.     What is happening with Sony and Microsoft?

3.     What else could influence dollars to the segment? VR? Mobile?

1. What is the case for the Switch?

Nintendo announced its upcoming new console, called the Switch and is scheduled to launch in the first quarter of CY2017. While there has been early criticism, as expected, of how the console looks, history shows that software drives hardware sales, and Nintendo has the most top-10 most popular IP in console history, with IP such as Mario, Zelda, Donkey Kong and Super Smash Bros. These are multi-generational games, meaning that the big IP typically launch once per hardware console cycle, and are multi-family generational titles. There are many 40-to-60 year old parents who grew up playing Nintendo games, a tradition shared by many 15-to-39 year olds also understand.

Nintendo IP is often family friendly, and again, has the easiest path for a family to just pick up controllers in the Living Room and just play. No family sits around the Living Room with four Xbox One or PS4 controllers, or connects on four Amazon Fire Tablet, or on four Apple iPads. This family gaming is a Nintendo tradition, and neither the Xbox One nor PlayStation 4 have focused on this aspect of multi-player family gaming software with any significance. Remember—when the Xbox One launched, it was focused on being an entertainment platform, while the PS4 was focused on the hard-core gamer market. So Nintendo will focus elsewhere—the family demographic with familiar, fun, friendly software.

Nintendo sets itself as being the likely choice the second-console-in-the-house position. The Xbox One and PS4 are just over three years old since the November 2013 launches. Assuming that the Switch is priced at $299 or less, Nintendo has the opportunity to launch a swath of big first-party games for the March and June quarters of 2017, and have the third-party publishers (Electronic Arts, Ubisoft, Activision, Take-Two, etc.) target September and December 2017 quarters to launch. The extra six-to-nine months are likely critical to third-party publishers for development time. This means the value proposition of buying a second console—with lots of first-, second- and third-party software available by Holiday 2017.

It is worth noting, too, that the public support for the Switch is notably better than for either the Wii or WiiU launches.

Why would the business model case for Nintendo fail? Likely one of two reasons: 1. Supply constrains inventory to the point of frustration for consumers and limits market share. 2. History repeats itself and Nintendo fails to roll out a continual flow of big IP after the launch of the Switch, leaving the channel short of marketing opportunities to push the new console.


2. What is happening with Sony and Microsoft?

Both companies are in new ground for Holiday 2016. The fourth quarter is typically the strongest hardware sales period, and Sony is pushing the new, updated version of its console, with the PS4 Slim ($299) and the PS4 Pro ($399), while Microsoft is pushing its Xbox One S. They vary in power (both CPU and GPU), and 4K streaming vs. 4K gaming, and consumers already know about the next Xbox One (Project Scorpio), slated for launch in Q4 2017. Again, it is an upgraded box over the Xbox One S, with full 4K gaming and 4K streaming, as well as likely enablement of a host of Virtual Reality/Augmented or Mixed Reality offerings.

The corporate goals for the companies, as a result of these hardware rollouts, show divergent paths: Sony has one goal and one goal only: to sell as many PS4 consoles as possible as the PlayStation business is the core of the company moving forward. This means that Sony has been very aggressive, with multiple bundles or discounts through partners such as GameStop, Best Buy, Target, Amazon and Wal-mart. Microsoft switched its goal to enable alignment between the underlying operating system to be Windows 10 for the Xbox as well as for tablets and PCs. This means Microsoft can enable cross-play among devices, opening up its ecosystem to more partners, including on the VR/AR/MR front. It also then appeals to developers who might want to code once, distribute anywhere in the Win10 ecosystem. Hence, this holiday, Microsoft has been happy to sell Xbox One S boxes, feature 4K streaming, and really focus on gaining share in Holiday 2017.

Could both Sony and Microsoft generate problems for Nintendo in CY 2017? Sure. It could come from a break-through title in VR that speeds up consumer adoption (and spending) on VR equipment, or it could be in the form of a killer, brand-new IP that sparks console sales (such as the original Halo launch), or it could be from either Sony or Microsoft being aggressive for either an exclusive licensing deal (such as for the next Grand Theft Auto), or going the merger and acquisition route (such as Microsoft buying Valve). These are all scenarios that could dim Nintendo prospects in 2017.

3. What else could influence dollars to the segment? VR? Mobile?

It has been a popular argument to say that Nintendo has lost market and wallet share due to mobile gaming, and it has been largely true of the declining cycle of the Nintendo 3DS handheld systems. However, the role of mobile gaming has largely been short-session engagements, or a car back-seat babysitter. It has not replaced the Living Room family experience, and that is why the Switch launch could be impactful to the overall gaming market.

Will VR/AR/MR take dollars from a Switch launch? The answer is likely no, but with some assumptions, such as Sony not having a killer PSVR game launched in 2017 (see https://www.digitalworldresearch.com/Virtual-Reality-Forecasts for our recent VR piece). If it does, it could erode some potential dollars at the margins for Nintendo. If the Samsung Gear or Google Daydream View sell incredibly well in 2017, those are likely incremental, small dollars (most headsets are either bundled or cost under $100). And at the high-end of VR, there is likely not many households making a buying decision between an $800 VR solution (assuming they have a compatible PC) versus a $299-or-under Switch.

By P.J. McNealy 07 Oct, 2016
Early Days and Overhype: Putting Reality Back Into Virtual Reality Forecasts

The word hype is defined by Webster’s as “to promote or publicize extravagantly.” Yes, analysts have been criticized historically over even overhyping an emerging market. We at DWR understand this criticism firsthand.

We also understand a phrase, courtesy of Columbia Business School Professor Eli Noam: “People have the tendency to overestimate the impact of change in the near term, and underestimate it in the long term.”

This is why we are attempting to put some reality back into virtual reality (VR) forecasts.

It is helpful to put parameters around buckets of VR, as well as Augmented Reality (AR), and the likely very long-term winner bucket, meshed VR/AR. The challenge is both fun and challenging: Are the buckets defined by operating system? By hardware? Tethered or wireless? By operating system? Experience genre? Price? Frame rate?

From our perspective, the timeframe for rollout of VR and AR solutions helps support definition more than any technological specification. There are two big buckets in the near term, meaning the next 24 months: First, AR, and second, VR, sub-segmented by the low-end, middle-tier, and high-end markets.

Third, the discussion of 25+ months can be found later in this document. Fourth, there is a discussion of a critical, undercovered aspect: the marketplaces for content tied to hardware solutions.

Fifth, and final, the forecasts: DWR takes its best shot at estimating the size of the VR hardware markets over the next four years.

FIRST: Augmented Reality—Easy category…for now.

AR is fairly straight forward: check back in the 2H of 2017 to see if the needle on unit penetration has begun to rise yet. AR holds huge potential in a wide range of scenarios, from healthcare to communications to education to gaming to broader entertainment scenarios, but the lack of hardware and applications are the current status quo. These are early days of an ecosystem being built.

We have seen early examples, such as using a Microsoft HoloLens with Skype, or playing a future version of its tremendous IP, Minecraft, to joining folks from the NASA Jet Propulsion Lab to visit the surface of the planet Mars. They are compelling, but the computational analysis (think big math processing) to bring AR from an example to a viable, reasonably priced consumer, educational or business model will take time. The pure math behind AR requires computational analysis that can first, scan a room or space; second, calculate an overlay of the AR app into that room/space, and then re-run both of those calculations should the person wearing the AR device actually move, requiring a re-scan/adjustment and changes to the overlay. And, the transfer I/O speeds today favor a tethered solution vs. a wireless solution.

The good news is that Moore’s Law works in favor of AR. Compute technology will continue to increase at a rapid pace, storage costs will come down, transfer I/O speeds will increase, and final retail pricing will come down from the current level of $3,000 per unit. This also means that, as transfer I/O speeds improve, the options for AR hardware increase.

But, to be clear, the computational capabilities needed push AR out of 2016 and likely into the back half of 2017. While there are multiple AR efforts afoot, they are early days. For example, Microsoft only started in early Spring 2016 to ship AR dev kits (PCs capable of programming AR apps). These are truly early days for AR.

SECOND: VR—A moving category, meaning, it’s moving and changing.

Let’s be clear: Oculus started its Kickstarter project on August 1, 2012. That date is not even four years ago, and it was 2013/2014 before other camps emerged from HTC/Valve, Sony, and Google, with off-shoots from companies such Samsung (Gear VR, based on Oculus). Yes, Google launched Google Glass in February 2013 ($1,300/pair of glasses), and has backed off of that specific area, but Google Cardboard continues to dominate the low-end of the market.

In other words, there has been a mad rush of investment in this area in the past three years, with roughly six platforms, and that is not including any future entries. It is likely that heavyweight companies such as Apple (purchased Metaio, an AR company and has filed patents for VR with an iPhone) and Amazon will become involved because this category will be too big to ignore over time. Google is invested in Magic Leap, too, which is likely focused on the VR and/or meshed VR/AR market. Further, Asia/Pacific mobile titans such as Tencent, Alibaba, Giant Interactive, Softbank and NCSoft are likely looming. LG, too, will likely fast-follow the footsteps of Samsung with a significant phone-based entry effort.

As a result, we can look at the next 24 months, and then speculate with everyone else for 36 months and beyond. Again, we are in Early Days, and the long-term impact is likely significant.

So what are the near-term categories? Four make sense:

1.    High-end PC, tethered

2.    Low-end mobile phone, head-mounted devices (Phone HMD)

3.    (Middle-ground) Console VR

4.    All-in-one head-mounted devices (A little further out…).

1. High-end PC, tethered

This means the Oculus Rift and HTC Vive, which means consumers have to spend at least $600 for the unit plus a $1,000-$2,000 PC capable of handling the high-end graphics, memory and I/O. This is the definition of a “high-end” experience to what DWR defines as a United States, mainstream audience: Joe Six-Pack in Middle America.

Joe Six-Pack is not buying a Vive or an Oculus. Joe Six-Pack this year is deciding if buying an Xbox One or Sony PlayStation 4 is the right call. Those two consoles launched in 2013 and have likely sold a combined 61 million units worldwide life-to-date. The price point on the consoles has come down to $299 (or even lower on short-term deals), and at this point in a typical hardware console cycle, Microsoft and Sony (and still Nintendo) are looking to last-generation console owners (PS3, Xbox 360, Nintendo Wii) to finally make the jump to upgrade to a “next-gen” Xbox One or PS4 console.

This is part-and-parcel with Joe Six-Pack having made the jump in the past three years to an HDTV, but have likely not bought in yet to a 4K TV. The Six-Pack family remains price sensitive and will look for discounts and bundles, but the bottom line is a high-end PC-based tethered VR experience is not on the 2016 Holiday Shopping List.

Will the Generation Me buyers rush to buy a high-end, tethered PC experience? Generation Me, also known as Gen M (18-to-30 years old), are social media champions, mobile device advocates, and are the reason for the future breakup of the current cable and satellite providers due to their a la carte behavior when it comes to media consumption. Gen M shows little interest in paying for subscriptions for music, TV and film and is more likely share passwords to streaming accounts.

They are mobile, meaning they use phones, tablets and laptops. They likely don’t own a high-end PC and see little value in purchasing one at this point. Would they buy an inexpensive, phone-based head-mounted device? Sure.

Or even better, they’re likely to use a Google Cardboard solution (as long as they didn’t buy the BIG Apple iPhone 6). It’s cheap and gets the Gen M’er into the experience. Perfect.

Alas, this demographic shrinks the total available market (TAM) for a high-end, tethered PC VR experience.

This is likely not new news to the management teams at Oculus and Rift. However, the splintering of the product for future products likely begins there. What that means is Valve, which is working with HTC on the Vive, understands the high-end PC gaming market better than any other company. They understand better what their TAM is and who their audience is, and may be perfectly content to serve what is a loyal, dedicated and paying high-end PC gamer market.
By P.J. McNealy 06 Oct, 2016

So kudos to Vizio, who sold out to LeEco for $2B. This is a great example of #DigitalEmpireBuilding in action where a company chooses to buy instead of building to grow its empire in the digital landscape. In this case, it’s an American company selling its TV hardware sales business to a Chinese company that wants in-roads into the U.S. market.

Here is why this matters: it is an inflection point for a Chinese consumer electronics company gaining a foothold into the U.S. distribution channels to market TVs to a U.S. consumer, thereby taking on the two incumbents, Korea-based Samsung and L.G..

The race to add blocks in #DigitalEmpireBuilding here means that LeEco:

-Now has a range of products such as phones and TVs to sell to U.S. consumers, with potential distribution partners lined up thanks to Vizio’s current distribution partners.  LeEco is also involved in funding electronic car research.

-Has access, specifically, to the growing Vizio footprint at retail both in bricks-and-mortar and online. Note that Vizio, just a few years ago, had limited distribution in channels such as clubs/warehouses, but as its TV products improved with competitive pricing, it’s footprint grew. This means that consumers today can buy a Vizio TV from Best Buy, Target, Wal-Mart, Costco, BJ’s Warehouse and, of course, Amazon.

-Now has a brand to possibly sell in China, where the growing middle class is moving to the coastal cities such as Shanghai and buying up consumer electronics (see: TVs, phones). Couple this brand with LeEco’s stated goal of creating original TV and Film content for the Chinese market. Think big content delivery network (CDN)–China big, and LeEco is building out the end points of hardware.

- Oh yes–don’t miss that LeEco is yet another Chinese company with VR hardware. This particular segment will only get noisier over the next three years.

Keep in mind the historical perspective of TV sales in the past 15 years in the U.S.–the Japanese brands, Sony, Panasonic and Sharp, dominated the landscape until they were overtaken by the Korean-based manufacturers in Samsung and LG, largely driven by a huge currency advantage. Vizio was the outlier in the market over the past five-plus years–a U.S.-based company with no manufacturing capacity, but a keen ability to negotiate for quality TV panels in a time where panel production volume was in flux in Japan, Korea, and with Chinese manufacturers coming online.

This means that there is more competition to control consumers both inside the home and while mobile — touchpoints are critical.

-Microsoft understands this already (see our piece on Windows 10).

-Apple is aiming for it and we expect to hear more in early September.

-Google is squarely in every aspect of this arena and its likely next big move is to revamp the phone OS for verticals such as VR. Stay tuned.

-Amazon keeps rolling out new hardware solutions (see: Echo, Tap, and Dot) to meet consumer needs.

-Facebook — while not involved in hardware per se, is clearly moving down the CDN path. See: Facebook Livestream.

Don’t forget–this list includes DirecTV/AT&T, now Verizon/Yahoo/Fios, Dish/SlingTV , Comcast/Xfinity, and a list of other content/service providers such as Netflix, TIDAL, etc. Every company mentioned saw the Vizio news and took note, and many are already trying to figure out the next building block to be built–or sold–as companies compete for the U.S. consumer market.

By P.J. McNealy 24 May, 2016

Digital Empire Building: The Business Model Case for Windows 10 and VR on XBOX One

KEY ASSUMPTION: new version(s) of an Xbox One console is launched and runs the full Windows 10 Operating
System, enabling new forms of entertainment on the console such as Virtual Reality (VR).

What is the business model case for why Microsoft would do this?

In short, they hope this will help them sell more Xbox Ones.
And, in a broader context, Microsoft is repositioning itself. It no longer ties to its Windows Operating System, and wants
to be a company that has offerings wherever consumers are on as many devices and, in a logical, contextualized

For example, while Microsoft has been exiting the hardware business of mobile phones, it has been enabling the mobile
version of Microsoft Office available on as many operating systems as possible, such as Apple iPhones.
Migrating, or evolving, the operating system for the Xbox One console is part of the road map for Microsoft to provide
more entertainment experiences for consumers. Conversely, Microsoft is positioning itself away from its main current
console competitor, Sony, with its somewhat vertically oriented entertainment platform in the Sony PlayStation 4 (PS4).
While enjoying likely nearly 2x the market share for console install base over Microsoft, Sony is rolling out its VR
solution this Fall, PlayStation VR (PSVR). At this point, the use case for Sony PSVR is likely limited to the PS4 console.

So let’s say there is a Windows 10-based Xbox One in 2016--six implications could include:

1. Opens the door for VR hardware companies onto another platform. This means that a VR company such as
Oculus or HTC could create a version of their respective VR hardware, the Rift and Vive, to run on a future Xbox
One. Remember—the Oculus Rift is currently shipping with an Xbox One remote and runs on Windows 10 PCs.
The new Xbox One could also run a version of Microsoft’s home-grown Augmented Reality (AR) solution,

a. Given that development kits for HoloLens only started shipping in the past few months, CY2017 is a
  reasonable timeframe for HoloLens to make its Windows 10 (and Xbox One) full debut.

2. Microsoft becomes “Switzerland” for all entertainment forms. Microsoft could position itself as an interactive
entertainment platform that enables multiple forms of VR and AR, something Sony will likely not able to
promote. The mantra becomes that an Xbox One has it all—console gaming, TV and film services, VR/AR, social
and communications layers, music services, photos and a built-in transactional layer. And, Microsoft builds it
from its traditional building blocks, software, cloud storage and services.

3. Microsoft gets big VR/AR marketing hook vs. Sony. Microsoft wants to position itself as the leading choice for
VR and AR. This is of utmost importance for Microsoft as it tries to continue to grow its market share and make
inroads against Sony with an eye on the long view.

This will become evident this year at the industry trade show, E3, in Los Angeles in mid-June. Sony is expected
to strongly promote PSVR, and Microsoft will likely have an answer to counter Sony’s VR messaging.

4. Microsoft evolves Xbox One with Windows 10 roadmap. Microsoft can update/evolve the Xbox One in lock
step with Windows 10 updates for the PC/laptop/mobile market. This, in many ways, announces the end of the
traditional “console cycle” of having an Xbox to Xbox 360 to Xbox One. The Xbox One becomes the one for the
future in Redmond. This point should not be overlooked—assuming that the Xbox One can be updated for an
extended time period, will Sony be able to do the same for the PS4?

  a. Is there a Sony PS5? This is Sony’s biggest long-term question. We will likely see an updated version of
  the PS4 this holiday (much like a new version of the Xbox One), but Sony’s future consoles aren’t tied to
  a larger OS upgrade cycle.

  b. Sony’s other near-term future will be to likely lock up exclusive content, such as games or at least launch
  windows/preferred platforms for big franchises such as Activision’s Call of Duty. This could also be the
  year when Take Two’s big franchise, Grand Theft Auto, also gets locked up again for the next installment.
  Having these franchises would help reinforce Sony’s marketing position that it’s the console focused on
  true gamers with the best games on PS4.

5. Appealing aspects for developers. A developer today making a video game has several primary business model
decisions to make, starting with a platform choice—will the game be made for console(s)? Mobile? PC? Having a
game that can easily run as a console game on an Xbox One as well as a Windows 10 PC/mobile device should
help entice some developers into a “make one game, run in many places” appeal.

  a. However, with other middleware tools and engines such as from Unity or Amazon’s Lumberyard, the
  ability for developers go cross-platform is becoming easier and more automated.

b. This then pushes Microsoft to offer additional incentives to developers, such lowered royalty rates, cloud
  services, ad support, etc. But to be clear, having a game nearly instantly on Xbox One and Windows 10
  devices is still a positive.

6. Appealing possibilities for consumers. Microsoft has been pushing for enabling digital content for consumers to
be consumed anywhere, anytime, on any platform. Having interoperability between hardware (console vs. tablet
vs. laptop vs. PC) and coupled cloud services has been a big, long-standing corporate goal for Microsoft (and
every other big company, to various degrees, such as Amazon, Apple, Google, Facebook, Samsung and LG). This
transition to a Windows 10 Xbox One is one more building block for Microsoft to making their vision more of a
reality—Digital Empire Building. And, it sends an ease-of-use message to consumers about potential—about
future products working seamlessly.

Two yet-to-be determined factors for consumers? New Xbox One and VR for Xbox One prices.

a. There will likely be multiple Xbox One models to choose from over time as Microsoft manages multiple
  stock keeping units (SKUs) in the retail channel. A VR-enabled Xbox One should have a higher bill-ofmaterials
  (BOM), meaning likely higher retail price than the current $299 pricing. The BOM vs. retail
  pricing will likely still follow the razor/razor blade model, where Microsoft sells the razor (the Xbox One)
  at cost or at a slight loss while making its profits from selling its blades (software and services) through
  the box.

b. The Oculus Rift currently costs $599, plus a relatively new PC that will cost in the range of $1,000 to
  $2,000. Simple math says the PC, tethered experience is expensive for early adopters. That is not console
  pricing math. This means that there could be a new version of an Oculus that strikes a middle ground--a
  cheaper Oculus with a more expensive Xbox One? Still tethered? The same challenge exists for the Hive.

c. Moore’s Law will suggest that parts pricing (affecting the BOM) will drop significantly over the next 18
  months, which means any significant ramp of a VR-on-console (specifically the Xbox One) is really
  2017, and the 2H of CY17. This would also keep VR offered via the Xbox One in near-lock step with the
  Sony PSVR rollout this Fall and into CY17 (assuming Sony ships less than 1MM PSVR units in CY16).

d. It is worth repeating: console install base and VR/AR are long-term critical initiatives for both Sony and
  Microsoft, and the “console war” will continue long after this upcoming holiday, no matter which
  company has sold more consoles.
By P.J. McNealy 24 May, 2016

CES 2013: The TV Manifesto

The Battle for the Living Room is OVER—the War for the Consumer is ON!

The reality has begun to sink in: The home is part of a larger war involving engagement of the consumer -- and companies battling just to dominate consumer engagement in the living room are going to lose the bigger war. The end-game is clear: Companies must engage the consumer both in the home and mobile and have devices that are not location-locked.

This shift in targeting consumers while mobile or in the home was the most significant takeaway from CES 2013. Before the show, the expectation was for thinner, greener TVs with better user interfaces to be the show highlights. Coming out of the show -- while the TVs are bigger, thinner and greener – numerous TV companies highlighted their improvements in their TV set user interfaces (UI). However, this focus means that they are still targeting the battle for the living room, and are not well positioned in the larger consumer war.

This is a significant shift that has taken place in the past 20 years, when TV manufacturers and consumer electronics (CE) companies ruled the home and the consumer.

Just 20 years ago, when analog devices such as VHS players were dominant in living rooms, and devices were not connected to the Internet or to each other, the CE companies were household brands – Sanyo, RCA, Sony, Panasonic, Magnavox, Philips, Zenith.

Starting a decade ago, PCs started appearing in the living room and the race to put connected devices in the hands of consumers began. With clunky connected solutions (remember the rack-mounted Media Center Edition PCs from Microsoft?) creeping into the living room, the concept of“tele-webbing” was born.

The race to connect the consumer in the living room was on, and the device with the pole position? The TV.

So what did the TV industry do to respond? They began putting Ethernet jacks in their premium TV sets five years ago, and just three years ago, major retailers such as Best Buy were proudly promoting that every 40” or larger TV would come with an Internet connection.

To go with the Internet connectivity, the TV manufacturers needed a compelling, easy-to-use UI. However, UI was not a core competency for any global consumer electronics company. Most of the UIs were simple and limited to some form of electronic programming guide (EPG) licensed from Rovi (who bought the patent portfolio to most TV EPGs). Adding a new, interactive UI was not a strength of any CE company. Most of the UIs shown at CES over the past three years were clunky, and the big upgrades were more focused around adding a web camera for Skype, service partners such as Netflix or Hulu, or being able to see YouTube videos or check a Facebook page. The upgrades were largely iterative.

At this past CES show, much of this remains unchanged with respect to iterative additions. However, in the meantime, while the TV industry slowly moved toward capturing additional consumer eyeball time with non-TV content, the PC and mobile industries have moved significantly faster.

As expected, software and UI companies in the United States are familiar with software upgrade cycles, which are typically faster than hardware upgrade cycles. Those cycles, coupled with the computing power increases, pricing curve decreases, and the emergence of feature phones into smart phones, have driven consumer behavior become more mobile, and not just in front of a PC. The emergence of tablets, with 8” to 14” screens, have also enabled more mobile computing.

Because consumers today are now familiar with being able to communicate, socialize, consume, purchase or entertain with devices such as phones or tablets, the pole position of the TV as the center of a consumers’ entertainment world has diminished.

While the TV and consumer electronics industry has tried to move into the digital world, the mobile world has taken advantage of the transition of analog to digital to move entertainment out of the living room and onto alternate devices.

As a result, consumers have become familiar with watching TV on a TV while “second screens” in their hands are typically phones, tablets or notebooks. This means that the opportunity that the TV industry had just a decade ago has been lost to the phone, tablet and laptop industries.

The silver lining for the TV and consumer electronics industry? The opportunity to partner and avoid the risk of being further marginalized as the “dumb” screen.

Table 1: Current and Future Consumer Leaders (traditional CE manufacturers in blue, PC/software/mobile companies in yellow, other companies in green)

By P.J. McNealy 01 Nov, 2013

The ultimate goal for Microsoft with its new Xbox One entertainment console? Living room domination through Input One into the back of your TV set.

There is nothing subtle about the Xbox One input/output slots: it wants you to pass through the output cable from your satellite/cable box en route to the home stereo or directly to the TV. Microsoft is hijacking the stream with the intent of a win-win for Microsoft and the consumer.

By controlling the TV viewing experience, combined with some neat, fast-switching technology that allows users to flip quickly between, for example, Skype and watching TV, or to have one pinned to the right side of the screen, Microsoft has developed some fun and new things that users can do.

The integration of Kinect using audio, or punching buttons on the Xbox One remote, can work well (as well as lead to some fun competition between siblings shouting out random Xbox One commands). Since the TV feed is a pass-through, there is no picture degradation, either.

If every Xbox One owner plugs in their TV signal through the Xbox One, then it will be an astounding victory for Microsoft and a landscape-changing differentiator from the Sony Playstation 4. The likelihood? Hmmmmmmmmm. If this were to happen, then Microsoft would be winning the battle for the living room, as part of a larger war to control the consumer in the digital age at home or while mobile, led by Surface tablets, Windows Phone, and its Smart Glass application for iOS and Android devices. [For more on this subject, see the DWR piece: The Battle for the Living Room is OVER and the War for the Consumer is ON .]

However, the Xbox One falls short on the integrated experience because the TV experience is closer to using a basic cable box than a more current DVR. And this is not a technology issue – the Xbox One could do it – but a business model issue. At the end of the day, does Comcast, Verizon, Time-Warner, Dish or DirecTV want to cede control of the user interface and interaction to Microsoft? While BSkyB did as an experiment in the U.K. and Ireland back in 2009 with the Xbox 360, it doesn’t appear than any U.S.-based providers are on board yet.

Why does the experience fall short? The Xbox One voice commands allow you only partial access to the functions of your DVR. You can not record anything through Xbox One commands – users have to find their regular box remote. Have a DVR with recorded shows? You can not use Xbox One commands – users again have to find their regular box remote. And using the voice commands on Xbox One? They work well for movie playback, and some TV, but for watching sports, it is cumbersome and lots of extra work. For example, watching an NFL football game on 15-minutes delay and having to skip through ads, is too much talking. You will be grateful that you did not name either your child or your dog “Xbox.”

Viewing TV is typically a passive, lean-back experience, and having to say “Xbox” followed by a command every time can be laborious, followed by using the command “Stop Listening” to get the overlay screen to disappear on the right side. Simply put, having a traditional TV remote control in hand is easier, often faster, and quieter.

While this integration of voice, TV viewing and an entertainment console is in its infancy, Microsoft deserves full credit for being the best of an emerging market – smarter boxes that use voice, gesture, and button mashing for an improved entertainment experience. And, being a living, breathing, connected entertainment console means that Microsoft could update the software so that more commands are available.

For Microsoft to truly anchor itself in the living room, there are two likely future versions of Xbox One:

1.    Ships with a conditional access card – after a partnership was put in place for Microsoft to become a service partner provider to any of the cable or satellite companies. This would require a deep partnership, and this is a time when competition for boxes in the living room is coming from companies such as Sony, Apple, and Google. Game on!

2.    The cable/satellite model is broken and true, over-the-top access becomes the norm. This means that any IP-addressable box (think any box connected to the Internet) could deliver the same content currently being distributed over the air or through satellite and/or cable.

The launch of Xbox One reminds me of a line from the Lord Of The Rings: Fellowship of the Ring in 2001, when Sam tells Frodo “If I take one more step, it'll be the farthest away from the Shire I've ever been.” With Xbox One, Microsoft has gone the farthest it has ever gone with TV, but has more steps to take.

Beyond TV, Xbox One does many things well, starting with gaming. We have broken down Xbox One by areas key to consumers.

Xbox One as a gaming console : Check! Gaming is fun and the new controller works well, highlighted by the improved rumble features. New games are easy to find in the store, quick to load and play, and the lineup. The graphics for the launch titles look great as expected, and Microsoft has a launch lineup that hits the major gaming genres.

To the dismay of GameStop, not having a game disc to insert is a really nice feature for consumers. Going disc-less is now an option for Xbox One owners (and PS4 owners). This option helps consumers avoid having to chase down discs, empty cases, scratched discs…all the benefits of going digital that consumers are already familiar with thanks to the music industry.

Microsoft has a solid launch lineup, has a big exclusive in Titanfall coming from Electronic Arts and Respawn Entertainment in the first half of 2014, and has already announced the next and widely anticipated installment of its Halo franchise.

Xbox One as a Skype portal: Big points here for Microsoft with the integration of Skype, which is captured beautifully by the camera in the Kinect sensor. The picture is wide, in HD, looks great, and the audio sensors work well even when two cousins are busy yelling at two other cousins on Skype across the country.

This app will see some significant usage and is a significant differentiator for Microsoft over the competition.

Xbox One as a movie services portal : Check the boxes – well done. Netflix. Amazon Instant Video, Vudu, Redbox…all the major providers. It will be interesting to see if the trend from the Xbox 360 continues – heavy video consumption such as movies by Xbox One owners – enough to account for more than 50% of total usage? Sony and Microsoft are clearly two of the biggest Netflix partners on the planet, and it stands to reason that this will continue.

Microsoft has done a nice job with the integration of movie content with service providers. When searching on a movie, the movie service options are shown for a particular movie, and users can quickly select the service they use and get right into the movie.

The integration with Microsoft Smart Glass looks promising, but the movies will have to be rented or purchased from the Microsoft store, not from a service provider such as Netflix or Amazon. It is unclear if this will change in the future. The goal of having a tablet integrating with the Xbox One interface on the TV works well, and is aligned with consumer behavior of being on a second device while watching TV.

Kinect voice commands work quite well for movies, such as with Amazon Instant Video. It is easy to pause, play, fast forward, etc.

Xbox One as a TV services portal : Check the boxes: Hulu Plus, HBO Go, ESPN 3, Fox, NFL Network, Netflix…the list goes on and it is highly adequate. The Xbox One, much like the Xbox 360, gets you what you need on this front. This lineup of TV services is critical as more and more over-the-top experiments take place.

Kinect voice commands works well, too, with typical TV show playback.

Xbox One as a music player : Simply put, the Xbox Music service isn’t enough. Microsoft re-upped its licenses with the music labels, so Xbox Music continues to exist. Consumers can’t use more popular music services such as Pandora or Spotify on Xbox One at this point and hopefully, this will change. Further, no integration with iTunes or any home music collection you have on your network. This is disappointing.

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