DWR Reports

Microsoft Plays The Xbox Long Game

Thu, 10 Jun 2021 19:25:04 GMT

Digital Empire Building through DAUs and IP

Microsoft has been in full Digital Empire Building mode, building and buying pieces that have been successfully integrated. All while gaining market share in the console space, while the industry is chip-supply constrained is still a goal. Microsoft has eyed the long game over the past five years. Microsoft’s strategy was on full display with its pre-E3 analyst briefing held this week, and here are the key takeaways.

• The two key components to building a sustainable business model are Daily Active Users (DAUs) and Intellectual Property (IP) . Microsoft is hitting on both right now.

• In the case of Xbox, the engagement metrics of gamers on Xbox Live have been up and to the right, and Xbox management highlighted the discovery aspect of its subscription Game Pass service. Having eyeballs coming to your service and spending time in game play or discovery are significant drivers of DAUs , which fill the top of the cohort funnel and down to, for example, paid conversions and ARPU. In the case of Game Pass, DAUs not only drive the value proposition to consumers, but also lead to ancillary revenue opportunities with additional digital purchases for content.

• Microsoft announced that after joining Game Pass, gamers are playing 30% more genres that before and 90% have played a game they wouldn’t have prior to the Game Pass subscription. This is interesting, because it means that the AI behind gaming suggestions is working well. Typically, the biggest influencer to drive consumers to try, for example, listening to new music or trying a new video game is friends, but the role of AI substituting for friends is growing as data sets continue to get populated on the back end on user behavior.

• Microsoft has not disclosed the churn rate for Game Pass . We believe it is likely under 10% and possibly under 5%.

• Microsoft announced in January that Game Pass had 18 million subscribers. This is a true testament that Xbox has put the right genres of content into subscription, led by mostly first-party content. Having a sports partnership with Electronic Arts, too, for Game Pass is a critical piece. It’s reflective, too, of the importance of licensed sports content such as in the recently soaring NFL licensing deals with both Amazon and Disney. Sports are a critical piece of the entertainment offering and a must-have for either live broadcast events or video games.

• So is 18 million subs, you know, a lot ? Sony disclosed nearly 8 million PS5 sales and over 100 million PS4 sales, and Netflix is at 207 million, Hulu at 39 million, and Spotify is at 158 million. So this is a complete apples-to-oranges comparison at one level, because Microsoft disclosed apples and Sony disclosed oranges. (It’s a classic marketing strategy—talk about the number you can win with.) However, directionally, 18 million is a great number, and it is growing. A number such as 23 million is even better, too.

• This leads us to the second component, IP . Under Phil Spencer’s lead, Microsoft has been aggressive and methodical in acquiring big IP, such as Mojang for its demographic-sweeping game Minecraft, and Bethesda Softworks with its massive portfolio. The Halo franchise remains an extremely popular IP and will have a new installment in the second half of 2021. Microsoft has taken some cues from the streaming subscription video world where Netflix is battling Apple TV, Amazon Prime, Disney+, Paramount+, Hulu, Peacock, etc. You must have IP to compete for eyeballs to drive subs, and either you have to make the content yourselves, buy it, or license it. Microsoft is doing some of everything, in effect, with Game Pass.

• So this begs the next question: how much IP does Xbox need ? The stated goal is to introduce one major IP every quarter into Game Pass, which means if a average game takes three years to make, then Microsoft needs ~17 (given 4x/yr plus some games get killed) games in production, or 21 if a four-year cycle. This is likely conservative, and Microsoft would ideally like a major IP every month, meaning 40+ games in production. Even with Bethesda Softworks, there are not likely 40 major title IP. Yet. This again means build-or-buy, and it's reasonable to expect more buying.

• In hindsight, the implementation of a gamer-first approach by Xbox first came about after buying Mojang . There was a fear in the gaming community that future editions of Minecraft would be made available only on an Xbox console or a Windows-based PC, thereby limiting it global appeal. Mr. Spencer was quite vocal that putting Minecraft on every platform in the world was the goal, which came across as a novel approach in the walled-garden world of 2014.

• So a key part of the future will include a social element, and Microsoft recently reversed its efforts to take on Twitch with its Mixer service. Not every building block is going to fit, but it is reasonable to see Microsoft find other ways to add a social layer. There was also speculation that Microsoft was interested in acquiring Discord, but to avail.

• There has been plenty of speculation that the current Gen 9 series of consoles would be the death knell of the traditional console . But our position remains that the art of the long tail of physical hardware will continue, with additional options enabled by technology. With Microsoft making strides with Cloud Gaming, the enablement of streaming gaming continues to head toward fruition.

The last-mile issue will continue, but eventual home installs of 5G routers will be a significant step. Microsoft is again seeking more hardware partners, such as the TV suppliers and cable/Internet-access boxes . This will mean a consumer could game with just a controller needed (and a good connection). This promise has been around since the early days of 5G and fiber-to-the-curb, and other big companies such as Google (Stadia) have entered and exited with record speed due to several challenges. The reality is Google’s timing seemed early, and we’d expect them to re-enter this market at some point.

But, the real point is Microsoft’s commitment is to be where gamers are, any time, any place, on any device, over (almost) any connection . With the news this week, Xbox moves one step closer to that prized long-view vision of gaming (and entertainment).

• So any platform? Really? On a Playstation ? If a device has a browser, then the theoretical answer is yes .

#CES2021 Thoughts from a Virtual Conference

Fri, 15 Jan 2021 19:37:26 GMT

No lines, more access and digital maturation begins

#CES2021 will go down as a relative virtual success -- no lines, wide access online, sessions timed well -- and gave the chance to dig in on how companies have adjusted to 2020 heading into 2021. These adjustments are opportunities for other companies to learn from others, because we are in the thick of #AdaptOrPerish. The one overriding theme was clear: 2020 has hyper-started consumer adoption rates to digital, changing consumer consumption behavior by a factor of years. As history has shown, consumer don't typically revert back, either.

In no particular order, some observations from this week:

The term "franchise is so 2020. "Universe" is so 2021 . (And you can add "Content is Still King" too.) As streaming TV/film content services have spent the last three years or so driving subscriber growth numbers, one of the underlying business model tactics has been #BuildVsBuy when it came to adding content to the service to build out the library while attracting new subs. The balance of creating original programming versus acquiring licensed content is regularly being tested and where the bulk of investment dollars for the next 12-to-24 months go. Take it one step further and more mature services such as Netflix have been focused on which international markets to spend money on for local content in those markets while still offering enough to the U.S. subscriber market and holding off any rising churn rates.
Part of the licensed content land grab has been for franchised content, whether it is, for example, Friends or Seinfeld or His Dark Materials . This year will see the expansion of the more important term: universe. The universe of Star Wars (Disney/LucasArts), the universe of The Avengers (Disney/Marvel), the universe of DC Comics (Warner Brothers). Comic book stories were sometimes islands of characters, and occasionally they overlapped. As those books moved to film, collaboration and overlap and off-shoots of story lines have grown in multiple prongs. There are TV series, mini-series, film adaptations--in other words, short-form and long-form content to be consumed on multiple-sized platforms, from phones to the Box Office.
Do consumers really know what they want to watch? @HBO had an interesting point on consumers viewing patterns: 66% of time, consumers know what they want, while 33% of time they’re looking for new. This is classic push/pull content balance for subscription providers. The 66% of time means that the service has to have a strong library of content that has few friction points to discovery and consumption. That 33% of looking for new? This is an evolution of what we saw 20 years ago in the early days of streaming audio, where streaming radio "channels" were either being curated by panels of "groovers and musicologists" (one music service did actually promote that phrase) versus early algorithms setting programming options.
The net-net is that consumers win. They enjoy a better experience, leading to a sticky subscription service. Potential benefits for the service provider include lower churn rates, lower marketing costs, better margin expansion potential, and better consumer data to build strong profiles for potential targeted advertising.
Voice hits its stride in 2021 . The evolution of consumer behavior with user interfaces continues to mature, from keyboards to digital pens to touch screens to voice commands. The use of voice is going to quickly become a default interface for many (mostly younger) consumers, from search to commands to dictation. This leads to a deeper learning set and the concept of a relationship of sorts with Alexa/Siri/Cortana will grow. A consumer could ask “Hey Siri, what should I watch tonight?” The question suggests inherent trust that Siri (or others) know enough of the consumer to give a relevant answer. The result could be a combination of known viewing habits, time of day, location, companions, how busy a day one had, consideration if dinner has been made/ordered/eaten, tone of voice, filter of live events...the combined data sets are endless. We have consistently seen in consumer survey data that the 18-to-30 year old market is comfortable with tradeoffs of giving up data in order to get a more personalized recommendation.
Also underlying is the trust in a reasonable result. Services such as Alexa are logging reams of data while answering a wider array of questions beyond "Alexa, what is the weather forecast for today?" Added functionality such as traffic information, intra-home device calling, streaming music, answering questions, telling jokes...all build up trust in getting a targeted response. (Bonus: pick a voice with an accent you find familiar or comforting for Siri!) Voice will become much more prevalent in homes in 2021. #GenerationMe #ItIsComing #CanBeCreepy #ChangingConsumerBehavior
What is "entertainment?" Who is a "gamer?" The concept of a "gamer" is simple these days: everyone. It is no longer just a teenager in a basement on a console, and one panel said the gaming market is 40% female. The concept of "entertainment" is now likely simple: it is everything. It is no longer just a TV show, going to the movie theatre, or to a live sporting event. "Entertainment” is now in people’s homes for cooking shows, fashion shows, DIY shows, podcasts, Zoom cocktail hours, etc. The services have redefined entertainment too as a major source of eyeballs and time on screens thanks to both TikTok and Twitch. Both have grown straight vertical users/user hours and 2021 should continue that acceleration. One service, however, that sank in 2020? Quibi. With dominating screen time of such importance, Quibi was really well positioned with very short-form, quality video content with A- and B-list talent. Unfortunately, when consumers stopped commuting in 2020, Quibi sank. It would have probably worked in 2021/22 and will be interesting to see how Roku continues to move away from being a hardware and service company to service company and integrate the Quibi content into its platform. #DigitalEmpireBuilding

Could COVID-19 Impact the PS5 and Xbox Series X Launches?

Fri, 21 Feb 2020 19:43:36 GMT

YES. Yes. Yes.

YES.

The launch of the upcoming Sony PlayStation 5 and Xbox Series X consoles could be delayed, have reduced launch inventory numbers, or be configured to regional launches which means no simultaneous global launches this Fall---all due to the COVID-19. Let us be clear, too – there are many unknowns at this point in February, especially understanding when manufacturing workers in China will be back to full-time production, enabling the supply chain, manufacturing and assembly for the upcoming consoles. While the consoles may still launch as scheduled in the Fall in North America, the global rollout, launch numbers and software support will be causing scenario planning discussions as the global outbreak of COVID-19 continues.

There are likely two current scenarios for launching the PS5 and Xbox Series X consoles in North America. The optimistic scenario is for an October launch, which allows retailers to sell hardware for 10-11 weeks before Christmas. The second scenario is a pre-Black Friday launch in mid-November, allowing the new console(s) launch(es) to be on the shelves ahead of Black Friday and what is now an extended sales period leading up to and following the day after Thanksgiving.

To build a schedule for key dates for making October/November possible is similar to getting an orchestra to play in sync at a future date—it requires layers of coordination. The console maker needs to hit critical dates around dev kits being built and distributed, retailer support being lined up, media buys locked in, operating systems being finalized, third-party software finalized for launch, and hardware debugged and manufactured for scale for shipment to North America. The last point? It is likely causing the most worry at this point because of the uncertainty of how off-schedule manufacturing is going to be disrupted this month, March, April, etc . It is virtually impossible to predict when the outbreak will subside and the supply chain and manufacturing are back to work in full force .

What we can predict is a timeline for manufacturing given an October or mid-November 2020 North American console launch.

This assumes there are no parts limitations, such as when Sony PlayStation 3 had limited blue-crystal diode inventory used for the blu-ray player.

It is a reasonable assumption that if manufacturing is impacted by both supply chain and assembly plants being shut down, then:

a) launch quantities could be lowered, meaning inventory at the launch date and launch window (the first three months from launch date) would be tight and retailer stock-outs would fill headlines.

b) regional launches (meaning not a global day-and-date launch for all three regions) get extended, meaning for example, if Sony launched in North America in mid-November and scheduled to launch in Japan in early-to-mid December. that the Japan launch could get pushed to January or later.

Which Way Is the Video Game Industry Going? Subscription or F2P?

Wed, 15 May 2019 17:00:28 GMT

With a wave of new F2P games and the quiet, slow rise of subscriptions, consumers are faced with an array of choices. Which one wins?

Is F2P the future, or gaming subscriptions?

This is the conundrum, the future, the battle ground for the video game industry. As is typical of the historical video game console cycle, a winner must be declared at many points in time! Heading into the holidays! Who won the holidays! Who will win the next year! Who has the best lineup!

The art of the long view says that success and struggles are measured over a multi-year time period, which is typically in sync with the minimum amount of time to create a lasting IP that gamers love. However, these are different times. The explosion of success of F2P gaming on console and multiple platforms suggests that consumer loyalty to franchise or gaming business model may be fleeting – while consumption of other media such as TV, film or music may suggest that a subscription model may be the long-term direction for industry participants. Two things are clear: F2P gaming is here and likely to continue to iterate, while a consumer demographic of 18-to-30 year olds now see value in subscriptions and access to content over ownership. We will unbundle these threads below.

With PUBG, Fortnite and Apex Legends, It Is All About F2P!

So F2P gaming has finally reached consoles after breaking out on PC. And now on mobile – from phone to tablets. We have now witnessed a new business model that has transcended platform (with all due respect to Minecraft which was a trailblazer, when the business case made sense, cross-platform play. See exception: Sony). F2P is not a new business model for anyone who has followed 2D, 2.5D and 3D gaming PC (café) models from Asia over the past 20 years, but it is the first model to crack the model of the consoles from the historical $60 retail-packaged goods game with (more recently) digital add-ons.

So PUBG begat Fornite (with Minecraft sandbox-building elements) which begat Apex Legends (sans Minecraft sandbox-building elements but arguably some of the best-of elements of Offensive Combat, TitanFall, Overwatch, Rainbox Six, and Call of Duty ). The numbers are up and to the right. Apex has hit 25 million downloads in its first week and 50 million in its first month despite being available on only console and PC. While the growth rate has marginally slowed in the past month, to put the launch numbers in perspective, there are north of 120 million PS4s and Xbox Ones (only consoles it is available on), and an untapped market of 32 million Nintendo Switches (and growing). Minecraft, which has been out since 2009, has reportedly sold over 154 million copies through 2018 across virtually every platform on the planet (it was not all cross-platform at launch). Tetris, according to Wikipedia, is #1 all time. So, to repeat, Apex is at 50 million in a month on three platforms, while Minecraft is at least 154 million in 10 years. This must be the future for all video games?

Wait – It Is All About Subscriptions, Dummy!

DWR has conducted multiple anecdotal research studies on the 18-to-30 year old market over the past three years, and the overarching data suggests that this demographic does not value ownership of content but does value access to content. And, as subscription business models have evolved to be tailored to consumer needs, subscription numbers have grown. For example, DWR has seen the swing in accessing Pandora via the free ad-supported tier to paying for the ad-free, tailored subscription tier over the past three years.

Consumer feedback has shown that this demographic values frictionless access on multiple devices to a wide range of content at a reasonable price. It is a more contemporary version of consumers want what they want, when they want, where they want, on any device they want. While Spotify pricing is now at $5.99 - $14.99/month, other music services were as high as $19.99 (Tidal) a year ago.

Access to subscriptions in the video field has led to binging behavior, where consumers will roll through consuming/watching a TV series online, and then move on to another, and typically, another suggested (in this case, from Netflix) thanks to refined algorithms built by the service. The consumer is will to pay for the subscription because of the access to consume content, not unlike unlimited access plans to streaming music from services such as Spotify.

Taking the concept of ownership a step further, anecdotal date from DWR suggests that ownership of a car is waning, especially given the easy access to transportation services such as Uber and Lyft. Ownership is down – access is up.

Taking the concept yet one step further, anecdotal data from DWR also suggests that access to a new phone model from a company such as Apple is preferred to ownership – preferring to rent a phone for a multi-year contract vs. buying a phone at full price.

So what does this mean for video games?

It means that for a segment of the video gaming demographic, a subscription model is likely the next wave of popularity. So what does that model look like?

DWR anecdotal research specifically targeted at this question suggests paying $10/month for a year to play a game plus more similar games strikes a chord with the 18-to-30 year old demo. Access matters. There will always be a segment of the console gaming population that will prefer paying $60 for one game because of a deep enjoyment of the game, but the subscription model is not the DWR position to be cannibalistic.

So is the Xbox Game Pass the winning model? Not at this point, but Microsoft gets credit for acknowledging that the subscription model must a) always be growing in content beyond Microsoft 1st- and 2nd-party content, b) continue to expand platform accessibility, and c) must educate/introduce consumers to the value proposition of paying for a video gaming subscription. Microsoft is cutting its teeth to be ready when publishers are ready to strike deals to add their gaming IP behind a Microsoft firewall for consumers on multiple platforms to be able to access its content.

Will a subscription be right for all content? NO. Not every game design fits well into a subscription model, especially if it is architected for game features such as season passes or map packs, or even micro-transactions

Will a subscription be right for back catalog and some new content? YES. The historical library of console-based games, especially prior to the Xbox One/PS4 generation, were optimized for physical disc distribution, which means they would be candidates for library inclusions in a subscription offering. Moving forward, a subscription environment could continue to be the right business model for game types such as RPGs, one-player games, or puzzle games. Subscriptions in video games are not a one-size fits all solution.

So is every new game published going to be a F2P game? In the near term, YES to many games. Success begets copycat games, ripoffs, knockoffs, and genuine new flavors of current game. When any publisher or game developer hears about the great early success of Apex, or Fortnite, or PUBG, or Clash of Clans, or Clash Royale, or Bejeweled, or ...imitation will follow. There is typically an influx (sometimes oversaturation) of a game type, gamer fatigue follows, and the category becomes replaced the latest-and-greatest thing in game by the next “thing.” Gamers are fickle, and online stores such as the AppStore constantly rotate much of what they position as fresh and now. It is the brick-and-mortar equivalent of assortment and what goes on the end caps that get the most foot traffic (and eyeballs) walking past. The next big thing is pushed with the hope of driving revenue growth, and in the case of Apple, driving association of high-margin hardware with cutting-edge content. For now? The flow of F2P games is going to continue as consumers are driving Apex and PUBG numbers still up-and-to-the-right on charts.

So What Model Wins?

The reality is both. This is not a market share cannibalistic situation, and a F2P game will never work well behind a subscription pay wall. Think about the expanding demographic of video games. As a wise man once said about the video game space, “soon, you will be able to talk about playing video games with your grandparents, like you talked about going to the movies.” That day is coming, and there are now not only multiple generations of gamers but also expanding demographics of gamers, from casual to hard-core gamers. The pie is expanding, and it is not a winner-take-all business model approach.

The run of F2P gaming models in PUBG/Fortnite/Apex is slightly reminiscent of Friendster (2002)/MySpace(2003)/Facebook (2004), and Facebook planted anchors and grew. PUBG launched in March 2017, Fortnite Battle Royale in September 2017, and Apex Legends in February 2019. The role of social influencers such as Ninja and the ability of having Twitch influencers is a new world of acquiring users for the top of a funnel for a F2P model. This alone dims the comparison to the social media rise of 15 years ago.

For subscriptions to work, the top of funnel must continually be fed, and DWR believes that gaming companies are waking up to the reality of influencers through non-traditional channels such as Twitch streamers in addition to traditional brick-and-mortar such as GameStop employees.

F2P gaming publishers already get this – keep feeding the top of the funnel or the 1-day, 3-day, 5-day, 7-day, 14-day, 30-day conversion and comp models no longer work against the marketing spend channels. The price tag of having someone such as Ninja promote a game is going up daily.

At the same time, we are seeing experiments with subscriptions to match another slice of the marketshare. Not everyone wants to play a F2P game. Some consumers want a two-minute experience, or a five-minute experience, but not a 30-minute or 50-minute gaming session. Publishers are realizing they need to find ways to leverage their tremendous back catalog of content that likely best suited for a subscription pay wall, but which one?

The early subscription lessons from other media verticals that are being driven by consumer subscriber numbers include both video and music. In music, we have seen the movement away from free ad-supported streaming from a service such as Pandora to consumers paying for an ad-free Spotify subscription. As discussed above, Spotify has enough of the right content, is a frictionless experience, the right price point, and is available on enough devices. These are good attributes for a video game subscription service to emulate.

In the video space, we have seen a fractured approach beyond Netflix, which pursued an aggressive content aggregation strategy to drive subscriber growth. It was an independent aggregator – no financial ties to a movie studio – with a global vision. Recently, we have seen Disney extend efforts to drive its new Disney+, ESPN, and Hulu subscription efforts, while bring Fox under its tent. Will a vertical subscription offering (for example, with historical Disney IP, Marvel, Pixar and Star Wars content) work? The likely answer is that the offering will meet part of the segmented subscriber audience, as will Hulu, ESPN+, etc.

We have seen early subscription offerings from players such as Microsoft with XBox Game Pass, but as discussed before, it needs to rapidly grow its content library (Microsoft has deep pockets). It may take an independent third-party, ala Netflix, to unify content from competitors such as EA and ATVI under the same subscription big tent. Activision may ultimately move all of its content behind its own subscription paywall, or go the opposite way of write-once, publish everywhere. These are early days.

Why 5G Matters Now For Video Game Publishers--CES 2018

Wed, 15 May 2019 15:55:10 GMT

The business model and planning implication for video game publishers are now becoming clear as 5G is on the cusp of being realized. EDITOR'S NOTE: This report has now been widely published beyond DWR subscribers.

CES 2018--Why Planning for 5G Matters in 2018 for 2020

[Please note: The business model implications of 5G are numerous and this is designed to be a first-pass look at potential scenarios that may arise over the next 20-to-36 months.]

CES 2018 was one of the best shows in the past year, and the tech news leading the way is the promise of 5G. Plenty of 5G news was expected, but one key milestone was hit: Qualcomm announced that the first 5G-enabled phones will ship in 2019, meaning the tests have gone well, the rollout of equipment is on track in 2018, and the 5G chipsets are on track for phones to be shipped in the 2H of CY19.

So 5G matters because, to put it in perspective, the time it would take to download a 2-hour movie:

· over a 3G network (iPhone 4, 2010): 26 hours

· over a 4G network (iPhone 6, 2014): 6 minutes

· over a 5G network (2H 2019): under 4 seconds.

It is important to emphasize that 5G will be a technology solution for delivering content and two-way data comms for all platforms—not just phones--such as tablets, PCs, TVs, cars, game consoles, VR/AR/MR, home routers, etc. The benefits of 5G include:

1. Low latency . This means, for example, that all content can be streamed real-time from the server without needing for any big downloads on the customer/client side. Streaming, for example, a 4K FPS (fast-twitch with need for robust two-way service) will be viable and help limit last-mile problems.

2. Storage requirements get lower. Because more content can simply be streamed, it means that while phones today are increasing in storage amounts, that trend can be reversed with 5G. Consumers will have access to a wider array of potentially cheaper end devices for enjoy entertainment such as 4K movies, high-res audio, and immersive gaming experiences.

3. Data limits on mobile devices could be widely changed, so all-you-can-eat data plans become the norm. This moves the content and services businesses closer to a utility model longer term (10 to 15 years?) as the distribution pipes become so fast that delivery of content moves toward commodity pricing, and eventually, to a metered utility world.

4. The vision of any game, any where, on any platform moves from a Powerpoint slide to reality. The promise of 5G enables delivery of content--finding content and accessing it--simpler and with less friction.

Potential impact on console hardware makers —5G to a console maker is a threat and opportunity. It’s an opportunity to give gamers options about how they want to connect to a service such as Xbox live—wired via ethernet, wi-fi, or through a 5G-enabled device (such as built into the console). If the 2020 time frame is correct, other enabling technologies such as USB 3.0 and HDMI 2.1 should be shipping. While LG was quietly showing off one 120 fps TV panel at CES, the reality is likely later than 2020 for possible model introductions for a variety of reasons. The discussion of 120fps is a longer and different thread.

The advancement of 5G will have similar threads to the arguments made in the past four years that “cell phone gaming will kill the Nintendo DS product line and handheld gaming.” The reality is DS gaming is still strong in Japan, and the introduction of something new instead of iterative from Nintendo will likely come in the next 18 months. Nintendo has a skill set to iterate to extend products (and keep backwards compatibility), and more importantly for Nintendo, to continue to drive revenues from its core IP. So, the expectation of “5G could kill console gaming” arguments are coming, but the position is easily defended: 5G will be additive to the gaming, not cannibalistic as the definition of a “gamer” continues to broaden globally.

Potential impact on retail —Gamestop is not going to be happy (per usual) because wireless delivery of content erodes their core economic driver of used game sales. This means a continued death-by-a-thousand cuts for Gamestop’s traditional gaming business, even though some of its business lines in gaming will have a long tail (used games sales, a potential subscription service for used, sales of in-game currency and gift cards, accessories, new hardware sales, etc.). Its GameTrust publishing label could be the biggest beneficiary of 5G for all the benefits discussed above.

The impact on Amazon, Walmart, Best Buy and Target need to be broken into two groups: Amazon /Walmart, and Best Buy /Target. Amazon and Walmart are a much, much deeper discussion as they both arm themselves for price wars by vertical for consumer market share. Both companies are going to beat up all other retailers whenever they both change their focus on the video game vertical after carving up the food retailer space (currently in motion; see Whole Foods, etc.). The adoption of 5G is solid for virtually every aspect of Amazon’s businesses. It is hard to name a negative impact for Amazon short of potential increased competition for its video streaming business. For Walmart, 5G provides an opportunity to build out its growing online presence with vertical offerings (either building its own service, buying one or partnering) in the short- and long-form TV/film space. But, if Walmart goes in that direction, they need to be moving now to have a service that can be battle-tested with current delivery pipes before the 5G launch. It remains to be seen how important games are to Walmart’s future because its core value remains trying to drive foot traffic into their physical stores, and games are going more and more digital.

Neither Best Buy nor Target have a pronounced online presence but 5G will be a big opportunity for Best Buy to see another bump in high-margin services revenue from a) Geek Squad consumer help with new 5G devices and b) attaching high-margin bounties by bundling/adding subscription services as Netflix to newly purchased device. Best Buy, outside of its Magnolia business, typically sees single-digit margins on hardware sales, so 5G is an opportunity, and if there are more (read: new) subscription gaming services that take advantage of 5G, then working with a company such as Best Buy is a future partnership opportunity. This also assumes that Best Buy continues a moderate downsizing/reconfiguration of store sizes and number of sizes over the next 24-to-36 months.

We don’t have a strong take on Target because it has not followed Walmart’s move to improving its online store and offerings through investments and new, high-profile management hires. The gut feel is that Target is a possible victim of the Amazon/Walmart wars, but we will follow up.

Potential impact on video game publishers —Multiple.

1. Mobile gaming opportunities broaden . While ecosystems such as selling through the Apple App Store will continue, the games themselves can become broader, deeper, richer, with more Live Ops opportunities (and a growth of more F2P games on mobile) because of the ability to have gamers download only a thin client app while the game is streamed live.

2. The inflection point hits for subscription services . If a video game publisher has a broad enough IP portfolio to launch a subscription service, the 5G rollout will likely be a solid service launch inflection point. It would mean consumers (gamers) could access any content from a vast library any where, any place, any time, over a 5G network in a frictionless, contextually relevant engagement. Frictionless is a key phrase here, too, meaning the single log-on and identification, transactional layer, social hooks, and communications layer are already in place, in the background, and easy to use. And, to take it a step further, are integrated with a user-generated content channel, potential engagement in e-sports, and synched with a music service.
Please duly note this the Holy Grail scenario, the same one pitched by Sony with the launch of the PlayStation 2 led by Kutaragi-san. However, they were still in the AOL dial-up and early DSL eras, with speeds that pre-dated 3G.
This scenario could easily be fleshed out to a much deeper level, both vertically and horizontally, but the purpose of this piece is a quick reaction to the CES show.

Potential partnership impacts for video game publishers because of 5G and Net Neutrality ---5G creates new Threats/Opportunities because of changes to Net-Neutrality. Assuming that Net Neutrality does go away under the Trump administration:

· Partnerships with companies such as AT&T or Verizon for access to low-latency delivery will likely become crucial. The partnerships could be by vertical (one for gaming, one for music such as Pandora or Spotify, for video such as HBO Go, Hulu or Netflix), by an aggregated provider (Amazon Prime, complete with its in-house content, or Apple and iTunes), or all of the above as deals are not exclusive.

· Partnerships with companies such as Netflix for a premium subscription (and over a preferred network) service could grow. For one price, a consumer/household could have unlimited access to movies, short-form TV, and video games from a great portfolio.

· Partnerships with automotive makers become more interesting as more screens and 5G chipsets are built into high-end autos first, giving video game publishers viable built-in interfaces into cars (in addition to current grab-and-go interfaces such as the Nintendo Switch or a mobile phone). While some auto makers have partnered with a company such as Apple for controlling the entertainment management of cars (see: Audi, BMW), streaming video and games have not been part of the in-vehicle entertainment options. Yet.
It is interesting because 12-to-15 years ago, there was plenty of excitement about how to get music into a car beyond terrestrial radio and satellite radio (XM/Sirius). Part of the value proposition of XM and Sirius was that for the most part, you could always listen to their services because of the combination of satellite coverage and the repeater networks installed in major cities (such as a repeater outside the Eisenhower Tunnel north of San Francisco). The argument was “How can you get music into a car that is going 60 mph?” With 5G coming, the viability of streamed content such as video games into a car going 60 mph is becoming real.

Is The Xbox One X Launch The Death Knell For Consoles?

pjmcnealy@gmail.com (PJ McNealy) — Wed, 08 Nov 2017 02:36:08 GMT

Microsoft Takes a Big Swing at a 4K Future

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

down thanks to historical TV pricing curves (and Moore’s Law), where this year’s Black Friday Specials should be flooded with 50+” and 60+” 4K TVs coming in at below $600, and many closer to $500 and $400 or less. It makes for a great holiday season for any consumer looking for a TV under a tree this December.

So does the Xbox One X matter? Yes, and in a huge way to Microsoft.

Microsoft needs the X to sell well because the S not only basically allowed Microsoft to buy time until the launch of the X, but also set Microsoft up with a two-tier price point console offering moving forward. Microsoft was biding its time over the past 18 months with the S to tell consumers that it had a 4K-enabled-ish box that made games and TV/film look great, but now, that message is getting hammered home. The Xbox One X is the self-titled “World’s Most Powerful Console,” and Microsoft wants the position the X as the console for the “best console experience” for games.

And Microsoft delivered. We’ve been testing an Xbox One X on the house 65” Samsung 4K TV, and the games and streaming video looks pretty spectacular. Some of the sports titles which haven’t even been fully rendered yet in native 4K have caused visitors to the house to pause and ask if it was a live match. And the audio rocks. Playing games such as Activision’s Call of Duty: WWII has had intense but engaging audio (that, maybe because of volume, has caused the house dogs to flee the room). Streaming 4K content from Amazon has looked just as good as using the Kindle 4K Fire TV box, which may now sit idle (but the remote still works better on the Kindle than on the Xbox One X for navigation).

Microsoft needs the Xbox One X because it is facing strong competition from the various PlayStation 4 models, which have now sold north of 67 million units, compared to around 30 million units in sales of the Xbox One models. It is most likely competition for “migrators” (current PS3 or Xbox 360 owners) who haven’t made the jump yet to a Gen 8 console that Sony and Microsoft are focusing on. Further, Microsoft is looking for “upgraders” (current Xbox One or Xbox One S owners) who want to make the jump to a full 4K entertainment experience to buy an Xbox One X.

The other threat for family entertainment dollars for Microsoft is from Nintendo. The Switch has been the top-selling console in the U.S. since its launch last March, coupled with a huge rollout of top-shelf titles, including Super Mario Odyssey in October of this year. For more on Nintendo’s success this year, check out the DWR piece from January, 2017: Why The Nintendo Switch Could be #1 in 2017 . If there is a second console being bought in households, it is probably a Switch, not a PS4 owner buying an Xbox One X or vice versa.

What are realistic expectations for the Xbox One X?

Microsoft needs to look no further than PS4 Pro sales, which have likely been 12%-20% of the mix of sales of PS4 consoles since it launched late in 2016. The new, high-end models from Sony and Microsoft are not cheap – they are $399 to $499. The “upgraders” and “migrators” are still viable targets because this 8th gen of consoles is in year 4, coupled with the household upgrade migration to 4K TVs over the past two years and moving forward in bulk over the next three holiday seasons.

The upgrade cycle for TVs are notable because it doesn’t mean just a new 4K TV in the living room. The average household has 2-3 TVs, so the cycle will continue for 4-6 years (at least in the advanced U.S. market compared to other global markets, meaning the 4K upgrade cycle has a long tail in marketing terms) as the other sets in the household get upgraded as 4K TV prices come down. This is all good news for Sony and Microsoft for the longer-term run rate of console sales. If Microsoft’s mix of Xbox One X vs. Xbox One S sales are 90%/10% (in favor of the S), Microsoft won’t be surprised. If the mix is closer to 80%/20% (in favor of the S), Microsoft management will likely be happy.

Why The Nintendo Switch Could Be #1 in 2017

pj@digitalworldresearch.com (P.J. McNealy) — Thu, 12 Jan 2017 16:31:02 GMT

Building the Business Model Case For a Surprise

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.

Putting Reality Back Into Virtual Reality Forecasts

pj@digitalworldresearch.com (P.J. McNealy) — Fri, 07 Oct 2016 18:12:09 GMT

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.

We also expect Valve to increase its number of partnerships to form other VR headset solutions. This may also include lower-priced VR solutions.

Oculus, however, was bought by the largest social media company on the planet, Facebook. While the goals of the two groups, Facebook and Oculus, remain independently focused, it is logical to expect that Facebook will want Oculus to grow bigger, wider, deeper, higher, and in any other dimension Facebook can imagine.

DWR has been engaged in voluminous discussions about “Why did Facebook buy Oculus?” with an inevitable response illuminated of “because Facebook wants social in VR!” We respectfully disagree. VR remains a tremendous long-term technology that has the capability of changing the landscape in many verticals. Facebook has a potentially dominant technology and future revenue stream in house, especially if Facebook should either face new competition or have a gradual decline due to numerous other quicker, more agile apps replacing single Facebook functions. Facebook’s biggest challenge is “death by a 1,000 cuts” as Gen M uses new apps to replace tools previously used on Facebook, one by one.

Oculus is critical to the long-term vision of Facebook as a whole and a nice additional potential revenue stream. This is a significant difference with respect to what HTC/Valve is doing with Vive.

This difference means that Facebook/Oculus has longer-term plans beyond being a high-end, tethered PC solution. That future likely involves moving the Rift technology a) down the value chain to lower-priced devices and b) non-tethered. But if you’re a groundbreaking technology company, you have to start somewhere. And Oculus started with a target market with $$$ – the high-end PC market, tethered.

2. Low-end, Phone HMDs

What we mean by low-end is the $99 and under, head-mounted display (HMD) units powered by a mobile phone. This means that the entry into VR means they have to own a mobile phone, and can attach it to a relatively cheap HMD. This is not a $700 solution requiring at least a $1,000 PC companion. This is a Google Cardboard or a Samsung Gear VR HMD, as well as the flood of knock-offs in this tier. (Do note that while a Gear could be $99, Cardboard is $15.)

This is a market that could appeal to Joe Six-Pack, as long as Joe Six-Pack has been updating his/her phone. Google Cardboard makes VR sampling, for a lack of a better term, viable. NY Times subscribers who have one can experience some of the short clips made available on the website. Samsung Gear VR owners have a chance to purchase content, such as games, entertainment or experiences, through the online store. Gear VR has an early, first-mover advantage by having the broadest early library of content available for consumers.

Gen M phone users will use Google Cardboard, and likely more than a Samsung Gear VR give the roughly $5 vs. $100 price points. Based on DWR research, Google Cardboard is a cool, fun, short-session experience. Short-session, in this case, is typically under five minutes. [This contrasts with longer, more intense experience with, for example, on an Oculus Rift. This experience can be 20 to 40 minutes, with occasional breaks.]

This low-end, phone HMD is the “fat” part of the market, meaning the largest number of early adopters of VR. It doesn’t mean they’re paying adopters (paying $60 for a game or experience), but they’re interested in the technology.

3. (Middle-ground) Console VR

This is an interesting market slice because of the business goals of the biggest two companies involved, Sony and Microsoft, with Nintendo remaining a wildcard heading into its 2017 console platform launch. This is called the middle ground from a pricing perspective – not as expensive as a high-end tethered PC solution and not as cheap as the low-end Google Cardboard.

Sony pushes entertainment through VR, led by gaming

Sony has a corporate goal of making the Sony entertainment brand, the PlayStation, a massive, global success. Sony as a corporate entity has suffered much of the past decade, shedding business units, reducing products, selling real estate, and laying off long-time employees. Sony has been forced to reconfigure its business from the analog era to the digital era, and leading that charge has been the PlayStation 4. It is imperative to Sony that the PS4 be a success to continue, plain and simple. And the PlayStation Virtual Reality (PSVR) is a critical effort to drive sales of more units and usage of the current PS4 install base.

As a result, Sony needs PSVR to be a marketing hit. It will position PSVR, which launches in October 2016, as the only dedicated VR solution on the market. And Sony is correct—it is.

But, the one concern for Sony, and for every other VR solution on the market, is that it has to have to the best, non-nauseous experience on the market. Based on our research on DWR, short of heavily curating the content (games, experiences) flowing through the PSVR marketplace, Sony cannot prevent the likely consumer feedback/pushback that some VR experiences induce nausea. This is not an issue specific to Sony—it is a secular issue. We are in Early Days of this technology.

That said, we expect Sony to launch of limited range of experiences on PSVR this Fall. Sony should be given credit for pushing hard on VR, but must take steps to avoid reviews, for example, where the NY Times said:

So, expect or hope for Sony to learn from others: no “nervous eye twitch” inducing games. Again—Early Days.

The other subtle change Sony has made heading toward Holiday 2016 is broadening the PlayStation brand again back to entertainment, in lock-step with its November, 2016 launch of the PS4 Pro. Sony wants its brand to gain some of the shine the brand had in the 1990s and 2000s, when it stood to consumers meaning all things entertainment. Sony is currently running an ad campaign (including TV ads) for watching TV through Sony’s TV offering, PlayStation Vue. It is another prong for the PS4, in addition to the PSVR.

So what will Microsoft do in VR?

Hello, Switzerland!

While we say that in jest, the reality is Microsoft sees the near-term jousting of low-end mobile HMD and high-end PC, tethered, and wants to stay above the fray while enabling multiple solutions in both VR and AR. We give Microsoft credit for not simply pushing all of its efforts behind Hololens and ignoring VR. The reality is their business strategy is not to be tied to just one VR or AR hardware solution, but to enable a variety of solutions.

Microsoft has already launched the Xbox One S console, which enables 4K streaming of video content and up-resolution for games. The next Xbox console, code named Project Scorpio, will have a full GPU and CPU upgrade which means it will support true 4K gaming when it launches (Holiday 2017).

So will Microsoft launch its own VR (or AR) solution? History suggests that Microsoft has sometimes launched its own hardware solutions (such as laptops or in the music space with the Zune or Windows Media Players, or even phones), but the corporate strategy has varied. Sometimes, Microsoft wants to seed a market. Other times, Microsoft has stepped up when partners have failed to spark or drive a market. Or, Microsoft has wanted to create a great solution to show its struggling partners a path to follow.

Microsoft created the Xbox hardware and several peripherals, such as multiple iterations of the controller, as well as the Kinect. Microsoft has learned, too, through successes and failures of when to cut bait or keep fishing. Our position is bifurcated—we would posit two points:

· Microsoft will likely create an AR hardware product, and while gaming will be a facet of AR, the application and promise for AR—as seen by Google but not fully delivered on with Google Glass—will be fulfilled in multiple, non-gaming verticals, such as enterprise and communications.

Microsoft will likely partner with others such as Valve to make a VR solution that worked on the Xbox One and was fed by apps from both the Xbox Live Marketplace and Valve’s Steam service. Conversely, Microsoft will likely become one of several Valve VR hardware partners.

While there has been discussion of “mesh” technologies that combine both VR and AR experiences into one hardware solution, we don’t believe this is viable as a mass market solution before 2020.

For more on the benefits of morphing the Xbox One into Windows 10-enabled console, see the DWR piece, see the DWR piece entitled Digital Empire Building: The Business Model Case for Windows 10 and VR on XBOX One.

Does Nintendo have a role in VR in the future?

Our working assumption is that Nintendo focuses more on great consumer experiences and less on what the latest technology feature to come on the market might be. Nintendo has pioneered VR in video gaming through the Virtual Boy in 1995. Yup, 21 years ago.

In 2008, the TV markets shifted to 3D TVs with required proprietary, bulky plastic glasses. The lack of standards for the glasses, as well as wearing the glasses themselves, stunted penetration of 3D TVs. However, Nintendo rolled out its own flavor of 3D gaming through its Nintendo 3DS in 2011—without requiring any additional glasses. Again, Nintendo put its own spin on 3D technologies and in its own time frame that remained focused on the consumer experience of fun in gaming.

4. All-in-one HMDs—the new category

If you look at the two current market positions, $99 solutions or $2,000 solutions, this assumes that market dynamics will push forces two ways: the low-end up or the high-end down. Moore’s Law certainly backs this likelihood, complete, with price movements toward the middle of these two price points.

So this begs the question: Which price point moves to the middle fastest? This is likely solved by first answering the business model question: What business model exists in the middle ground? The razor/razor blade model will likely still be in effect, meaning companies will want to sell their hardware units at breakeven or a slight loss, while making up profits and margin on selling software/apps/games/entertainment solutions. This favors the low end in the near-term because of typical market dynamics.

This means that we could see standalone, or all-in-one HMDs, coming to the market in 2017. The technology is there for converting mobile phone technology into an HMD, and the price point is likely $499~$999, which places it in between Google Cardboard and an Oculus Rift.

In other words, in the middle of a wide middle ground.

The technology pieces needed for VR are morphing – Google is likely optimizing a version of its operating system with Daydream to help with I/O, battery life, and intense usage, and chipsets could be modified for the same types of upgrades. Then go a step further—take a mobile phone configuration and strip out all of the phone aspects to focus the chipset on a mobile VR experience, and this could be a scenario we see on the market in 2017. It likely wouldn’t be mass market volume due to manufacturing efficiencies and unit pricing until 2018-19, but it would drive, from a technological perspective, an all-in-one HMD solution.

DWR’s position is that this is more likely in 2017 (or sooner), with a company such as Magic Leap entering the fray in this category. Further, by the end of 2017, could Oculus have created a cost-reduced solution with a cheaper PC to get the total solution below $1,000? Maybe, but Moore’s Law, again, suggests that this scenario is more likely 2018, short of Oculus launching an all-in-one HMD that doesn’t match up to current high-end PC specifications. This latter scenario would suggest an all-in-one HMD for Oculus in 2017 and possibly more accurately reflect corporate goals of market penetration for versions of the Rift.

THIRD: So what happens in 25+ months?

The rise of the New Entrants

One of the most likely disruptions to the VR market, beyond all-in-one HMDs, will be the rise of the new entrants. We believe there are a few, big companies out there who could enter the VR market: Tencent, Apple and Amazon. Here is the case for each of them:

· Companies new to VR enter the market in 2017/2018, but not new companies: Tencent, Amazon and Apple. Adding VR and/or AR is a reasonable building block for Digital Empire Building for big (and getting bigger) players in the consumer space, hence:

o Tencent has slowly been building multiple pieces of the food chain for VR from content to engines to mobile gaming, and likely have manufacturing partnerships lined up in China. Tencent has three major subsidiaries, Riot Games, Epic Games, and Supercel, as well as social layers such as QQ Chat.
With the evolution of e-gaming, led by Riot, the next logical step beyond filling The Staples Center for a tournament is to have it available for a small price via VR for all the fans who could not travel to Los Angeles. This is part of a larger entertainment expansion via VR, but easily crosses over to e-gaming.

o Amazon, too, has been building multiple pieces from Lumberyard to content acquisitions, with payment systems, etc., already in-house. Amazon already has users, payment systems, games through FireTV, and infinite amounts of data on consumers. We could envision a headset that works in part with a future Kindle Fire TV and its apps universe. It would likely move beyond just games, too, just as it has diversified its video content as well.
One potential source for VR entertainment will be Amazon’s strategic acquisition: Twitch. Gamers today can subscribe to watch Twitch for following gaming experts, and subscribe and follow them on YouTube, too. Now, instead of watching a stream via Twitch, why not watch it in VR? We think this is a logical next step, especially given that VR capture cameras will rapidly come down in price over the next 24 months.

o Apple. Of course. Will be a feature for an Apple iPhone? If we had to guess, we’d say no—rather a standalone hardware device tied to the App Store and Apple TV. We find it hard to see Apple not wanting to have a presence in this market, especially given Apple can waterfall VR hardware in typical Apple style—starting with a fully-priced high-end product.
The contra argument for Apple bears merit, in that Apple has the App Store, featuring content that makes either Apple’s operating system or hardware look fantastic—the best experience for consumers, best photos, best way to consume music, etc. The App Store is built to drive highly profitable hardware margins, north of 30%. So, if Apple goes down the VR route, it would likely need the VR hardware to be high margin, fed by the App Store, which could happen through Apple TV.

Looking to 25+ months from now is the part of any crystal ball is typically the most foggy. The working DWR assumptions include that in 25+ months…

· Microsoft will have partnered with a company such as Valve for a VR solution for Xbox One, featuring both the Xbox Live and Steam
marketplaces.

· Microsoft will have rolled out a high-end, v 1.0 AR solution.

· Sony will be bundling a price-reduced PS4 Pro with the PSVR.

· Oculus will have a mid-tier priced PC solution.

· Oculus will have partnered with non-gaming and entertainment partners in verticals such as health care, science, education and
communications.

· Both Oculus and Valve will have partnered with more hardware manufacturers for both high-end and eventually, mid-tier (priced) solutions.

· Google Daydream likely holds the largest market share because it gains rapid adoption given the massive global install base of
Android-based phones.

· Samsung continues to promote Samsung Gear VR as a peripheral to its Galaxy phones, and eventually creates its own Milk Music-equivalent
for VR apps in conjunction with the Powered-By-Oculus Gear VR marketplace today.

In 25+ months, we expect to see VR experiences and games redefined.

Right now, many developers are becoming comfortable with the features and capabilities of VR (i.e. getting scared by a shark while diving, vertigo-inducing cliff walking), but a truly, bottoms-up new transformed experience should arrive in 25+ months, hopefully sooner. Entertainment needs to be created in VR, not just ported over from a console or PC game, or having just a portion of a game be VR-enabled.

Today, gamers are used to either short-session mobile games, or long-session console games. Early on, VR will be more likely short-session games, but in 25+ months, we would expect to see the beginnings of long-session VR games.

FOURTH: One other key piece for VR – the marketplaces

The basic parts for VR include hardware, an operating system, and software/apps to drive adoption and usage. So what do VR marketplaces look like today? Fragmented.

A key question is “How does a consumer connect to a store, and which store?” There are currently islands:

· The Samsung Gear VR, powered by Oculus, works with the Samsung Gear.

· The Oculus Rift works with a slimmed down version of the Gear VR store, as well as with select Steam content.

· The Vive works with Steam.

· The Hololens will likely work with the Xbox Live Store, as well as other Windows 10-based stores.

· Google Cardboard works the Google Play Store.

· The Sony PSVR will work with the Sony Playstation Store.

That means there are six, mostly not-interoperable markets, which are signs of early days and fragmented markets, driven by competing operating standards and corporate goals. This is not helpful with driving consumer adoption and, rather, promotes consumer confusion. This is also typical of early days as consumer adoption can be stunted by confusion until a few big winners emerge and others fall off. We are 25+ months away from that shakeout beginning to happen, and the winners will have integrated, easy-to-use online stores or marketplaces to find a range of content.

What we are looking for is integrated markets – where a Valve-based VR device, connected to an Xbox One and running on Windows 10, can provide an easy experience for a consumer to access content from Steam or the Xbox Live Marketplace. This is a win-win; consumers win, and both Valve and Microsoft win. Microsoft has already gone down the route of launching its Xbox Play Anywhere campaign, and critical to that success is having a unified store for both Xbox One and Windows 10 gamer.

Fifth: The VR Hardware Forecast

Yes, this is what is called, “burying the lead.” However, this is not a simple subject and not a simple forecast, so the logic behind how markets could emerge is detailed in the prior pages. Additional color for parts to the forecast are included below.

This forecast was put together from a combination of discussions with industry participants this year. Segmenting the VR universe has been complex because the tiers that exist today will morph in the next three years, and not only will current participants in tiers likely move up or down with new products, but there will also be new entrants not yet directly involved in VR, but involved in other gaming segments in mobile, console or PC.

The total VR install base, based on low-end VR products, middle-ground console VR, and high-end tethered PC VR, is forecast to be at 8 million units in 2016, heading toward 150 million in 2020. Note that Google Cardboard is not included in this forecast, as we consider it a VR sampler, or introduction into VR at this time. We also believe that the new entrants, such as Tencent, Apple and Amazon, could add another 30 million units to this overall forecast in multiple tiers by 2020 — that 30 million unit number is not included in this forecast, but that forecast is available upon request to DWR.

Graph 1: Total VR Install base, 2016-2020

Source: Digital World Research, 2016

We are forecasting this growth because we foresee solid growth through consoles, the advance of VR with mobile phones, and lower prices at the high end in the next three years thanks to Moore’s Law. We also expect a standalone VR hardware market to emerge thanks to adjustments to both mobile operating systems, increased mobile battery power, chipsets optimized for VR, and the emergence of a few compelling VR market places. One of the single biggest drivers behind our forecasts, too, is the emergence of a killer VR app: a built-from-scratch experience that reimagines VR entertainment. We assume this new app(s) will come in 2018, helping drive adoption and generating additional consumer interest while a variety of price points emerge for consumers to adopt a VR platform.

The annual VR shipments this year will be mostly driven by the low-end, highlighted by Samsung Gear VR, with Google’s Daydream platform having a big impact behind the forecast starting in 2017. We are forecasting just over 7 million units shipped in 2016, growing to nearly 50 million units shipped in 2020.

Table 1: Annual VR Shipments, 2016-202

Table 2: Annual VR Shipments, by Tier, 2016-2020

By tier, we expect the low-end segment to account for the largest percentage of the VR install base in 2016 at 70%, and ticking down to 54% over the next four years as the middle-ground console VR space gains traction.

Low-End Mobile VR Tier—A Deeper Dive

When looking more closely at the low-end VR tier, this is going to be the biggest path to consumer education and experiences around VR. We are forecasting 5 million VR units shipped in 2016, increasing to 30 million in 2020.

We are forecasting numbers based on the impact on two likely leaders, Samsung and Google. This forecast does not include a meaningful impact from LG, and the Google Daydream forecasted numbers could prove conservative. Further, a wildcard to this market is Asia-Pacific, led by China, because there are already easily 75+ knock-off low-end mobile headset manufacturers, but they will still need a phone and a marketplace to drive what we consider to be meaningful VR shipment growth. One forecast that is now being worked on is next tying hardware to app purchase and usage, driving the overall VR market in multiple verticals, in which China’s adoption rate of all VR low-end mobile devices may prove more important in our view.

Graph 2: Low-End Mobile VR Shipments, 2016-2020

It is our position that Google Daydream is going to be a significant product for Google and a bigger “hit” than Google Glass. After talking with multiple developers, the excitement around Daydream is high, and we are forecasting a ramp that may prove conservative. Again, we are forecasting for a baseline with upside.

Middle-Ground Console VR Tier—A Deeper Dive

The middle-ground console VR tier will likely be a significant avenue for consumers to play in VR. We forecast under 1 million units in 2016 (they start shipping in October) and could reach up to 12 million units in 2020. This forecast does not include any meaningful VR units for Nintendo with the NX at this time (see the Second section above for more).

If Sony has an install base of roughly 25 million PSVR units in 2020, and Microsoft has an install base of nearly 15 million VR units, this could mean roughly a tie ratio of 24%~31% to our forecast for all PS4 consoles and XBOX One consoles by 2020. We believe these are reasonable ratios.

In forecasting tie ratios, it is important to note that come 2017, Sony will have the original PS4 install base, the PS4 “slim” install base, and a new PS4 Pro install base. The performance of PSVR will be optimal on the PS4 Pro, but still possible on earlier PS4 consoles. This also means that the tie ratio for PS4 Pro owners will likely be higher with PSVR than PS4 original console owners. Part of the value proposition of buying a PS4 Pro is for full HD gaming and full HD streaming (Netflix, etc.), and owners of 4K TVs being enabled for a great experience.

It is possible, too, that either/or/both Sony and Microsoft could bundle in VR solutions with console shipments in 2018~2020, which would tick our numbers up.

For the XBOX One forecast, there is a similar challenge – the XBOX One, the XBOX One S, and next year’s launch of the XBOX One Project Scorpio. While the S current supports HD streaming, the holiday 2017 launch of Project Scorpio will enable full HD gaming and full HD streaming, similar to the PS4 Pro.

The other enabling technology advantage for Microsoft is running full Windows 10 on the XBOX One Project Scorpio, which means any PC-enabled VR solution, such as the Valve-HTC Vive or Facebook’s Oculus, could theoretically run on an XBOX One. This means the potential partners for VR for Microsoft are broad and why we have forecasted an inflection point in units for this tier in 2018.

Our breakdown forecast of PS4s and XBOX Ones, and tie ratios by console tiers, can be supplied upon inquiry to DWR.

Graph 3: Middle-Tier Console VR Shipments, 2016-2020

We forecast a 5% tie ratio for PSVR early in this adoption cycle, and could prove conservative if Sony can ramp manufacturing in 2017 beyond our numbers. We also forecast Sony to continue its significant lead, nearly 2x, of the PS4 install base over the XBOX One install base.

The table below shows Sony’s forecasted marketshare lead in console VR, which is reflective of its continued dominance in this hardware cycle.

High-end Tethered VR Tier—A Deeper Dive

The high-end tethered VR market is the driver of early excitement in this market, with Facebook spending $2 billion on acquiring Oculus and starting a modern-day Gold Rush with VC investors backing multiple VR efforts. While the segment has grown rapidly in the past four years, the high-end, while expensive with $1,500-PCs and ~$799 VR setups, have had some early success as manufacturing has ramped.

We forecast nearly 1.5 million high-end VR shipments in 2016, rising to 10 million units in 2020, driven by Valve and Oculus. We forecast an install base for high-end VR at nearly 30 million units in 2020.

The two main variables for growth in this tier are pricing and partners. Oculus has already cut its price on the Rift headset, and the faster the units can be price-reduced through volume manufacturing (and Moore’s Law), the faster the high-end VR tier can help morph into middle-tier units in the next four years.

While Valve has partnered with HTC for the Vive VR headset, we believe Valve will be aggressive with adding additional hardware partners and help fuel usage of its online marketplace (app store), Steam. Note that Steam is not simply an online marketplace, but it is a VR-friendly location to find new content that works with both the Vive and the Oculus Rift.

Graph 4: High-End Tethered VR Annual Shipments, 2016-2020

Depending on how rapidly Valve adds partners, and adds a mid-tier priced solution, could mean this forecast is conservative. Also note that we forecast an inflection around the launch of the XBOX One Project Scorpio box as well.

The other factor for VR adoption, especially in the case of Oculus, will be the expansion of VR beyond gaming and entertainment. Longer term, while Valve is focused on gaming, Oculus remains focused on multiple verticals beyond gaming such as health care, education and communications. If a non-gaming vertical should gain significant momentum before 2020, the Oculus forecast could prove conservative.

The excel model for these forecasts is available upon request to DWR. >> Download the Printable PDF Here

Why Vizio Being Bought Shouldn’t Be Overlooked

pj@digitalworldresearch.com (P.J. McNealy) — Thu, 06 Oct 2016 00:00:00 GMT

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.

Digital Empire Building: Windows 10 and VR on XBOX One

pj@digitalworldresearch.com (P.J. McNealy) — Tue, 24 May 2016 12:10:49 GMT

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
integration.

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,
HoloLens.

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.

CES 2013: The TV Manifesto

pj@digitalworldresearch.com (P.J. McNealy) — Tue, 24 May 2016 12:09:38 GMT

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)

Table 1 above shows the companies in the new pole position for consumer engagement. The mobile, tablet, and laptop companies are in the top right, and the majority of consumer electronics companies are in the bottom left. There is much more company-level discussion and a breakdown of this table later in this document.

The growing install base of non-TV devices already have comfortable, familiar UIs, such as devices from Apple, Microsoft and Google (and its Android partners), and to a lesser degree, Amazon. Consumers are used to these platforms/devices not only within the house, but also in their mobile lives. The TV then becomes a connected, but somewhat “dumb” device to which consumers can direct content to that screen, using a smart, connected other device.

Within DWR’s survey panels in the past, two trends are consistent:

1. Consumers have more and more devices (screens) in their hands from companies such as Apple, Google, Microsoft and Amazon, such as phones and tablets.

2. Consumers have not been demanding (at least in the U.S.) for “Where is my tablet from Panasonic?” or “Where is my Sharp smart phone?”

These trends strongly suggest that, while a company such as Sharp or Sony may improve its own UI for its TV sets, it’s simply not enough. The end-around for the living room has passed them by on the relevance scale to mass markets.

Another filter on Table 1 provides the alternative perspective shown in Table 2.

Table 2: Current and Future Consumer Leaders by country or state of origin

The talent base for mobile, tablets and laptops, as well as leaders in software and UI, are all located in either the states of California or Washington. As the media industry has gone digital, the traditional TV and CE companies (based predominantly in Japan) have struggled.

This is not to suggest that there is not hope for the Japanese companies – but, a big BUT – corporate culture must change with respect to the role of engineers and partnering with non-Japanese companies.

Traditionally, Japanese companies do not move quickly, while many in the U.S. move quickly – as in daily. This means that not only do Japanese corporate cultures (such as at Sony, Panasonic, Sharp and Nintendo) have to acknowledge that they need help, but they also need to figure out how to partner with companies who specialize in UI and software, as well as services such as cloud computing.

The Korean companies remain the wild card in this consumer equation. Both Samsung and LG have significant currency tailwinds, and they have been putting it toward increasing research and development budgets. By virtue of blunt force, a company such as Samsung may figure out the magic of UI and become the first non-U.S. company to do so, but it lacks a key component. To understand how to truly distribute digital content, such as video games or movies, there is a highly vested interest to have some skin the game. If Samsung were to launch a significant effort to fund and create movies or video games, it would better understand the needs of content owners and be able to tailor its vast resources to creating products aligned with those interests.

This is a criticism often leveled at companies such as Google as well, but at least with both Apple and Google, both have courted and supported reams and reams of third-party content. This isn’t true of Samsung to date.

Company-Specific Implications

As the war for the consumer evolves, there are companies who will thrive or struggle based on hardware, software, content and services. Those below are a snapshot of those entries, and implications for a tablet or mobile device-driven consumer scenario. The companies have been broken up based on which quadrant they are positioned in Table 1, followed by other future potential players not in the quadrant.

Keep in mind that companies will move throughout the quadrants as the year progresses. This will be driven by a series of filters, including:

1. New hardware announcements

2. New distribution deals

3. New content aggregation or creation news, in TV, news, music, movies, other video, photos, video gaming, real-money gaming, or other consumer-generated content

4. New social communications networks or tools

5. New software product offerings, including utility-driven consumer offerings.

6. Improvements in transactional capabilities

7. Longer term initiatives in remote medical diagnostics and collaboration with health care infrastructure partners.

TOP RIGHT QUADRANT—Huge potential to dominate consumer time, both in home and mobile

Facebook

Facebook is the social layer woven throughout devices, and is not location specific. While there is criticism that “Facebook is for my parents but not for me,”it is not well-founded. The numbers for Facebook remain massive, and consumer behavior means updating Facebook statuses, checking others updates, etc., no matter where a consumer is – at home or mobile.

As a result, Facebook is clearly lodged in the living room on phones, tablets and laptops. To a lesser degree, Facebook is on TVs as part of a connected UI through a TV manufacturer. Where Facebook is more interesting on TV is logging into Facebook for your Xbox Live account, playing an Xbox Live game and being able update your status after playing a game, or being able to share a recently watched YouTube video on Facebook. It is arguable that you can do that on YouTube with Facebook on any device, but for the sake of this discussion, it reiterates that Facebook is already in the living room.

The potential for Facebook looms as large as any company out there today since it already dominates in social. While it has a significant presence in gaming, if the movement to HTML 5 gaming in the next two years happens, it opens up an even deeper relationship for Facebook with consumers on multiple screens.

Can Facebook do more? Sure, it could partner with Rovi to become part of the Electronic Programming Guide (EPG), or become an interactive ad for what TV content your friends are interested in and might be watching. Recommendations from friends for content -- any content -- have proven to be wildly powerful, and Facebook user data combined with a TV guide is a pretty compelling combination.

Facebook should look to partner more with the TV guide food chain – from Rovi, to Dish and DirecTv, to Comcast and other cable companies. Even if Facebook cannot become part of the EPG, it could still become part of a separate app that shows friend recommendations and become involved in interactive discussions such as polls and voting on TV content.

Amazon

Amazon should likely be split a couple ways, including:

· Amazon the hardware company . The Kindle Fire and its future iterations will likely include either a phone and/or a TV panel. As a hardware company, Amazon likely has moderate aspirations – seed the market, own the e-book vertical, and inch into other adjacent verticals such as music services or TV/movie content. Amazon has a main goal: keep the consumer in the Amazon universe of buying or consuming, so that means being a multi-media services and content company.

· Amazon the TV/movie/video game content creator . This strategy is simple: every other content creator feels better making content for a piece of hardware and service (such as Amazon) when Amazon has some skin in the game. This means they understand the morphing needs of content creators without having to constantly ask for and be completely reliant on feedback from their developer community.

Microsoft

Similar to the discussion around Amazon, Microsoft needs to be sub-segmented:

· The Interactive Entertainment Business (IEB) unit, including the Xbox teams . This means a reset of potential power within the traditional Microsoft divisions as the next-gen console is prepared for launch likely later this year. Given that the underlying kernels for the console -- code-named Durango -- are the same as those running the Windows Phone and Windows 8 operating systems, cross-platform functionality should be as easy for Microsoft as it is for Apple. This also means that Microsoft has one big target in the living room with Durango: Apple (i.e., not Sony or Nintendo).
At a more complicated level, the internal challenges of “who is calling the shots?” will be significant as Microsoft tries to roll out cross-platform services such as Xbox Music. Who controls Xbox Music? An independent team, or the Windows 8 department, or Windows Mobile, or IEB? Let the power struggles continue in Redmond.

· Windows 8 tablet/PC/laptop OS teams . These groups have been laying the groundwork by rolling out Windows 8, and tablet penetration is a key objective (beyond obvious objectives such as an enterprise PC upgrade cycle). The capabilities for consumers to move content from a Windows phone to a Windows tablet to a TV, much of the capability of its “Smart Glass” marketing, has been in anticipation of adding a console/set-top box into the equation, likely in 2013.

· Windows Phone . This team has been pounding away trying to make inroads against both the Android-based phones and the iPhones, and it has been all uphill. However, from a second-screen perspective, this screen is still highly strategic as a secondary source of content and controlling the consumption function on a TV.

So will Microsoft then make its own TV set? It could likely extend its current operating system for basically a “lite” version where most of the brains and power of the TV would be handled by the cloud. Possible? Yes. Likely? No. Multiple versions of Durango by region (think some with TV tuner cards included, various sizes of storage) are highly likely.

Further, Microsoft has been experimenting with selling the Xbox similar to selling a phone: $99 with a two-year commitment to Xbox Live. Microsoft could package a version of Durango in this fashion, but would not be popular with Triple A game developers who need hardware profile assumptions for game development. If those profiles changed every two years or so, development would have to be heavily reconfigured.

Apple

Apple is split in a similar fashion to Microsoft:

· Apple iPhone . This product upgrade cycle of new iPhones every 18-to-24 months allows Apple to continue to innovate on second screen possibilities, including navigation for Apple TV. Apple has continued to tweak and try new things using its iPhones and Apple TV such as flicking or sending content (photos) from an iPhone for viewing on a TV. The growing install base of iPhones worldwide is a massive advantage for Apple when discussing control of the consumer not only while mobile, but also within the home.

· Apple iTunes and App Store . This is Apple’s content aggregation approach on the iTunes side for TV and movies, as well as games and apps for mobile and home utilization/consumption. There appears to be zero interest in Apple becoming a content creator, but given its install base of devices, it is an attractive partner as an aggregator.

· Apple iPad . Similar to iPhone upgrade cycles, the role of the iPad just hammers home utilization no matter where the location. The iPad mini extends that approach, filling out a product gap based on screen size.

This analysis of Apple products and services begs the question of whether Apple needs to make an Apple-branded TV set. The business model case can be made from many perspectives, including its dominance over the food chain, its turnkey content already prepped for large-screen formats in iTunes and the App Store, and its familiarity with monitors and TV through Apple TV. However, the contra-arguments remain: TVs are closer to 5-to-7-year replacement cycles and do not hold up well with typical Apple 40% hardware margins. Further, Siri does not yet work well at distance for voice commands in the living room (unless, of course, the use case is on handhelds or tablets).

The concept of Apple TV as a hobby remains, and Apple not only has not been able to secure numerous over-the-top content deals, but it also can still dominate the consumer in the home or mobile given the install base or hardware. One piece of news we believe critical to Apple’s future success with AppleTV is simple: It must sign more content deals for over-the-top delivery of content from multiple partners, such as HBO.

Google

Google is sub-segmented as its operating system efforts have spanned multiple devices. Google’s growth with Android-based devices has been impressive, but critics have remained, focusing on a consistent argument – why focus on an Android OS-based device when making an OS is not the primary business of Google? Criticism aside, the non-search segments include:

· Android OS for mobile , including Google Phone. Google clearly has had success in this arena to Apple’s and Microsoft’s chagrins, and has been hugely driven by support from Samsung as a partner. Growth in Android-based phones is surpassing Apple’s growth rate in smart phones.
The challenge for Android is inherently a significant challenge for content and services companies. Because the Android market is widely fragmented by OS version and phone features, it presents a programming challenge. Further, the price points on Android phones are very wide, meaning the likelihood or predilection for an Android owner to spend additional money for content or services over the phone is challenging. That said, Android will have a significant role with consumers, mobile or at home.

· Android OS for tablets . Welcome to the low-cost alternative to buying an iPad. The environment for apps on Android phones and tablets has been described as “the Wild, Wild West” and wide open, meaning curation for quality apps does not exist. However, Android-based tablets (including Amazon’s Kindle line) will likely remain in second place in market share behind Apple unless Windows 8 tablets have a significant rise. Again, Google tablet penetration means a significant role with consumers both mobile and in the home.

· Android OS for TVs . The efforts behind Google TV have ebbed and flowed. While making a splash over the past few years at shows such as CES via partnerships, Google TV has remained muted. At CES 2012, partners such as Sony, LG and Samsung all introduced a few models of TVs featuring Google’s OS. However, at CES 2013, there were few new products announced, yet multiple Japanese and Korean TV companies made a point to call out and highlight what a great partner Google was, how they enjoyed working with them, etc. It bodes well for Google for continuing to grow its presence in consumer devices used while mobile or in the home.

During CES 2013, Google was the one company mentioned onstage in nearly all the major press conferences without holding one itself, while Apple was the company mentioned off-stage in the crowd in nearly all the major press conferences without holding one itself. Strange days, indeed.

Samsung

Samsung has potential to play in the consumer space simply due to market share. It is already the top handset maker worldwide, the top TV manufacturer worldwide, and is gaining ground with its Android-based tablets and laptops.

However, Samsung stumbles with UI, software, and content aggregation outside of Korea. There are vast sums of Won being spent trying to solve some of these issues outside of content aggregation.

The question of Samsung as a content aggregator or creator remains unanswered – aggregation seems to be the answer for now, but the content creation question remains. Samsung has cash, but seems reluctant to spend on outside of research and development, as well as marketing.

Samsung is already in consumer living rooms with its TVs, and in some hands at home and mobile with its phones. It is impressive that Samsung can compete for market share in so many different areas (all the way to home appliances), but as one commenter from CES said, “have you seen a good working UI from (Samsung) yet? Let me know when that happens.”

TOP LEFT QUADRANT—Huge potential to dominate consumer time, somewhat in home and not well-positioned in mobile

LG in many ways mirrors Samsung with TV production, panels for tablets, and some phone and appliance production. However, again, it stumbles on UI, software and content.

LG is smaller than Samsung in all areas and has fewer products spread across fewer areas. And, while some of the UI presentations in Las Vegas looked good on stage, it remains an isolated strategy.

Longer term, LG could be one of the first to present a unified home system where your fridge, stove, washer, TV, air conditioning and electricity are all controlled by a single LG device, but may be felled by a bigger problem -- vertical integration where that home networked group works only with LG devices. Not many homes are built in such a fashion, and there is very little evidence to suggest any early actions to create cross-device software and integration solutions.

BOTTOM RIGHT QUADRANT—Limited potential to dominate consumer time, currently in home and with some presence in mobile

Sony

Sony has made some sound business decisions, such as looking to partner for TV panel production instead of manufacturing them, and some baffling business decisions, such as treating DeNA as an investment instead of a potential partner.

It has continued to muddle through phone production, and there is plenty of aging speculation that a PlayStation phone could finally be coming now that the Sony-Ericsson agreement has ended. However, Sony will require a massive marketing effort to gain market share outside of Japan in the smart phone market.

Sony has continued to produce Sony Vaio computers, and featured several tablets at CES, but, again, there seems to be little traction for theses devices outside of Japan.

Sony has taken a more network-centric approach, with connected devices meaning connected to the Sony network, not necessarily to each other. The only exception to this is integrated gaming with a Sony PS3 console and a PS Vita handheld — and this exception is limited at best, and more of a technological capability demonstration.

The challenge for its network-centric approach is that, plain and simple, Sony has struggled creating a network with content and services. It has finally moved away from offering Sony-centric content, but the privacy data breach was a significant hit, and trust remains an issue to consumers. Simply being able to access consumer content in the cloud is not enough to stay competitive with Microsoft, Google, Apple and Amazon today.

Sony finds itself at an absolutely crucial crossroads —what does the Sony brand mean in an Apple-centric world? And what technological edge can Sony exploit to drive a new generation of products and services? Things are mighty dark for Sony in Tokyo these days.

When might it get brighter? Sony recently announced a February 20th press conference in New York City, with expectation of a PlayStation 4 console. Expectations are that Sony will attempt to move, in essence, higher up in the quadrant to capture more consumer time with an improved social layer. Further, it could still announce a new PlayStation phone, too, moving Sony in a potentially more meaningful shift further right in the quadrant. However, Sony has a moniker that reads “Make.Believe.” We remain on the sidelines on Sony’s
future until we “See.Believe.”

Nintendo

Nintendo continues to try to innovate and differentiate with offerings such as WiiU TV, but the uptake rate from consumers is too early to measure. Nintendo has a storied legacy of remaining focused on what it does extremely well --- making great games. While there is plenty of public criticism of what Nintendo is not , Nintendo has not wasted time and money on a large scale trying to become something it is not.

However, Nintendo continues to explore new possibilities at its own pace, and partnerships with content providers or aggregators such as Netflix have been announced. It is a WiiU box specific strategy – not tied to any smart phone or tablet hardware providers.

This likely means Nintendo will continue to be, well, Nintendo, and likely out of the second screen discussion beyond using a WiiU tablet as a content controller.

BOTTOM LEFT QUADRANT—Low potential to dominate consumer time, currently in home and not well-positioned in mobile

Panasonic

Panasonic continues to shift its business models away from competing for the living room. To its credit, it has focused on its battery business, and reapplied some of its plasma-panel production capabilities to serve the solar panel market. It is unlikely to make the jump to create a presence in the mobile phone or tablet markets at any scale.

Sharp

Sharp demonstrated an improved UI experience at CES, and it will work well for households that do not have other connect devices. However, that market size is small.

Its opportunity being pushed at CES was 60”, 70”, 80”and 90” TVs. They looked phenomenal. However, how big is the market opportunity for very expensive, very big TVs? Limited again.

Sharp has a future in TVs and tablets, but as a panel provider for companies such as Apple. Its IZGO technology demonstration at CES was impressive, and Sharp deserves kudos for partnering with Corning on panel technology. Sharp is arguably the best panel producer in the world today, and will continue to drive the company.

COMPANIES NOT YET IN THE QUADRANT

Aereo

Aereo is included in this conversation because they are, as DISH has said, “trying to give consumers what they want.” In this case, it is giving consumers access to content and making it easy. Aereo is offering consumers a chance to rent an individual TV antenna to be able to access its local content over the air and through the Internet to any location.

It is an interesting workaround to the traditional conditional access approach to paid TV content. It also enables TV to be consumed on something other than, say, a TV. It sounds funny, but it aligns with changing consumer behavior for the 18-to-30-year old crowd. They are used to consuming content on a 15” or 20” screen, or even a 4” smartphone screen, so providing them access reiterates that TV does not have to be on TV, thereby lessening the importance of the traditional TV manufacturers who are not involved in the tablet/laptop/smart phone discussion.

Aereo not only works around some of the constraints of the current consumer delivery infrastructure, but could also be considered a form of unbundling. While more classic examples would be enabling consumers to buy ESPN directly through the web instead of having to have a subscription to a current cable or satellite provider, technology is enabling other workarounds such as Aereo.

DISH

DISH is in a tooth-and-nails fight with DirecTV and has been aggressive in promoting not only its new (last year) Hopper series but also its ad-skipping capabilities.

DISH has been aggressive in positioning itself as meeting consumer needs for simplicity, access, storage, and convenience. It wants consumers to access content stored on a set-top box anywhere, any time, and with or without ads. It is a powerful marketing push, but is also differentiated from DirecTV, which pushes content and numbers of high-definition channels. In other words, if you can not win the current battle, change the terms and pick a fight you perceive you can win.

To that point, DISH realizes that while it is a satellite company, it needs to deliver content to not only TVs, but also to phones, tablets and notebooks. It has been able to see beyond a connection to the back of a TV set, which positions itself in a decent spot as more consumers watch “TV” on tablets and phones. It is not landlocked to a legacy idea of the battle for the living room.

Netflix

Netflix is arguably already in an enviable position having successfully moved from a focus on physical disc rental to its online streaming service. As a result, Netflix simply wants to keep consumers happy, and subscribing. Netflix does not care if a consumer wants to stream content from Netflix on an Xbox 360, a Sony PlayStation 3, an iPad, a Macbook, a Windows 8 device, through a TV UI, or even on a phone.

As a result, Netflix is insulated from the consumer mobile-vs.-home locations. Netflix is already wherever the consumer is.

The main threat to Netflix is likely Amazon, not iTunes, at this point. Amazon Prime subscribers have access to a wealth of content to stream included with the subscription, and while it may not be early “window” release content, it often may be considered to have “good enough” content to keep consumers happy and consider canceling a Netflix subscription.

Twitter

Twitter by-and-large has become a huge second-screen phenomenon by virtue of consumer empowerment. For example, a consumer could arguably skip watching the Grammy Awards show live on TV, but instead follow some key influencers on Twitter and learn in near-real time which artist won which award.

Granted, Twitter is not limited to being just a second screen for TV, but it has certainly become a required “tool” or service to have handy during other TV viewing events such as professional sports.

Most consumers today do no use Twitter on a TV screen via a remote keyboard, but instead use a phone, tablet or laptop. This again diminishes the prospects for a TV-driven user interface dominating a consumer experience without having some additional interactive software layer tied to a handheld screen of some size.

Zeebox

Zeebox is one of the early services that take advantage of the second screen concept in the living room. While it is not directly integrated with the content being consumed on the TV (can not play, pause, record, etc.), it is positioned as an enhancement to the content with a social, data, communications and transactional layer.

At one level, Zeebox will work on virtually any handheld, tablet or notebook device, but is more of an overlay rather than a consumption driver. Over time, as companies move from providing one to two or three screens that consumers will use, a company such as Zeebox will be an attractive layer to add in.

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Xbox One and Living Room Domination Through Input One

pj@digitalworldresearch.com (P.J. McNealy) — Fri, 01 Nov 2013 00:00:00 GMT

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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