e.Digital Corporation (fka EDIG)

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OT-Home ownership
Steven Fyffe, Contributing Editor -- 5/1/2002
CommVerge


Driven by the conviction that entertainment applications will succeed where straight broadband access hasn't, startups, spinoffs, and established companies alike are aiming at the home. Each wants to stake a claim to what is arguably the most valuable tract of convergence real-estate: the exalted spot at the center of the living-room entertainment system.

As part of their campaign, they're touting a wide variety of AV appliances that can do it all for the entertainment-hungry consumer. Members of this new breed of home hub can play movies, store music, access interactive content, pause live TV, and even stream video throughout the house or across the country.

The contest pits the established cable industry and its favored set-top manufacturers against smaller companies that are looking for a way to break in—whether that means working with TV providers or finding a way to outflank them. At stake is not only a massive market but also control over how entertainment content will flow to and be consumed within the home.

Larry Marcus is a general partner at the venture capital company WaldenVC, where he helps manage a $270 million fund focused on broadband and enhanced-TV technologies. He believes there will be strong demand for this new breed of set-top box.

"The question is, how much are consumers going to be willing to pay for it?" he asks. "And who is going to ultimately deliver it?"

Companies that are now building these new multimedia appliances are trying to persuade the cable industry to license their technology. A single sale to a cable operator can reach millions of households in one fell swoop. But cable companies are a notoriously hard sell.

"The cable industry is very difficult to sell into because essentially it is a collection of local monopolies," Marcus says. "In the US, the cable companies buy their hardware from Motorola or Scientific-Atlanta, which is really a domestic duopoly. So you have a value chain where you are trying to sell through a duopoly to a monopoly."

Another option is to go head-to-head with the cable operators and sell these boxes direct to the public or through a retail middleman.



“Once set-top-box OEMs start putting hard drives in their products, standalone PVRs are going to disappear.”
Jay Srivatsa, iSuppli


"The battle is generally going to be around augmentation of existing devices versus a completely new device," Marcus says. "The consumer-electronics channel is going to end up being an interesting launching pad for a lot of these products."

Some companies are even trying to go one step further; they hope to cut the cable operators out of the loop by becoming content distributors themselves.

Caught in the Web
Not so long ago, the big buzz in digital home entertainment was around Internet appliances: low-cost devices that would let users send email and surf the Web on the television.

In-Stat/MDR analyst Brian O'Rourke was assigned to watch Internet appliance companies like WebTV back in the heady days of the dot-com boom. His area of coverage has shrunk steadily since then.

"The idea of strictly Internet access through your TV, that market seems to have collapsed," O'Rourke says. "People thought there would be these single-function devices, like WebTV and PVRs [personal video recorders]. But we seem to be moving into a more converged product."

Despite being bought by Microsoft, WebTV seems destined for the same inglorious death as many of its dot-com compatriots, according to O'Rourke and others. But WebTV's founder Steve Perlman made a comeback at the Consumer Electronics Show (CES) earlier this year when his new company, Moxi Digital, stepped out from behind the dummy corporation Rearden Steel Technologies.



SPLASH MAKER: Though it has since been acquired by digeo, Moxi Digital grabbed headlines at January’s Consumer Electronics Show with its design for a box including a PVR, DVD player, digital jukebox, satellite/cable receiver, and broadband modem.


Sitting alongside satellite broadcaster EchoStar, Perlman unveiled his vision for the set-top box of the future. The Moxi Media Center included a PVR, a DVD player, and a digital jukebox, as well as space for a satellite or cable receiver and a DSL or cable modem.

The trade press gave the Media Center its best-in-show-award, but Moxi has suffered some deflating blows since then. Perlman was bumped from his position as CEO, and the business press reported that Moxi had burnt through most of the $67 million it had raised in its first round of funding.

License to sell
Moxi recently announced plans to merge with digeo, an interactive TV company created by Microsoft co-founder Paul Allen. It is a move that will give Moxi a ready-made market for the software and reference designs it plans to sell to cable and satellite operators; Allen is also a major shareholder in Charter Communications, the fourth-largest cable company in the US.



“People don’t want a whole stack of boxes on their TV set. What the digital cable box does is it allows you to integrate it all into one box.”
Bob Van Orden,
Scientific-Atlanta


But regardless of the new alliance, there has never been a better time to do a licensing deal with cable companies, according to Eric Roza, vice president of product management at Moxi. "The cable operators are clearly feeling competitive pressures," Roza says. "They have more urgency now than they have ever had in the past."

Cable is struggling to keep pace with the rate of innovation in the satellite industry, which has been shipping boxes equipped with PVR functions for some time.

"I have seen numbers that say about 40 percent of [satellite broadcaster] Dish Network's new installs are PVR installs," says Bob Van Orden, vice president of strategy at Scientific-Atlanta, one of the two major set-top-box makers in the US. "Last year, Dish Network signed up about 1.2 million to 1.3 million subscribers. That is a big number. So cable is going to respond."

Van Orden says the cable industry is determined to catch up with its satellite rivals. Scientific-Atlanta plans to release a cable set-top box with built-in digital video recording in early summer. Scientific-Atlanta's main rival, Motorola Broadband, has a similar box in the works, which is being built for Charter Communications.

As these new cable boxes hit the market, stand-alone, single function boxes will die out, Van Orden asserts.

"A stand-alone box that is not connected to a network, like a cable network—we've proved there is not a viable market for those products," he says. "Look at WebTV. The founder made a lot of money, but as a consumer product it is really a flop. People don't want a whole stack of boxes on their TV set. What the digital cable box does is it allows you to integrate it all into one box."

Sonic blues
But some industry veterans say it is too early to predict the demise of the stand-alone digital-video recorder just yet.

Facing a daunting array of audio and video equipment with a large remote control in his hand, Anthony Wood says most people aren't ready to accept the idea of an all-in-one digital entertainment box. He is sitting in what he calls the "digital room" at SONICblue's Silicon Valley headquarters.

Wood knows how hard it can be to make a profit as a small company, even at the beginning of what looks like a promising trend. ReplayTV, the company he started, was a pioneer of digital video recording, but it was in financial trouble when SONICblue bought it last year.

"We are not rushing to build convergence products," says Wood, now a senior vice president at SONICblue. "I don't think that is what consumers are looking for. Most people want products that do specific things. They want a product to play music or watch TV." To some extent, Wood is ignoring his own advice. A ReplayTV with a built-in DVD/CD player is already in development, he says.

SONICblue has had modest success selling its ReplayTV boxes through the standard retail channels, but it has failed to break through to the mass market.



WHAT’S ONLINE? SONICblue’s ReplayTV 4000 features an Ethernet link to a home network and the Internet, which enables it to send shows to other ReplayTV units at home or abroad.

"It is tough, as all the PVR manufacturers out there will tell you, to put a box in a consumer-electronics store and sell a lot of them, Internet-enabled or not," says Mike Paxton, an analyst at In-Stat/MDR. "They are on the outside trying to get in. You really need another distribution channel, and that is through the [cable and satellite] service providers. You can come up with all the bells and whistles, but it is more of a curiosity than a valid product in my mind."

Other analysts say having access to the content-distribution channels, which cable and satellite operators now control, is just as important as having them distribute the box itself.

Wood and his team came up with a scheme to go around the cable operators and provide content directly to the consumer after looking at some market research.

"Our number one, most requested feature for the [latest ReplayTV unit] was broadband connectivity," Wood says.

Equipped with a broadband connection, the ReplayTV 4000 series can record a program off the air and email it to as many as 15 other ReplayTV boxes at a time. It takes about 8 hours to email a half-hour show on the lowest quality setting, but it is "still faster than mailing a video tape," Wood says.

The broadband connection is also the key to a new strategy Wood calls iChannels. The idea is to allow ReplayTV users to order shows over the Internet, circumventing the cable and satellite networks. TV production houses could charge viewers directly for their shows, instead of having to go through the standard content distributors. SONICblue would take a cut of any fees.

Support for MPEG-4 could potentially make features such as "send show" and iChannels easier to deliver, but the current Replay product uses MPEG-2. SONICblue is evaluating MPEG-4, but at this stage the hardware and royalty costs are too high, Wood says. "We're very interested in MPEG-4 and low-bit-rate codecs in general," he says. "The big issue is cost. It takes a lot of processing power...and the hardware required to decode MPEG-4 is pretty expensive. That's the big issue, as well as the onerous licensing terms."

No matter how the company delivers them, features like "send show" and iChannels have angered the TV networks. A powerful conglomerate of entertainment companies filed a lawsuit against SONICblue over the ReplayTV 4000 series last year.

Others like Vialta have side-stepped the cable networks by utilizing a much more old-fashioned content distribution system: the US postal service.

Vialta is a subsidiary of ESS that makes a DVD player with some extras. The ViDVD player is also an MP3 player, a karaoke machine, a digital photo viewer, and a Web browser for the TV.

Mail-order movies
Artisan Home Entertainment has agreed to license its movies and programs to Vialta. Vialta plans to package Artisan's content onto DVDs and send it to subscribers though the mail every month. Some of the movies and programs will be free. Users will have to pay to access others.

"This will grow into a new alternative for distribution," says Ken Tenaglia, Vialta's director of marketing. "It is another way for the consumer to get media and another way for the content provider to distribute their media to the public."

People are used to the idea of watching a DVD, Tenaglia says, and they don't want to download TV shows from the Web.

"Most people are used to taking a disc, throwing it in the [player] and pressing play," he says. "When you are talking about delivering to the home over the Internet, you have to ask how many people are connected with broadband? And how long is the download time? Right now, the majority of households in the US don't have broadband. They don't want to change their usage habits."

New technology is often confusing for consumers. That fact has probably been the biggest obstacles to ReplayTV reaching the mass market, Wood says.

"The biggest issue in adoption is people not understanding what a product does," he says. "When you add features, it becomes even more complicated and people are even less likely to buy it."

Vialta is aiming its product, which costs about $280 to $300, at the mass market. The electronics chain Micro Center carries the ViDVD in its stores, and Vialta is in talks with other retailers to stock it.

Outside the box business
Like other companies in this space, ZapMedia has found it difficult to survive selling its own branded boxes.

ZapMedia conceived of its ZapStation at the dawn of the Napster age of digital file sharing. It could play and rip CDs, play DVDs, and download audio and video from the Web. An Intel Celeron processor provided the brains, while a DSL, cable, or T1 connection linked the box to the outside world.

But at a price of around $1300, the ZapStation was well beyond the means of the average consumer. ZapMedia tried to sell the box from its Web site, but its main sales channel was an association of home-theater installers, who built entertainment systems for rich clients.

ZapMedia also inked a deal to co-produce a box with audio-electronics manufacturer Harman/Kardon, but Chris Solomon, ZapMedia's vice president of business development, says the companies later made a "mutual decision" not to make the box because it didn't make "economic sense."



“It won’t be a case of one box for all. There will be parts of the market that aren’t ready for certain features.”
Bernadette Vernon,
Motorola


After "significant" layoffs among its small staff, which peaked at 130 employees last year, ZapMedia is quitting manufacturing and selling the ZapStation. It is selling off its inventory at the cut price of $599 per box, and will stop sales entirely after June.

Instead, ZapMedia will focus entirely on licensing its technology, Solomon says. However, no deals had been announced as of press time.

"For a lot of consumer-electronics companies like Sony or Panasonic, this is new," Solomon says. "They are not used to selling a PC-like device. It needs to act like a CD or DVD player. You turn it on and it has to work quickly and not crash. It is definitely a challenge to make a PC as stable as a CD player. My computer crashed this morning. If you are sitting in the living room listening to music, you can't have that happen."

One for all?
Even as cable operators are adding new features to their set-top boxes to compete with satellite broadcasters, demand for plain-vanilla cable TV remains strong, says Bernadette Vernon, director of strategic marketing for digital consumer gateways in Motorola's Broadband Communications Sector.

"It won't be a case of one box for all," she says. "There will be parts of the market that aren't ready for certain features. As more and more of these advanced services come out, some people will really want a PVR and others won't find it that interesting. Others will want HDTV and will be willing to pay."

That means cable operators will have to stock an arsenal of different boxes, each targeted at a different sector of the market, Vernon says. Obviously that would mean more money for companies like hers.

Some consumers may choose to stick with stand-alone products like ReplayTV, which cost more but in the future could include features like CD and DVD players that many cable companies are unwilling to build into their boxes. Cable companies are so focused on keeping the price of their set-top boxes low, they can't justify adding those features—especially when they distract consumers from the TV shows cable companies use to sell their service.

But even with added features like these, stand-alone boxes won't be able to compete with the new products cable companies are rolling out, says Jay Srivatsa, an analyst at iSuppli. The only viable long-term business model for them is to license their software to cable operators, he argues.

"That will probably be the only way for these guys to survive in the long-term," Srivatsa says. "Once set-top-box OEMs start putting hard-drives in their products, standalone PVRs are going to disappear. These small technology companies will have a hard time establishing themselves as large-scale OEMs, because there is no money in hardware. They should let OEMs work on enabling a low-cost box. As a team they could create a better box for the service providers and consumer as well."

Either way
ReplayTV's main rival in the selling of standalone PVRs, TiVo, is sanguine about the future of the market. The company has already licensed its PVR technology to satellite broadcaster DirecTV and consumer-electronics giant Sony, and is trying to woo cable operators as well.

"The road to mass adoption is probably through integration with cable and satellite receivers," says Ted Malone, TiVo's director of product and service marketing. "When you see digital video recorders show up in cable, it is likely that some of these boxes will have TiVo [technology] in them."

At the same time, Malone questions whether consumers want to deal with the complexity of an all-in-one digital entertainment box when they would probably be better off with a PC.

"We have been selling a digital video recorder for three years in the marketplace, and one thing I will tell you is that it is not lack of features that is keeping this product from being accepted," he says. "If anything, the technology is still a little intimidating to them. The road that Moxi has gone down, adding a lot of features in the box, is a non-starter....It's confusing to the customer, and only a small number of people are going to want all that functionality in a single product."

Regardless of which approach wins in the marketplace, it is a win-win situation for TiVo, Malone asserts. It is just a matter of whether most of the money comes from licensing fees or subscription fees, he says.

Even if licensing deals become the major money-maker for companies like TiVO and SONICblue, the stand-alone boxes will be the main platform for innovation, Malone says. Winning features from the stand-alone boxes can then be licensed back to the cable and satellite operators.

To a large extent, cable companies are still in control of the set-top box market, including how this new breed of all-in-one entertainment hub will evolve. But with satellite broadcasters snapping at their heels, cable companies are being forced to think outside the box. Perhaps they will even learn that in this convergence era, with the old barriers breaking down, no industry can truly stand alone.



Author information

Contributing Editor Steven Fyffe ([e-mail]) switched back to old-fashioned cable because the digital set-top box took too long to change channels.

I want my MTV
Along with all the startups, established PC companies are trying to license their software to cable companies. Microsoft is one of them. But licensing software to cable operators is not the same as licensing it to PC users.

"It is a pretty complex industry, coming from the PC side," says Ed Graczyk, director of marketing for Microsoft TV. "The TV space is much more difficult. It is more than just coming out with that great product that you can sell at retail. Your customers really are the cable industry."

While the bar is higher, the rewards of a single sale can be very high as well, Graczyk says. "There is certainly a big opportunity," he says. "It's much more difficult convincing Charter Communications that your hardware and software service is the better than someone else's. But if you do, you automatically reach 7 million subscribers."

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