Six months after Microsoft launched the mainstream PC business into the digital home with its Windows Media Center XP operating system, the digital home dream is proving to be a hit and miss affair for the IT channel.
Hardware partners including HP, Acer, Toshiba and Optima had been conservative in their sales predictions for the Media Center, which was hobbled by the lack of a local electronic program guide (EPG) to allow users to control TV watching and recording.
Local manufacturer Optima says the Windows Media Center PC (MCPC) represents less than 5 percent of its sales.
Selling a full-featured Media Center PC at around the $3000 mark was 'very difficult' in a market where the PC price point is $1500 or less, says Optima Chairman Cornel Ung. While Optima was having more success selling PCs bundled with Media Center software, even these accounted for just 15 to 20 percent of sales.
While claiming that sales of HP's Media Center PC had been 'absolutely in line with our expectation', HP's Image and Printing vice-president Rebekah O'Flaherty says the market is still developing.
'We've been focused on trying to help consumers put the pieces together to deliver a great experience. That's why we offered installation with our MCPC and why our retailers offer value added services to consumers to help them move from the analogue world to the digital world.'
The challenge facing Media Centre PCs was to make them more user friendly, says Ung. 'If you want to record something, today you'd prefer to use a VCR or DVD recorder.'
Despite a slow start for the multimedia PC, consumer spending on lifestyle technology has continued to be strong in other market segments.
According to new figures quoted in the Canon Digital Lifestyle Index (CDLI), consumer spending on digital lifestyle products including cameras and audio players was worth more than $1 billion in the second half of 2004.
The CDLI report, compiled by analyst firm GfK Marketing Services, suggests the spending sweet spot continues to be standalone devices rather than a central digital home hub such as a Media Centre PC, an observation echoed by vendors including Samsung.
'The most dramatic new product in the past six months has been the growth in digital portable entertainment devices - MP3 players and the like,' says Samsung's sales director for IT and AV products, Norman Krieke.
Coupled with the continued low penetration of broadband (Australia had just passed the one million connections mark in June of last year, according to the ACCC), the Australian market has not evolved to use a multimedia PC as its home entertainment hub, as some PC manufacturers had hoped and predicted.
In fact, in 2005 the sales of Media Centre PCs would be less than those of high end gaming PCs, according to IDC analyst Mike Sager.
'In Australia, the digital home dream hasn't delivered,' says Ian McLean, Netgear vice-president for Asia Pacific. 'We have no electronic program guide, so [the mechanism] to get from the PC to the TV screen is not really there. Six to 12 months ago we thought that this would happen quickly.
'From the amount of wireless and broadband kit being sold, there's no doubt that networking is happening, but we've got that split between the computer and television.'
Another figure in vendor land who is keen to hose down the hype and focus on the realities of the Australian market is Samsung's Krieke.
'The hype may have been too great in the early stages. The product was definitely available but the channel has not followed through. Various vendors got behind promoting the concept, while Tech Pacific as a major distributor put a lot of effort in demonstrating various digital home scenarios at their Tech Expo road shows,' Krieke says.
'However, the IT channel resellers really didn't take this on board as a concept to run with and promote. The most successful channel for convergence seems to be the high end or pro AV resellers.
'Samsung has enjoyed significant growth in large screen business, but this has been largely through the consumer electronics retail channel.'
The market reality is that Australia is lagging in adoption of key digital home technologies compared to countries like Korea, Krieke says.
'Korea has been one of the benchmark countries for digital home technologies stimulated by broadband adoption - the highest rate in the world. This has led to downloading of a lot of content that gets used in the home environment for entertainment and information purposes. It is fast and relatively inexpensive.'
Krieke acknowledges Australia's poor penetration level of broadband and its relatively high cost. 'This limits usage and the development of localised applications. Until broadband gets at least 50 percent penetration in major metropolitan areas, we will lag behind other major global markets.'
But this does not mean that the digital home is not developing at all. So far, at least, the television is winning against the PC as the delivery mechanism for digital content.
Television and video-on-demand - two key features that multimedia PCs will not be able to deliver without an onscreen EPG - are both starting to be offered through pay television operators, with ISPs also looking to follow suit.
While ISPs might aspire to provide multimedia content through the PC, content providers such as pay television operators were stepping into the breach, says McLean. 'Our friends at Foxtel will probably drive an even greater wedge in the market.'
While pay-per-view television has been offered for transmissions such as large international sporting events for several years, it is now starting to be made more widely available, and in direct competition to video stores, through Foxtel's iQ and Canberra-based telco TransACT.
In February this year, Foxtel released its version of a personal video recorder (PVR) called the iQ. It is designed to operate with Foxtel's digital television service, offering an onscreen EPG and the ability to pause, record and play back live Foxtel digital transmissions. The iQ unit also has storage space for around 60 hours worth of shows.
Using a rental model, Foxtel charges a one-off $295 access fee for subscribers to receive the iQ box, along with a $5.95 monthly subscription, which is waived for platinum package subscribers or those who subscribe for two or more set-top boxes.
There is also a $100 installation fee, but Foxtel says future upgrades and maintenance of the iQ box will be free.
Foxtel is also drawing on its stable of movie content to offer its Foxtel Box Office service to its subscribers. The pay-per-view service can be purchased using the iQ's remote control. The 'near video-on-demand' service offers content such as blockbuster movies starting as frequently as every half hour.
One ISP beginning to make inroads into the video-on-demand market is TransACT. In January, TransACT began offering video-on-demand to its customers via a set-top box that accesses its fibre-optic cable.
Through a deal with Singapore-based content aggregator Anytime, TransACT claims to have access to 20,000 movies from major Hollywood studios Fox, Universal, Sony Pictures and Warner Brothers.
Unlike Foxtel's Box Office, TransACT customers can stop, rewind and fast-forward movies.
Although TransACT's coverage only extends to the Canberra region, national carriers Telstra and Optus are also preparing video-on-demand offerings.
While broadcasters and ISPs jockey for position as the content providers of video-on-demand and other multimedia services to the home, IT resellers and retailers continue to tussle for the lucrative market in standalone digital devices.
The latest figures from the CDLI show that in the second half of 2004, Australians spent $1.1 billion on digital lifestyle products.
Digital cameras and audio devices were the number one and two sellers of the 10 device types monitored by the index.
Sales of digital cameras broke the half-million mark in the fourth quarter 2004 - just under 520,000 sales were recorded, for a total sales value of $222 million.
This coincided with the average price of digital cameras falling 19.2 percent ($101.33) compared to the same quarter a year earlier.
Digital audio devices were the second largest category, with Q4, 2004 spending of $99 million for 297,315 devices.
Interestingly, the CDLI showed two formerly popular categories begin to falter in the latter half of 2004. Gaming console sales fell compared to the previous year's Christmas period. Also down were digital camcorder sales.
For digital camcorders, with fourth quarter 2004 sales of 61,048, down from 72,000 sales in the final quarter of 2003, the report tipped that sales in this category may have peaked.
Games console sales of 340,000 units in Q4 were way below the 416,000 units recorded in the same quarter during 2003.
'Games consoles are a highly seasonal product, and the comparatively poor performance over the Christmas quarter this year will dismay manufacturers,' says GfK analyst Angus Macaskill.
'The current generation of games consoles is probably near saturation point, and sales will only recover when next generation models are released late next year.'
The growth in the portable audio category was also noted by research firm IDC, which predicts that 1.3 million MP3 players will ship by the end of the year, reaching almost 2.4 million units by 2009.
'The market for portable MP3 players started to experience phenomenal growth during the second half of 2004, achieving 126 percent and 135 percent growth in shipments units in the third and fourth quarter of 2004 respectively,' says research director Landry Fevre.
'Average selling prices for portable flash players will increase by 6.8 percent in 2005 because of the influence of the higher-end brands, such as Apple, Sony and Samsung pulling their weight and intensifying their marketing and promotion activities.
'However, cost per megabyte of flash memory is experiencing a downward trend and there will be fierce competition within the portable flash segment, with some brands offering portable flash players below $50.
'Declining average selling prices for portable flash players is unavoidable and they will start and continue to drop from 2006 onwards,' adds Fevre.
Capitalising on the popularity of digital audio players, Optima's CE division will bring new products to the market in June, according to Ung. Hitting the $99 price point had helped Optima sell more than 10,000 units in the December 2004 quarter, Ung says.
Optima's new range of audio products will include flash memory-based players and hard disk-based players with up to 40G storage.
As consumers buy MP3 players and grow their collections of digital music, content management could open up another opportunity for resellers, says Ung. 'It could be external, for music or videos,' he says. 'DMA technology will be really attractive.'
Krieke is another who sees the MP3 player boom developing the digital home market more broadly. 'The iPod of course has been an enormous success for Apple, but it has also stimulated market growth and interest in these types of devices.
'What we will see will be less music-centric portable devices, although these will remain strong, but there will be the emergence of more and more devices which store images, video clips and text which is downloadable from the home PC,' Krieke says.
Changing channels
In 2004, the IT industry, spearheaded by manufacturers such as Intel and Microsoft, promoted the digital home to consumers while also making advances towards traditional 'smart house' custom installers such as the CEDIA (Custom Electronics Design and Installation Association) membership base.
However, the convergence of the IT and AV channels is something that has only seen incremental success.
Tech Pacific, perhaps the leading driver of the digital home concept at the distribution level, may get its message to more resellers through its merger with Ingram Micro.
The new Ingram had largely preserved the existing management structure and commitment to the digital home market, according to Netgear's Ian McLean, who says the merger had not greatly affected its reseller base, as it was already a touching many Ingram customers through its relationship with rival distributor Synnex.
Samsung was one manufacturer that took the convergence bull by the horns last year, combining its IT and AV business under one business unit, headed up by sales general manager Krieke.
He says the vendor has had 'a selected few' of its IT distributors take on its AV product range, bringing new resellers and AV specialist stores into the fold.
'At the same time some of our AV retailers have started to take on board some of our IT products, for example multimedia notebooks, as a means of consolidating their vendor line-up and provide a one-brand solution to their customers.
'New resellers are coming on board, particularly based on our notebook line-up. As our product categories increase in the coming 12 months, we expect our reseller base to potentially double on what we had at the start of this year,' Krieke says.
One of the few IT companies to attend the CEDIA Expo last year, Netgear has had some success entering the audio retail market with the signing of JB HiFi. 'We're attending the CEDIA Expo again this year,' says McLean. 'With a lot of the programs and strategies you have to think longer term.'
Another vendor who had seen some success through the CEDIA Expo was Danish company KiSS, distributed in Australia by Melbourne-based QualiFi. 'The CEDIA Expo worked out really well for us. We targeted Harvey Norman Electrical stores for KiSS, and we're now in 40 or 50 of their stores,' says QualiFi's Joe Salamanca, general manager, KiSS, Force & PJ.
With the digital home boom currently centred on devices such as digital cameras and MP3 players, IT resellers must look beyond directly competing with the purchasing power of the large retail chains in order to find a niche in the digital home market.
Computer resellers remain reluctant to embrace the opportunities presented by the digital home concept, Krieke says.
'There is still too great a focus on assembling and selling a box at the lowest cost level rather than value adding and selling the concept of the PC being the hub for home and portable entertainment.'
Resellers should be looking at market trends and trying to capitalise on them, he adds. 'For example, promote ground-breaking concepts such as images and video on the go and how simple these are to download and use when bundled with the PC that delivers the solution.'
The large retailers are devoting their floor space to promoting the concept of the digital home, and while they do this and demonstrate the concept, they will dominate this segment.'
This sentiment is echoed by Robert Wilkinson, Toshiba retail business manager, A/NZ, who points to opportunities to provide value-added service and consultation. 'We feel some resellers are nervous about the digital home - there has been lots of hype about the concept and resellers are holding back to see where the opportunity is.'
Higher margin products and the service revenue potential made it worth investigating, he says.
Wilkinson believes taking on the role of consultant and tailoring offerings to a particular purchaser's wants and current technology set-up (as opposed to off-the-shelf products as found in retailers), installation and 'try and buy' packages, could open up a niche for resellers.
'This maturity may not be far away. Currently smaller retailers and third party services organisations are testing this space with installation services for consumers,' he says.
With vendors highlighting the need for in-store experience to sell consumers on the possibilities of digital convergence, sales strategies such as Toshiba's kiosks in retailers such as David Jones, and HP's Home of the Future at Sydney's King Street Wharf, resellers also need to get in on the act, says Wilkinson. 'Touch and feel' is very important to consumers who are curious about what is available, he says.
Resellers would also need to invest in staff training, in-store demonstration models and the development of new service offerings to capitalise on the opportunity, he adds.
While retailers like Harvey Norman are catching up, IT resellers who have traditionally provided connectivity and networking solutions still have an opportunity to turn their hands to selling the latest video and audio technology for the home, says Optima's Ung.
'If technology developers like Cisco are able to provide good products and training, I think resellers can make inroads in future business.'
Products with potential
As with the ongoing boom in digital cameras and MP3 players, resellers can also look forward to some emerging technologies to provide other digital home opportunities this year.
Manufacturers including Samsung and Optima predict that displays will continue to be a hot technology this year. Optima launched a 42-inch standard definition plasma screen in December, and sold the whole first shipment of 800 units within a month, says Ung. The manufacturer also expects to start selling LCD TV products in June.
High definition (HD) plasma screens would rise over the next six months, according to Krieke. 'The market is moving away from standard definition screens to take advantage of HD broadcasts and digital images,' he says.
TFT-LCD monitors were still hot, he says. The faster refresh times - as low as four milliseconds - would make them ideal for moving images and gaming, Krieke says.
One manufacturer hoping to take advantage of the emerging market in pay-per-view television is KiSS, which has a relationship with major Danish television station TV2 to supply set-top boxes.
KiSS' DP-558 hard disk recorder provides an easy-to-use interface for using online electronic program guides, such as that provided by yourtv.com.au, Salamanca claims. 'It can be programmed to record from the user's PC or mobile phone.'
Low broadband take-up has held back the market for online multimedia services and entertainment in Australia, but the price drops of last year, combined with the rise of the faster ADSL2/2+ standard, are set to improve this situation in 2005.
With a small number of ISPs, including national carrier iinet, already offering the higher speed ADSL through their own DSLAMs, Netgear's Jeff Fulton says broadband uptake will be boosted by the ratification of the ADSL2/2+ standard, which is expected mid year. 'There are many ISPs ready to offer it at that time.' Many networking manufacturers including Netgear are already selling ADLS2/2+ compatible products, he says.
'ADSL2+ is the one people will care about because the data rate is effectively doubled,' he says, while the potential end-user market will also grow as the range of ADSL2/2+ is greater.
Based on Netgear's discussion with its ISP customers - many of whom are rolling out their own DSLAMs to compete with Telstra - Fulton predicts the number of homes with DSL ports will double this year. 'There are something like one million DSLAM points already with another million to go this year,' he says.
While the sales of digital cameras and MP3 players have highlighted that the Australian consumer has a taste for the digital life, manufacturers and the channel continue to work together to fill in the missing pieces of the digital home puzzle.
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