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TECHNOLOGY

Trends in Disruptive Consumer Technologies Emerging innovation and the key drivers of change By Gary Eastwood


Gary Eastwood Gary Eastwood is an experienced writer and editor on business and IT issues, contributing to many of the leading IT publications and magazines. As well as holding senior editorial positions on a number of IT trade publications, he has worked with companies such as the UK Department of Trade & Industry, the Confederation of British Industry, Microsoft, IBM, CSC, Oracle and Intel on a variety of projects.

Copyright Š 2010 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Reuters. Reuters accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon.

While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy.

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Table of Contents Disruptive Technology in Consumer Electronics

Executive summary

8

Anticipating disruption

8

Disruptive trends

9

Enablers of disruption

10

Technology areas facing disruption

11

Chapter 1

Introduction and scope of report

14

Introduction

14

Who is this report for?

15

Chapter 2

Anticipating disruption

18

Summary

18

Introduction What is a disruptive technology? Examples of disruptive technologies

19 19 19

Defining disruptive patterns The evolution of a disruptive technology Characteristics of a disruptive technology

21 22 23

Drivers and inhibitors of disruption Intrinsic and extrinsic factors

26 28

Assessing the ‘tipping point’ for disruption Shifting consumer behavior and media consumption patterns Attitudes to work-life balance Growing impact of the Internet Embracing technology and connectivity Changing media consumption habits The ‘mobile lifestyle’ Cost of technology Technology performance

30 32 32 34 35 37 38 39 40

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Enablers of disruption

41

Conclusions

43

Chapter 3

Disruptive trends

46

Summary

46

Introduction

47

Disruptive trends Consumption patterns: Time and location-shifting Trend towards customization Trend towards mobility and mobile technology Trend towards social networking Growth of social networks Types of social networking sites Trend towards cloud computing Technology business models The concept of ‘good enough’ Best-in-class technology

47 47 49 53 55 56 60 60 63 63 65

Conclusions

67

Chapter 4

Enablers of disruption

70

Summary

70

Introduction

71

Enablers of disruption Content delivery models New ‘broadcasting’ models Mobile TV Commoditization of older technologies Broadband access and data transfer speeds

72 72 76 77 78 80

Conclusions

84

Chapter 5

Technology areas facing disruption

86

Summary

86

Introduction

87

Home entertainment Digital video recorders Internet radio and music streaming

88 88 91 iv


Internet TV Three-dimensional (3D) TV and Internet 3DTV 3D Internet

94 96 96 99

Portable technology Netbooks / mobile internet Mobile applications Mobile gaming Flash storage

101 101 103 105 107

Ethical technologies ‘Green gadgets’

109 109

Natural user interfaces Gaming Multi-touch screens

113 113 115

Index

119

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List of Figures Figure 2.1: Figure 2.2: Figure 2.3: Figure 2.4: Figure 2.5: Figure 2.6: Figure 2.7: Figure 2.8: Figure 2.9: Figure 3.10: Figure 3.11: Figure 3.12: Figure 3.13: Figure 3.14: Figure 4.15: Figure 4.16: Figure 4.17: Figure 5.18: Figure 5.19: Figure 5.20: Figure 5.21: Figure 5.22:

The evolution of a disruptive technology 23 Characteristics of an early-stage disruptive technology 24 Simple checklist for assessing potentially disruptive technology 25 Examples of drivers and inhibitors of disruption 27 Interaction of intrinsic and extrinsic factors for disruption 29 Assessing the ‘tipping point’ for disruption in consumer technology 30 Average time spent working and on the Internet per person, per day (by country, 2012) 33 Connective technology drivers and inhibitors 36 Average time spent consuming media per day, hours (by country, 2002-2012) 38 Apple App Store downloads by category 51 Global mobile subscribers and penetration (bn, %), 2004-2008 54 Global iPod sales and units sold, 2006-2008 55 Global social networking revenue ($m), 2006-2012 57 Global social networking memberships, 2006-2012 59 Examples of disruption enablers 72 Six steps of commoditization 79 Average Internet connection speed by country, 2009 83 DVR household growth by region (m), 2007-2013 89 Global IPTV subscribers, 2009-2013 (m) 95 Global 3DTV market size, 2010-2015 ($bn) 97 Global netbook market size, 2008-2012 (millions of units shipped) 102 Global mobile gaming market size ($bn), 2003-2013 105

List of Tables Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 3.6: Table 3.7: Table 3.8: Table 4.9: Table 4.10: Table 4.11: Table 4.12: Table 5.13:

Examples of disruptive technologies Intrinsic and extrinsic factors for disruptive technologies Average time spent working and on the Internet per day (2012) Internet users and total % of population, by continent, 2008 Average time spent consuming media per day, hours (by country, 2002-2012) Global mobile subscribers and penetration (bn, %), 2004-2008 Global social networking revenue ($m), 2006-2012 Global social networking memberships, 2006-2012 Internet speeds available in Europe, 2009 Internet speeds available in the Americas, 2009 Internet speeds available in the Middle East, 2009 Internet speeds available in Asia Pacific, 2009 DVR household growth by region (m), 2007-2013

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20 28 34 35 37 54 57 59 80 81 81 82 88


Executive summary

7


Executive summary Anticipating disruption ‰

A disruptive technology creates or improves a product or service in a way that the market has not forecast or expected, either by improving performance, convenience, or ease of use of an existing product or service at a lower cost, or by serving an unmet customer need (or serving an existing need in a new and improved way).

‰

Initially, disruptive technologies are often perceived as having ‘low value’, and so start out serving niche – but new – markets.

‰

Four factors – technological performance, consumer behavior and lifestyle trends, price, and the presence of technology enablers – can be used to assess the likelihood of disruption in consumer technologies.

‰

The accessibility and convenience of contemporary connective technology is highly appealing for time-poor, gadget conscious global citizens.

‰

Computers and the Internet have become more influential in managing the roles and tasks that consumers perform on a day-to-day basis.

‰

Driven by increasing amounts of leisure time, and digital content and services that can be accessed almost anywhere, anytime, the consumption of all types of media continues to grow.

‰

Consumers are gravitating towards more convenient, connective technology – the multitude of features available on mobile phones therefore means that they are now a mainstay of contemporary culture.

‰

The time that consumers spend consuming all types of media continues to grow, with individuals in Japan, the Netherlands, France and Sweden spending the most time consuming media, at just over four hours per person per day.

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Disruptive trends ‰

In recent years, there has been a steady evolution in the way that we as a society consume media – the locations, the times and the ways in which we use technology to communicate and enjoy leisure time.

‰

The steady evolution of technology has meant that the concept of time-shifting – which allows consumers to consume media at a time convenient to them – has grown in its scope and impact.

‰

Portable devices and home entertainment ‘media hubs’, have increasingly enabled consumers to consume and enjoy media wherever there is an Internet or network connection – this has enabled ‘location-shifting’ or ‘placeshifting’.

‰

The concept of customization is fast becoming a business model differentiator and providing competitive advantage for suppliers and service providers alike, as increasingly sophisticated consumers demand customization capabilities.

‰

The success of the Apple iPhone mirrors the evolution of the iPod and iTunes service, whereby the iPhone can be customized to suit consumers’ needs and preferences.

‰

Services such as TiVo allow consumers to ‘customize’ their television viewing habits.

‰

The number of global mobile subscribers hit a penetration level of 61% in 2008 while fixed line penetration level has almost stagnated at around 19%, less than a third of the mobile penetration levels.

‰

The Apple iPod accounted for a 71% share of the MP3 player market in Q1 2008.

‰

Since 2004, social networking sites have proliferated to an extraordinary degree. Barriers to entry are virtually non-existent, and the rewards are potentially immense.

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‰

Although still in its infancy, the cloud will become increasingly popular as a way for consumers to access content whenever and whenever they want.

Enablers of disruption ‰

Enablers of disruption provide the platform on which disruption can occur.

‰

New technologies and changes in consumer behavior – such as mobility, connectivity, social networking, and so on – are driving an evolution in delivery and ownership models for digital content.

‰

Digital rights management (DRM) has, to date, acted as the single most significant barrier to the growth of the digital download market.

‰

In the future, faster Internet connections (usually in excess of 24 MBits) will allow full TV programs and feature films to commonly be streamed, on demand, not only to people’s computers but directly to their TVs.

‰

Research suggests that at least 45m US consumers are willing to view adverts if they are able to access free music. Younger consumers are the most likely to want to use such services.

‰

Like Spotify in the music industry, the free TV and film streaming service Hulu is shaking up the TV broadcasting industry.

‰

Commoditization and disruption can be viewed as two sides of the same coin; once a technology has been commoditized, it is vulnerable to disruption.

‰

Connectivity will be one of the most important factors that drives the evolution and success of new and disruptive technologies in future.

‰

The majority of Internet users in Western Europe have a connection speed of at least 2mb/s. Japan, South Korea and Hong Kong have the highest proportion of users with Internet access speeds of 5mb/s, although it is still only half of the population of each country that has such high-speed access. 10


‰

Only 5% of consumers in India and China have Internet access speeds of 2mb/s or above.

‰

South Korean consumers enjoy the fastest average speed for Internet access out of any of the countries featured.

Technology areas facing disruption ‰

The concept of DVRs and DVR services is already disrupting traditional media content delivery and broadcast models, and the pace of this disruption is likely to accelerate in the near future.

‰

It is estimated that around one in seven US consumers over the age of 12 listen to an Internet radio station every week; that is more listeners than podcasts, mobilebased radio and ‘HD’ radio combined.

‰

There is also a growing number of more innovative services, from websites such as Last.fm, Spotify and Pandora. These services differ from ‘broadcast’ (or webcast) Internet radio, in that the consumer essentially chooses the playlist.

‰

A new breed of online music streaming services combine a number of trends and capabilities that serve the needs of customers, including customization, personalization, time-shifting (from broadcast schedules), connectivity, mobility, social networking, and so on, and are only expected to grow in popularity in future.

‰

Internet TV on demand continues to evolve rapidly, with the lines between Internet TV and DVR services rapidly blurring.

‰

Apple is rumored to be looking for support for a monthly subscription fee service that allows iTunes users to watch and download TV programs and films at a much lower cost than that for subscription TV or video on demand.

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‰

The potential end prize (the upgrade of millions of TV sets) means that TV manufacturers are not likely to halt their pursuit of 3D television in the foreseeable future.

‰

The opportunity for 3D websites and online virtual collaboration spaces are significant, and it is only a matter of time before the Internet experience provides a much more faithful representation of the real world.

‰

For Q2 2009 (ended March 2009), iPhone shipments reached 3.8m, an increase of 123% over the same the same period in the previous year, while iPhone 3G, which was launched in July 2008, sold more than 6.9m units in the first quarter after its launch.

‰

The runaway success of Apple’s App Store for the iPhone and iPod Touch personal media player has been one of the most notable developments in mobile digital content in 2009.

‰

The number of mobile phone subscribers increased from 3.3bn in 2007 to 4.1bn by the end of 2008, corresponding to a penetration level of 61% of the global population, meaning that current mobile application sales are just the tip of the potential iceberg.

‰

The market for mobile games grew at a CAGR of 56.4% over the period 2003-2008 and is expected to grow at a CAGR of 17.6% over the period 2008-2013 to $15.1bn.

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CHAPTER 1

Introduction and scope of report

13


Chapter 1

Introduction and scope of report

Introduction There are numerous examples throughout recent history of disruptive technologies appearing, apparently from nowhere, to displace existing technologies and the industries and vendors that grew up around them. In the consumer technology space, the phenomenal adoption of mobile phones springs quickly to mind, but equally innovations such as the desktop computer, video recorders, the iPod and iTunes, flatpanel TVs, digital/personal video recorders (DVRs/PVRs) and Internet TV have caused – and continue to cause – disruption in markets and shifted the balance of power in entire industries. A number of rapidly evolving trends, technological advances and consumer behaviors are changing the shape of consumer technology markets, and in turn combining to create new consumer technology product classes and markets. As a result, a number of traditional business models are under threat.

However, disruption is rarely a consequence of technology innovation alone, but rather a reflection of how existing industries detect and respond to them. Indeed, disruptive technologies often share similar characteristics and appear under similar market conditions – as a result they are, to a certain degree, predictable. This report aims to provide in-depth insight into the patterns and characteristics of potentially disruptive technologies and the cultural trends that are shaping consumer technology disruption, by analysing the factors that combine to create disruption. Armed with this knowledge businesses can turn disruption from a threat into an opportunity. Finally, the report applies this knowledge and asks the all-important question: Which consumer technologies are most vulnerable to disruption?

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Who is this report for? This report is aimed at manufacturers, designers, application and software developers and service providers in the consumer technology sector – and due to the nature of consumer technology it equally applies to broadcasters, media companies and content providers. While the report offers information on specific markets, it also outlines some over-arching technological and cultural trends that will impact the evolution of technology in general for the foreseeable future.

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16


CHAPTER 2

Anticipating disruption

17


Chapter 2

Anticipating disruption

Summary ‰

A disruptive technology creates or improves a product or service in a way that the market has not forecast or expected, either by improving performance, convenience, or ease of use of an existing product or service at a lower cost, or by serving an unmet customer need (or serving an existing need in a new and improved way).

‰

Initially, disruptive technologies are often perceived as having ‘low value’, and so start out serving niche – but new – markets.

‰

Four factors – technological performance, consumer behavior and lifestyle trends, price, and the presence of technology enablers – can be used to assess the likelihood of disruption in consumer technologies.

‰

The accessibility and convenience of contemporary connective technology is highly appealing for time-poor, gadget conscious global citizens.

‰

Computers and the Internet have become more influential in managing the roles and tasks that consumers perform on a day-to-day basis.

‰

Driven by increasing amounts of leisure time, and digital content and services that can be accessed almost anywhere, anytime, the consumption of all types of media continues to grow.

‰

Consumers are gravitating towards more convenient, connective technology – the multitude of features available on mobile phones therefore means that they are now a mainstay of contemporary culture.

‰

The time that consumers spend consuming all types of media continues to grow, with individuals in Japan, the Netherlands, France and Sweden spending the most time consuming media, at just over four hours per person per day.

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Introduction What is a disruptive technology? The term ‘disruptive technology’ – or ‘disruptive innovation’ – describes any new technology, innovation or platform that evolves to challenge and eventually replace an existing technology. This cycle of technological disruption has occurred time and again throughout modern history, whereby existing technology is made obsolete by a ‘new wave’ of disruptive technology. Indeed, technological disruption is by no means a new phenomenon – steam ships, the motor car, telephones, radio, television, and airplanes are all examples of disruptive technology.

More importantly, such disruptions not only displace technologies, they also fundamentally shift the balance of power in entire industries and can ring the death knell for established market leading vendors. For example, the growth of the mobile phone industry has significantly altered the shape of the global telecoms industry in recent years, changing business models, wiping out incumbent players, and creating a cascade of M&A activity. Meanwhile, the phenomenal success of Apple’s iTunes, launched in 2000, radically altered the shape of the music industry and reflected a fundamental shift in the way we consume all types of digital media and content. The iPhone and accompanying App Store then disrupted the mobile telecom market in the same manner as iTunes did to the music market.

Examples of disruptive technologies The table below offers a few examples of modern technologies and innovations that can be seen as disruptive. It is important to recognize that while these disruptions are obvious in hindsight, at the time of their introduction they were considered by established players and industry watchers to be of value to only a minority of customers, and unable to meet the performance levels of existing technologies.

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Table 2.1: Examples of disruptive technologies Technology

Timeline

Disruptive impact

Disk drives

1970s

The evolution of the disk drive industry acts as a ‘petri dish’ for observing disruptive technology, with established players usurped time and again by leaps forward in technology, performance and capacity since the 1970s. Of 17 firms leading the industry in the mid-1970s, 16 had failed or been acquired by 1995 (IBM is the sole survivor).

PCs

1980s

PCs and client-server model spelled the end of the existing mainframe and minicomputer model, creating new markets and a new industry.

Digital camera

1990s-present

The recent explosion of consumer and prosumer interest in digital cameras has almost replaced the photographic film industry and impacted the players that created it, notably Kodak.

Mobile phones

1990s-present The advent of the mobile phone has significantly reshaped the entire telecoms industry, and become an essential technology.

VoIP

2000-present

Initially, voice over IP was limited to a minority of users and had quality issues – the classic hallmarks of a disruptive technology. However, its improved performance, and promise of free voice calls, now impacts telecoms’ revenues and has created a new generation of handsets.

iPod/iTunes

2001-present

The introduction of Apple’s iPod and iTunes laid down a new model for consuming music and, later, video.

iPhone

2007-present

The Apple iPhone changed consumer perceptions of what could be done with their mobile phones, changing the face of the mobile telecoms industry and spawning a new generation of smartphones. Business Insights Ltd

Source: Business Insights

Today, the evolution of consumer technology is being shaped by a fundamental shift in consumer behavior, as consumers use technology not only to consume media and content in new ways, but also to communicate and even manage their lifestyle and relationships. Near-ubiquitous broadband access, rich Internet services and applications, the move towards perpetual connectivity and mobility, and the massive growth of the social networking phenomenon are all shaping the way in which we not only interact with technology, but use it ourselves for interacting with friends, family,

20


colleagues and online communities. In turn, there is a demand for unique consumer technologies and platforms that can provide these capabilities in a simple, convenient, portable and ‘easy-to-use’ fashion.

So how does disruption happen? Is it an inevitable result of technological advancement? Can it be predicted?

Defining disruptive patterns Before assessing the potential for disruption among the main forms of consumer technologies, it is important to understand the disruptive patterns that can indicate potential disruption and, indeed, help us to forecast where disruption is the most likely to occur.

Disruptive technologies challenge established technologies in one of two ways: ‰

A disruptive technology significantly improves an existing product or service – measured in terms of performance, scalability, lower cost, greater convenience etc. – to the point where it surpasses the established, or existing, technology (in the eyes of the customer), or;

‰

A disruptive technology meets a customer need that was either previously unserved, or serves it in a previously unknown or different way.

A disruptive technology, therefore, creates or improves a product or service in a way that the market has not forecast or expected, either by improving performance/ convenience/ease of use of an existing product or service at a lower cost, or by serving an unmet customer need (or serving an existing need in a new and improved way). Regardless of the method by which they disrupt, disruptive technologies are particularly threatening to industry incumbents and market leaders, as they are unexpected and unpredictable. At least, that is the prevailing misconception.

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As put forward by Harvard business professor, Clayton M Christensen – who first introduced the concept of ‘disruptive technology’ to the masses in his ground-breaking 1997 book, The Innovator’s Dilemma – there is nothing disruptive per se about any new technology; rather disruption comes from the manner in which the industry leaders and players manage it (… or, more accurately, fail to manage it).

The evolution of a disruptive technology Christensen’s book outlines two types of technologies: ‰

‘Sustaining’ technologies, whereby iterative improvements in existing technology helps established companies to maintain their market-leading position;

‰

‘Disruptive’ technologies, which apparently come out of nowhere to replace ‘sustaining’ technologies by offering greater performance, new functionality or greater convenience, usually at a lower cost.

The figure below represents the evolution of a disruptive technology in terms of performance, compared to an established, or ‘sustaining’, technology. The top line represents established vendors which continue to invest in the sustaining technology that gained them market position in the first place, by steadily improving performance to meet customer demand, and increasing their own margins. At the same time, there is a constant process of innovation, in research departments, universities, startup companies, technology parks, and so on, as represented by the bottom line. The vast majority of these innovations are unlikely to become mainstream technologies or commercial successes, for a variety of reasons, and are largely of no concern to the established players.

However, disruptive technology emerges from this process of innovation and, because it appeals to a small or new market at first – as it offers something different, better or new to the established technology – it develops and evolves, perhaps creating a cluster of startup companies specializing in the technology, until performance levels match or exceed that of the established technology. At this point, a new wave of specialist

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companies have already developed the markets, technology and expertise around the new technology, leaving behind the established incumbents in this ‘new wave’ of technology.

Figure 2.1: The evolution of a disruptive technology

Performance

in High-marg

‘sustaining

’ technolog

s Di

y

e tiv p ru

og ol n ch te

y

vation Low-end inno

Time

Business Insights Ltd

Source: Business Insights

The scenario described above can be played out time and again, as we move right along the x-axis. In time, the initial disruptive technology will become the established technology, i.e. sustaining, and could itself be surpassed in future by the next disruptive wave of technology.

Characteristics of a disruptive technology This section defines a set of factors and patterns for predicting which disruptive technologies are likely to succeed, by assessing them against a set of characteristics. If 23


it is possible to define common characteristics, or indeed develop a way of assessing the likelihood of disruption, then it should be possible to begin to predict (and therefore manage) disruption.

The figure below outlines some common characteristics of early-stage disruptive technologies, which provides a simple tool for beginning to recognize potential disruption.

Figure 2.2: Characteristics of an early-stage disruptive technology Intrinsic characteristics

Extrinsic characteristics

• Performance does not match that of existing technology, at first

• Often perceived as a ‘low value’ innovation

• Offered at a lower cost than existing technology

• User application not always apparent

• Provides new or additional functionality

• Evolves ‘under the radar’ of market leaders

• Easier to use than existing technology

• Changes customer behavior

• More convenient than existing technology

• Serves a customer need to a small group of users, thus creating a new market • Tackles an old problem in a new way

Business Insights Ltd

Source: Business Insights

One of the most common characteristics of a disruptive technology is that it often starts out life as an immature, or low-end product or service, perceived as having little or no value to customers because it appeals only to a minority, has performance issues, is too costly, and lacks a proven application. As a result, previous disruptive technologies have often been ignored by established players – for example, it is suggested that Kodak once described digital photography as “a fad” – until it is too late. It is important therefore for market leaders not to ignore low-end innovation.

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Disruptive technologies rarely meet the performance parameters of existing, or sustaining, technologies when they are first introduced. Indeed, it can be the ‘pared down’ nature of them that initially appeals to a certain set of users. As the performance of the technology improves, it may evolve into a service or product that offers the same levels of performance as the high-end system, but is smaller, simpler, more intuitive, cheaper, and so on.

The figure below provides a simple checklist for an initial assessment of a new and potentially disruptive consumer technology.

Figure 2.3: Simple checklist for assessing potentially disruptive technology

Y

N

Does it help consumers to perform tasks faster or more easily? Does the technology offer new or additional functionality? Does it cost less than existing technologies on the market? Can the technology use existing media technology or does it require a high cost of switchover? Does the technology offer significantly improved performance (e.g. larger memory, better battery life, improved graphics, faster processing)? Does it provide better connectivity or portability? Is the form factor significantly improved (e.g. smaller and lighter, bigger screen size, more comfortable design, touch screen, and so on)?

Business Insights Ltd

Source: Business Insights

25


Drivers and inhibitors of disruption Of course, a successful disruptive technology has to provide at least one additional benefit to the existing technology – whether it offers an iterative performance improvement, the same performance in a smaller unit, or completely new functionality. However, such factors in themselves could, arguably, be seen as irrelevant – these benefits or additional capabilities must address a customer need in order for the disruptive technology to be successful. To put it simply, a new technology could be wonderful and amazing… but if it doesn’t address a customer need, it will not be a success.

For example, higher performance for the sake of it is useless if it does not provide any tangible customer benefit. Imagine a new type of extremely powerful microprocessor: If it grants no tangible benefit to the customer – for example, it is not backwardscompatible with existing or legacy devices and systems, or indeed offers power far in excess of practical customer needs – then the technology will not be a success. It is impressive in its own right, but it will not disrupt industries, rather it will find a niche market – indeed, it may in future become compatible with devices and systems, but that will take many generations of hardware advances and will hardly come as a ‘surprise’ disruption.

Regardless of the additional or new benefit that any potentially disruptive technology offers, serving a customer need – either in a more efficient or new way – is the largest single driver of a successful disruptive technology. For example, better (practical) performance, portability, greater ease of use, and lower cost are all factors that address a customer need. Conversely, if a customer is completely happy with the existing technology, which meets all of their performance, functionality, size and portability needs at the right price point, then why would they switch to any new – or different – technology?

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The figure below lists some of the main drivers and inhibitors of successful disruption.

Figure 2.4: Examples of drivers and inhibitors of disruption Drivers

Inhibitors

•Lower cost

•High cost

•Lower cost of switchover

•High cost of switchover

•Existing infrastructure or services

•Poor supporting services / infrastructure

•Backwards-compatibility

•Lack of backwards-compatibility

•Interoperability

•Lack of interoperability

•Improved user experience / form factor

•Inappropriate form factor

•Clear route to market / early adopter

•Lack of route to market

•User trust / knowledge

•User mistrust or lack of knowledge

•Convenience / ease of use

•Inconvenience / difficulty of use

•Technology performance •Additional functionality •Lifestyle trends •Improved connectivity

Business Insights Ltd

Source: Business Insights

As shown, there are various factors that will drive or inhibit the success of a new or disruptive technology. For example, backwards-compatibility and low cost of switchover is seen as important in consumer technology. Indeed, part of the success of iTunes and the iPod revolved around the fact that consumers could move their entire existing music collection onto their PCs and iPod, without having to replace what they had previously purchased. The caveat is that if the new technology really does offer a substantial leap in performance, capability or convenience, consumers may be compelled to purchase it, despite the high switchover costs – as demonstrated by the success of the iPhone.

As we will see later in this chapter and throughout the report, lifestyle trends and the availability of enabling technologies are equally significant when it comes to the adoption of new technology. Technologies that address trends such as mobility, social

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networking, managing the work-life balance, and so on, are also likely to meet with a greater chance of success.

Intrinsic and extrinsic factors There is nothing inherently disruptive about a technology, rather disruption refers to the impact it has on the market or industry e.g. it meets an un-served customer need. Therefore, we can characterize disruptive technologies further, by breaking them down into ‘intrinsic’ and ‘extrinsic’ factors. Intrinsic factors are those that are inherent attributes of the technology, which would include performance, functionality, interoperability, and so on. Extrinsic factors, on the other hand, are characteristics that are not related to the technology itself, such as barriers to market entry, target clients, and so on. The table below lists the most important intrinsic and extrinsic factors involved in the evolution of a disruptive technology.

Table 2.2: Intrinsic and extrinsic factors for disruptive technologies Intrinsic factors

Extrinsic factors

Performance Lower cost Convenience Ease of use New functionality Solves user problem

Barriers to entry Customer demand Customer trust/knowledge Existing market Access to market

Business Insights Ltd

Source: Business Insights

The figure below shows how these intrinsic and extrinsic factors interact to dictate the likelihood of success for a disruptive technology.

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Figure 2.5: Interaction of intrinsic and extrinsic factors for disruption Extrinsic factors

SIGNIFICANT BARRIERS TO ENTRY

Intrinsic factors

High integration costs

Better performance

High switchover costs

Lower cost

Lack of awareness Lack of interoperability Lack of supporting infrastructure

Convenience Ease of use New functionality

Extrinsic factors

SIGNIFICANT CUSTOMER NEED

Solves customer problem

Unlikely to cause disruption

Likely to cause disruption

Business Insights Ltd

Source: Business Insights

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Assessing the ‘tipping point’ for disruption The ‘tipping point’ for a technology being identified as disruptive is easiest to gauge in terms of cost – once the price starts to drop rapidly as uptake increases, it is clear that the original market has been disrupted. The sections above outline some of the characteristics of disruptive technology, and how disruption occurs. From this basis, we can then start to analyze and identify some of the factors and conditions that can be used to predict and identify where and when disruption is more likely occur. The figure below outlines the four conditions that, when present, are a good predictor of potential disruption. The four conditions are: technological performance (as discussed above); consumer behavior and lifestyle trends; price; and the presence of technology enablers.

Figure 2.6: Assessing the ‘tipping point’ for disruption in consumer technology Enablers of Technology Faster network access speeds Commoditization of older technology New content delivery models Network infrastructure and costs

Consumer trends Mobility

Price Available at competitive / acceptable price

DISRUPTION

Social networking Internet usage Work / life balance Media consumption

Technology performance Offers new capabilities More portable / convenient Provides greater connectivity

Business Insights Ltd

Source: Business Insights

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In order to understand how these factors can be used to predict the success of new and potentially disruptive technology, consider the example of the iPhone. Applying each factor to the iPhone and the accompanying App Store shows how all four factors have allowed the device to take a strong hold of the mobile and smartphone marketplace, with organizations such as Blackberry (Storm handset), Google (Android-based handsets), Nokia (N900), and many others keen to create similar business models.

Are there lifestyle and consumer behavior trends that the iPhone addresses? Absolutely. The iPhone plays into lifestyle trends such as mobility, convenience (one device acting as a music player, phone, email and Internet surfing, camera, address book and other applications), and ‘always-on’ connectivity. It also plays into the consumer trend towards ‘customization’ and individualism, through the download of thousands of different applications from Apple’s App Store. Does the iPhone offer improved technology performance? Yes, it offers 3G and Wi-Fi connectivity, 16GB of storage, multimedia capabilities, touch screen technology that is easy to use and works. Can it compete on price? An estimated 17m consumers believe it offers value for money, plus the price of applications is either free or under $10 per download. Is it supported by enabling technologies and services? As of November 2009, the App Store offers over 100,000 applications. Wi-Fi and 3G coverage is growing all the time. It incorporates Flash memory, which has a smaller footprint than disk drives, generates less heat and therefore uses less power, and is ‘rugged’, making it ideal for use in mobile phones. A plethora of enabling technologies have made the iPhone possible.

Conversely, what looked like a successful consumer technology on paper, Nokia’s hybrid handheld gaming console and mobile phone device, the N-Gage, was not the success it was expected to be, at least by Nokia. Indeed, the company admitted defeat in October 2009 when it announced that it would be shutting down its N-Gage gaming service, just six years after its launch. So why did an apparently strong idea – a gaming and mobile phone device that appealed to a young demographic – ultimately fail? Taking the four factors outlined above, reveals that the N-Gage barely meets a single criteria.

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For example, one of the main reasons for N-Gage’s failure is considered to be its high price – the device was considered to be too expensive with a launch price of US$299. Indeed, in the US, it was outsold by the much cheaper Nintendo Game Boy by an estimated 100 to 1. At the same time, new games were too expensive for young gamers, particularly when free or subscription online gaming services are so prevalent on the Internet. The product also failed to provide what it was designed for: a compelling gaming experience – due to a lack of compelling games brought about by a weak developer community and a lack of expertise. Some enabling technologies, such as Bluetooth and the capability for online gaming were present, but Nokia did not focus on this latter emerging consumer demand and ultimately paid the price. Technology performance was also deemed to be poor, with a badly designed, and uncomfortable, console and interface for gaming. It also failed to meet consumer behavior trends in that it completely missed the trend for downloadable and customizable content (i.e. games) and, as mentioned, failed to leverage its online gaming capability. The device was sold as a serious gaming device with phone capabilities – again, this missed the massive trend towards mobility and demand for attractive mobile phone design. With mobile phones offering a relatively good gaming experience themselves, perhaps Nokia should have marketed the device the other way round – as a mobile phone with serious gaming capabilities?

The following sections will consider each of the four factors, and outline some of the conditions that prevail today and so help to identify some of the consumer technology areas where conditions are ripe for near-term disruption.

Shifting consumer behavior and media consumption patterns Attitudes to work-life balance The attitude to work-life balance varies between cultures, regions and countries, but globally consumers are actively seeking more things to do in their leisure time and surfing the internet is an important part of this. The figure below shows that by 2012, on average, European consumers will work for a considerably shorter period than those in the US and Asia. Much of this can be attributed to the higher amount of paid

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holidays enjoyed by European workers as well as legislative restrictions on the working week in certain countries (for example France). In contrast, South Korean workers are subject to some of the longest working hours in the world. With the exception of Japan, consumers in the westernized world also tend to spend more time on the Internet than those in developing markets and the east. This is to be expected in terms of the technological infrastructure available to consumers in more developed markets. Much of the innovation in consumer technology develops first in the Japanese, US and South Korean markets, and it is interesting to see that consumers in each of these countries work long hours on top of spending a relatively large amount of time on the Internet. This particular work-life balance appears to be a strong environment for fostering disruption.

Average time spent on the Internet per person, per day (minutes)

Figure 2.7: Average time spent working and on the Internet per person, per day (by country, 2012) 75 Netherlands 70

Sweden

Germany

Japan

France UK

65 Australia

US

New Zealand

60 South Korea 55

Italy

Spain 50

China 45 India 40 3.0

3.5

4.0

4.5

5.0

5.5

6.0

Average time spent working per person, per day (hours) Business Insights Ltd

Source: Ovum

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Table 2.3: Average time spent working and on the Internet per day (2012) Time spent working per day (hours) Time spent on the Internet per day (minutes) Australia China France Germany India Italy Japan Netherlands New Zealand South Korea Spain Sweden UK US

3.8 5.1 4.2 4.1 4.9 4.0 5.0 3.4 3.9 5.8 3.9 4.2 4.3 4.8

62.4 47.8 67.5 70.1 40.3 54.3 69.5 74.3 62.9 57.6 53.5 70.2 65.7 66.4 Business Insights Ltd

Source: Ovum

Technological advances have allowed many consumers to partake in work-related activities outside of the office environment. The ability to work from home is becoming increasingly valued as consumers can perform tasks in the comfort of their own home, and also cut down on time spent at the office. However, this situation is not wholly positive as it makes it harder for consumers to get away from work, making leisure time all the more valuable.

Growing impact of the Internet The Internet is impacting on consumer lifestyles by blurring distinctions between media formats (for example many television programs can now be viewed online), and as a result consumers are cutting down on other forms of media consumption. Consumers also have the ability to (amongst many other things) shop, bank, manage relationships, publish thoughts and even find romance online, all from the comfort of one’s own home. An improvement in computer literacy in recent years (especially among older consumers) is reflected by the high percentage of consumers who actively use the Internet. Europeans recognize several benefits to technology, and this is reflected in their increasing reliance on it to perform daily tasks.

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A significant proportion of developed country populations use the Internet on a daily basis – historically, the Internet was mainly embraced by younger consumers who have a degree of computer literacy, but increasingly older consumers have made efforts to understand and embrace it. As the table below illustrates, nearly three quarters (74%) of North Americans use the Internet, while usage is also prominent in Oceana (60%) and Europe (49%). In regions where there are more developing nations, such as Africa and Asia, usage is lower. However, it is here where the biggest growth will occur as accessibility improves.

Table 2.4: Internet users and total % of population, by continent, 2008 Internet users (000s)

% of population

393,373 251,290 173,619 657,171 20,783 45,861 54,172

48.9% 74.4% 29.9% 17.4% 60.4% 23.3% 5.6%

Europe North America Latin America/Caribbean Asia Oceana/Australia Middle East Africa

Business Insights Ltd

Source: Internetworldstats.com

Embracing technology and connectivity Consumers also embrace technology that can improve their lives in some way. Often this benefit will manifest itself in the form of making something easier (for example, buying groceries online or online banking) or by making processes faster (for example, downloading content to a mobile phone). Technology is also progressively improving connectivity, both in terms of connecting consumers to more forms of entertainment (e.g. smartphones, online gaming) or to each other (e-mail, online social networks etc.). The latter, in particular, has had a gargantuan effect on how consumers communicate and interact with each other. In the past couple of decades, the internet has grown into an almost-mandatory entertainment and communication facility.

The accessibility and convenience of contemporary connective technology is highly appealing for time-poor, gadget conscious global citizens. The internet provides a 35


wealth of information at their fingertips, while accessories such as mp3 players and smartphones offer multiple features in a portable device that further facilitates on-thego lifestyles of convenience orientated consumers.

Figure 2.8: Connective technology drivers and inhibitors Drivers

Inhibitors

• Wider internet access means more consumers have the ability to go online

• Time spent on computers is being blamed for decreasing social skills and reducing the time that consumers spend interacting face-to-face

• More powerful / faster internet speeds allow consumers to connect and perform tasks more quickly

• Internet availability and computer literacy is still lower in poorer, developing nations

• Social networks are offering more features so consumers can shop or play games as well as communicate with each other

• Keeping up with the rapidity of technological advances is difficult for some consumers

• Mass storage websites such as Flickr allow consumers to share media (e.g. photographs) with each other easily

• Rapid progression also means that companies or consumers committing to using a certain technology may find it going out-of-date very quickly

• Personal products (e.g. smartphones) are becoming more multi-functional in order to satisfy multiple entertainment needs • Consumers are finding concepts such as online dating a more acceptable and attractive idea • Platforms are merging, with consumers now able to watch television on their computers at their own convenience • Confidence in the use of online facilities such as shopping has grown significantly in the past few years

Business Insights Ltd

Source: Ovum

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Changing media consumption habits Driven by increasing amounts of leisure time, and digital content and services that can be accessed almost anywhere, anytime, the consumption of all types of media continues to grow – albeit slowly. Consumers are spending more time using different, newer forms of media. While the Internet is the fastest growing medium, more traditional forms such as television and print are still important. Television watching time is still showing increases, even in developed markets, but this is expected to level off and decrease in some areas over the next five years.

Individuals in Japan, the Netherlands, France and Sweden spend the most time consuming media, at an average of just over 4 hours per person per day. Italian, Chinese and Indian consumers spend the least time consuming media, but these countries are showing strong growth in time-spend in this area as broadband penetration increases together with the sophistication of media offerings available (especially within China and India). The data below shows the continued and steady growth in the number of hours spent consuming media each day.

Table 2.5: Average time spent consuming media per day, hours (by country, 2002-2012) Country Japan Netherlands France Sweden US Germany UK Australia New Zealand Spain South Korea Italy China India

2002

2007

2012

CAGR 2002-2007

CAGR 2007-2012

4.0 4.0 3.8 3.9 3.8 4.0 3.7 3.7 3.7 3.2 3.2 2.9 2.8 2.2

4.1 4.1 4.0 4.0 3.9 3.9 3.8 3.7 3.8 3.3 3.2 3.0 3.0 2.6

4.2 4.1 4.0 4.0 4.0 3.9 3.8 3.8 3.8 3.4 3.3 3.1 3.1 2.9

0.8% 0.2% 0.9% 0.2% 0.6% -0.2% 0.6% 0.2% 0.5% 0.6% 0.1% 0.6% 1.7% 3.4%

0.2% 0.1% 0.1% 0.0% 0.2% -0.1% 0.2% 0.0% 0.2% 0.4% 0.2% 0.4% 0.6% 2.1%

Source: Ovum

Business Insights Ltd

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Figure 2.9: Average time spent consuming media per day, hours (by country, 2002-2012)

2002

2007

2012

Japan Netherlands US Sweden France Germany New Zealand Australia UK Spain South Korea China Italy India 2

2.5

3

3.5

4

4.5

Average time spent consuming media per day, hours

Source: Ovum

Business Insights Ltd

Gaming is increasingly becoming an important component of leisure time. Indeed, as a result of the recession consumers are looking to cut back on eating out and visiting pubs and clubs, and cheap, informal gatherings in the home based around video games on consoles such as the Nintendo Wii can be seen to be an attractive option.

The ‘mobile lifestyle’ Consumers are gravitating towards more convenient, connective technology – the multitude of features available on mobile phones means that they are now a mainstay of contemporary culture. Consumers can take pictures and videos with their phones, as well as access the internet and listen to music. In addition to this, mobile phone 38


contracts are often cheaper than landlines due to the improving value-for-money offered by network providers in highly competitive markets. This has driven a movement away from the traditional home phone towards the more multi-functional mobile phones in recent years.

Remote working, busy lifestyles, and prosumer technologies that blur the lines between work and leisure time are all trends that reflect our increasingly ‘mobile’ lifestyles and, therefore, reliance on mobile technologies and connectivity. During work hours, we increasingly need to be in constant contact regardless of location, while ‘downtime’ such as lunch may be spent on a notebook managing the email inbox in a Wi-Fi zone, such as a café or public space. At the same time, consumers are increasingly reliant on mobile technology to manage and maintain personal relationships. These trends are driving a massive trend towards mobility and mobile technologies that keep us connected at all times.

Cost of technology 2009 served up some of the toughest trading conditions in modern history, a scenario that is likely to continue through 2010. Two of the hardest-hit areas have been retail, and in particular goods associated with the house (such as stereos, DVDs and TVs), and spending on leisure events, such as eating out. It is a trend that is set to define the consumer technology market over the next few years. Crucially, the recession is likely to have a lasting impact on the retail landscape, in particular, with consumers taking a more cautious and conservative approach to spending long after the recession has ended. Credit will be harder to obtain and consumers will be less willing to spend beyond their means. Spending will recover before too long – particularly against weak comparatives, but the era of carefree spending that has characterized the past decade will have finally drawn to a close. Consumers struggling to repay credit cards and loans in the face of high unemployment, higher taxes and little, if any, wage growth will lead to a new era of frugality.

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Price has always been a cornerstone for consumer technology strategies and for some manufacturers, retailers and service providers it has been the foundation of their competitive position. But, going forward, it will be an even greater competitive attribute. Low prices, or at least strong value credentials, will be a must and consumers will be more demanding. When it comes to the purchase of electronics and consumer technologies, one of the biggest factors in the buying decision is therefore likely to be price, for the foreseeable future at least.

A growth in subscription services can be expected through 2010-2011; with less spare income available for one-off purchases, more consumers are likely to use contracts as a way of spreading out payment for mobile phones over a lengthier period. The introduction of the subscription system to computers is less mature and therefore likely to grow more rapidly over the next few years. The strong pipeline of new technologies that existed between 2005-2007 has also taken a hit, partly due to the principle that products that are perceived as high luxury purchases, in particular, are massively exposed to consumer spending cutbacks. On top of these challenges, increasing technology convergence means that demand for most current consumer devices will be reduced.

Technology performance As we have seen earlier in the chapter, a disruptive technology has to provide a jump in technology performance – or offer some kind of new benefit, or additional functionality to the existing technology – in order to be successful. It could be smaller, more portable, simpler to use, more convenient, or it may offer customers a way to solve their challenges in a previously unpredicted way. iTunes, the iPod and the iPhone, for example, provide a simple, intuitive and effective system for purchasing, storing and playing music (and other media), and, in the case of the iPhone, for communicating. The benefits are: portability, small factor size, an intuitive interface that is simple to use, cost, convenience, and performance which has steadily improved over iterative generations. It is a mainstream technology system that is so seamless that it is easy to wonder how the same process was performed before its advent.

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Technology performance improvements can include such factors as new or additional functionality, extended battery life, faster processing or operation, a more intuitive interface, converged capabilities or multimedia capabilities. The list goes on, but the simple principle is that without technology performance improvements of some kind there is no reason for consumers to spend more money to replace existing technology. Therefore, technology performance is an essential consideration when it comes to assessing the tipping point of a new disruptive technology. Step-jumps in technology performance are vital in driving the success of new technologies, as without them consumers have no reason to upgrade or switchover, especially if a new technology requires a change in media or the re-purchase of a back-catalogue in which case the step-up in performance or capability needs to be considerable.

However, on the other hand, there has been a growth in the concept of ‘good enough’ technology – low-end technology that does the job intended to a minimum degree, but costs a fraction of the price of similar high-end technology. Indeed, high performance is shunned by consumers in return for other factors considered by them to be ‘valuable’, such as convenience, immediacy and ease of use. Recent examples include ‘flipcams’ and netbooks. This concept will be discussed in greater detail in the next chapter.

Enablers of disruption The fourth factor associated with, or a predictor of, disruption is the presence or availability of technology enablers. This critical success factor for disruption encompasses a broad range of technologies, infrastructure requirements, software and hardware capabilities, market conditions, and so on, depending on the type and impact of the potentially disruptive technology. As such, this factor is covered in much greater detail in a dedicated chapter later in this report (see Chapter 4).

In summary, enabling technologies might include ubiquitous broadband and/or fast data access speeds, without which any number of relatively mainstream actions may not be possible – for example, online video streaming, mobile internet browsing, online

41


and mobile video gaming, and even simple text-based actions such as social networking. Likewise, the growth of 3G and Wi-Fi mobile network access is the basis for the phenomenal growth of mobile technology, such as notebooks and mobile phones and, more recently as speeds continue to increase, smartphones enabled with Internet-rich applications and netbooks.

In the case of mobile technology, the steady reduction in the price of subscriptions and network access to the Internet has also acted as an enabler for the growth of mobile technology, with flexible and new pricing models still being tested by service providers and content/media developers. Indeed, traditional pricing models have been unable to keep up with the pace of technological change and evolving consumer behavior and demand for the services that today’s technology enables. As a result, content delivery and ownership models have to evolve in order to drive the growth of today’s online and mobile services. One of the earliest and best-known examples of this, Apple’s iTunes, changed almost overnight the way that the music industry manages, licenses and charges for digital audio content. As technology capabilities and ubiquitous, fast broadband access to services continues to evolve, so too have pricing, delivery and ownership models for digital content.

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Conclusions At first glance, the process of disruption appears to be an inevitable ‘renewal’ and advancement of technology. However, disruption is not an inevitable threat that vendors of technology must accept – indeed, disruption is not an intrinsic characteristic of any new technology. Rather, disruption occurs when market incumbents fail to recognize, or respond to, potentially disruptive innovation. By defining disruptive patterns and characterizing the common traits of, and tipping points for, disruptive technologies, it should be possible to monitor, manage and, where appropriate, invest in new technologies that could otherwise be disruptive if blindly ignored. This chapter has introduced some of the factors involved in the creation of disruptive ‘tipping points’ and, hence, an insight into how disruption might be predicted.

While all four ‘tipping point’ factors do not necessarily have to be present all together in order for disruption to occur, it is clear that these four factors often interact to create the conditions for potential disruption. Subsequently, the absence of one or more of these factors would be a significant limiting factor in the success of a disruptive technology, but that is not to say that it would prevent disruption.

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44


CHAPTER 3

Disruptive trends

45


Chapter 3

Disruptive trends

Summary ‰

In recent years, there has been a steady evolution in the way that we as a society consume media – the locations, the times and the ways in which we use technology to communicate and enjoy leisure time.

‰

The steady evolution of technology has meant that the concept of time-shifting – which allows consumers to consume media at a time convenient to them – has grown in its scope and impact.

‰

Portable devices and home entertainment ‘media hubs’, have increasingly enabled consumers to consume and enjoy media wherever there is an Internet or network connection – this has enabled ‘location-shifting’ or ‘placeshifting’.

‰

The concept of customization is fast becoming a business model differentiator and providing competitive advantage for suppliers and service providers alike, as increasingly sophisticated consumers demand customization capabilities.

‰

The success of the Apple iPhone mirrors the evolution of the iPod and iTunes service, whereby the iPhone can be customized to suit consumers’ needs and preferences.

‰

Services such as TiVo allow consumers to ‘customize’ their television viewing habits.

‰

The number of global mobile subscribers hit a penetration level of 61% in 2008 while fixed line penetration level has almost stagnated at around 19%, less than a third of the mobile penetration levels.

‰

The Apple iPod accounted for a 71% share of the MP3 player market in Q1 2008.

‰

Since 2004, social networking sites have proliferated to an extraordinary degree. Barriers to entry are virtually non-existent, and the rewards are potentially immense.

‰

Although still in its infancy, the cloud will become increasingly popular as a way for consumers to access content whenever and whenever they want.

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Introduction This chapter outlines some of the ‘disruptive trends’ that are shaping consumer attitudes to and relationship with technology and, ultimately, dictate the success of new or disruptive technologies. Likewise, the evolution of new technologies is taking manufacturers and service providers down new and diverse paths, with multiple options for business model success – for example, technology convergence (such as a music player, camera and mobile phone in a single device) versus best-in-class technology divergence (that is, the best possible quality in a single device). Similar considerations include technology commoditization and ‘good enough’ iterations of new technology versus disruptive technologies. At the same time, our technology purchases increasingly say something about our own lifestyle preferences and personalities – as a result the concept of ‘customization’ of technologies is becoming an important factor in technology purchases. Likewise, over-arching technology trends are dictated by prevailing cultural, social and business attitudes, with technology evolution responding to – or, better, predicting – changes in consumer behavior and therefore technology purchasing preferences. This section considers the evolution of new

technologies,

and

how

the

relationship

between

consumer

trends,

commoditization, ‘good enough’ technologies, technology convergence, and best-inclass technology models might interact to dictate the success of new technologies.

Disruptive trends Consumption patterns: Time and location-shifting In recent years, there has been a steady evolution in the way that we as a society consume media – the locations, the times and the ways in which we use technology to communicate and enjoy leisure time.

This is not a new phenomenon. For example, the advent of vinyl discs meant that we longer needed to be at a concert, venue or in a studio in order to listen to music. The

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video recorder then changed the way in which we watch broadcast television – before it arrived and offered a way to record a TV program and watch it at a later date or time (now known as ‘time-shifting’), consumers were tied to broadcasting schedules if they wanted to watch their favorite program or film. The advent of DVD players allowed us to watch blockbuster films at home, on a PC or notebook, regardless of cinema timetables. The steady evolution of technology has meant that the concept of timeshifting – which allows consumers to consume media at a time convenient to them – has grown in its scope and impact.

Indeed, the concept has come almost full-circle – in terms of broadcast TV at least – with the phenomenal success of TV broadcasters’ online services, such as the UK’s BBC iPlayer. The online platform launched in December 2007 at an estimated cost of £6m ($11m), and allows audiences to retrieve scheduled BBC radio and TV content – at a later time convenient to them – through a downloadable application or flash-based streaming platform. The appeal of the service is that it does not require consumers to remember to set the PVR in order to record the program from standard schedules – as long as there is fast/broadband access to the Internet, consumers are able to watch the service free of charge on the BBC website. Many other Western European broadcasters have followed suit, with iPlayer so successful with consumers that it has actually impacted the performance of the entire UK broadband network.

Alongside the concept of time-shifting, ‘location-shifting’ or ‘placeshifting’ means that we can consume media not just when we like, but where we like. Portable devices and home entertainment ‘media hubs’, have increasingly enabled consumers to consume and enjoy media wherever there is an Internet or network connection. We can now listen to music or an audio book on the commuter train, watch a film in a coffee shop, play arcade-level video games at home or watch TV on the Internet and stream content to a different room in the house, to mention just a few examples. Portable music players, such as the Sony Walkman and the phenomenally successful iPod, allowed consumers to carry around their entire music collection in a convenient single device. Portable DVD players, the iPhone, smartphones, netbooks, ebook readers, portable gaming devices – the list continues to grow at a startling pace; all of them allow 48


consumers to interact with various media types whenever and wherever they desire. So fast has this behavioral and technological shift been that the concept of having to be in a single location at a specified time to consume a particular form of media is becoming an archaic idea.

Trend towards customization As a society, our relationship with technology is evolving. Technology is increasingly used to improve efficiency during working hours, and increasingly as a cornerstone of our entertainment and leisure time – for example, consuming digital media, playing video games, keeping in touch with friends via social networking sites, and so on. At the same time, our technology purchases increasingly define us as individuals and as a society. For example, the most successful mobile phone models for teenagers are likely to be very different from those models seen as stylish (and practical) for white-collar professionals. Within each demographic, there will be further levels of technology (or technology style) nuances, each revealing further details about the lifestyle and working preferences of individuals and professional/social groups. As a result, the concept of ‘customization’ is seeping into every aspect of consumer technology, regardless of media or content.

For some time now, the Internet has enabled the customization of non-technology products at an economically viable price point. For example, publishers now offer the ability to customize books, greeting cards and other materials – so individual names can be immediately dropped into text providing personalized products. Likewise, sportswear giant Nike offers consumers the ability to create limited edition trainers through its Nike iD online facility, with the option of changing colors, materials and a personal ID that can be stitched into the trainer before dispatch to the consumer.

From a technological perspective, PCs and notebooks are perhaps the most obvious examples of customizable technology, providing the ability to build completely different machines on the same hardware, through software and application choices, as well as physical customization options. This can be done through online stores, such as

49


Dell.com, that offer consumers a range of options such as color, memory, audio/graphic capabilities, and so on. Likewise, FlipCam offers a customization service for its extremely successful range of affordable but ‘good enough’ wallet-sized video recorders, with consumers able to choose the recorder’s cover and finish from a massive range of colors and patterns.

However, the concept of customization is fast becoming a business model differentiator and providing competitive advantage for suppliers and service providers alike, as increasingly sophisticated consumers demand customization capabilities. Take the iPhone, for example. The basis for its success is not necessarily due the fact that it is a combined music player and mobile phone device with a ‘sexy’ and useable interface. The differentiator for the iPhone is the App Store, which offers consumers a claimed 110,000 third-party applications – with estimated downloads of well over two billion applications between its opening in July 2008 and November 2009. While every device is exactly the same in terms of hardware, the success of the iPhone is based on its ability to be customized to the preferences and requirements of each consumer. For example, Consumer A may download business applications to use the phone as a smartphone for business purposes, Consumer B may use the same device for entertainment (music, films, games, social networking applications), while Consumer C may use it as a device for managing their leisure time – for example, by downloading applications such as outdoor maps, weather forecasts, compasses, satellite tracking and navigation.

The figure below shows the diversity of applications available in the App Store, and the popularity of different types of app. Games, books and entertainment are the most popular types to download, reflecting the idea that iPhones are still primarily a consumer rather than professional device – people choose to use them for leisure rather than work. There is, however, a broad range of other categories that allow users to customize their device in any way they like, including business and productivity applications.

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Figure 3.10: Apple App Store downloads by category Games Books Entertainment Travel Utilities Education Lifestyle Reference Music News Health & Leisure Business Productivity Navigation Sports Medical Finance Photography Social Networking Other

16% 13% 13% 7% 6% 6% 5% 4% 3% 2% 2% 2% 2% 2% 2% 1% 1% 1% 1% 11% 0%

6%

12%

18%

% of total downloads

Business Insights Ltd

Source: 18Apps.biz

The resounding success of the iPhone has since been copied by a several companies, including Research in Motion, which launched Blackberry App World in April 2009, Microsoft’s Mobile Application Store (launched February 2009), Google’s Android Market (an open source version opened in late 2008), Nokia’s Ovi Store (May 2009), Samsung’s Mobile Minute (September 2009), and so on.

The Apple iPhone mirrors the evolution of the iPod and iTunes service, whereby consumers’ music tastes could be stored or ‘customized’ in a variety of ways, including playlists and remix albums chosen by the other consumers. Likewise, the iPhone can be customized to suit consumers’ needs and preferences. More recently, the Genius service delivers playlist suggestions based on consumers’ existing music collection, for further customization and personalization. 51


However, the trend towards customization is not just confined to audio content. For example, TiVo’s digital video service essentially turns a television into a service that can be customized to each consumer’s needs. The TiVo hard drive, much like a personal video recorder (PVR), uses a simple interface to record consumers’ favorite programs and films. It ‘controls’ the TV and PVR through a normal TV connection, whether the broadcast is cable, network or satellite, and uses the phone line connection to regularly monitor and download detailed scheduling lists. However, it too can be ‘taught’ to recognize the types of programs that a consumer likes or dislikes (the user rates programs, which the service then uses in a similar way to the Apple Genius service). As well as allowing the user to ‘pause’ live TV while they perform a household task, for example, and enabling ‘time-shifting’ (by allowing consumers to watch their favorite programs whenever they want), the service will also recommend and automatically record other programs that it thinks suit the tastes and preferences of the user. Hence, TV has become customized and personalized.

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Trend towards mobility and mobile technology The success of any new technology will also be dictated by prevailing trends in work, leisure and culture that change consumer behavior. For example, the success of the mobile phone has been driven by the move towards mobilization of the workforce, remote working, and the accelerated, ‘on-the-move’ pace of our daily lives. Of course, as a society we are also more likely to travel, commute, work from different locations, relocate to new geographical areas, and so on. All of these trends mean that mobile technology has become an integral component of our daily routine. Similarly, these trends have driven the growth in social networking, which provides a fast and simple way to keep in touch with friends, colleagues and lost acquaintances as the demands on our work and leisure time continue to grow. In the last chapter, for example, we saw that throughout the world there is a desire to achieve a better work/life balance, with technology helping us to achieve that. It is these behavioral and cultural trends that shape the evolution of new technology, with mobile technology such as smartphones and netbooks leading the way. The figure and table below compares global mobile subscriptions between 2004 and 2008, including mobile phone penetration.

As shown, mobile subscribers increased from 3.3bn in 2007 to 4.1bn by the end of 2008, corresponding to a penetration level of 61%. The fast pace at which the mobile platform has overtaken the world can be gauged by comparing it with other technologies – fixed line penetration level has almost stagnated at around 19% in 2008, less than a third of the mobile penetration levels. The advent of high speed networks and launch of 3G services has fueled the uptake of mobile value added services, in particular mobile music.

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Figure 3.11: Global mobile subscribers and penetration (bn, %), 2004-2008 5

70% 60% 50%

3

40% 30%

2

20%

Mobile Penetration (%)

Mobile Subscribers (bn)

4

1 10% 0

0% 2004

2005 Mobile subscribers

2006

2007 2008 Mobile penetration

Source: ITU

Business Insights Ltd

Table 3.6: Global mobile subscribers and penetration (bn, %), 2004-2008

Mobile subscribers (bn) Mobile penetration

2004

2005

2006

2007

2008

1.76 27.6%

2.22 34.3%

2.76 42.1%

3.36 50.3%

4.1 61.1%

Business Insights Ltd

Source: ITU

Likewise, worldwide smartphone shipments reached 139.7m in 2008 and are forecast to grow at a CAGR of 19.5% to reach 406.7m by 2014, according to estimates by Ovum. The portable audio player market also benefited from the move towards mobility, witnessing a host of new devices on the market, which is still strongly dominated by Apple’s iPod. Apple sold around 54.8m units in the fiscal year ended September 2008, up from 51.6m units in FY2007. It accounted for a 71% share of the MP3 player market in Q1 2008.

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Figure 3.12: Global iPod sales and units sold, 2006-2008 10

60 50

8

30 4

Units (m)

Sales ($bn)

40 6

20 2

10

0

0 FY2006

FY2007 iPod sales

FY2008 Units sold Business Insights Ltd

Source: Apple

The new breed of devices, such as the iPhone, iPod Touch, Zune player and other 3G handhelds are equipped with wi-fi functionality and allow internet browsing. These devices facilitate easy music downloads, blurring the divide between online and mobile platforms.

Trend towards social networking Since 2004, social networking sites have proliferated to an extraordinary degree. Barriers to entry are virtually non-existent, and the rewards are potentially immense. Social networking is defined as the web of personal acquaintances made through common interests or circumstances, and a social networking service is a tool which allows users to represent and extend their social networks online. Social networking sites now range from titanic generalists like MySpace and Facebook to tiny individual networks run on DIY platforms like Ning. Users may express themselves in peacock splendor on virtual worlds like Second Life, or restrict themselves to sparse 140character updates on micro-blogging sites like Twitter or Jaiku.

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The majority of Internet users visit some sort of social network or online community while they are online – according to comScore research, 1.1bn people went online during May 2009, of which 75% visited a social network. On average, a typical internet user spent 3.7 hours on such websites over the course of the month. Such a high penetration of internet users means that the vast majority of consumers desire some of the ‘life-caching’ options that these networks provide, be it the opportunity to share photographs, personal information or thoughts and opinions.

The following list represents some key trends in relation to the social networking market: ‰

Global social networking will grow and then plateau by 2012;

‰

Three distinct paths to success have emerged for social networking services;

‰

Major enterprises have committed to social networking as a marketing channel;

‰

A nascent value chain is evolving;

‰

Innovation will continue at a high pitch.

Growth of social networks The following figure and table show social networking revenue for the four major regions of the world, assuming that the primary contribution to revenue growth is membership growth, they represent the revenue possible from advertising on social networking sites. However, the average revenue per user (ARPU) differs from country to country.

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Figure 3.13: Global social networking revenue ($m), 2006-2012

North America

CALA

APAC

EMEA

2500

Revenue ($m)

2000

1500

1000

500

0 2006

2007

2008

2009

2010

2011

2012

Business Insights Ltd

Source: Ovum

Table 3.7: Global social networking revenue ($m), 2006-2012

Revenue ($m)

2006

2007

2008

2009

2010

2011

2012

CAGR 2007-12

North America CALA APAC EMEA

317.5 9.7 142.4 118.0

496.9 15.6 187.4 266.0

699.7 21.9 317.8 391.6

880.7 25.5 424.5 507.6

1,082.8 29.2 517.8 600.8

1,104.4 29.8 573.8 653.9

1,115.5 30.1 594.2 683.8

17.6% 14.1% 26.0% 20.8%

Total

587.5

965.9

1,431.1

1,838.3

2,230.6

2,361.9

2,423.5

20.2%

Business Insights Ltd

Source: Ovum

North America is, and will continue to be, the largest source of social networking revenue, with almost $700m in revenue in 2008, increasing to $1.1bn in 2012. The

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second largest source of revenue is EMEA (Europe, Middle East and Africa), with $392m in revenue in 2008, increasing to $684m in 2012. The third largest source of revenue is APAC (Asia-Pacific), with $318m in revenue in 2008, increasing to $594m in 2012. The smallest source of revenue is CALA (Central and Latin America), with $22m in revenue in 2008, increasing to $30m in 2012.

The figure and table below show social networking memberships for the four regions of the world. North America has led the world in social networking innovation and adoption, with memberships in the region growing at a predicted CAGR of 17.5% between 2006 and 2012.

Membership growth in EMEA, led by the United Kingdom, took off in 2007. EMEA memberships will grow at a CAGR of 20.6% between 2006 and 2012. In CALA, Brazil occupies the lion’s share of social networking membership, but people in other Latin American nations are taking advantage of a broad spectrum of social networking services based in the United States. CALA memberships will grow at a CAGR of 11.7% between 2006 and 2012.

Adoption of social networking is not uniform across APAC; in China and Japan, social networking membership is concentrated in services that were developed specifically for those markets. Indian membership, however, is well represented in international services like Orkut. APAC memberships will grow at a CAGR of 22.9% between 2006 and 2012.

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Figure 3.14: Global social networking memberships, 2006-2012

North America

CALA

APAC

EMEA

600

Membership (m)

500

400

300

200

100

0 2006

2007

2008

2009

2010

2011

Source: Ovum

2012

Business Insights Ltd

Table 3.8: Global social networking memberships, 2006-2012 Membership (m)

2006

2007

2008

2009

2010

2011

2012

CAGR 2007-12

North America CALA APAC EMEA

36.2 18.0 63.0 28.4

56.6 28.3 80.5 64.1

79.6 39.0 117.4 92.8

100.2 43.5 157.0 120.3

123.1 47.9 190.8 143.0

125.6 48.8 214.1 156.2

126.9 49.3 225.3 163.5

17.5% 11.7% 22.9% 20.6%

145.6

229.6

328.7

420.9

504.8

544.7

565.0

19.7%

Total Source: Ovum

Business Insights Ltd

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Types of social networking sites Social networking sites can be divided into three distinct categories: ‰

People-based sites. These are defined by the desire of users to maintain and extend connections with friends and acquaintances;

‰

Content-based sites. These are defined by the desire of users to consume, exchange, and promote content;

‰

Special-interest sites. These are defined by the desire of users to share experiences with like-minded others.

Moreover, social networking sites serving these three needs fall into two important genres. The first of these aims to maintain and extend relationships that originally developed off-line: connections made at school, at work and so forth. In the second genre, the core of the relationship takes place online: people engage in discussions, share content and opinions, and develop a variety of virtual relationships without ever feeling an obligation to meet in physical reality.

Social networking services span a large spectrum. All such services strive to satisfy their current users and to extend their reach. There are technological, as well as strategic, considerations that can help them attain those goals. The first and most critical consideration is to be able to maintain consistently high performance in the face of potentially severe tests on their resources. Having achieved that, services must constantly look for economical ways to extend their appeal.

Trend towards cloud computing In recent years, ‘cloud computing’ has become one of the biggest buzzwords in enterprise computing. ‘The cloud’ represents an online network of services and applications supported by a geographically and globally dispersed infrastructure. So what does that mean for consumers and consumer technology? Slowly but surely, as a society we are becoming comfortable in using the Internet and networked devices for 60


managing our relationships – and arguably our identities – within a single location online. According to a recent survey from Pew Internet & American Life Project, 69% of Americans use web-based services, store data online or use software applications, such as word processors, that are located somewhere on the Internet rather than installed on their home computer. The report notes that 56% of respondents say they have used a Web mail service such as Hotmail, Gmail, or Yahoo, 34% have stored photos online, 29% have used online applications such as Google Docs or Adobe Photoshop Express, and around 7% of respondents said that they store personal videos online. A further 10% use a paid online storage or backup service. Probably without realizing it, these consumers are already using the cloud.

Users of these services cite ease and convenience as the main attraction, followed by the ability to access online data and services from any device they are using at the time, and ease of sharing information. The same report highlights that, as might be expected, mobile phone users are even more likely to use ‘cloud’ services – among those that use a Wi-Fi connection to access the Internet on their mobile phone, 79% of respondent said that they have used at least one cloud computing activity above, and 52% have used at least two.

Although still in its infancy, the cloud will increasingly allow consumers to store data, use applications on a free or pay-as-you-go basis, and access media content and other online services from the Internet, without the need to store anything on a hard drive or desktop computer at home. This will have clear ramifications for the consumer technology roadmap – if all data and services are available online, then the most popular devices might, for example, be those offering the broadest connectivity capabilities, the largest viewing screen size and the easiest user interface, while devices with large memory and storage capabilities could become redundant – in this scenario at least.

An example of how cloud services and applications might work comes from online music service lala.com. The service basically takes an inventory of a user’s stored music library when they connect to the site, compares it to what already exists in its 61


rapidly growing online database of music tracks, and uploads only those tracks it does not yet have. Hence, the service uploads consumers’ music libraries into the cloud, and then allows them to access all of their own tracks (that were listed in the initial inventory) and listen to them on any connected device – so reverting to a locally stored music library is only required in the absence of an Internet connection. In addition, users can set their preferences and, while there is no social networking capability as yet, follow other users based on their music tastes, which adds a Twitter ‘twist’ to the user experience.

However, one of the most popular cloud services currently is that of storage; whereby consumers can backup all of their local data into the cloud (the Internet), allowing them either to have a duplicate copy of important information or access that data from any connected device, including mobile phones. The existing method of sharing data between devices, such as photos, music, documents, and so on – might require a portable hard drive, USB key, or emailing attached documents to online mail services. Examples of such storage services include LiveDrive, Dropbox, Sugarsync, Box.net and ZumoDrive.

However, the fact that Microsoft entered the fray with its Live Mesh service – announced in April 2008 – represents the growing importance of cloud computing for consumers. The online storage service allows each user to have 5GB of storage that can be shared and synchronized across any device. Importantly, any changes made to the data on one device are mirrored on any other associated device. The Live Mesh software is available on Windows and Mac operating systems, and soon to be available for Windows Mobile. It also has other components, including Live Desktop, which allows data to be synchronized via a website, and Live Mesh Remote Desktop, which allows users to remotely connect to and manage any of the synchronized devices from any connected computer.

Meanwhile, Google’s Chrome browser is part of an open-source project called ‘Chromium’. But Chrome should be considered as far more than a browser, representing Google’s entire mobile / online / cloud strategy to complement its mobile 62


open-source platform, Android, and acting as a rich internet application platform. In this sense, Chrome is not only a platform for Google Apps, but in fact represents Google’s cloud-optimized challenge to become the client platform that replaces the Windows environment on the desktop and the mobile phone. Indeed, take this concept one step further and it is not too much of a stretch to suggest that, in future, a fully optimized, high-speed cloud network might even do away with the need for operating systems altogether, as devices access the services, applications and data they need via the internet.

Technology business models The concept of ‘good enough’ The sheer speed and connectivity of the digital age means that – in some cases at least – consumers are increasingly prepared to sacrifice ‘best-in-class’ products for ‘good enough’ technology, particularly if ‘good enough’ offers a specific quality – such as speed, price, convenience, unique capability, and so on – over and above anything else available. Recent examples of successful ‘good enough’ technologies, include Flip video cameras, netbooks, camera phones, and arguably the iPhone (which provides a number of functions – camera, video screen, music player, game machine etc – none of which are necessarily best-in-class, especially compared to higher end smartphones). In a technology rich society, consumers increasingly expect to own most of the following devices: PC, notebook, smartphone, plasma/LCD screen, a Blu-Ray or HD DVD player, a PVR, a game console, a portable music player, camera, video recorder, and so on. However, purchasing the best-in-class product in each consumer technology category is beyond the financial reach of most consumers – particularly the most avid adopters of new technology, the younger generation.

At the same time, increasing pressure on work and leisure time means that we do not always need or want the highest quality; instead convenience, access and speed are becoming important decision-making factors. Although not a technology per se, the global success of the video website YouTube signifies the point: Users are more than happy to watch low-definition, low-quality, homemade videos and clips on a jerky,

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small screen in order to gain access to the media, if the location and timing suits – for example, showing friends a favorite clip while out socializing. The immediacy and connectivity now required and demanded by consumers means that in many cases, the concept of best-in-class technology is just not relevant.

The Pure Digital Point and Shoot camera and video recorder (later renamed the Flip Video/Mino, also known as a ‘flipcam’) is perhaps the most successful recent example. While camera giants such as Sony, Nikon and Canon were slugging it out with everhigher specified devices in an attempt to win the consumer war, a US startup called Pure Digital Technologies (PDT) introduced the decidedly low-definition, cheap Pure Digital Point and Shoot in 2006 and the Flip Ultra, a stripped-down camcorder, in 2007. Despite their modest specifications and poor image quality, the video recorders’ low price (US$150) and pocket-ability have made them a massive hit with the ‘YouTube-generation’. It did the job that consumers wanted it to do, and by September 2009, the device had captured 19% of the global camcorder market. Larger companies have tried to mimic the business model with modest success – a reminder of the importance of timing and branding – and PDT was bought out by networking giant Cisco in March 2009.

Meanwhile, the success of moderately specified, and priced, ‘good enough’ netbooks and notebooks is represented by the Asus Eee PC, which was introduced in late 2007 with a sub-7-inch screen and less storage than an iPod. But, again, it was cheap (subUS$300) and portable (small and lightweight), and while enjoying moderate success it shook up the notebook industry overnight. As well as being affordable, it could be used in locations or situations in which a high-end notebook might best be left at home. On a similar note, but with a more altruistic raison d’être, the One Laptop Per Child Association distributes the XO-1 notebook (previously know as the $100 notebook) to children that would not normally have no access to such technology. The XO-1, built by Quanta Computer, is the size of a small textbook, is ruggedized and uses Flash memory instead of a hard drive. It comes with a Linux open source OS and has Wi-Fi capability, allowing mobile ad-hoc networking which means that a chain of notebooks can surf the Internet as long as one of them is in range of a Wi-Fi access point. The 64


$100 notebook is cheap, rugged, portable and ‘good enough’ for the task it needs to perform, and essentially acted as the template for a new breed of netbooks.

These and many other examples show that a number of trends are converging, and changing the values that consumers apply to consumer technologies. Is a high-spec Sony camcorder ‘better’ than a cheap, convenient and small Pure Point and Shoot? For many consumers, the answer is no – because they do not need all the specifications, and cost, of a high-end camcorder, they just want to share their experiences with friends by immediately downloading photos directly to Facebook. Because of the growth of the internet, cloud computing, mobility, social networking, connectivity, and so on – the concept of what makes a device ‘better’ is shifting, particularly in the current frugal financial environment.

Best-in-class technology The counter-argument to the ‘good enough’ principle outlined in the section above runs thus: given the speed at which advancements are being made, consumers will be unwilling to compromise on quality simply because they are being offered a new or novel feature. Whereas in the recent past a consumer may have accepted poor picture and/or sound quality on a video clip watched on a mobile phone, the development of technology means that competitors who can address this will win these consumers over by offering better products. Brand loyalty cannot be relied upon in an era where there is always something better on the horizon, so efforts must be made to continually upgrade the quality of all goods and services offered.

In reality, it is likely that there will be room for both business models, and it may be that these two apparently conflicting business models serve different consumer demographics. For example, the younger generation are more likely to want the latest technology at a low price, with quality a secondary factor – a compromise made acceptable by the convenience, immediacy and low cost of ‘good enough’ technology. On the other hand, best-in-class technologies are perceived as ‘status symbols’, with young professionals able and willing to spend money on best-in-class technology with

65


a ‘wow factor’ to impress friends, colleagues and clients. Likewise, older consumers are likely to want the highest quality technology that they can afford, and are less willing to compromise. Values such as immediacy, convenience and low cost are likely to be secondary to owning high-quality, top-specification technologies. Plasma TVs, home-entertainment systems and hubs, Blu-Ray disc players, high-powered notebooks, high-spec computer monitors – these are the types of technology that those in a position to afford them are likely to demand the highest quality.

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Conclusions There are a number of trends – technical and behavioral – that are likely to drive new technology adoption over the next few years, and could be the catalyst for potential disruption. In recent years, we have seen a shift in the way that consumers not only interact with, and use, technology, but also in the ‘values’ they place on it. For example, while some consumers want best-in-class, others are prepared to sacrifice on quality in order to have access to the latest content or newest technology capabilities. YouTube is a great example of ‘good enough’ technology: as a media content website it receives more hits than any other website of its kind, and is probably one of the bestknown websites in the Western world, if not the world. Yet the majority of content it offers is generated as low-definition, poor-quality video or audio clips by amateurs and ordinary people. In this case, immediacy and access to ‘contemporary’ culture are the two most perceived values of the service. The examples of the Pure Point and Shoot camcorder, and netbooks, also point to the fact that for some tasks, ‘good enough’ technology is good enough.

The prevailing economic conditions and potential backlash towards frugality also suggest that the price and cost of new technology may become one of the biggest factors in the purchasing decisions of consumers, at least in the next few years. Again, technology that does the job required at a small price is more likely to cause disruption than a high-end technology that requires the re-purchase of entire media libraries. At the same time, connectivity is increasingly perceived as having ‘value’ to consumers, with the quality of the media content of secondary concern.

Another driver for potential disruption comes from the massive interest in, and growth of, social networking. Consumers want to be able to contact friends, colleagues and peers wherever they are, at a time convenient to them. So new devices, technologies, and services that allow them to connect to social networking sites and services are tapping into a demand that is, so far, possibly just the tip of the iceberg. Likewise, the

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demand for technologies and services that allow time-shifting and location-shifting are set to drive the success of new technologies for the foreseeable future. Perhaps the single factor that brings all of these trends together, though, is consumer behavior. Consumers more than ever use technology to access media content, and increasingly they want to access that content or service on their own terms – and technology that enables that in an increasingly simpler, sophisticated, cheaper or better way is unlikely to go far wrong.

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CHAPTER 4

Enablers of disruption

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Chapter 4

Enablers of disruption

Summary ‰

Enablers of disruption provide the platform upon which disruption can occur.

‰

New technologies and changes in consumer behavior – such as mobility, connectivity, social networking, and so on – are driving an evolution in delivery and ownership models for digital content.

‰

Digital rights management (DRM) has, to date, acted as the single most significant barrier to the growth of the digital download market.

‰

In the future, faster Internet connections (usually in excess of 24 MBits) will allow full TV programs and feature films to commonly be streamed, on demand, not only to people’s computers but directly to their TVs.

‰

Research suggests that at least 45m US consumers are willing to view adverts if they are able to access free music. Younger consumers are the most likely to want to use such services.

‰

Like Spotify in the music industry, the free TV and film streaming service Hulu is shaking up the TV broadcasting industry.

‰

Commoditization and disruption can be viewed as two sides of the same coin; once a technology has been commoditized, it is vulnerable to disruption.

‰

Connectivity will be one of the most important factors that drives the evolution and success of new and disruptive technologies in future.

‰

The majority of Internet users in Western Europe have a connection speed of at least 2mb/s. Japan, South Korea and Hong Kong have the highest proportion of users with Internet access speeds of 5mb/s, although it is still only half of the population of each country that has such high-speed access.

‰

Only 5% of consumers in India and China have Internet access speeds of 2mb/s or above.

‰

South Korean consumers enjoy the fastest average speed for Internet access out of any of the countries featured.

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Introduction The enablers of disruption outlined in this chapter provide the platform upon which disruption can occur. As shown in Figure 4.15, an enabler can be a number of things from, for example, high-speed broadband access (fixed or wireless), the miniaturization of components (for portability), improved technical performance of enabling technologies (such as greater processing power), or the creation of new digital content copyright or pricing structures (which must keep pace with the technology itself: note how iTunes heralded a new mainstream pricing structure for audio content). As well as laying the foundations on which disruption can occur, enablers are also impacted by new and disruptive technologies in a positive feedback loop. For example, if a large number of consumers demand video streaming on a new form of mobile device, then in turn this may encourage them to seek out, and pay for, faster internet and/or wireless network access. Likewise, the success of iTunes was based on a number of factors, but an affordable pricing structure and a previously unknown copyright model has undoubtedly shaped subsequent media content consumption and delivery models, and in turn fed back into the success of iTunes.

The list of enablers in this chapter, and in the diagram below, is by no means exhaustive. Rather the enablers that we can identify at this point in the technology evolution curve. These enablers will evolve themselves, and new ones will appear, as each enabler is interlinked with the development of new and potentially disruptive technologies.

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Figure 4.15: Examples of disruption enablers

DISRUPTION

Supporting technologies

Network costs

Technology lifecycle

Content and delivery models

Broadband access

e.g. processing power, memory / storage, battery life

e.g. low-cost internet or mobile access

e.g. commoditization

e.g. new ownership and copyright models, new pricing structures for content

e.g. high speed internet access, Wi-FI and 3G wireless access

Enablers of disruption

Business Insights Ltd

Source: Business Insights

Enablers of disruption Content delivery models Digital rights management (DRM) has, to date, acted as the single most significant barrier to the growth of the digital download market – adding to the problem of a distinct lack of interoperability between services and devices. With DRM in many cases causing consumers to forfeit their music or video collection and repurchase it, the technology could be viewed as anti-competitive, as it forces purchase from one provider – such as iTunes. At the same time, digital content – whether music, films, ebooks, and so on – is more open to the threat of piracy than ever before. As a result, new technologies and changes in consumer behavior – such as mobility, connectivity,

72


social networking, and so on – are driving an evolution in content delivery and ownership models.

A significant recent development has been the emergence of DRM-free downloads. The majority of companies use DRM to curb piracy by restricting consumers’ ability to copy music and video downloads. The biggest issue with DRM is that downloads are not compatible on competing systems. If a consumer is to change music download provider or portable players, it is very likely that previously purchased music or video files will be unusable. Downloaded files could also become unusable if the service provider from which they were purchased went out of business.

With DRM in many cases causing consumers to forfeit their music or video collection and repurchase it, the technology could be viewed as anti-competitive, as it forces purchase from one provider – such as iTunes. Unlike traditional physical music and video specialists, in using DRM, download service providers are able to lock consumers into their service.

Already copyright-free content is proving popular through services such as YouTube. In the UK the BBC, for example, is providing a growing proportion of its news content via its website. Moreover, many channels are becoming increasingly interactive, with services such as the BBC iPlayer, 4OD from Channel 4 and SkyPlus from Sky. These features allow huge freedom over when and what programs to watch, either through a TV or online. The extraterrestrial channels are also offering an increasing range of films through dedicated channels, pay-per-view and interactive services. In the future, faster Internet connections (usually in excess of 24 MBits) will allow full TV programs and feature films to be streamed, on demand, not only to people’s computers, but directly to their TVs.

Such convenience and choice will compete directly against DVD and retailer downloads and may have a negative impact on the market. That said, it will be several years before broadband is both fast and reliable enough – and copyright issues over

73


content are resolved – to make such services widely available. The recent introduction of DVDs with ‘digital copy’ – allowing consumers to make digital copies of purchased DVDs - will stem the flow of spend towards downloads to an extent.

At the same time, service providers are experimenting with new revenue streams. For example, targeted advertising can not only help generate revenue for the creators, but also divert the traffic to other revenue generating activities. This is considered as a way to get music fans that have developed a taste for ‘free’ music widely available on the Internet, hooked on to legitimate services that compensate the music companies to a certain extent. Research in the US suggests that at least 45m US consumers are willing to view ads if they are able to access free music. Younger consumers are the most likely to want to use such services.

Examples of this are the deals signed between some record companies and social networks such as MySpace, Bebo, YouTube, etc. These deals are mostly based on licensing agreements for streaming music and music videos for a share of advertising revenues. MySpace Music was launched in the US in September 2008. It partners with all major music companies to provide users with unlimited audio and video streams. Users can create their own playlists and post their favorite songs on their profiles. Users that want to buy these songs are directed to Amazon MP3 offering legitimate tracks for download. Examples of ad-supported services include Last.fm and We7 in the UK, QTrax internationally, Imeem in the US, Deezer and Spotify in Europe. These services have vast online catalogues to attract consumers away from illegitimate sites offering pirated tracks.

Spotify represents a particularly successful example of this evolution in digital content consumption and ownership models. Spotify works much like iTunes but allows consumers – currently limited to Europe – to legally stream and listen to music from millions of artists free of charge. There are three membership models: the free, advertfunded service, which requires consumers to listen to three ads every hour; a £10 per month advertising-free subscription; and, a £0.99 per day model. It is estimated that there are well over one million users in the UK alone and over three million tracks 74


available. Premium subscribers to the music streaming service can also download their playlists to a PC or chosen device. However, as might be expected there are still issues surrounding DRM and copyright, which limits even the premium service. Currently, premium users can only store up to 3,333 songs on up to three devices, including a phone.

The success of the free service suggests that in our rapid consumption and ‘throwaway’ society, consumers might in future be happy to stream music for free, rather than purchase and own a CD or DVD. After all, if there is a large playlist of artists and songs available at any time on any [connected] device through streaming (with little buffering delay), then what is the difference to owning the track? Indeed, it may be easier to stream a favorite album to the device the consumer is carrying at any particular time, rather than download every CD or DVD the consumer owns to each device they use.

As well as testing the water with ad-funded and free content models, digital music retailers, along with music companies, are still experimenting with different pricing packages to get more customers hooked on to digital music. They are trying to introduce more value-based pricing, where the price reflects the perceived value of the tracks. They are also trying to create attractively priced packages, including the song, its video, ringtone, etc., to lure more customers.

For example, Apple’s iTunes introduced the three-tiered pricing system in April 2009, driven by the music labels. The tracks are divided into three categories priced at 69 cents, 99 cents and $1.29, as opposed to the one price fits all strategy used earlier. The idea here is to price the more popular songs at a higher level to increase the revenue from digital sales. This is forecast to boost album sales as well, as more customers will use iTunes’ ‘Complete My Album’ feature. In this feature, the fans just have to pay the additional cost to own the complete album if they already have one or more songs from that album.

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Amazon also expanded its variable pricing tiers in April 2009, following iTunes’ shift. It offers tracks at 69 cents, 89 cents, 99 cents and $1.29. Amazon has used price-based promotions, such as ‘MP3 Daily Deal’, which offers short-term discounts on newer music, weekly deals offering ‘5 albums for 5 dollars’, slashed prices for older albums, etc., to establish itself in the market.

New ‘broadcasting’ models Television is facing the same challenges as the music industry, which in turn is driving the development of new technologies and services. Like Spotify in the music industry, the free TV and film streaming service Hulu is shaking up the TV broadcasting industry. The service is ‘paid for’ through advertising and offers consumers TV and film content owned by its parent companies NBC Universal, Fox Entertainment Group (News Corp) and ABC (The Walt Disney Company), as well as other networks and movie studios. The content is premium network and studio TV programs and movies streamed in Flash Video format, although it is currently only available to users in the US, with copyright issues cited as the reason for international limits. However, a planned launch of the service in the UK in September 2009 has been delayed until the first half of 2010. Hulu also provides web syndication services for other websites including AOL, MSN, MySpace, Facebook, Yahoo!, and Comcast's fancast.com.

According to figures from comScore VideoMetrix, which measures online video and TV metrics for Internet marketers, publishers and online advertisers, there were 856 million online videos viewed on Hulu in October 2009 alone – second only to Google Sites with 10.5m video viewings (with Google’s YouTube.com accounting for 99% of that figure). Hulu is becoming a major force in online video and content – the notable difference is that, unlike YouTube, the content is created and distributed by this group of major global media organizations.

The service is based on an advertising model to actually generate revenue – as opposed to covering costs. Despite its rapid growth, however, it is expected to make a loss of around $30m in 2009 on revenue of around $165m. As a result, this has led to a high-

76


profile public debate about the possibility of offering, like Spotify, a subscription-based service alongside the free advertising-led service, with some industry watchers suggesting that a beta-version is already in development.

Mobile TV Mobile TV is another media form undergoing the same challenges and discussions surrounding how to make digital content attractive financially both for consumers and media providers alike. Currently, bundled subscription options seem to be the most successful strategy for achieving economies of scale and a rewarding RoI for broadcast TV to mobile. Pay-per-view options are likely to be a successful add-on service offering to generate higher ARPUs, but traditional pay-TV subscription-style business models will lead the market. It is likely that, as in many other media industries, there will be a combination of content ownership, delivery and pricing models.

Various research findings indicate that consumers – although surveys and reality are often wildly different – think that $10-$15 per month for unlimited broadcast TV to mobile is a reasonable price. In this case, revenue will only be driven by subscription fees, hence by subscriber numbers. Looking at big mobile operators like Vodafone and T-Mobile with 151.8m and 69.2m subscribers respectively, a subscription fee driven model bears huge earning potential. But ‘potential’ is the key word. In order to reach a critical mass and economies of scale, operators will be forced to make introductory offers. Yet any kind of offer significantly limits mobile operators’ scope to charge premium prices at a later date.

Pay-per-view could operate as a parallel but different pricing model. Depending on the type of content, operators could charge $1 to $2.50 per viewing. Packaged options like 10 times TV access for $9 could incentivize consumers to sign up for mobile TV or even switch to an unlimited subscription package.

Charging per minute or per second for the duration of watching is not feasible in a broadcast network as the operator cannot tell when a subscriber was watching

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broadcast TV. In addition, charging per minute is too complex for billing. This model would only work on 3G video services where the consumer pays for the amount of data downloaded, as today.

Commoditization of older technologies For as long as technology has existed so too has commoditization. Indeed, no matter how technologically sophisticated a product or service becomes, it is still vulnerable to commoditization. In turn, commoditized products are then vulnerable to disruption. Companies are vulnerable to disruption as they move higher up the value chain in order to stave off competition and retain high margins for a product that may have originally been proprietary and disruptive itself (and delivering high margins). This is the first step both in commoditization and towards potential disruption. In Christensen’s book (see Chapter 2), The Innovator’s Solution, he outlines six steps in the process of commoditization, and disruption. The conceptualized diagram below illustrates these steps.

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Figure 4.16: Six steps of commoditization

Early product. Technology not good enough but satisfies customer needs. Proprietary, high margins.

Evolved product (more than good enough). Due to competition, overshoots the needs of lower market.

Change of competitive landscape and market in lower tiers.

Disruption?

Commoditization

Time Starts an evolution towards modular architectures.

Disintegration of the industry.

Lack of differentiation on product and cost.

Business Insights Ltd

Source: Business Insights

A company with a proprietary, fast-growing product creates a new market and commands high margins. But in order to stay ahead of the competition, as new entrants enter the market, the company moves towards the higher end until it eventually overshoots the needs of the lower tier of the market, which can no longer utilize or

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afford its product. In turn, this leads to a change in dynamics in the lower market, and precipitates an evolution towards modular architectures, eventually leading to disintegration of the market and an inability to differentiate on price or product – a commoditized product. This ‘over-shooting’ in the second stage of technology evolution – the ‘more-than-good-enough’ technology – opens up a vulnerability to commoditization and / or disruption. Commoditization and disruption can be seen as two sides of the same coin, because by the time a company finds itself in a very highend market, it is in trouble: either disruption will steal its market or commoditization will steal its profit. Therefore, the process of commoditization can be viewed as an enabler of disruption: in any market that is commoditized, disruption is a real opportunity.

Broadband access and data transfer speeds As we have seen in previous sections, connectivity has become one of the most important factors in the development of new technologies and services. The growth of the Internet, mobility, remote working, social networking, media consumption, and so on, are all tightly tied in with the drive towards connectivity. In order to have a rewarding experience on the Internet or have access to services and applications within the cloud, broadband or high-speed network access is essential, whether fixed or wireless. The tables below show the average speed of broadband Internet connection in different regions of the world.

Table 4.9: Internet speeds available in Europe, 2009

France Germany Italy Netherlands Spain Sweden UK

% above 2mb/s

% above 5mb/s

Average speed (kb/s)

78% 85% 66% 81% 64% 79% 80%

10% 23% 5% 36% 4% 49% 11%

3439 4213 2752 5362 2637 6853 3734 Business Insights Ltd

Source: Akamai State of the Internet Q1 2009

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Table 4.9 shows that the majority of Internet users in Western Europe have a connection speed of at least 2mb/s, with Sweden and the Netherlands having a relatively high percentage of users with access speeds above 5mb/s. It is worth noting that Italy and Spain lag behind the other featured countries at both speeds.

Table 4.10: Internet speeds available in the Americas, 2009 % above 2mb/s

% above 5mb/s

Average speed (kb/s)

63% 74% 12%

26% 23% 1%

4163 3840 1134

US Canada Brazil

Business Insights Ltd

Source: Akamai State of the Internet Q1 2009

In North America, consumers generally have Internet access speeds of more than 2mb/s, but only around one-quarter of the population have 5mb/s broadband access. In Brazil, Internet access speeds are much lower – only 1% of the population has Internet access exceeding 5mb/s.

Table 4.11: Internet speeds available in the Middle East, 2009

UAE Saudi Arabia

% above 2mb/s

% above 5mb/s

Average speed (kb/s)

17% 19%

6% 3%

1638 1514 Business Insights Ltd

Source: Akamai State of the Internet Q1 2009

In the Middle East, around one-fifth of users have access speeds of 2mb/s or more, under one tenth have speeds of 5mb/s or above.

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Table 4.12: Internet speeds available in Asia Pacific, 2009

Australia China Hong Kong India Japan New Zealand Singapore South Korea

% above 2mb/s

% above 5mb/s

Average speed (kb/s)

49% 5% 88% 5% 90% 61% 66% 83%

13% 1% 39% 1% 57% 6% 24% 52%

2806 821 7584 898 7990 2790 3759 10,956 Business Insights Ltd

Source: Akamai State of the Internet Q1 2009

As shown in Table 4.12, and as might be expected, the Asia Pacific region shows a wide variation in Internet access speeds. A high proportion of Internet users in Hong Kong, Japan and South Korea have access speeds of at least 2mb/s, indeed the majority of people have this speed of Internet access, while just under one half of Australians enjoy the same access. With such large, and relatively poor, populations India and China lag behind the remainder with just 5% of users in both countries enjoying Internet access speeds of 2mb/s or more, and just 1% able to access the Internet at more than 5mb/s. Again, as might be expected, Japan, South Korea and Hong Kong have the highest proportion of users with Internet access speeds of 5mb/s, although it is still only half of the population of each country that has such high-speed access. South Korea, meanwhile, has the fastest average speed for Internet access out of any of the countries featured.

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Figure 4.17: Average Internet connection speed by country, 2009

China India Brazil Saudi Arabia UAE Spain Italy New Zealand Australia France UK Singapore Canada US Germany Netherlands Sweden Hong Kong Japan South Korea 0

2000

4000

6000

8000

10000

12000

Average connection speed (kb/s)

Business Insights Ltd

Source: Akamai State of the Internet Q1 2009

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Conclusions This chapter has outlined just some potential enablers of disruption. Equally, the acceleration of processing power, the miniaturization of components, the extension of battery life, the evolution of storage and memory technologies, such as Flash memory, could all be considered enablers of disruption. These and other enablers essentially provide the ‘platform’ for potential disruption. However, it is also difficult to predict and list all such ‘platforms’ as they themselves are evolving and making possible new disruptive technologies – these are just the enablers that we recognize at this time. When considering whether a technology is likely to be disruptive or not, it is essential to identify the enablers that are in place and vice-versa those that are not, but need to be, in place for the successful adoption of a new technology.

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CHAPTER 5

Technology areas facing disruption

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Chapter 5

Technology areas facing disruption

Summary ‰

The concept of DVRs and DVR services is already disrupting traditional media content delivery and broadcast models, and the pace of this disruption is likely to accelerate in the near future.

‰

It is estimated that around one in seven US consumers over the age of 12 listen to an Internet radio station every week; that is more listeners than podcasts, mobilebased radio and ‘HD’ radio combined.

‰

There is also a growing number of more innovative services, from websites such as Last.fm, Spotify and Pandora. These services differ from ‘broadcast’ [webcast] Internet radio, in that the consumer essentially chooses the playlist.

‰

A new breed of online music streaming services combine a number of trends and capabilities that serve the needs of customers, including customization, personalization, time-shifting (from broadcast schedules), connectivity, mobility, social networking, and so on, and are only expected to grow in popularity in future.

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Internet TV on demand continues to evolve rapidly, with the lines between Internet TV and DVR services rapidly blurring.

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Apple is rumored to be looking for support for a monthly subscription fee service that allows iTunes users to watch and download TV programs and films at a much lower cost than that for subscription TV or video on demand.

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The potential end prize (the upgrade of millions of TV sets) means that TV manufacturers are not likely to halt their pursuit of 3D television in the foreseeable future.

‰

The opportunity for 3D websites and online virtual collaboration spaces are significant, and it is only a matter of time before the Internet experience provides a much more faithful representation of the real world.

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‰

For Q2 2009 (ended March 2009), iPhone shipments reached 3.8m, an increase of 123% over the same the same period in the previous year, while iPhone 3G, which was launched in July 2008, sold more than 6.9m units in the first quarter after its launch.

‰

The runaway success of Apple’s App Store for the iPhone and iPod Touch personal media player has been one of the most notable developments in mobile digital content in 2009.

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The number of mobile phone subscribers increased from 3.3bn in 2007 to 4.1bn by the end of 2008, corresponding to a penetration level of 61% of the global population, meaning that current mobile application sales are just the tip of the potential iceberg.

‰

The market for mobile games grew at a CAGR of 56.4% over the period 20032008 and is expected to grow at a CAGR of 17.6% over the period 2008-2013 to $15.1bn.

Introduction This final chapter outlines some of the consumer technology areas where, based on the trends, factors and technological advances outlined in the earlier parts of this report, disruption is most likely to occur in the near-to- medium future. The list is by no means exhaustive, but includes the most obvious and pressing technology areas, where disruption is either on the verge of occurring or where the conditions discussed previously are present and offer the biggest opportunity (or threat) for disruption.

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Home entertainment Digital video recorders Hard disk-based recording devices (digital video recorders [DVRs], or personal video recorders [PVRs], depending on preference for US or UK terminology, respectively) have been around for several years, with standalone devices from ReplayTV and TiVo starting the ball rolling in 1999. Their popularity stems from the fact that they make ‘time-shifting’ possible for consumers – DVRs directly facilitate ‘time-shifting’, whereby consumers are no longer tied to schedules for watching TV or films. They also provide added convenience in that they can be programmed to record an entire series of episodes without the user having to remember to ‘set’ the device. More recently, a number of manufacturers – for example LG, which was the first to introduce the feature in 2007 – now include DVR hardware and software within the television itself. Similarly, new functionality includes remote controlling and programming of DVRs from mobile devices, networked PCs and Web browsers.

As the data below shows, DVRs have seen strong growth and by 2013 it is forecast that 208.5m households across the globe will be making use of them.

Table 5.13: DVR household growth by region (m), 2007-2013

North America Western Europe Asia Pacific Eastern Europe/MEA Latin America Total

2007

2008

2009

2010

2011

2012

2013

29.4 4.7 1.4 0.6 0.2 36.3

42.8 8.6 3.1 1.1 0.5 56.1

57.7 14.2 6.7 2.0 1.0 81.6

66.4 19.3 10.8 2.9 1.6 101.0

76.3 26.3 17.4 4.3 2.5 126.8

87.8 35.7 28.0 6.4 4.0 161.8

99.4 48.2 45.1 9.4 6.4 208.5

Business Insights Ltd

Source: Informa Telecoms & Media

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Figure 5.18: DVR household growth by region (m), 2007-2013 225.0 North America

Eastern Europe/MEA

Western Europe

Latin America

200.0

DVR households (m)

175.0

Asia Pacific

150.0 125.0 100.0 75.0 50.0 25.0 0.0 2007

2008

2009

2010

2011

2012

2013

Business Insights Ltd

Source: Informa Telecoms & Media

The term DVR includes standalone set-top boxes, portable media players (PMP) and software for PCs that enables video capture and playback to and from disk. DVRs consist of a hard drive that allows users to record and playback their favorite TV programs and films, with the added benefit that DVRs can ‘pause’ live TV (as they record the scheduled program in real time onto the hard drive), allow instant playback of interesting scenes and allow the user to watch a program as it is still being recorded (for example, if viewing started 10 minutes later than the scheduled program).

One of the pioneers of PVR technologies is US based company TiVo, which provides DVR functionality, along with intuitive EPGs (program guides), for a monthly subscription fee. However, TiVo faces increasingly tough competition from 89


broadcasters, media companies, and new market entrants as the DVR technology and services market evolves. Services such as Sky+, Freeview+, FreeSat, and many others, have offered DVR capabilities built into their set-top boxes for some time.

In order to fight the threat of subscriber churn, TiVo has signed a number of recent agreements and partnerships with a host of different companies, including: online retailer Amazon (which allows TiVo customers to access Amazon’s Unboxed online video distribution service); US mobile network operator, Verizon Wireless (which allows Verizon mobile subscribers to access a ‘what’s-on’ EPG as well as permitting subscribers to program their home TiVo’s to record television shows while they are away); German software company Nero (to develop an application to put TiVo DVR capabilities onto PCs); and most recently Virgin Media (to develop a converged television and broadband interactive interface to power Virgin Media’s next generation of HD set-top boxes).

Likewise, the Slingbox (introduced in 2005) made the concept of ‘place-shifting’ possible, as it allows consumer to watch TV or the DVR contents over any broadband Internet connection. Hulu, meanwhile, provides TV and video content on demand via a Web browser – the service is covered in more detail in a later section ‘called Internet TV’ as it blurs the lines between the two formats.

The concept of DVRs and DVR services is already disrupting traditional media content delivery and broadcast models, and this disruption is likely to accelerate in the near future. Some have already embraced the trend (see media giants NBC, ABC and Fox and their joint venture, Hulu, and UK terrestrial broadcasters’ online offerings such as BBC iPlayer) in order to be best placed to be part of that disruption, rather than the victim. However, others continue to fight against it. What is not in doubt is that with DVR specialists, broadcasters, media companies, and others looking to develop and evolve these and other innovative services, this sector is ripe for continued disruption in the immediate future.

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Internet radio and music streaming Previous chapters have highlighted the growing impact of the Internet, the willingness of consumers to use it in their daily lives, and the growing range of devices that facilitate high-speed Internet access. At the same time, the capabilities and growing number of services offered by ‘The Cloud’ means that the Internet is becoming a single source for the consumption of all types of media. Watching TV or listening to the radio on the Internet is no longer unusual. The benefits of doing so are myriad, and a growing number of innovative services are taking advantage of these trends, as outlined in the following sections. As a result, a new breed of music streaming and sharing communities is growing in popularity, often providing free access to music in return for advertising.

‘Traditional’ Internet radio is an audio broadcast transmitted over the Internet. While it is not a particularly new medium, it is an often underestimated one. For example, it is estimated that around one in seven US consumers over the age of 12 listen to an Internet radio station every week, that is more listeners than podcasts, mobile-based radio and ‘HD’ radio combined. One of the main advantages of Internet radio is that it allows listeners to choose from a global list of radio stations – so, for example, an ‘expat’ could listen to a ‘local’ station from home regardless of their own location. Likewise, the ‘global’ nature of Internet radio listening means that almost every genre of radio station is catered for. So consumers can essentially listen to any radio station in the world on any device, as long as they are able to access an Internet connection, without any of the reception issues that can plague even local ‘traditional’ radio broadcasts.

However, alongside the growing use of Internet radio, there are a growing number of more innovative services, from websites such as Last.fm and Pandora. These services differ from ‘broadcast’ [webcast] Internet radio, in that the consumer essentially chooses the playlist. At the same time, such services offer music community sharing, intelligent music recommendations, social networking, and other benefits, which create

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a completely different experience to simply listening to radio broadcasts on the Internet.

Pandora, for example, is an Internet radio station with a difference, offering a combination of broadcast, music community and audio streaming. The website was created by the Music Genome Project in 2000. The service allows users to choose a selection of their favorite songs or artists, which it then compares with its database using 400 attributes to find and stream a radio playlist of old and new music based on the listener’s preferences. In this way, subscribers to the service can create up to 100 different ‘radio stations’ for example based on different genres, moods, and so on. The station playlists are continually refined by the listener by voting ‘yes’ or ‘no’ to each song played by Pandora. The site also offers a ‘broadcast’ service based on genre, rather than consumer preferences.

The concept behind Pandora is that listeners are introduced to new artists and music (as playlists are based on the consumer’s preferences). At the same time, listeners are given the opportunity to purchase the music being played at any time through various online retail partners. Artists give their authorization for such ‘sharing’ on the basis that they may find a new audience (or generation) for their music. For the consumer, the first 40 hours of streaming each month are free, in exchange for a limited number of adverts, after which listeners can continue unlimited streaming for a further $0.99 for the rest of the month. It also offers a $36 annual subscription, which is advertising free. Unfortunately, the service has in recent years been limited to users in the US – as defined by the IP address of the user – with copyright issues cited as the reason.

However, the service is also available to mobile users in the US, through Pandora Mobile – which streams the music service to iPhone, Windows Mobile and Blackberry devices. Users can download a fully operational Pandora Internet radio application and access the service normally. Pandora claims a total subscriber base of 27m, with 3-4m of those listening on mobile handsets. The company also claims 2m downloads of the mobile application to iPhones.

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Likewise, Last.fm is a UK-based Internet radio and music community site founded in 2002. It now boasts 30m active users in more than 200 countries, and was acquired in 2007 by media giant CBS Interactive for £140m (US$280m). The service builds a detailed profile of each subscriber’s music library and tastes using not only their local music library but also the music they have on portable devices and their listening preferences on other streaming services. The user’s musical preferences are then displayed in a profile page, which also offers social networking capabilities, which allows users to share music and communicate with other users and music lovers. So, for example, a user’s profile page might include favorite playlists, most recently listened to tracks, ‘friends’ within the Last.fm community, groups, and so on. Users listen to music by creating playlists from the Last.fm database and can listen to some individual tracks on demand or download tracks if the artist has authorized it. For users in the UK, the service is free (advertising based), but those in the US and Germany, for example, have to pay a minimal subscription fee of €3 per month (no advertising – although UK users can subscribe to receive the advert-free service).

Last.fm has deals with media companies such as Time Warner and Sony BMG giving the service access to their entire music catalogues. At the same time, artists on independent labels are encouraged to authorize music sharing on the site in order to gain access to its audience of subscribers. In November 2009, the Last.fm service was also launched on the Xbox 360 game console to UK, US and German subscribers, while a Last.fm mobile application is available for iPhones, Windows Mobile devices and Google’s open source mobile platform, Android.

Meanwhile, Spotify provides a peer-to-peer online music streaming service via two subscription models: advertising funded and monthly or annual subscription fees (without adverts). Spotify allows users to stream music from the Spotify database (which is derived from downloading every track it does not already contain from a new subscriber’s music library) with no buffering delay. While this requires a good Internet connection (fixed or wireless), it means that users can listen to their favorite music (i.e. their music library, plus everyone else’s) without the need to carry local storage on a device. In turn, this means that users can access their music library from any device 93


with an Internet connection without the need for keeping multiple devices synchronized with new music tracks. Music can be browsed by specific track, artist, album, record label, and so on, and users are provided with a link to directly purchase the music from partner retail sites. The service is only available from IP addresses in Finland, France, Norway, Spain, Sweden and the UK, again due to copyright issues. But the important point is that, if users can stream music to any new device from a database such as Spotify, why is there a need to maintain a local music library? Indeed, why own CDs, DVDs or even iTunes downloads?

A new breed of online music streaming services combines a number of trends and capabilities that serve the needs of customers, including customization, personalization, time-shifting (from broadcast schedules), connectivity, mobility, social networking, and so on, and are only expected to grow in popularity in future – indeed, one of the main inhibitors is the time taken to develop new copyright and licensing models in order to take full advantage of the global opportunity for music sharing and streaming.

Internet TV In recent years, the evolution of IPTV has not been a smooth one. However, with technical issues and protocol-wars largely becoming irrelevant, the growth of Internet TV, Internet-based TV services and ‘TV on demand’ is surely at a tipping point. Multimedia Research Group reckons there to be 28m IPTV subscribers in 2009, and forecasts a total of 83m in 2013 (see Figure 5.19). This statement is further borne out by the rapid success of online TV services from mainstream broadcasters. In the UK, for example, the success of BBC’s iPlayer – which allows consumers to watch scheduled TV programs they missed online for free – is said at times to have slowed the performance of the entire UK broadband infrastructure. All five of the terrestrial broadcasters in the UK now offer their own version of these ‘playback’ or ‘watch again’ services. Likewise, users can now stream online ‘live TV’ as scheduled directly to their mobile phone, including the iPhone, as long as they have reasonably good mobile reception. With consumers increasingly tied into hectic business and personal

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schedules, such services once again play into the themes of ‘time-shifting’, Internetbased media consumption, and convenience.

Figure 5.19: Global IPTV subscribers, 2009-2013 (m) 90 83.0

Global IPTV subscribers (m)

80

70 62.9 60 48.1 50

36.7

40 28.0 30

20 2009

2010

2011

2012

2013

Business Insights Ltd

Source: Multimedia Research Group

Internet TV on demand continues to evolve rapidly, with the lines between Internet TV and DVR services rapidly blurring. At the same time, the shift away from scheduled broadcasting continues apace. One such example of a service meeting both of these needs is US-based Hulu. Since its launch in 2007 Hulu has made waves due to its surprising ownership and the fact that it blows traditional TV broadcasting models out of the water – as well as its rapid ascent to become one of the most popular media content websites, second only to YouTube.

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Hulu is a joint venture between media conglomerates NBC Universal, Fox Entertainment Group and ABC (Walt Disney). The service provides commercially supported streaming video and TV shows free of charge, with users now able to watch around 10,000 hours of premium content on their PC (or TV using specialist software and a networked home entertainment hub). The Hulu service is currently restricted to US consumers; however, there is a planned rollout for the UK and Ireland in 2010. Hulu provides video in Flash Video format, including many films and shows that are available in 360p and 480p. Hulu also provides web syndication services for other websites – including AOL, MSN, MySpace, Facebook, Yahoo!, and Comcast's fancast.com – and has another 30 affiliates providing additional media content. Notably, there are rumors that the Hulu board is currently considering moving to a subscription-based model – although no decision has yet been formally announced.

On that note, Apple is heavily rumored by multiple industry sources to be pitching a new type of TV subscription service for iTunes to TV network operators. It appears that Apple is looking for support for a monthly subscription fee service that allows iTunes users to watch and download TV programs and films, at a much lower cost than that for subscription TV or video on demand. The service would mimic its successful music download service and if it does come to fruition could represent a further evolution of TV content business models.

Three-dimensional (3D) TV and Internet 3DTV In 2009, there was a noticeable trend in film-making towards 3D versions of blockbuster films, including James Cameron’s Avatar, the children’s film Up, and the horror Final Destination 4, among others – with 2010 shaping up to continue the trend. However, while the big screen and a pair of 3D glasses has for some time offered a 3D spectacle, similar experiences in the home have been lacking. But with sales of new LCD and plasma TVs flagging in the midst of the economic recession, TV manufacturers have started to unveil 3DTV models – combining HD viewing with 3D technology – in order to whet consumers’ appetites and boost flagging TV sales. For

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example, Samsung, Sony, LG Electronics and Panasonic all unveiled 3DTVs during 2009. The next 5 years are likely to see quick growth in the 3DTV market, with research house DisplaySearch forecasting that overall market volume will grow from $1.1bn in 2010 to $15.8bn in 2015.

Figure 5.20: Global 3DTV market size, 2010-2015 ($bn) 15.8

16

14

3DTV market size ($bn)

12

10.5

10

8

6.9

6

4.6

4

2

2.8 1.1

0 2010

2011

2012

2013

2014

2015

Business Insights Ltd

Source: DisplaySearch

3D movies have been around for some time, but since the 1950s the concept has been viewed as something of a gimmick. However, newer technology and advanced special effects mean that today’s 3D experience is far removed what older consumers think of as 3D, and is about to bring it into the mainstream. Indeed, much of the drive is coming from Hollywood with filmmakers pushing the technology. Indeed, movie production company DreamWorks has produced all of its films in 3D since the beginning of 2009.

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The company has also partnered with chip manufacturer Intel to develop processors that will bring the 3D experience into the home. But it is not just movies that are getting the 3D treatment, some sports events such as basketball and American football matches in the US are already broadcast in HD 3D to selected cinemas, while the Olympics in Beijing were also broadcast in 3D for those lucky enough to be able to receive and view the transmissions. Industry watcher accounts of the technology suggest that the experience was akin to being stood on the track itself during Olympic events, such was the immersive quality of the technology. In 2010 the trend arrives in the UK through international rugby, as RBS 6 Nations games are screened live in HD 3D in selected cinemas.

Pricing of 3D-ready TVs is in fact similar to that for today’s flat-screen HD TVs, but the big question is whether the added 3D functionality will be enough to persuade consumers to upgrade their existing LCD or plasma TV, which themselves are only relatively recent advances. Indeed, one of the major inhibitors for 3D-ready TVs is the fact that the familiar 3D glasses are still a requirement. The glasses essentially merge two sets of 3D imaging on the screen to fool the brain into thinking that there is a single 3D image – without the glasses, the image is fuzzy and can cause headaches for the watcher. One of the reasons why 3D glasses are still required is the limit to the number of pixels that the screen requires to create such images – it is estimated that a 50-times increase in the number of pixels on TV screens is required in order to achieve glasses-free 3DTV, which is likely to be more than a decade away. However, some manufacturers, including Phillips, already claim to have developed technology that does not require glasses for 3D viewing. Phillips’ WOWvx uses a thin film coating on the screen that mimics the effects of glasses, although this is not yet commercially available. Other potential inhibitors include a lack of standards for 3D protocols, and the cost and availability of bandwidth for broadcasting (or streaming) such large amounts of data across networks. However, the potential end prize (the upgrade of millions of TV sets) means that TV manufacturers are not likely to halt their pursuit of 3D television in the foreseeable future.

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3D Internet The popularity of the online community/game/phenomenon Second Life introduced the concept of 3D Internet to the mainstream. The game allows users to create an online avatar, or identity, for themselves and enter a 3D world, where they can interact with millions of other ‘Second Life-ers’, build things, visit new worlds, purchase goods, trade, set up business, socialize, and so on. Indeed, Second Life has its own economy that generated around $32m in 2007. But Second Life is not alone, with a number of other virtual or 3D worlds pushing the boundaries of how the Internet could be used and heralding the concept of the 3D Internet.

While the popularity – or at least the media coverage – of such Internet-based virtual worlds has waned a little in recent years, the most notable feature is that they attracted – in particular Second Life – a broad range of commercial organizations who experimented with using 3D modeling, 3D websites and 3D virtual spaces to enhance the user experience of Internet users. For example, Second Life has been described as a blank canvas on which individuals and organizations can create content and services and experiment with them in a virtual world, with ‘real’ consumers, without the risk that would entail in the ‘real world’. It is also considered to be the start of the growth of the 3D Internet.

For example, PC maker Dell has an island in Second Life, called ‘Dell Island’ – users can purchase ‘real estate’ in the virtual world using Second Life currency, which is controlled by the creators of the virtual world, Linden Labs. Virtual visitors to the island are able to view and customize Dell computers and notebooks, for example by changing color, within the virtual world, and see a 3D model of what it will look like. Likewise, car manufacturer Toyota released customizable prototypes of its Scion model of car, and watched how consumers interacted with it, and customized it. It used this feedback to guide the development process of the car back in the real world.

Indeed, the concept of buying clothes from a 2D list on a website appears rather ‘unnatural’ when considered in this context. It would be more helpful – and

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commercially successful – to provide online 3D stores that look like ‘real-life’ stores, with racks of clothing and stock, allowing consumers to see the goods in 3D. Using an avatar based on the consumer’s clothes size, height etc would then allow users to see how the clothing might look when worn, and allow them to change size and color, for example, all from the comfort of their desktop. UK retailer Specsavers, for example, offers a simple website service that allows users to upload a photo of themselves and then ‘try on’ different styles of glasses to see whether they suit them or not.

3D websites could not only mimic the real-world shopping experience, they could also be used to represent, for example, real estate (to show how a new-build house might look), hotel rooms (whereby consumers can view the room they are about to book, the surrounding area, the view from the balcony, and so on), furniture (using a 3D representation of their own living room to see how it would look), and so on.

At the same time, 3D websites with incorporated collaboration tools, webcams, and so on, have already been used in Second Life by companies such as IBM to host meetings and conferences in virtual space. A 3D representation of a meeting room, with all the participants labeled by name or represented by a webcam view of themselves, collaboration tools such as a white board for making notes or giving presentations could significantly boost productivity and cut down on transport costs, environmental impact, and time lost travelling.

The opportunity for 3D websites and online virtual collaboration spaces are significant, and it is only a matter of time before the Internet experience provides a much more faithful representation of the real world.

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Portable technology Netbooks / mobile internet The notable success of netbooks, particularly in Europe, represents in microcosm the shift in technology evolution and consumer behavior that we are currently seeing, and which has been consistently outlined in this report. Before the advent of netbooks – which was a direct consequence of the One Laptop Per Child initiative to provide children throughout the world with access to low-cost but ‘good enough’ notebooks – buying a portable computer, i.e. a notebook, was all about performance. How large is the memory, how fast is the processor, what graphics card does it come with? But as consumer values shift – towards convenience, portability, connectivity, cost, and so on – the concept of ‘highest-possible performance’ is being thrown out of the proverbial window. Indeed, it is becoming clear that many of the tasks – an estimated 95% – that we perform can be done via a browser. Responding to emails, surfing the Web, streaming video, keeping in touch with friends via Twitter or Facebook, listening to Internet radio, and so on.

As a result, netbooks need to provide a fraction of the storage space of a traditional notebook (and use flash memory and storage rather than DRAM or hard drive), have much slower processors, smaller screens, and often run a lower-power hungry OS, such as open source Linux. Indeed, netbooks are optimized to be portable and connected devices that make use of the growing number of services and applications that are available from the Internet, and within ‘the cloud’. Accessing applications such as word processors, games, Internet TV via the Internet means that much of the local processing power and storage requirement of a notebook is steadily becoming redundant. Importantly, netbooks not only allow users to perform most of the tasks that they can do on a notebook, but also at about a third of the price.

A selection of Taiwanese manufacturers of netbooks have led the way, although most consumers are unlikely to have heard of them: including, Quanta Computer – which 101


completely designed Apple’s G4 notebook in 2001, and is responsible for designing the XO-1 for the One Laptop Per Child initiative – has annual sales of around $25bn; and Asustek, which is the leading netbook maker in the world; and MSI, which has branched out from making motherboards to designing consumer devices from LCD TVs to smartphones. At the same time, incumbent notebook leaders such as Dell, HP and Acer, some of which initially viewed netbooks as ‘not good enough’, have now been forced into entering the market in order to not miss out on the growing market for netbooks. As can be seen in Figure 5.21, a consensus forecast from research firms Gartner and IDC is that netbook sales will take off over the next few years, reaching 47m shipments in 2012.

Figure 5.21: Global netbook market size, 2008-2012 (millions of units shipped) 50

47.5

45

Global netbook unit shipments (m)

40 35 28.5 30 25 20.4 20 15 9.5 10

6.1

5 0 2008

2009

2010

2011

2012

Business Insights Ltd

Source: Gartner, IDC

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Meanwhile, sales of mobile devices, and in particular smartphones, continue to grow (as evidenced by various statistics highlighted previously in this report). The release of Apple’s iPhone 3G in July 2008 ignited the smartphone market. Although the iPhone has its flaws, the product brought together telephony, internet access and multimedia experience in a manner that the other vendors never managed to do. For Q2 2009 (ended March 2009), iPhone shipments reached 3.8m, an increase of 123% over the same the same period in the previous year, while iPhone 3G sold more than 6.9m units in the first quarter after its launch.

Notably, in 2008, Google also entered the smartphone market, with the HTC G1 becoming the first smartphone available on the market to run Android, Google’s opensource mobile operating system. The Nexus One, designed directly by Google and manufactured by HTC, was released in January 2010 and is seen to be the closest rival yet to the dominance of the iPhone. The benefit of the Android OS is its tight integration with Google Apps for both personal and business use, including GMail and collaboration and office productivity suite, respectively.

The unprecedented interest in smartphones and the rise of netbooks has led media commentators to question which product category will emerge as the mobile device of choice. However, it is more likely that the two product categories can co-exist. Smartphone screens may be adequate for web browsing but are unsuitable for editing documents, while netbooks have much of the portability of a smartphone while retaining the functionality of a notebook, and may be more suited to tasks that require more screen space or on-screen document/file manipulation. The two are not in direct competition and the expansion of both netbook and smartphone sales is likely in the foreseeable future.

Mobile applications The runaway success of Apple’s App Store for the iPhone and iPod Touch personal media player has been one of the most notable developments in mobile digital content in 2009. Since its launch in July 2008, Apple has recorded over 2bn application

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downloads from the App Store (which forms an integrated part of Apple’s media manager and content storefront software, iTunes), and counts over 110,000 applications in the store from around 125,000 developers (as of November 2009).

Apple does not release figures concerning App Store sales, but downloads have been estimated to be worth between $100-200m per month in revenues. Apple takes a 30% cut and the rest goes to developers – even though the majority of applications in the store are free to download and use. These download volumes are unprecedented in the annals of mobile application downloads for a single mobile device. What is not in contention is the fact that mobile application downloads – so long a specialist backwater of mobile content – have been revived as a perceived potential source of revenue for many players in the mobile telecoms value chain.

As a result, other device manufacturers and developers of device software platforms have made a move to grab a piece of the action, notably Google’s Android Market for Android-based handsets. Other releases include RIM’s BlackBerry Application Centre, Nokia’s Ovi Store, and Microsoft’s Windows Marketplace for Mobile.

Given trends including mobility, connectivity, the growth in sales of mobile devices, and consumer demand for technologies that can be customized to suit individual needs, the current market for mobile applications is likely to represent just the tip of the iceberg. For example, the number of mobile phone subscribers increased from 3.3bn in 2007 to 4.1bn at the end of 2008, corresponding to a penetration level of 61% of the global population. App stores from all the players are still relatively new, and it is likely that increasingly sophisticated and ‘intelligent’ mobile apps will continue to be developed, while consumers will further begin to understand the power of downloadable mobile applications for converting mobile devices into specialized or customized units.

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Mobile gaming As the mobile application market in general is growing rapidly, so too is the mobile gaming market. Indeed, it is the fastest growing segment of the video gaming market. For example, the market for mobile games grew at a CAGR of 56.4% over the period 2003-2008 and is expected to grow at a CAGR of 17.6% over the period 2008-2013 to $15.1bn (see figure below).

Figure 5.22: Global mobile gaming market size ($bn), 2003-2013 16 14

Market Size ($bn)

12

R G CA

10

=

17

.6

%

8 6 R G CA

4

=

56

.4

%

2 0 2003

2008

2013

Business Insights Ltd

Source: Business Insights

Increasing mobile and 3G penetration are the key drivers of mobile gaming – 3G networks, which accounted for approximately 11% of mobile phone subscribers in 2008, will account for nearly 50% of mobile phone subscriptions in 2013. The other key driver of mobile gaming is increasing smartphone sales. The advent of high-speed networks and launch of 3G services has fuelled the uptake of mobile value added services, including mobile gaming. As per ITU, 3G networks, which accounted for approximately 11% of mobile phone subscribers in 2008, will account for nearly 50% of mobile phone subscriptions in 2013. The smartphones, particularly Apple iPhone, are expected to revolutionize the mobile gaming market. Smartphones such as Blackberry and iPhone are gaining huge popularity and their sales are increasing 105


rapidly. Worldwide smartphone shipments reached 139.7m in 2008 and are expected to grow at a CAGR of 19.5% to reach 406.7m by 2014 as per estimates by Ovum.

As in so many other markets, it is Apple’s iPhone that has revolutionized the mobile gaming market and will be the largest contributor to the growth of mobile gaming in the near future. Apple is increasingly focusing on positioning iPhone as a mobile gaming console and the latest upgrade, the 3GS, has a strong focus on mobile gaming. The key reasons for the success of iPhone as a gaming device are: ‰

Electronic distribution of games via iPhone’s App Store;

‰

Features such as large display screen, the accelerometer and multitouch display;

‰

Portability compared to its competing product – portable consoles.

The Apple App Store had over 19,000 games applications available for download as of November 2009, accounting for around 17% of total apps – a larger proportion than any other type of application. As Figure 3.10 shows, games also account for around 16% of all downloads. However, the quality of games available on iPhone and other smartphone remains basic due to processing limitations, graphic capabilities and memory management. To be able to capture a bigger chunk of the mobile gaming market, Apple needs to overcome technical challenges to deliver more sophisticated games to gamers and support one or two major blockbuster titles. To overcome these limitations, Apple is working on improving iPhone’s graphics and processing capabilities. In April 2008, Apple acquired semiconductor company PA Semi to manufacture ARM chips for future iPhones, which are likely to enhance the gaming experience on iPhone.

The key mobile gaming publishers are EA Mobile, Gameloft, Glu and THQ. EA Mobile is the largest mobile gaming publisher, closely followed by Gameloft. The market share of these top four publishers increased steadily – their combined market share increased from 11% of the worldwide market in 2004 to 22.0% in 2007 – until the launch of new platforms such as the iPhone and Android in 2008 made it a lot 106


easier for less established developers to generate significant revenues. As the big players’ market share stagnates, there is an opportunity for smaller developers to make a name for themselves in the mobile gaming segment.

Flash storage As values such as portability, connectivity and mobility have become increasingly appreciated by consumers, an increasing number of devices have swapped hard drive memory and storage units for a smaller, lighter memory technology known as flash – technically called ‘NAND’ flash. Flash memory is becoming the de facto memory and storage medium for smartphones, netbooks, mobile phones, cameras, portable audio players, and other mobile devices, for a number of reasons. First, flash is a non-volatile, solid-state storage (meaning that unlike hard drives it does not require constant power to retain data and has no moving parts). It also offers fast access times and flash is physically robust – making it ideal for use in portable devices. At the same time, Flash generates less heat and uses less power than other forms of memory, which again makes it ideally suited for use in mobile devices – which have a finite and limited amount of battery power. Indeed, these benefits are considered as significant factors in making possible the small size factor of the iPod Nano, launched in 2005.

Furthermore, while flash was not cheaper than hard drive storage just a few years ago, soaring sales of mobile phones, digital cameras and MP3 players in recent years has driven up production volumes, and in the process driven down its price. Flash has seen massive uptake in consumer devices almost overnight, significantly driving down price to the point where it is now well below the price of dynamic RAM, which is used in most servers and PCs.

With the number of smartphone shipments alone set to rise from 139.7m in 2008 to 406.7m by 2014, according to figures from market research specialist Ovum, there is a significant market opportunity for NAND Flash memory in portable devices. As demand for such devices continues to grow, so the price of Flash continues to fall. Indeed, Flash is steadily replacing DRAM in not just smaller handheld devices, but

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also more historically ‘heavy duty’ devices, such as notebooks. Flash first started to appear as a supplementary storage/memory medium to DRAM in hybrid notebooks – which combine the benefits of both media. However, advances in Flash now mean that full solid-state (i.e. Flash-based) notebooks are now coming to market. For example, in March 2009, Toshiba launched the first all solid-state drive (Flash) notebook. The Portégé R600 offers 512 GB of memory, with low power consumption (and therefore an extended battery life of 9.5 hours), fast read/write times compared to a hard drive, and a lightweight form factor. It promises to be the first in a range of increasingly powerful, low-power, Flash-based notebooks. Heavy competition in this market also means that the technology is advancing at a rapid rate, with improvements in read/write speeds, higher capacities, and lower power consumption occurring on a regular basis.

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Ethical technologies ‘Green gadgets’ As concerns over climate change and sustainability continue to grow over the coming decades, demand for ‘green gadgets’ and applications that help the environment in some way represents a significant opportunity for manufacturers, designers, software developers and service providers alike. Increasingly, consumers will demand devices that use alternative energy sources or offer longer battery life, are made from recyclable materials not harmful to the environment at the end of the product’s lifecycle, or provide access to services and applications that allow consumers to focus on their environmental footprint.

As already discussed in the previous section, the replacement of hard drives with flash memory in most mobile devices is one example of how technology can help to reduce power consumption and prolong battery life. An increasing range of ‘green gadgets’ are set to meet a growing consumer demand. For example, according to figures from Juniper Research, over 5bn standard batteries are used and thrown away each year at significant environmental cost. There are three main areas in which consumer technology can provide environmental benefits – improved energy efficiency, recyclability/upgradability, and completely new capabilities, as yet still in development.

Incremental improvements in energy efficiency – enabled, for example, by the adoption of flash memory, or advanced battery technology – offer significant improvements, as these apparently small advances can have a massive combined effect when spread over billions of different types of devices across the world.

Already, desktop PCs have come under the scrutiny of energy-efficiency improvement, particularly driven by the need to cut energy costs in businesses across the world. A new breed of energy-efficient PCs adopt designs and technologies that can cut power 109


consumption by up to 50% in some cases, relating to significant savings in electricity usage and, of course, in carbon footprint. The range of energy efficient desktop PCs is now broad, and all make use of a variety of energy-saving technologies, including lowpower processors from the likes of Intel and AMD (which generate less heat and noise, and use less power), air-cooling optimized designs (which therefore require less power for fan-assisted cooling of PC components), more efficient power management (such as idling and standby), and low-power, high-performance monitors.

Althought traditional ‘towers’ are still popular, as they offer room for expansion and are now increasingly energy-efficient, small form-factor PCs are becoming increasingly popular, due to their desktop space-saving and lower heat production. Mini PCs, such as Apple’s Mac Mini and Dell’s Studio Hybrid, are increasingly popular – as well as reducing energy, these tiny PCs also mean less weight (during transportation, for example), less material, and less packaging. Most of the major manufacturers also offer very small, high-performance PCs, such as Dell’s OptiPlex 740 Ultra SFF Desktop Computer, HP Compaq’s dc5750 SFF PC, Toshiba’s Esprimo range and Lenovo’s M57 Energy Star Ultra Small Desktop models. Popularized by the iMac, meanwhile, all-in-one PCs come with an integrated monitor.

Another consideration is the recyclability of PCs, which in the past have been made from a cocktail of materials that were toxic to the environment – such PCs could not be recycled or made safe and so were often dumped in landfill sites (or in the worst cases, shipped to underdeveloped countries in return for financial rewards). However, a variety of new EU-wide and US legislation, such as WEEE and RoHS, means that PC makers are building their units from fully recyclable, non-toxic materials. Likewise, newer notebooks and netbooks also make use of the same techniques and technologies as this new breed of desktop computer.

Mobile devices, on the other hand, currently lag behind the advances being made in PC and notebook markets, with few handsets offering any ‘green credentials’. Indeed, according to a report from market analysts Juniper Research the average mobile user is responsible for around 25kg of CO2 emissions per year – which globally adds up to a 110


significant carbon footprint. Furthermore, the disposable, fashion-related nature of many mobile handsets provides an environmental headache as few are made from recyclable components. As a result, there is a significant market opportunity as green concerns become an increasing factor in the consumer purchase decision.

Currently, only a few manufacturers offer green handsets, and those devices that are environmentally friendly are still perceived as ‘gimmicky’. For example, Samsung’s Blue Earth phones are solar-powered touchscreen phones made from recycled plastic water bottles. The solar cell adds energy to the battery during daily use, and the phone itself is free from environmentally harmful substances such as beryllium and phthalates. In Samsung’s footsteps, Chinese manufacturer ZTE has just released its Coral-200 Solar handset, aimed at users in remote or underdeveloped regions where there is not always constant access to electricity. Motorola’s Moto W233 Renew phone, made from recycled plastic bottles, has also followed suit.

As might be expected ecological mobile applications are following close behind such handsets, including a pedometer application which measures the amount of CO2 a user is saving by walking, compared to driving, and a sat-nav service from GPS company Garmin, which generates directions based on the most fuel-efficient course for a vehicle.

The harnessing of alternative energy sources is also high on the agenda of young technology companies and technologies. For example, Regen’s ReNu solar charger is a standalone power module for charging a rechargeable lithium-ion battery. While USbased technology company, Tremont Electric has launched its nPower PEG (personal energy generator), which converts the human kinetic energy generated by the act of motion into power that can drive mobile devices such as smartphones and portable audio players. The device is a closed aluminum tube one-foot long, which takes an equal amount of time to charge as an electrical wall socket – so, for example, if a mobile phone takes 10 minutes to charge, then 10 minutes of walking will charge it by the same amount. The device also works on buses and trains as it uses motion to

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generate energy, and even shaking the device will provide a small amount of power in an emergency.

Other technologies getting the ‘green treatment’ include TVs from companies including Panasonic, LG and Toshiba, which incorporate a range of technologies, including ‘luminosity-boosting’ which allows Panasonic TVs to reduce power consumption by up to 50%, as it enhances screen brightness while using less power. Sony, meanwhile, has incorporated motion sensors into TVs that will turn the set off when it does not detect the presence of any viewers.

It is easy to envisage a time when such technologies come as standard, regardless of device type, as they just appear to ‘make sense’. If devices can use less power, generate power from alternative sources, or are just made from less harmful products, which do not damage the environment at the end of a product’s lifetime, then so much the better. Importantly, while the list of technologies in this section is just representative of some that are available now (and hints at those that might be possible in future), it shows that the manufacturers of devices and developers of services and applications are starting to think in a ‘green’ fashion. Furthermore, given increasing consumer demand for ecologically and environmentally sensitive goods, it seems that the consumer technology market will offer significant opportunities for green gadgets and services.

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Natural user interfaces Despite their near-ubiquity the keyboard and mouse can still be a clunky and inappropriate human-to-machine interface in certain situations and for certain users. As technology advances, it makes possible the design of more natural interfaces, such as voice, touch, motion, and even thought.

Touch and voice interfaces, in particular, represent different ways of enabling people to interact with technology, and are currently the most popular. As with the keyboard/mouse interface, they will not be appropriate for all people or all types of tasks. However, different types of interfaces will be used increasingly to suit the application or task in hand. At a time when SOA is enabling the right services to be brought together to serve a particular need, including the ability to serve up existing application interfaces to different types of devices such as PDAs of PCs, the concept of providing the most appropriate type of interface is likely to find traction in the near to medium future.

The success of the iPhone, which has almost overnight made touchscreens the norm for mobile devices, and the Nintendo Wii, which changes user interaction with video games from passive to active, suggests that consumers are ready and willing to embrace new user interfaces.

Gaming According to recent research from Verdict Research, the UK video games market grew by ÂŁ1.37bn in 2008, compared to the stagnation of the music and video sectors, which recorded a combined growth of just ÂŁ30m in the same period. A video game, while costing three or four times as much as a DVD or CD, offers much more longevity and hence better value for money as people opt to stay in more often. Furthermore, it offers a more involved and interactive form of escapist entertainment when compared to a CD or DVD. This essence of escapism has been embraced by video game peripheral 113


manufacturers as gaming increasingly moves away from the traditional console and joystick/joypad format in order to provide a more interactive and exciting user experience.

For example, the Nintendo Wii's movement based controller (or 'Wii remote') has had a particular impact on the market, as has the arrival of stylus pens (for the Nintendo DS), dance mats, fitness pads, drum machines, microphones and other assorted peripherals. Sales of these accessories have widened interest in the sector and generated a new revenue stream for retailers. Indeed, the video games accessories market is set to continue enjoying massive growth, with sales more than doubling in 2008 to represent more than 10% of the video games sector value.

At the heart of this success is the improvement these accessories provide in terms of user interface – these accessories transform the gaming experience from a passive, almost anti-social activity, into a leisure and social event that can be enjoyed by friends and family. The mainstream acknowledgement of this trend comes from Microsoft, which is set to launch its much-awaited ‘Project Natal’ for the Xbox 360 gaming console in November 2010. Natal essentially aims to completely do away with handheld controllers and will instead track users’ body movements and convert them into gameplay activities, recognize users’ facial expressions and moods during gameplay and detect changes in emotion in players’ voices. The system, which will be sold as either an accessory for existing owners or bundled as part of new Xbox packages, contains two cameras, an array of microphones, and dedicated software to gauge depth, movements, and voice tone. Recently a leaked memo suggested that the standalone unit will retail for as low as $50-$80 – giving it an opportunity to become a truly mainstream console. The project is the concept of Israeli technology startup, 3DV Systems, which was acquired by Microsoft in 2009.

Like the Wii, Natal promises to shake up the entire gaming industry, and both represent the first moves away from controller-based interfaces and towards more natural and intuitive forms of user interface. Indeed, the Wii opened up an entirely new market for gaming consoles, with the majority of those owning the console unlikely to consider 114


themselves a classic ‘gamer’. Once the preserve of the younger generation, gaming consoles are becoming an integral part of many homes, and will be increasingly played by a broader demographic as leisure time and media consumption become increasingly valued by consumers. As noted earlier in this report, gaming has even become a social event for friends and family, particularly in the current economic climate as consumers spend less on dining out and going out.

Moreover, with the lifecycle of the current generation of video games consoles having now peaked, manufacturers are looking to new ways to boost sales, and improvements in user interface are set to become the next battleground in the video games console market. The next obvious target for new gaming interfaces is the handheld market.

Multi-touch screens The success of the iPhone ushered in a new interface for mobile devices almost overnight, with many manufacturers quickly following Apple’s lead, including Blackberry (Storm), Samsung (Omnia II), HTC (Touch, Hero, Nexus One), Nokia (5230), and Motorola (Droid) to name just a few. Microsoft’s Zune, meanwhile, provides a touchscreen mobile audio, gaming and video device with Wi-Fi connectivity – rumors abound of a ‘Mobile Zune’, which would incorporate mobile phone capabilities akin to the iPhone.

The touchscreen, or multi-touch (stylus, fingers, pens, and so on) screen as a format is likely to become the de facto interface for a wide range of mobile devices, particularly as the technology is advanced enough for it to work accurately and quickly. However, touchscreen smartphones and mobile phones are likely to represent just the beginning of more intuitive and natural touch-based interfaces not just for mobile devices, but also on the desktop, in the home, and anywhere else the interface is most suited to.

Ebook readers, for example, are set to see widespread uptake in 2010. They have the potential to disrupt the book publishing industry in the same way that downloads affected the music industry, as publishers will no longer hold the power over what

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exactly they want consumers to read and authors will have the option to bypass them. However, they do offer an opportunity for the newspaper industry, which is struggling to cope with decreasing hard copy sales and looking for new sources of revenue. Whereas paying for online news content (as put into operation by Rupert Murdoch’s News Corp) is not a popular option for consumers, people may well be more willing to pay to have content delivered to their portable devices whenever and wherever they want. Amazon’s Kindle (currently on its version 2.0 incarnation) has so far dominated the space and is able to hold the contents of up to 200 book titles, as well as wirelessly download paid-for editions of magazines or newspapers. Kindle Books can also be read on an iPhone thanks to the Kindle for iPhone App, launched in March 2009.

However, the Kindle does not yet sport a touchscreen and now faces stiff competition from numerous rivals that do, such as the Barnes & Noble Nook, the Skiff Reader (which is also flexible), and a series of different devices from the likes of Sony, Bookeen, Copia and Astak – all showcased at CES in January 2010. The Sony readers will also incorporate social networking, which provides another example of how convergence can create new technology formats that meet consumer demands.

All of these ebook readers also face a challenge from the emergence of tablet PCs, another type of device set for launch in 2010. Not least among these is Apple's iPad device - essentially taking the form of a large iPhone, its access to the newly launched iBooks service combined with other multimedia capabilities make it a real threat to ebook readers. Furthermore, rumors suggest that Microsoft is also set to launch a ‘mobile tablet’, called ‘Courier’ – which comes with a dual multi-touch screen that folds out like a ‘digital booklet’. The device is said to be two small tablets attached by a hinge that folds out to provide a larger screen working area, with the device containing an ‘iPhone-like’ home button as the only physical controller. Other vendors, notably HP, Lenovo, Sony and Dell, have also confirmed that they are releasing multitouch tablets. If tablet PCs truly take off, there is the potential to disrupt the ebook reader market if they can compete on price as they offer the same capabilities, plus all those of a netbook or notebook, on a similarly sized device. Going by early indicators, some tablets may even be similarly or lower-priced than some high-end ebook readers. 116


Microsoft is currently showcasing the most ambitious project for intuitive touch interfaces, with its much-discussed Microsoft Surface technology. Surface (codenamed ‘Milan’) combines multi-touch hardware and software that allows individuals or multiple users to manipulate digital content through touch and gesture recognition. Much has been made of its similarity to a scene in the blockbuster sci-fi film Minority Report, which sees the police detective character played by Tom Cruise manipulating complex data on a transparent glass screen wall with his hands and movements. Sliding his hand one way, pushes the data from the screen in the same direction, while pointing to a point on a local map, for example, sees the screen zoom in to a specific street.

While Microsoft Surface may not yet be as sophisticated and reliable as this example, demonstrations of the technology have been impressive. The technology takes the form of a large flat, thin screen, which can be incorporated into table tops, for example, or walls. Known as a ‘surface computing platform’, Surface is a natural user interface that responds to user’s hand gestures and recognizes real-world objects that are presented to it. The interface is 360 degrees and allow users, for example, to drag a paintbrush across the screen with their fingers, track moving data, manipulate real-world objects that the technology has recognized, and so on. It responds to 52 touches at a time, and so can handle multiple users working on it simultaneously. In future, it may be able to recognize credit cards, for example, and take payments as soon as a card is presented to its surface (and recognize the user’s signature), or pull up details of a shop product that is presented to it. For example in AT&T’s stores in the US, two mobile phones may be laid on its surface; Surface then automatically recognizes and pulls up the different price plans, specifications, offers, and so on, for each product. It could also be used for tabletop gaming, satellite navigation or mapping purposes, 3D modeling, and so on.

Natural user interfaces are here to stay and the market is just at the very beginning of a long-term evolution towards touchscreen, multi-touch and movement/gesture recognition interfaces that will make human-technology interactions much more natural and intuitive. Again, it is convergence that will create new product categories and, therefore, market opportunities, in the home, at work, and on the move.

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Index 3D, 11, 12, 86, 96, 97, 98, 99, 100, 117

desktop, 14, 61, 63, 99, 109, 110, 115

3G, 12, 31, 42, 53, 55, 78, 87, 103, 105

digital camera, 20, 107

advertising, 56, 74, 76, 91, 92, 93

digital content, 8, 10, 12, 18, 37, 42, 70, 71, 72, 74, 77, 87, 103, 117

Android, 31, 51, 63, 93, 103, 104, 107 DVR, 11, 86, 88, 89, 90, 95 App Store, 12, 19, 31, 50, 51, 87, 103, 104, 106 Facebook, 55, 65, 76, 96, 101 Apple, 9, 11, 12, 19, 31, 42, 46, 51, 52, 54, 55, 75, 86, 87, 96, 102, 103, 105, 106, 110, 115

film, 10, 20, 48, 70, 76, 96, 98, 117

battery, 84, 107, 108, 109, 111

flash memory, 101, 109

best-in-class, 47, 63, 64, 66, 67

flipcam, 64

Blackberry, 31, 51, 92, 105, 115

good enough, 41, 47, 50, 63, 64, 65, 66, 67, 101, 102

Blu-Ray, 63, 66 Google, 31, 51, 61, 63, 76, 93, 103, 104 broadband, 20, 37, 41, 42, 48, 71, 73, 80, 81, 90, 94

HD, 11, 63, 86, 90, 91, 96, 97, 98

broadcast, 11, 48, 52, 77, 86, 90, 91, 92, 94, 97

HTC, 103, 115

Christensen, 22

Hulu, 10, 70, 76, 90, 95

Chrome, 63

Internet radio, 11, 86, 91, 92, 101

cloud computing, 60, 61, 62, 65

Internet TV, 11, 14, 86, 90, 94, 95, 101

commoditization, 47, 78, 79, 80

iPhone, 9, 12, 19, 20, 31, 40, 46, 48, 50, 51, 55, 63, 87, 92, 94, 103, 105, 106, 107, 113, 115, 116

connectivity, 10, 11, 20, 31, 35, 39, 61, 63, 64, 65, 67, 70, 72, 80, 86, 94, 101, 104, 107, 115

iPlayer, 48, 73, 90, 94

convenience, 8, 18, 21, 22, 27, 31, 35, 40, 41, 61, 63, 66, 73, 88, 94, 101

iPod, 9, 12, 14, 20, 27, 40, 46, 48, 51, 54, 55, 64, 87, 103, 107

convergence, 47, 116, 118

iTunes, 9, 11, 14, 19, 27, 40, 42, 46, 51, 71, 72, 73, 74, 75, 76, 86, 94, 96, 104

copyright, 71, 73, 75, 76, 92, 94 Last.fm, 11, 74, 86, 91, 92, 93 customization, 9, 11, 31, 46, 47, 49, 50, 51, 52, 86, 94

Linux, 65, 101

data transfer speeds, 80

location-shifting, 9, 46, 47, 48, 68

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media consumption, 32, 37, 80, 94, 115

Second Life, 55, 98, 99, 100

media hub, 9, 46, 48

Slingbox, 90

Microsoft Surface, 117

smartphone, 31, 50, 54, 63, 103, 105, 106, 107

mobile application, 12, 87, 92, 93, 104, 105, 111

social networking, 9, 10, 11, 20, 28, 41, 46, 49, 50, 53, 55, 56, 57, 58, 59, 60, 62, 65, 67, 70, 73, 80, 86, 91, 93, 94, 116

mobile gaming, 105, 106 Sony, 48, 64, 65, 93, 96, 112 mobile operator, 77 Spotify, 10, 11, 70, 74, 76, 77, 86, 93 mobile phone, 8, 12, 14, 18, 19, 20, 31, 32, 35, 38, 40, 42, 47, 49, 50, 53, 61, 62, 63, 65, 87, 94, 104, 105, 107, 111, 115, 117

streaming, 10, 11, 41, 48, 70, 71, 74, 75, 76, 86, 91, 92, 93, 94, 95, 98, 101

mobility, 10, 11, 20, 27, 31, 32, 39, 53, 54, 65, 70, 72, 80, 86, 94, 104, 107

subscription, 11, 32, 40, 74, 77, 86, 89, 92, 93, 96

multi-touch, 115, 117, 118

time-shifting, 9, 11, 46, 48, 52, 68, 86, 88, 94

music, 10, 11, 19, 27, 31, 38, 40, 42, 47, 48, 50, 51, 53, 55, 62, 63, 70, 72, 73, 74, 75, 76, 86, 91, 92, 93, 94, 96, 113

TiVo, 9, 46, 52, 88, 89, 90

netbook, 102, 103

Twitter, 55, 62, 101

Nokia, 31, 32, 51, 104, 115

user interface, 61, 113, 114, 115, 117, 118

Ovi, 51, 104 Panasonic, 96, 112

video, 11, 14, 38, 41, 48, 49, 50, 52, 61, 63, 64, 65, 67, 71, 72, 73, 74, 75, 76, 78, 86, 88, 89, 90, 95, 96, 101, 105, 113, 114, 115

Pandora, 11, 86, 91, 92

video on demand, 11, 86, 96

portability, 26, 40, 71, 101, 103, 107

Wi-Fi, 31, 39, 42, 61, 65, 115

price, 8, 18, 26, 30, 31, 32, 40, 41, 42, 49, 63, 64, 66, 67, 75, 76, 77, 80, 101, 107, 117

Wii, 38, 113, 114

touchscreen, 111, 115, 118

work-life balance, 28 PVR, 48, 52, 63, 89 Xbox, 93, 114 reader, 116 YouTube, 64, 67, 73, 74, 76, 95 Samsung, 51, 96, 111, 115

120


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