Beasts from the East.

Electronics and computer companies become competitors for the consumer market.

Marketing Computers, June, 1995.

When Apple introduced the first mass-market personal computer, the Apple II, in 1978, it single-handedly created the personal computer industry--an industry whose main product, the PC, now outsells in dollar value) every other consumer electronics device in North America, including television sets. By unseating even the TV, the personal computer has taken center stage as the world's preeminent consumer electronics device, an eventuality few predicted.

Conventional wisdom saw the PC mainly as a machine for office use, or work at home, but certainly not as a contender for home entertainment on a wide scale. Ironically, home entertainment, in the form of video games, dominated PC use until IBM entered the market in 1981 and positioned its PC as a machine meant for work. Until then the top two PCs, the Atari 800 and Apple II, vied for the title of best game machine. How soon we forget. Well, now home entertainment is back with a vengeance, and it is unsettling the fault lines between consumer electronics firms and PC manufacturers. As each side dips into the other's territory. blurring the divisions between them, a major realignment is underway. Over the next five years, certain PC makers will become bona fide consumer electronics giants, and some consumer electronics firms will become successful personal computer manufacturers. While they come from different histories, with their own assets and liabilities, all share the same longterm ambition--to redefine themselves in the service of the Information Age consumer. Up for grabs is the nature of the device that will serve as the gateway into household management, entertainment, education, shopping and finances. In the process, what we call a PC may become unrecognizable.

The Catalyst: Multimedia

For the moment, PC makers hold an obvious advantage in this struggle--they, by definition, dominate the manufacture of the world's most popular consumer electronics device. But a closer look at why the PC gained this position hints at the increasingly important role of traditional consumer electronics. The technology that spurred 1994 holiday-season PC sales to exceed by 31 percent the previous year's sales is the CD-ROM drive. An appendage to the PC, built by traditional consumer electronics companies, the CD-ROM provides enough storage to offer consumers multimedia entertainment. Most importantly, multimedia doesn't imitate television or the stereo, but stands on its own as a new medium.

The demand for multimedia entertainment also propelled Packard Bell into second place last year, behind Compaq, as the most successful personal computer company in terms of units shipped. In 1992, Packard Bell introduced the first PC bundled with a CD-ROM drive, a prescient move. Today, Packard Bell controls 43 percent of the home market, 24 percent ahead of its nearest competitor, IBM. In fact, multimedia remains popular, pushing the growth of PC sales to the home to 21 percent a year, compared to 9 percent on the corporate PC side. But while this growth is impressive, PC makers have their own Achilles heel, which consumer electronics makers are well suited to exploit.

The Maladjusted Home PC

"The traditional PC manufacturers are not used to designing at the margins that consumer electronics manufacturers are," says Bill Bluestein, an analyst with Forrester Research, a technology research firm in Cambridge, Mass. "They do not have the expertise in terms of retail channels--how to handle inventory, how to drive demand. They're only just learning this now with their consumer PCs." Another weakness PC makers face is the demographic of the PC buying household. According to Forrester Research, 22 percent of homes earning more than $ 50,000 a year own PCs, slightly lower than the 27 percent market penetration for homes earning between $ 25,000 and $ 50,000. Families with this kind of income are capable of spending $ 1,500 on a personal computer, assuming they want one. The vast majority do not seem to. This implies either one of two things: they see $ 1,500 as too much money for what they are going to get, or they simply do not think the PC is something worth having. Either way, both opinion might be altered through marketing. The current conventional wisdom among most PC marketers is expressed well by Rod Schrock, who's in charge of product marketing for Compaq's consumer products. When asked about the cost of personal computers he accepts their high price, he says: "The funny thing is, we saw the average sale price of PCs climb during the 1994 Christmas season. I think buying a computer is going to be a capital purchase, an essential piece of equipment for most Americans." Schrock's point-of-view is that the price is right, and the real marketing job is to create a rationale for the expense of a new PC.

Resetting expectations in this way may work. But there is a second alternative which can further penetrate the rest of well-off households--lowering the price of a PC. This second strategy is one most PC makers are loath to embark on. It requires readjusting all their economies of scale, revenue streams, and marketing strategies. One PC maker is aggressively trying and its progress is being closely watched by its competitors.

"A Pippin is a kind of Apple, like a Macintosh or Granny Smith," Vicki Vance, head of marketing CD-ROM initiatives for Apple, explains. "It is a green apple, and you don't see them that often anymore." Vance tells me this, because next to her is one of four Pippins--the electronic variety--in the world. Built around a PowerPC 603 chip, the same chip that runs a Power Mac 6100, the Pippin is a Mac stripped of all appendages; squashed into a box the size of a Super Nintendo, it will ostensibly retail for under 8500. Apple doesn't plan to actually build Pippins. That task goes to its licensees, and the first is Bandai, a Japanese electronics firm that owns the rights to the Power Rangers. Bandai plans to sell the device in Japan this fall, with a North American introduction scheduled for Christmas 1995. The Pippin comes with two things--a quadspeed CD-ROM drive and lots of ports. No keyboard, no monitor, no internal storage--this device isn't supposed to be confused with a PC. Instead, the consumer hooks up Pippin to the TV set and uses it to access Macintoshfriendly CD-ROM titles.

Do consumers want such a device? Vance thinks so. "We are looking at the 50 percent of the population that is not interested in buying a PC this year for the home. When we did our market research, we asked the target audience what they wanted if you could break a PC into pieces. They wanted a device to play back the CD-ROMs they heard about, and some connection to this thing called the Internet. Those were the two things they wanted. That's what we gave them."

So what's the logic behind Pippin? Simply put-- expanding the installed base of Mac friendly content. The majority of CD-ROMs sold today are not Macintosh-compatible because Apple's market share doesn't merit the investment. The fewer compatible CD-ROMs, the less attractive the Mac becomes as a multimedia player, a vicious self-generating cycle that takes Apple out of the running. The solution? Broaden market share and available content with Pippin. Content, in the long-term, is allimportant in the consumer electronics race. To succeed in manufacturing a low-cost consumer electronics device, the favored tactic involves creating high-margin content to go with it. This is what Sony, Sega and Nintendo do.

Few PC makers stand to succeed in making the transition to content-based revenue streams. Bluestein sees Apple, IBM and Compaq as having the best shot at making the transition. Compaq's Schrock agrees. When pressed on how this strategy will alter Compaq, he explains "You should expect that in the future Compaq will selectively target what we call 'lifestyle-needs' content. This may be either software or services that are very targeted towards home use. We have an opportunity to create a dialog with our customers and sell them content or services on an ongoing basis." Of greatest concern to Schrock in the meantime are the consumer electronics firms. "It is the great battle that occurs whenever two industries converge," he says. "We look at people like Sony and Sega as potential partners or potential competitors down the road."

Sonic the Hedgehog vs. OEM

For consumer electronics makers, there are several paths into the home PC business. Most people assume that the likely path begins with the game player, followed by set-top boxes or dedicated CDROM players with a built-in CPU, something similar to Pippin. But, as usual, conventional wisdom may be offtarget. A more likely point of entry comes from the quiet, and very large, presence consumer electronics companies have building PC accessories and, under confidential licensing agreements, actual PCs--the OEM (original equipment manufacturing) strategy . Sony manufactured PC components, and complete PCs. starting in the early 1980s. Today, two computer makers rely on Sony to build their machines from start to finish. Sony can't divulge names, and Manny Vara, a Sony spokesperson, would neither confirm or deny that Dell is one of the two. This manufacturing experience gives Sony a strong advantage were they to enter the market for consumer PCs. According to Vara, Sony hasn't entered the market yet because until recently the majority of PCs went to businesses, a market where the Sony brand-name doesn't have the same clout.

Now that PC sales to the home dominate, Vara delicately minces around the question of whether Sony intends to enter this market. "We are coming out with products that will go into the home computing market, but for now they rely on someone else's CPU," he says. "It would be difficult for anyone to enter this market," he says "but we've been a computer manufacturer for ten years. A lot of the technology associated with computers came from Sony. Probably 80 percent of the data storage devices available are made by Sony." Integration of the Sony peripheral line with their CPUs would create a "plug and play" machine with strong brand-name appeal for consumers. It's no wonder then that Compaq sees Sony as its main competitor down the line.

Closed-end game machine makers, like Sega and Nintendo, face a tougher transition. Neither has experience making open-ended peripherals for the PC, and their proprietary game machines offer little advantage when it comes to bufiding a multimedia PC. Ironically, these dominant firms, because of their dominance, have little incentive to make the change, since it would undermine their closed-end strategy built around using inexpensive hardware as the platform for a content-based revenue stream. Perrin Kaplan, a Nintendo spokesperson, scoffs at the PC's entertainment value. "We still see the PC as a system that sits in a den or an office, and may be used for some game value. It is something that has entertainment as a secondary component. The PC is not set up for the wide use of entertainment." Nintendo intends to stay focused on their game players. "We'll see if I'm right," Perrin says.

Of course. Nintendo, Sega, and Sony's upcoming Play Station all have one strong advantage--list prices under 8300. The dilemma is that making an open PC for say 8500 offers little ancillary revenue opportunity for these manufacturers--there is no guarantee the consumer would buy the manufacturer's content over someone else's. To succeed in the home PC market, consumer electronics firms will need to derive some profit from their hardware. Practice makes perfect, and it's no surprise that the number of consumer elecironics firms signing OEM agreements with PC companies keeps growing. For instance, Pioneer agreed to build Mac-compatible machines, Aiwa acquired CORE, a PC-peripherals manufacturer, and Samsung purchased 40 percent of AST Research.

The Open Platform

Home PCs continue to sell well because people are increasingly more comfortable with PC technology, and multimedia content providers now have several year's experience providing entertainment. As the two trends continue, what is clear is the importance of an open platform to allow this content opportunity to flourish. PC makers, or more specifically IBM and Apple, squandered this opportunity by not following through on the PowerPC initiative. They intended to both create an open platform based on RISC-technology and issue a joint operating system named Taligent. Today, both firms have retreated, ignoring a long-term trend and leaving the door wide open for competitors to step in and satisfy the demand for an open platform. IBM is pushing OS/2 Warp with renewed vigor, and some success, while Apple strategically expands the base of Mac-compatible machines with their licensing agreements (Bandai, Pioneer). Cynics say the whole initiative was a marketing ploy from the start, an attempt to wrest microprocessor dominance away from Intel. If that's true, then in some ways the PowerPC chip succeeded: it is showing up both in PCs and dedicated video-game machines, where Intel has no presence.

The real winners in this open-platform debacle are the chip makers and content vendors: one certainty is that the winning device will use microprocessors and run entertainment. The biggest potential loser in this struggle may be Microsoft. Again, this flouts conventional wisdom. It turns out that Microsoft's cornerstone product, Windows, Is ill-suited as a user interface for home entertainment. Windows is simply too rooted in text, a problem when one factors in the American literacy rate: 20 percent of Americans are functionally illiterate (meaning the can read signs, but not much else), and 2 out of 5 high-school graduates cannot read at the 12th grade level (that's not counting kids who don't graduate at all). When one talks of home entertainment, this sorry fact cannot be ignored. Instead, it becomes a business opportunity to exploit-- one which Microsoft shows no signs of paying attention to. On the other hand, consumer electronics devices, VCRs excepted, require no reading skills to operate, and a lot of work goes into designing clever icons like stop and play buttons. Many entertainment- oriented CD-ROMs don't require advanced reading skills either--they often rely on sounds, icons and image to move through the story. When the PC meets MTV, literacy becomes a factor.

Steve McGready spends a lot of time thinking about this issue of usability. Vice president of Intel's architecture labs, he researches ways to make the PC more consumerfriendly. For instance, he is working on a card bus that allows for the installation of new cards into a PC without having to open the machine, a kind of jumbo PCMCIA slot. He sees the Windows interface as a real issue: "Do these things need a new interface? Absolutely. The thing that is going to make or break it is hitting on the right name, the right emotional response from people."

For now, Microsoft appears dominant, a likely winner as a "content" provider whichever way the wind blows, but the pressure and demand for change is mounting. Microsoft does not really make "content," it makes software for business or "personal productivity" applications and Windows. It is a crucial distinction, since its product line wasn't created for home entertainment, and still isn't. That may be hard to change. For now, Microsoft's strategy involves a two-pronged attack. Continued domination of PC software through Windows, and expansion into content-carrying through the creation of its own network. Neither strategy addresses the fundamental question of a multimedia-friendly interface. As the clash between PC makers and consumer electronics firms heats up, all eyes will turn to Windows as the weak link, bringing both industries into conflict with Microsoft.

In an industry hitting the ripe old-age of seventeen, nothing is certain. In 1978, who would have predicted IBM's fate? Or the existence of Microsoft? Or that a company called Apple would be in the position to squander an opportunity to dominate both the personal computer and software industry, and then actually do so? If there is one certainty, it is that the predictable never happens. When asked to look into the future, Forrester's Bluestein embraces this axiom. "New content and services will be brought to market by people leaving companies to do their own thing, recent college grads starting businesses with friends, and venture capitalists on the edge. It will not be a production of the Wall Street, IBM, Microsoft, TCI, NYNEX and EDS crowd." Twenty years ago, Bill Gates, Steve Jobs and Steven Wozniak proved that this could happen--decimating the mainframe industry. History, as the cliche says, has a way of repeating itself.

by David S. Bennahum