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Consumers Demanding New Generation Of Devices

John Moore|Special to CNBC.com
Tuesday, 5 Jan 2010 | 6:12 PM ET

Buying music, movies, books—how passé. Consumers are demanding a world of infinite media choices available on demand.

The Nook e-reader
Source: barnesandnoble.com
The Nook e-reader

With that comes a new way of thinking about media consumption. It’s no longer about ownership, it’s about access. And that means a shift is in order for the next generation of consumer electronics devices.

At last year’s Consumer Electronics Show, much of the hype surrounded Internet-enabled HDTVs. Now it’s about a broad range of Internet-enabled devices.

While this shift provides opportunities for device and component makers, others in the consumer electronics food chain may find the new environment challenging.

New Devices, New Opportunities

Devices like Amazon’s Kindle and Barnes & Noble’s Nook mean fewer books on your shelves. Why buy DVDs when you can stream movies from Netflix directly to your flat-screen television?

Music downloads have ripped the heart out of CD sales. But soon even storing gigabytes of digital music files on your hard drive may seem like a quaint endeavor. Apple recently acquired streaming music service Lala. Although the company has been tight-lipped on details, the smart money has Apple developing a subscription model for accessing music as an alternative to purchasing songs and albums.

“Consumer electronics companies want to present content to consumers wherever it is, whenever they want it,” says Ross Rubin, director of industry analysis at NPD Group. “Historically, consumer content has been delivered on discs. But with the rise of services like Internet radio, Netflix, and Hulu, devices are getting away from physical drives to network connections. They’re moving away from mechanical components to a network architecture.”

A new generation of networked devices could be a boost for consumer electronics device makers. MultiMedia Intelligence forecasts 244.5 million Internet-connected consumer devices will be shipped in 2013, while In-Stat predicts Wi-Fi-enabled entertainment device shipments will increase from 108.8 million in 2009 to 177.3 million in 2013.

But this trend will force device makers to change how they develop their products.

“It requires a different skills set,” Rubin says. “It requires investment in understanding software in a way [consumer electronics companies] haven’t had to in the past. It will require an investment in internal talent or striking partnerships with companies that have experience in creating online experiences.”

With the Internet increasingly becoming the source for content delivery, devices will have to handle the connectivity, security, and digital-rights management requirements inherent in online distribution.

amazon.com

Randy Lawson, senior analyst, digital TV and display electronics at iSuppli, says companies like Sigma Designs and Cavium Networks ,which develop processors used in a range of consumer devices, stand to benefit from this trend.

Analysts also note that user interface design will become even more critical. Most people still consider watching television a passive experience. But as the industry moves closer to unlimited choices available on demand from the Internet, that demands a new way of presenting that information to the consumer.

“Most of the TVs and DVD players coming out don’t have full Web browser capabilities,” Lawson says. “But as they move toward that model, how do you search for content? Will there be a search engine residing and running on your TV that allows you to search for content? The user interface and how the content is presented to you and how you search for it is in its infancy stage.”

Lawson notes that Yahoo has made a step in the right direction with Yahoo TV Widgets. Part of Yahoo’s Connected TV platform, TV Widgets allows users to access services such as Twitter, Flickr, and Netflix directly from an Internet-enabled HDTV.

Rubin says device makers are more likely to partner with or acquire companies that have user interface expertise. He points out that when Cisco acquired Pure Digital, maker of the Flip Video camcorder, the company also gained expertise in designing consumer products that integrate software (FlipShare) and cloud-based services (FlipShare.com).

Trouble Ahead for Some

Although opportunities exist in this new consumer electronics landscape, some sectors will find it challenging. Cable and satellite companies seem particularly vulnerable if services like Hulu and Netflix continue to develop partnerships that enable them to deliver a broader range of products.

Big Hole For Big Box

“The younger group, the more tech-savvy folks are not afraid to cut the pay TV subscription and get the content directly through the Internet,” says Victoria Fodale, senior analyst at In-Stat. “Is the younger generation that graduates with $70,000 in student loans going to want a cable bill of $100 a month? It’s the economics of it.”

Along with pay TV companies, purveyors of physical media—both content providers and retailers—will also struggle to find solid footing in this new landscape (Fodale herself no longer buys DVDs, preferring to use Netflix’s streaming video service through a Roku digital video player).

Shoppers rush to get in line outside of the Best Buy early Friday, Nov. 24, 2006, in Jackson, Miss., to take advantage of the Black Friday bargains. (AP Photo/Rogelio V. Solis)
Rogelio V. Solis
Shoppers rush to get in line outside of the Best Buy early Friday, Nov. 24, 2006, in Jackson, Miss., to take advantage of the Black Friday bargains. (AP Photo/Rogelio V. Solis)

Digital music sales are surpassing those of CDs, but it hasn’t translated into more revenue for the record labels. And while the slow death of the CD continues, the demise of record stores like Tower Records occurred rather quickly. If there’s less physical media gear to sell, that could spell trouble for retailers like Best Buy .

“Another challenge is how you demo the product at retail outlets,” Rubin points out. “In general, connected products have had a hard time being demoed at retail. It’s going to be challenging for retailers that sell packaged media.”

Rubin says retailers will have to find ways to adapt to digital distribution. Barnes & Noble, for example, plans to allow users of its Nook e-book reader to read entire e-books for free while they’re in a Barnes & Noble store. Whether that will be enough to drive traffic into stores remains to be seen, Rubin says.

CES '10 - Your Digital Life - A CNBC Special Report
CES '10 - Your Digital Life - A CNBC Special Report

Analysts note that consumers are driving the trend toward on-demand access. As the consumer electronics industry responds to this demand, Rubin cautions that everyone from device makers to content providers to retailers are only beginning to deal with the full implications of this shift.

“Is the content compelling enough to get consumers to buy connected features?” Rubin says.
“With Blu-ray, companies worked hard to convince the consumer that that step up from your DVD was worth it. And there are business model implications. Electronics companies may want to sign exclusives with content providers. It’s a transition.”

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