Electronic Products and Markets of the Future

Adrian Baan

Introduction

Electronic products and markets of the future

The total value, its segmentation, the growth we can expect

Enabling Technology

The economic drivers - considerations of governments

The economic drivers, network operator considerations

Economic drivers, considerations of the user access equipment industry

What will change our way of life?

Introduction

The multimedia value chain is described in terms of content owners, packagers, distribution networks, user site access, audiences and advertisers. The total value in this chain will grow faster than GDP growth of the OECD countries. However the excitement is foremost about the substitution which is taking place. Players in the chain can replace each other or expand into each others territory, like telephony over CATV networks, PC's for access instead of TV's or PC's for communication.

Traditionally time consuming applications come much more efficiently on the network, e.g. homeshopping and banking. New products and services will follow the penetration curves which are typical for consumer products. It will take some 5 years before even successful new services will enter the fast growth part of the curve. It is expected that very few services will have double digit penetration eventually. It will take new generations to fully appreciate the network based communication for occupational and entertainment activities. The enabling technologies will continue to produce more powerful hardware. Performance is expected to increase exponentially for another decade. Most innovation in terms of user applications will come through software development.

Governments will invest in infrastructure to foster economic growth and improve health care and education. Network operators need to invest to stay competitive. The user access equipment industry will provide the powerful hardware and the innovative software. The battle is on between the PC, the Telecommunications and the Consumer industry.

We are seeing the beginning of the information society, personal navigators through data bases, database marketing, electronic retail, less travelling for business, a new attack - electronic this time - on our privacy, speech recognition replacing operators, digital cash substituting bank notes, an instant voting democracy, video demand replacing TV Broadcasters, more equal opportunity with respect to education, new difficulties to define the real world and an Information Highway personality looking for selfrespect and development among 1 billion people connected in 2020.

Electronic products and markets of the future.

If we take "electronic" as broad as "everything based upon semiconductors and the associated software", then we would have to cover the consumer electronics industry, the telecommunications industry and the computer industry. The content which makes these industries valuable are film, music, games, speech, data and documents. If we want to give meaning to "future", then we must add the publishing industry, the advertising industry and the online services industry. All media for communication will be based upon digital electronics and made to good use by means of software geared to specific applications.

This multimedia world can be described by a value chain with the following segments:

Owners of content and rights: books, newspapers, magazines, software, filmed entertainment, music, online information. It should be noted that the monetary value and the ownership of the majority of the content e.g. speech, documents and data are not explicitly known in the communication process.

Packagers: text and music publishers, TV networks, film studios, software houses combine products for consumption and use by audiences or user groups. Content can be packaged for distribution over networks or for transportation on packaged carriers such as CD, videotape, CD-ROM, CD-I, Digital Video Disk.

Distribution and transport: the distribution over networks such as terrestrial broadcast, satellite broadcast is designed for broadband but one way traffic. Telephony networks have been designed for narrowband and bidirectional communication.

The packaged carriers are sold through retail chains to consumers.

User site access: In the office telephone, fax, PC, wireless videocommunication links us into narrow- and broadband networks. At home telephone, fax, personal digital assistant, multimedia PC, TV with set top box will enable access to the content on the carrier or from the network. On the road mobile telephony is omnipresent, whereas wireless communication through microwave technology for video is in introduction phase.

Audiences/user groups and advertisers spend money and time to be entertained, to be educated or to promote their business interest with the information provided.

The total value, its segmentation, the growth we can expect.

In 1993 the total of the revenues realised by all players in the value chain as mentioned above was DM 600 Bln in Europe and US$ 415 Bln in the USA. About 60% of the value is in distribution if we include telephone operators and publishers. Between 25% (Europe) and 45% (USA) of the total value is paid for by advertisers. Content itself represents only 10% of the total value. However without content the rest of the chain would be without any value. One must expect that the nature of the content and its audiences will be determined by the advertising funds even more so than this is the case today.

The growth of the total value of the multimedia business will not be spectacular. It will be higher than the GDP growth of the economies of the OECD countries. How much, is difficult to judge, since new killer applications have not been identified, since users need to change their spending patterns and since employees need to adopt new practices at work. And will they change the way they spend time, leisure or occupational?

There is a trend to capture an audience by transmissions in the clear in order to prepare for increased revenue by changing over to encrypted services with conditional access in a later phase.

New technology is often made to good use first in professional applications. Semiconductor technology applied in main frame computers for a.o. the accounting application in large organisations, in personal computers to increase the productivity of individual office workers, is now becoming the basis for the multimedia PC, the information and communication device at home.

Another example concerns network technology which is being applied in large organisations to share documents between people in different locations. Software facilitates collaborative applications. Business processes of these organisations can be re-engineered for cycle time reduction. The introduction of network technology will cement these productivity improvements. This way the gains can be held.

Next we will see broadband network technology enter the home for use by teleworkers, for training and education purposes, for interactive services. The cycle time of these processes will shorten, the pace of the information society will increase.

During such evolution the volume of the business is gradually increasing. We are riding the learning curve. At some point in time products become affordable in consumer applications. Simultaneously new generations of users are adopting the new products and tools.

A typical penetration curve of consumer products spans some 20 years from product introduction until maximum penetration. It should be noted that invariably it takes some 5 years before a market penetration of about 5% has been reached. During this initial phase the new product is hailed, doomed, supported or abandoned. The products which will make it, enter the fast growth phase which may last some 10 years. At maturity the question is what the eventual penetration will be. For TV sets in the USA it is 2.6 units per household, for VCR in Europe it is 75% of the households which have a VCR available.

The audio compact disk was introduced in 1983 as a replacement of the vinyl record. It has taken several years of intense debate to gain acceptance for this new carrier. Now the CD player and the CD's are in their fast growth phase with an expected penetration of close to 100% of households in some 5 years from now.

All products and services which play a role in the multimedia value chain are following very much this same pattern which means that new applications and services will need their 5 year initial phase before we see substantial penetration. We don't expect that there will be many services which will demand final penetrations in double digit numbers. So, new interactive videobased services over networks start now, but fast growth is some 5 years away.

A faster way to exploit new technology is to look for existing applications and realise them in a more cost effective way. In fact CD audio replaced the vinyl record, whilst the content, the repertoire, was already available. CD audio player substituted the gramophone.

E-mail, networked CAD-CAM, logistics networks are professional applications which functions existed already and which are now being enhanced and speeded up by interactive network technology.

Video on demand, home shopping, electronic banking over networks are existing applications with low interactivity trying to find acceptance of consumers.

On the contrary highly interactive products and services for consumers, whether they come over a network or on a physical carrier like CD-I, need to build up new content to create a market. These businesses will find their audiences during the coming 5 years, not faster.

It will require new generations of users to fully appreciate the good use of new technology. People above 60 years of age don't operate a HiFi stack, above 50 don't use PC's in their office or at home, above 40 will not collaborate over networks, above 30 are too slow to operate an electronic game, above 20 would not browse electronic encyclopedia, home shopping catalogues or electronic dating services. The development of the skill base of an individual is limited, his lifestyle evolves until a fixed pattern has been established.

Concluding, total revenues of the multimedia value chain will show modest growth. Technology will be used first to substitute existing products. Very often players new to the industry will perform this task. This is causing most of the turmoil. New applications will evolve over time.

Enabling Technology.

Digital electronics, microprocessors, memories and signal processors, enable the processing of information of very different nature by the same device. Analogue telephony, audio and video signals were specific and could only be used in uniquely defined equipment. Once digitized they all can be treated as data, combined and distributed through the same network or on the same carrier. The semiconductor industry will continue to increase the performance of its devices exponentially for another ten years to come. There will be very powerful hardware looking for applications.

A digital signal can be compressed by applying a mathematical algorithm to its numerical representation. In the same operation irrelevant data can be deleted, or information is sampled to serve as a reference in the decoding process. CD audio is making use of compression algorithms. Video compression technology has only seen the beginning of its development. Compression factors will increase substantially.

The capacity and access performance both of solid state devices and optical media storage devices for data, audio and video will continue to increase.

Database management software will enable operations regardless of form factors of content and organisation of the database.

Operating systems of PC's extend their functionality from the confinement of the PC to the wide world of communication networks. Graphical user interfaces are becoming very user friendly with children and computer illiterates as target groups. The de facto monopoly of PC operating systems has accelerated the creation of a vast amount of widely usable application software.

Digital technology allows the computer, consumer and telecommunications industry to substitute each others products and services: telephony over CATV networks, video on a PC, wordprocessing and telecommunication on your TV set.

Compression techniques are reducing the cost of transmission and storage and free up bandwidth in the frequency spectrum for new communication channels.

The economic drivers - considerations of governments.

Investment in infrastructure, if done properly, enables economic growth, increases employment. Investment in information technology has destroyed millions of jobs. Investment in the Information Highway will do this as well. According to a survey of the US Labour department the occupations likely to loose out are machine operators, typists, switch board operators, directory assistant operators. The occupations in the service sector will see increased employment. The sum total could well be positive. The infrastructure investment is needed to maintain competitiveness of the cable operators and telecommunication companies.

In the USA some 6% of the working population are teleworkers. This group are the younger, the better educated and the higher salaried people compared to the average worker. The Information Highway increases the mobility of the workforce without adding to traffic congestions. It might require a new generation of employees and employers to reap these potential benefits.

The Information Highway will enable immediate access to vital information in the health care sector. Specialists can be consulted from remote locations. It will improve the performance of the health care sector. It is not clear how this development will affect the cost of healthcare.

Training and education will benefit from the Information Highway. Teachers and training material can be made available to many more students. Cost benefit studies cannot give guidance to such investment decisions. What is it worth that everybody can follow his subject of interest presented by the best of teachers?

Governments can foster these developments in several ways:

The deregulation of the distribution of video, data and speech should proceed as planned. Investment will flow if the deregulation and the tariffs for services are predictable.

The compressed digital information format, the user interfaces need to be standardised. The standardisation process by Governments should keep pace with the industry. A difficulty is that the industry is motivated to establish world standards.

Equal access to content and services or the universal service obligation will reduce the risk that a separation will develop in society between the people linked to the Information Highway and those who are decoupled.

With the industry Governments could share the initial investment for change of infrastructure and digitization of content and services. However it will be very difficult for a Government to pick the winners.

Privatisation and deregulation will break up monopolies of network operators. In doing so free market forces will give direction to investments. Infrastructure which requires large investments, tends to monopolistic behaviour. One could speculate that within ten years today's monopolies will have been replaced by new monopolies.

The economic drivers, network operator considerations.

Network operators have and will have overcapacity in bandwidth and in the number of satellite transponders. For example in 1996 there will be 600 transponders available over the Asia Pacific region. Also the investments in ISDN assets made during the last decade are not yet bringing returns for a major part of the capacity.

At the same time the existing networks, terrestrial for audio and TV broadcast, and twisted pair for telephony and data, are under attack for economic and bandwidth reasons.

TV broadcast via satellite is two orders of magnitude more cost effective than terrestrial transmission. Compressed digital video allows for 6 more channels in the same frequency bandwidth.

Hybrid fibre-coax networks can handle video, audio, data and telephony speech in the same infrastructure more efficiently than separate twisted pair and CATV networks. Market rates for transmission by such systems come down by some 30% as soon as the traditional networks are challenged by new technology.

Microwave transmission of video avoids the heavy investment in cable to the individual offices and homes. This budding technology promises to produce the lowest cost two way communication network.

Network operators wish to participate in the new network technology and make sure that they maintain their presence at the consumers' home for access equipment. Therefore investment in more economical and better performing networks is unavoidable despite of the existing overcapacity and despite of the fact that there are no interactive applications yet which require a broadband return path.

Economic drivers, considerations of the user access equipment industry.

User access equipment has been supplied by the telecommunications industry, by the computer industry and by the consumer electronics industry each for their own specific functions. The entry barriers to these markets are disappearing. As a consequence these industries have started to make inroads into each others territories.

In the office PC's have been linked to networks. Communication is improved by broadband gateways and supported by personal videoconferencing equipment. Operating systems extend their functionality from the PC itself to the network for work sharing tasks.

In the affluent home there will be an entertainment corner which is TV centred and an information corner which is home PC centred. Interactive applications and communication are performed on the home PC. However the TV is expanding its functionality as to include interactive and communication applications. The combination of a TV with a set top box connected to a broadband network will allow for all interactive applications known. Set top boxes come from various corners. It has a PC architecture and quite some functionality which is usually found in a TV.

If we include the investment in the connection of the network to the home and the investment in video servers and other databases in the network, it is clear that the cost of interactive video network systems has to come down to break even with the additional revenues from entertainment and services. Consumer trials give reason to believe that this will be achieved in 2 to 3 years.

The consumer on the road is connected to the Information Highway through various wireless mobile devices. The Personal Digital Assistants will take off once they are supported by networks which cover enough territory and support an adequate portfolio of services.

Networks and the wireless connections can be upgraded to allow for videobased communication. Cost levels commensurate with consumer expectations are quite some years away.

The access equipment industry is at that point of the learning curve where digital technology starts to make economic sense for the interactive and entertainment applications of today. The exponentially increasing performance of the hardware enables these applications. Innovations which customers perceive as useful, will come primarily through the continuous development of new software programmes.

What will change our way of life?

Technology push, industry economics and consumer benefits lead to the following speculations on what will impact our way of life.

Digital cash is being designed to substitute banknotes and to bypass the credit card company and bank transactions now required to settle payments.

Today speech recognition software can handle a modest vocabulary of some 3000 words in most languages independent of the speaker or his dialect. This could well be the application of the nineties for powerful microprocessors replacing machine and switchboard operators, and enabling verbal communication with databases.

Instant access to massive amounts of information regardless of its location will change the way we create value for ourselves and for outside stakeholders: increased automation, value added services, service brokers. Personal navigators will support us in searching for relevant information among the databases improving individual productivity and performance.

Database marketing will develop into a more efficient way of reaching consumers. Electronic direct marketing will develop in competition with retail stores.

If education is available on networks it will provide equal opportunity for everybody to realise his full potential.

Will we still like travelling if we can work from home and if we have abundant access to information and entertainment? Or has travelling become synonymous to a meaningful life?

The old issue of privacy will get completely new dimensions. Where can I be traced? What is stored about my whereabouts? What is known about my spending pattern?

Democracies with freedom of press and speech have found that TV has become a major factor in political decision making and election campaigns. Interactive networks will enable instant polling and voting. Today's TV democracy could turn into a fast response democracy through interactive networks.

If entertainment on demand, instant access to news and business information is possible, the role of TV programme providers will change drastically.

We will have new difficulties to define the "real world" as it is perceived by us after the compression, decompression and image enhancement processes.

We might have an Information Highway personality which is looking for personal development and respect for his software contribution to society.

If 100 million people are connected to the Information Highway by the year 2000, we will have to rethink how a company communicates with ist suppliers and customers. If by the year 2020 one billion people are connected we start to learn what the information society means to us. At least the pace of the business processes will be faster, bottlenecks for information exchange will be removed. Will we communicate better?

Stand: Juni 1995