Archive | April, 2014

vertical integration of design and post-pcs

9 Apr

The news that Apple has been building an RF/baseband team is a great reminder about how cool vertical integration of intellectual property design can be as design and final manufacturing continue to fracture.

I wasn’t a business strategy wonk growing up, I was too busy writing software, so my first view of vertical integration in manufacturing, contract manufacturing and white-label manufacturing came during the mid- and late-90’s at Microsoft while working with PC OEM’s on the troubling issue of “low-cost consumer PCs.” OEM’s were in a price war that was driving their margins into the dirt and were giving Microsoft (the $70 Windows software license) and Intel/AMD (the $50 CPU price) grief over those parts of their cost as well as trying to figure out how to differentiate their products. We were helping key OEMs prototype different special-purpose uses for the Windows operating system which could be sold with new high-volume consumer products under a lower licensing cost to hit the <$300 retail price point. (This effort and some of our prototyping was one contributor to the initial XBox.) I was fascinated to learn details about how much PC OEM’s had outsourced manufacturing (and some forms of the hard intellectual property design) to foreign white-label manufacturers. Some small players had literally outsourced everything but their logo, their sales staff, and their direct-mailing lists. It was clear even then that they were not differentiable and fully doomed. Others, like Dell, were still doing final customer-specific options assembly and industrial/mechanical (particularly pluggable component) design but were no longer designing much of their printed circuit boards (PCBs). The more I learned the more this seemed like a difficult-to-defend position without unique software capabilities to differentiate the clearly commodity hardware. PC OEM’s had no brand-exclusive content.

One PC OEM that stood out and then led me down the rabbit hole of game consoles was Sony, who I learned was an extremely vertically oriented company – at one point it probably built the trucks that dug the sand and copper to be carried by its ships to its factories to be turned into glass and magnets for TV tubes to be carried again by its ships to markets around the world. Sony’s vertical integration experience in many different CE devices from Walkman to CD players to stereos to TVs taught it how to manufacture Playstation One consoles cheaply and then to radically reduce their build costs each year over the life of the console. It was using this technique in PCs and notebooks as well, delivering the most appealing and smallest PCs and commanding the highest margins for a time (though the PC OEM war of specs and hundreds of configurations dilute and defeat many of these advantages). Studying Sony’s’ Playstation and PC/notebook businesses as well as their various content business illuminated two important things for me which may seem at odds, but they are not: (1) vertical integration of hardware intellectual property is critical for differentiation, though the actual manufacturing can be carefully out-sourced if possible, and (2) Software differentiation (content) is the even more important differentiator. Ironically for Sony, it was the fact that even the strongest advantages of their vertical integration and their deep investment in hardware intellectual property for consoles wasn’t enough to keep ahead of the price-performance trajectory of commodity PC CPUs and GPUs. (It’s good to see them embracing the PC ecosystem and focusing on exclusive content now.)

Which brings me back to Apple, who clearly learned more lessons than everybody else combined from the PC OEM wars. Lessons about how differentiation matters, how intellectual property design must keep its distance as far as possible from manufacturing, and most importantly how to prevent a cross-over threat from another ecosystem.

In the classic PC/notebook space, Macs continue to use many off-the-shelf PC parts (ethernet chips, CPUs from Intel, memory), but their deep investment in industrial design and consumer-important features like thinness, lightness, screens and longevity require expertise and investment in the intellectual property of PCBs, glass, mechanics, aluminum, manufacturing, just to name a few. They use the intellectual property of hardware design to make their products unique and their exclusive software clinches the deal, allowing them to keep their margins high.

More interesting still, though, is the mobile, Post-PC or “Internet Of Things” space. Here with iOS and ARM-based in-house-designed CPUS Apple’s overall vertical integration strategy is just shockingly impenetrable for the foreseeable future. Post-PCs will be small, highly-capable, full of sensors, network-connected, power-sipping, and accessible to developers. Apple’s environment is all this, and is particularly strong in low-power. At this point Apple just lacks dedicated in-house designers of displays, touch-screens and batteries, though they appear to have long-term investments and future capacity contracts with their key suppliers and manufacturers. They don’t actually own the team which designs the graphics processor (Imagination Technologies, creators of the PowerVR GPU) though there is evidence of a deep investment & long-term contract. I suspect there must be a right-of-first-refusal or right-of-first-purchase in place. (I still don’t understand why Imagination hasn’t been bought by somebody, they are an amazing company who understand low-power better than just about anybody).

Android plus off-the-shelf hardware from the non-Apple ecosystem of ARM CPUs, GPUs and baseband controllers are nearly price-competitive, but already at the cost of very slim margins for all the intermediaries (increasingly for the medium- and high-end, this is just Qualcomm). Apple building custom baseband chips will mean Apple has fewer intermediaries and so pays less (it would likely pay $20-30 less per device using in-house baseband, or 10% less of its fully-loaded bill of material), and I’m guessing they will continue to outperform on power-consumption. Qualcomm will feel pressure from OEMs to further reduce prices and power-consumption, leading to lower margins and less ability to invest long-term. This is the aspect of the strategy which prevents an ecosystem cross-over – living in the same ecosystem as your competitors, retaining exclusive content, as in PCs and notebooks, but being able to do cutting edge intellectual property investment in literally every component with no exceptions. By bringing the hard intellectual property design of the very same ecosystem in-house and securing inexpensive manufacturing there simply is no competitive price-performance curve for competitor to cross over.

I shake my head at the genius of not just managing your supply chain but literally eating every bit of intellectual property designed within it except the lowest margin manufacturing. I see no offensive strategy capable of cracking Apple’s Post-PC lead at this time. Perhaps (I hope not) anti-trust will eventually be used, but it’s really more a waiting game for Apple to stumble and slow their pace of innovation.

Game Console Ecosystems – Part 2, Strategies (Now What?)

2 Apr

In Part 1 I wrote about content, price, and lifecycle patterns of game consoles and described ways they are blocking their own adoption. This second part describes now what? strategies for consoles, micro-consoles and others in the TV, CE and video, with the exception of Valve/Steam which is complex enough it deserves its own post. In another future post I’ll talk about something even more important to me: how to place your bet as a developer, and how VR (and AR) will radically impact developers and the CE space.

Many super smart people wonder What’s going to happen in TV? After Amazon’s FireTV announcement and the Android TV leak, even the most dull-witted among us now realize that small, inexpensive, network-connected, cloud-backed, UI-excellent, rapidly improving devices easily replaced every 12-18mo are the most natural product to deliver content to less-frequently purchased & expensive “big pieces of dumb glass” (televisions). The United States has an estimated installed base of 270M TVs (2.24 per household), 240M are sold worldwide annually, and the worldwide installed base is estimated north of 2B. Americans spend 5+ hours each day around their televisions. Selling internet-connected devices, services and content to that big an audience is not a hobby.

I’m a big console, now what?

The big-three consoles are in for a world of hurt as fast-improving, cheap-to-update, lower-cost mobile hardware and an enormous ecosystem of mobile developers transition into this market, either through a variety of Android-based micro-consoles (including Amazon’s FireTV) or an iOS-based Apple TV, or simply if TV’s begin to lose user attention to video streaming and games on tablets and phones. At the same time the most lucrative and loyal hard-core gamers and developers are drawn to high-end PCs which out-perform consoles by increasing margins and are easier and cheaper to work with. High-end PCs are likely to arrive in a TV-friendly form factors via Valve’s Steam box initiative by this holiday season. The question is how quickly and how hard, not if, this world of hurt descends on existing consoles.

Putting content and usability mis-steps aside for a moment, the past two generation of consoles have tried to ride a particular spot on the price-function curve in their graphics hardware and content arms-race, a spot that has pushed their price up and made them and their developers dangerously dependent on blockbuster hits. Chasing hits that fully exploit expensive custom hardware causes hardware and software that are fundamentally over-priced and increasingly over-squeezed.

To defend themselves the big consoles’ best chance in direct consumer sales is to reduce their competitors’ advantages and increase their own. On the hardware side:

  • Accelerate the current generation subsidy. Since micro-consoles, Amazon FireTV and Apple TV competitors will be priced at $99-149 in the 2014 holiday season, subsidize to $169-199 to make consoles an easier choice. It may be possible to strip some storage space or software services out for the upcoming season, but be prepared to spend on this defense even if nothing can quickly change. Creating better bundles with a contracted service subscription, unbundling Kinect and the controller and adding support for older XBox, Wii and DualShock-3 controllers which consumers already have are some ideas; there are many others to be found. Crazy to subsidize so heavily, you say? How could you possibly subsidize 10-20M units per year? To that I say – hey, if you are lazy, do no work to reduce manufacturing and sales costs or to understand your supply-chain and have to subsidize at $300 apiece it might cost you $15B over three years – are you saying that a beachhead entertainment device is worth less than what Facebook is paying for WhatsApp?
  • As part of subsidizing, use 2-year service subscription contracts. You can only do this if subscriptions are more like Playstation Network and Steam membership (full of value, free games, sales) and less like today’s XBox Live (subscribe and pay so that you can even use Netflix and other apps – stupidity), as most consumers won’t see any value. See also Spotify-style subscriptions described below under micro-consoles.
  • Commit to yearly hardware updates and forward and backward game compatibility over three to four years to defend against yearly micro-consoles updates which will follow the app compatibility model from mobile devices. This makes sure new hardware has an existing catalog of titles instead of resetting every generation, which is attractive to consumers and developers while still giving developers and users access to the cutting edge. Another side-effect: this model appears to match Valve’s public strategy and so may counter a Valve and Steam machine OEM advantage.
  • Introduce yearly staircase pricing: each year a model phases out, last year’s model steps down the price ladder and a new, faster model takes its place at the top. In 2015 drop the current hardware to a steeper $149-169 subsidy and introduce more interesting hardware, hopefully less subsidized if you’re doing your supply-chain work, at $199-249. Rinse and repeat in 2016. Throughout this time period the goal is to create a many-generations road-map with a razor-focus on reducing hardware costs so that the subsidy costs come down while function improves. The larger goal is to get your console to a more price-defensible position on the price-function curve, keeping it enough ahead of peak function coming from mobile CPU+GPU hardware in micro-consoles that better games are possible but not so far ahead that you chasing the arms-race of cutting-edge PC graphics, which is too expensive. All consoles lose some high-end PC and Steam Box gamers, but this should help block lower-end Steam Boxes from capturing a large chunk of market.

On the software side:

  • Make your platform wide-open for independent developers. Kids, students, anybody with skill and spare time who owns one of your devices should be able to download free tools (for PC and Mac) and write games that they can give away for free, sell in your app store, or just show their friends. Review apps to prevent junk, spam, and copy-cats, curate lists of great content to put it front-and-center in your store, but most importantly just let any developer write software for their own console using free or very inexpensive tools. Don’t just speak about it and slowly roll it out over a year or two, do it immediately; remove the strange sign-ups, verification, approval, wait-list nonsense. Remove the strange pricing rules, size limits, trial periods and overall regulations found in Microsoft’s XBLIG/XBLCG and SCEA’s Indie Outreach. Let the community of developers share code and support one another without hindrance.
  • Offer a better “App Store,” let prices float, but don’t drive to zero. Draw the best of simple finding, paying, and in-app-payment as well as curation from the iOS App Store and the best of sales, membership and deals from XBox Live, Playstation Network and Steam. Remove the constraints and restrictions that held prices extremely high but don’t
  • Perform a immediate radical dissection of your user experience, particularly around how you navigate and watch or play content and around how you find and purchase additional content to watch or play. Use voice through phones, tablets, and remotes, not by yelling at your TV. Simplify first-run and every launch to speed access to content. Simplify billing, account setup, account recovery, subscriptions. Speed up launch and software updates. Eviscerate all error messages. Make backup/recovery, roaming your gamer profile, and restoring to a newer console work seamlessly.
  • Do even more to allow control of the device, its services, and the TV through mobile and tablet “remote” apps and bluetooth hardware, and open up the control mechanism to third-party mobile app developers through free SDKs, hardware development kits, open protocols, and tools.
  • Invest more deeply in exclusive game content, minimally for time-windowed exclusivity.

To summarize, the goal is to truly level the playing field in simplicity, usability, and price as a defense against lower-cost devices that can’t yet deliver high-quality game content while also creating a broader defense to a multi-tiered, multiple-OEM PC market through more frequent updates and console-exclusive content (more on that play, which is Valve’s Steam, in a future post). This should be a sustainable gaming location for several years. Microsoft is at a slight disadvantage to Sony in adopting this PC-isolating approach as it is more difficult for them to choose exclusivity of content between PCs and consoles; Microsoft is not sure whether PCs or consoles are going to be the larger volume, dominant devices long-term.

I’m a micro-console, now what?

Apple TV, micro-consoles like Ouya and now Amazon FireTV (and potential Android TV devices) have an advantage over current consoles in being a profitable piece of hardware at a reasonable and interesting consumer price-point. Ouya and Amazon FireTV don’t have a depth of supply-chain control and they have to pay more middlemen for parts, so Apple’s 35-40% hardware margin at $99 retail will be out of their reach initially. Over a few years if they achieve high volumes they can either find higher margins or drop their prices below Apple TV (their retail strategy will likely be the latter, which suits Apple just fine); future cable operator subsidies and Apple’s brand strength may obviate any retail price advantage vs Apple for most consumers. In any case micro-consoles could be self-profitable on hardware alone, and they will definitely provide a profitable distribution path for existing subscription streaming partners like NetFlix and Hulu. To have gaming content help drive their growth and to grow gaming and an app ecosystem, though, they must create:

  1. Must-have, exclusive, break-out content that helps move 5-10M units of the hardware.  Initial hits are needed to seed the market which in turn causes more content developers to focus on exclusives for the device, to see its market potential, and to see a viable customer base for doing business long-term. For games this is particularly important since “console” games tend to be longer and require longer development cycles. Amazon has primed its pump for FireTV with original streaming content (which has been somewhat well received but not yet as critically acclaimed as NetFlix) and is at least trying on the games front with the acquisition of some strong game teams and a commitment to first-party titles, and a big outreach to many game studios. There are no two ways around the fact that Ouya really must scout out and invest money (if they have it) in an exclusive must-have game title which showcases its excellent little product.
  2. A virtuous-cycle ecosystem where money can be made by content developers. This is more than an app store with a 70/30 revenue split, it’s more than supporting payments seamlessly or supporting in-app-purchase. Its about an overall business model and community culture that ensures long-term profitable businesses can be built in the environment, not just get-rich-quick schemes or games that prey on addictive behavior or psychological chicanery. Directly copying the current iOS App Store is not without risk – many aspects of the pricing and free-to-play/in-app-purchase model have soured game development on mobile, leading to an exodus of great game developers back to PCs and Steam. In the last year Ouya’s everything-has-free-trials policy (now rescinded) was quite a bad mis-step in my mind because it set customer expectations on “free” and it also put developers immediately into the free-to-play/in-app-purchase mindset of get-rich-quick schemes dominating in mobile. The Amazon FireTV slide describing the average selling price of paid games as $1.85 sets up a similarly low and cheap expectation which may prevent the creation of break-out game content. My spidey-sense is that as Apple has already spotted the negative customer satisfaction impact from free-to-play and unlimited in-app-purchase as well as highly creative developers shifting their attention away from iOS and are poised to make App Store rule adjustments. I won’t try to read Apple tea leaves, but some suggestions for other micro-console ecosystems to avoid scaring away developers are
    • proactively block clones and knock-offs under guidelines such as Apple’s 2.12
    • adopt time-window constraints on the frequency and amount of in-app-purchases (perhaps introducing several different categories that apps can choose which best fit their game mechanics), with the underlying goal of disrupting app dependencies on “whales
    • introduce Spotify-style subscriptions of all-you-can-eat daily, weekly, or monthly access to groups of games and pay developers in proportion to the amount of time consumers spend during the period in their game, with the underlying goal of encouraging the creation of content users like to spend time with (time spent being an imperfect representative of their enjoyment)
    • If I personally ruled the world I would also set a minimum base price of $0.99 or $1.29 for apps, just to keep consumers aware that content has value.

The complaints I have previously leveled against consoles and which I suggest they fix – better UI, easier setup & account management, faster game loading, etc – are a baseline for micro-consoles as well. Though they start at a simpler place than consoles and bring less baggage, they still have room to tighten up, and getting ease-of-use just-right in the $99 space is going to be how they differentiate and sell. Apple TV is in solid shape, though voice search in FireTV ups the ante quite a bit. FireTV UI looks good, but until I set it up later this week and play with it for a while and get a software update I won’t truly know. Ouya is a pretty rough around the edges, but they have been making updates and have a good software team; I think they know these issues are important for their future, I look forward to seeing what they do.

The final point for micro-consoles is having an excellent bundled content remote and an excellent bundled or separate game controller. From what I’ve seen, FireTV has nailed the remote, especially with voice integration – I’m looking forward to trying it. Both Ouya and FireTV are not off to a strong start with their gamepads, though Ouya supports Playstation DualShock3 controllers and wired XBox 360 controllers, which is smart. Iterating aggressively on their own game controllers or drafting off the excellent open-protocol Bluetooth DualShock3/4 controllers is a great idea (I recommend the DualShock4 – the speaker is a surprisingly great addition to the controller). Apple’s TV remote is excellent – it only remains to be seen if they integrate voice in the next version. I expect Apple to design a really great gamepad as well as supporting existing customers with DualShock 3 & 4. It would cost a licensing fee to integrate XBox 360/One controller support since Microsoft uses some (stupid) proprietary technology – I doubt Apple or any others will choose to support it.

I’m a streaming stick/dongle or mini-set-top-box, now what?

Right now these are exciting little products for consumers. The sticks and dongles remind people of convenient thumb drives. They are incredibly inexpensive and can be justified as an impulse purchase just to get Netflix or Hulu – most consumers have a spare HDMI port on their new television and what the heck, it’s only $35! The mini-set-top-boxes are small and don’t take up much space near the TV or cause much additional house clutter – your partner won’t complain. Existing Smart TV software is so bad and changes so slowly that when someone sees a better looking UI demo reel they want to give it a try.

In this category the Roku products are excellent. The Chromecast is fairly underpowered but somewhat good; my best guess is Chromecast sells well to Androidees who want to project their pictures, videos, and youtube to a television, which I love doing with my iOS devices and Apple TV, but I have only anecdotal evidence that this is how Chromecast is being used. Myriad other teeny dongles out there which offer photo or video streaming or Netflix/Hulu are mostly meh in quality.

But even as the hardware improves and prices come further down there is a fundamentally narrow range within which general-purpose sticks and dongles can operate given their size. You can’t dissipate much heat from such a small device volume, and so you can’t draw much power or carry much storage or content. Pure video streaming isn’t a problem, but buffering multiple streams quickly is, and you are barely going to get smooth UI transitions and compelling graphics or even carry a lot of software or content, especially as screens grow in density from HD to 4K. No matter how Moore’s Law progresses, the stick/dongle form-factor will be too far down the price-function curve to be super appealing. Technically sticks and dongles can be carried easily to a friend’s house or on a vacation, and while this a niche use has utility today, I suspect it eventually dies in a cloud world. The $99 mini-set-top-box which has dedicated power and a larger volume to dissipate heat is the most interesting form-factor for the foreseeable future.

So what to do?

  • Focus on software. Making your software exceptionally easy to use, modular, and easily licensed and rebranded. Rethink and innovate on the tough issues on TV like discovery, search and parental controls. Unless you’re Apple, pick Android as your base so you can appeal to developers and improve your own application development. (Note: this is where I think Roku, otherwise executing with excellence, will be in trouble with its Linux+Brightscript SDK)
  • Make your devices controllable via smartphone “remote” apps and bluetooth. Create a free SDK for mobile and hardwared developers to use to write custom controllers – don’t think that you can do the best job. Rapidly and generously buy up the best solutions from your software and hardware developer community rather than trying to copy them in-house; don’t alienate developers.
  • License your software and hardware solutions directly to “Smart TV” manufacturers who need to get out of the software business. Promise them better software, more frequent updates, and better customer support.
  • Use the stick/dongle and Smart TV integration as the free/cheap entry to your broader software platform. Assuming you have long-term ambitions to be part of a TV ecosystem, take a look at how Roku has created a set of devices that span the portable/cheap stick to a plugged-in form factor with more hardware horsepower potential.

Is there room for single-purpose free or cheap HDMI sticks and dongles to do things like just video conferencing or just displaying photo albums or just letting you do presentations from your phone or tablet or streaming games from a PC? Absolutely there is room for these niche players doing this for several years until apps and high-powered $99 mini-devices take over completely, just don’t expect to build a huge business; use sticks and dongles during the transition.

I’m a “Smart TV,” now what?

Because of the slow replacement cycle of TVs and the accelerating pace of computer and graphics hardware improvements I’m pretty skeptical that it is useful for the “smarts” of a TV to live inside large & expensive TVs. Evidence suggests that even inexpensive tablets have long replacement cycles (perhaps they are used primarily as portable TVs?). In the short-term you can solidify your position as the best piece of dumb-glass moving forward as follows:

  • Don’t ship another single unit carrying your worthless, unusable, frustrating custom software.
  • Pull every stop to partner and integrate 3rd-party software with great UI by the 2014 holiday. At the moment I’d recommend Roku, though Ouya is a smarter choice due to the Android base (their UI is not quite as refined as Roku, though), but soon we should hear what Android TV’s licensing terms are. Please don’t roll your own Android version, custom store, and UI – you are not a softare company.
  • Be sure to integrate AirPlay, iView and the protocols underlying Chromecast so that your TV is accessible by the majority of mobile devices without users having to think about or buy an additional device. There may be other protocols specific to your geographic or cultural market – the key is to choose a partner which has some form of application SDK so you can add features and target specific models of your TV quickly and easily (this is Roku’s one big challenge at the moment, and why Ouya or another Android-based system stands a chance)
  • Focus on usability and customer service. Hey, what do I know, but here are some suggestions: Streamline setup. Be faster to turn on (with less of your logo). Ideally detect but also OK to let me name my inputs – like “XBox One” and “Cable” and “DirectTV” instead of “HDMI-1” and “HDMI-2”. Don’t make changing inputs vs. changing channels modal – go watch families struggle with TVs, it’s not rocket science. Each time the TV turns on, show me thumbnails of all my named inputs – what could be more frustrating than a blank screen showing “HDMI-2” when the last person left a different (now turned off) source selected? Revamp your manuals.
  • If you’ve got a speaker, support audio playback even when the screen isn’t on. Integrate Spotify through Roku and let people have ambient music, controlled by their phone or tablet.
  • Bonus points for TV/AV folks: Buy Sonos or partner deeply with them instead of trying to copy their features poorly in your line of sound-bars, TV’s, A/V receivers and 5.1 speaker sets using barely functional Spotify, Pandora, TuneIn, and Rdio integration. You do not have the software chops to build your way to a solution, you should just buy: they are doing a much better job than you possibly can because they focus on software and hardware working harmoniously.

Fundamentally, you are in a really, really tough spot long-term as a purveyor of dumb glass – but these are my suggestions for remaining differentiated while you figure out your next step.

I’m a cable- or satellite-operator with my own set-top-box, now what?

All your set-top-box hardware, remote controls, and software have been universally condemned and unconditionally criticized as slow, difficult to use, lacking in cutting-edge features, and slow to update – even back when you blatantly copied TiVo or built in their technologies. Because you aren’t a software company, because you have a huge installed base of odd TV and stereo configurations you fear weaning from traditional remotes, and because you completely subsidize the cost of the device or charge a small monthly fee, your goal is to simply minimize the cost of the hardware, software, and support associated with it. You have been either actively creating barriers to prevent your set-top-box from being a gateway/hub for other web-based or local-to-the-home photo & video content or have been integrating it poorly with custom-built apps. Your own set top boxes are not a competitive edge and continuing to invest in them will never lead to you growing your market share or improving customer satisfaction. There are two things you have traditionally done that you should keep doing:

  1. Secure content exclusively to your own networks, especially video content, especially sports. Most video content is becoming commoditzed, so you need desirable short-shelf-life exclusive content like sports as well as a broad tail of ideally exclusive niche content. Be willing to spend big to secure exclusive content.
  2. Improve your service. Faster internet speeds, better reliability, better customer service. Lower prices than your competitors is great, but dramatically better service is always the strongest long-term differentiator.

What should you do differently? You should either ease your way out of the hardware and deep software business by using off-the-shelf packages like Android TV and white-labeled hardware, or you should partner with a company already selling game console or set-top-box hardware to the public directly and draft on their business model. In either case you should sell, rent, or help subsidize new device to all your customers as quickly as possible, taking yourself out of the hardware and deep software business and into the app business. Integrate your tuner hardware and DRM technology if that is technically necessary.

If you are not going to use Android TV and white-labeled hardware, you have three serious choices for third-party complete ecosystems at this time: Microsoft XBox One, Apple TV, and now Amazon FireTV.

My guess is Microsoft will make XBox One available to many different cable operators as one choice for consumers among the set-top-box options available from the operator, and they are looking for a small subsidy assist or subscription percentage. It is typical for Microsoft to pursue consumer choice & perceived quantity over deep quality. (This isn’t meant as a dig – it is just their traditional method for hedging bets and keeping multiple OEM or other partners happy and more future moves available). The fact that it has on-board storage, a cloud infrastructure, and reasonably good programming guide integration makes it an attractive looking option. Unless it’s subsidized deeply to the free-$100 range, though, I’m skeptical that consumers will readily choose it over basic set-top-box options, but there may be some attractive ways to bundle it with new services which surprise me. It is also physically a little bit big and requires more complex physical integration and setup.

In contrast Apple would I think be looking to initially partner with a single operator to get a better time-window exclusive and to help further pull down the consumer price-point, to increase the subsidy so that the operator gets the cachet of exclusivity, drawing new subscribers. Recall AT&T and the iPhone – which cable operator wouldn’t want to be AT&T in 2007? The leaks around content deals with a combined Comcast/TimeWarner are mostly random noise without much depth, but in-between the lines I see indications that an Apple TV distribution partnership with new content is actually the deal that’s pending. Whether or not XBox One is also an option for Comcast/TimeWarner customers, I suspect the next generation Apple TV will be available as a free or <$50 option to Comcast customers and will include deep direct program guide and custom Comcast app integration. Apple TV will also be available at retail, like an unlocked iPhone, for the higher $99 (or future $149?) price-point. I’ve written that the next Apple TV will support gaming, and I even that I thought games would be its launch focus. But reading about content negotiations, thinking about Eddie Cue and how Apple typically chooses a single product facet for launches in order to have crisp messaging, I think the pending Apple TV update will focused entirely on user-interface issues like search and parental controls, new streaming content partners, and a Comcast/TimeWarner distribution partnership with live- and time-shifted-tv programming guide integration. Though it will have the hardware specs and iOS capabilities to support apps and specifically games later, that will likely be a separate fall/holiday 2014 announcement.

As a cable operator I would certainly be reaching out to Amazon if they hadn’t reached out to me already, because the voice-search, parental controls, Android ecosystem, UI/support and overall sizzle are what I need, but I suspect that in 2014 Amazon FireTV is a pure consumer play and they haven’t had time to pursue deep cable operator integration and getting into this form of subsidy.

If I were a cable operator or ISP of any kind, I would be reasonably worried about partnering with any of these companies and would be drawn to retaining control over my own destiny by sticking with custom STB hardware or choosing the path with the most opportunity for customization (perhaps Android TV). This would be a poor choice, though. Cable operators should look to the history of the past 7 years in wireless operators and smartphones: long-term you do want to support many different devices, but short term you want the most compelling product deeply integrated so that you can acquire more contracted customers. You want to be the AT&T of this round, you want the exclusive Apple TV.

Thus ends my current thoughts on navigating the connected TV, set-top-box, console, and micro-console landscape – a bit adjusted at the last minute to account for Amazon’s FireTV announcement and stripped of references to Oculus VR and Facebook while I try to get my head around what that will mean. Feel free to tell me I’m wrong in the comments or harass me on twitter, I’m @natbro. You perhaps won’t be surprised to hear I sometimes consult and brainstorm with companies in the CE industry about these issues in more detail; if that interests you, I can be found through