Sunday, November 13, 2005

Your Next Set-Top Box

You’ve probably got a set-top box in your living room. Most likely, it’s a cable model made by Motorola or Scientific-Atlanta. It might have a DVR with a hard disk built in, but most likely, it gives you access to analog and digital channels, perhaps on-demand programming, and maybe HD (if you pay extra). That’s it.

If Microsoft and Sony get their way, however, your next set-top box with look suspiciously like a XBOX 360 or a Playstation 3. A game console as a set-top box? In reality, the next-generation systems are called game consoles only because that’s the easiest way to categorize them. The XBOX 360 is the obvious follow-on to the XBOX, just as the Playstation 3 was born from the original Playstation and Playstation 2, but game playing is only the tip (albeit a very big tip) of the iceberg.

For years, consumer electronics, computer, cable and satellite market analysts have searched for a “Holy Grail” that will bring about the great age of Convergence. Today, if you want a digital cable receiver, DVR, DVD player and game console, you’ll need as many as four different boxes, all of which have to be connected to each other and to other home theater equipment. It’s a nightmare--when something goes wrong, where does the consumer go for help? One version of the Grail is what I’ll call the One Box: One set-top box that does it all…one box to replace all four boxes. Nothing to interconnect because everything is in one box, and a handful of connections to the home theater system.

Digital cable (or satellite) receivers and DVRs have been integrated by the major cable set-top box manufacturers, as well as TiVo and Pace (both for DIRECTV.) These integrated receivers are being adopted much faster, and in much greater numbers, than standalone DVRs. That mergers two boxes into one. The current generation of game consoles can play CDs and DVDs, so they can replace a standalone DVD player (merging another two boxes into one,) although DVD players are so cheap and so much more flexible than the current game players that there’s little reason to substitute one for the other.

That still leaves at least two boxes for the consumer to deal with, each with its own set of connections, remote controls and “looks & feels.” One Box Nirvana is reached with a single box that does all four key functions, plus new functions that are enabled by combining everything together. That’s where the next-generation game consoles come in.

The XBOX 360 and Playstation 3 can of course play videogames superbly, on conventional definition and HD screens, in stereo or 5.1 surround sound. Their built-in optical drives (DVD in the XBOX 360, Blu-Ray in the Playstation 3) will be a match for any standalone player on the market. There won’t be any reason to keep a standalone player if you have a next-generation console. That removes one box (the standalone disc player.)

The next two pieces are a little tougher. The most challenging job is to integrate a digital cable or satellite receiver into the game consoles. Both the XBOX 360 and Playstation 3 have the horsepower to handle all the functions that set-top boxes now perform—not just tuning to a channel, but also interactive program guides, on-demand and pay-per-view programs. However, in their current incarnations, neither console will incorporate a slot into which a module (a CableCARD) can be inserted in order to add set-top box functionality. There are ways to work around this, and both Microsoft and Sony have undoubtedly already chosen their approaches (either a module that can be connected to their game consoles, or a different version of their consoles with CableCARD slots.)

Note that this isn’t a problem for consoles connected to IPTV systems (the kinds of video networks proposed by Verizon and SBC, among others.) Those systems use the Ethernet connections like those already built into the XBOX 360 and Playstation 3 to send content to and from the set-top box.  If you’re using IPTV, skip this step; no receiver required.

The last piece, the DVR, falls in place once the receiver is added. Both the XBOX 360 and Playstation 3 need at least 80GB of hard disk space to be usable DVRs. Microsoft’s hard disk will only be 20GB; enough to store game data and lots of MP3s, but nowhere enough for video recording. Sony hasn’t announced the hard disks available for the Playstation 3, so it remains to be seen if they’ll be limited. In either case, however, adding larger capacity disk drives is only a matter of how much more consumers are willing to pay, not technical limitations.

In short: Add a digital cable or satellite receiver, along with at least 80GB of disk space, and either the XBOX 360 or Playstation 3 becomes the One Box. This analysis doesn’t even begin to take into account all of the additional things that become possible after you’ve combined all the functions. For example, you can connect the One Box to your network and share audio, video, images and games with your PCs and Macs. You can take programs recorded by the One Box’s DVR and make them available to your notebook computer, anywhere on the Internet, or to your cell phone or media player, anywhere at all. You can create podcasts and videocasts, and then stream them anywhere via the One Box.

In Part 2, I’ll discuss why the One Box represents both a threat and opportunity to the biggest players in the business.
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