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Connected Homes December 2012/January 2013 Viewpoints

Technology Analyst: Kyle M. Whitman

2012: The Year in Review

A high-profile bankruptcy and another high-profile acquisition helped signal the transformation of the cloud-gaming business into a new and very different form. Wi-Fi became a mainstream connectivity protocol for home-automation equipment. Device manufacturers and content-industry players invested heavily in the tablet-computing form factor. And for the first time ever, a major internet streaming-video company secured the right to deliver first-run pay-TV content to homes ahead of delivery by conventional pay-TV networks. I discuss these and other significant 2012 connected-homes developments below.

Second Screens

Throughout 2012, consumer-electronics manufacturers and media companies invested heavily in attempting to capitalize on the growing "second-screen" trend, in which individuals increasingly interact with digital content on both a television screen and a tablet or smartphone screen simultaneously. Stakeholders whose businesses are oriented around a TV-centric home-network environment often view tablet- and smartphone-based home media consumption as a threat, given that such devices increasingly compete with televisions for household users' attention. Individuals who use tablets or smartphones while a television is on in the background frequently play games, interact with friends on social-networking sites, read news feeds, and engage in similar activities that may have nothing whatsoever to do with what is happening on the television screen. Often, another household member might be using the television for gaming or a TV program may simply be playing in the background, with none of the household members really paying attention to it.

Some stakeholders appear to view the second-screen trend as an opportunity, having invested in building tablet and smartphone applications that serve as companions to live-TV content that users may be watching at the same time. Analysts widely cited the 2012 summer Olympic games as a successful example of this kind of second-screen model, with at least two major television networks reporting very high user engagement and satisfaction from their Olympics-companion applications. Overall, however, tablet and smartphone users continued to report relatively low levels of satisfaction with dedicated TV-companion applications. The marketplace for tablet-computing devices itself showed signs of diversification in 2012, following the considerable sales and critical success of the Asus Nexus 7 tablet, which runs Google's Android operating system. The Nexus 7 is the first Android-based tablet device (and, in most respects, the first tablet device of any kind) that analysts view as a serious competitor to Apple's iPad devices, which have historically dominated the tablet-device market. As of the end of 2012, the Nexus 7 had sold well enough that major application developers were beginning to release tablet-optimized versions of their Android applications. Such applications have long been absent from the Android platform (because of a lack of user adoption of tablet devices, among other factors), limiting its appeal in comparison with that of Apple's iOS (which has many highly acclaimed tablet-optimized applications).

Unfortunately, not all manufacturers' forays into the second-screen-device market met with success in 2012. Both Microsoft and Nintendo released tablet devices in the second half of the year, the former's being a flagship product for a new hybrid PC-mobile operating system and the latter's being a pioneering home game console that incorporates a touch-screen tablet device into its controller. Microsoft's product, the Surface tablet for Windows RT, generated significant interest initially but ended up faring poorly in the marketplace amid criticism of the company's new operating system and the many compromises in hybridizing PC- and tablet-centric user-interface concepts. Nintendo's product, the Wii U, also has suffered from poor sales, together with significant software-related issues that negatively affected the user experience for early adopters. (For example, the console shipped without key features, such as the ability to stream TV programs on the tablet screen, and new users had to download a massive multi-Gbyte firmware update to begin playing the system.)

Cloud Gaming

The market for cloud-gaming services saw significant upheaval in 2012, with one major player—OnLive—filing for bankruptcy protection, and one other major player—Gaikai—finding itself acquired by a maker of conventional game consoles. Cloud-gaming services allow subscribers to play games via an internet-streaming model. Server clusters under the control of the gaming service handle software and media storage and graphics-rendering and other gameplay-related computation, and they stream compressed, high-resolution, high-frame-rate graphics to subscribers' devices over a broadband internet connection. The subscriber's device—which, depending on the cloud-gaming service, could be any device from a smartphone to a laptop PC to a specialized "thin-client" console plugged into a television—decompresses and displays the video stream and captures and transmits the subscriber's control inputs back to the gaming-service provider. Besides offering subscribers the benefit of being able to play games without specialized hardware (such as gaming PCs or expensive "thick-client" consoles), cloud-gaming services could allow subscribers the ability to start playing a new game virtually instantaneously, because no additional software download is necessary beyond the cloud-gaming service's client software.

OnLive, one of the first mainstream cloud-gaming services, offered its subscribers access to a library of premium-quality PC games and—provided the subscriber's internet connection was up to the task—offered subscribers the ability to play those games with a level of graphical quality and smoothness equivalent to running the same games on a high-end gaming PC. Although users and the gaming press praised the service for generally delivering on its promises of high quality and low latency, OnLive struggled for years to find a business model that would allow the company to attract the critical mass of gamers it would need in order to sustain operations. Evidently, nothing like such a critical mass ever materialized, and OnLive filed for bankruptcy in August of 2012, transferring its assets to a re-formed company and laying off most of its staff. At the time, company insiders asserted that the service had never exceeded more than 1600 concurrent users worldwide—far below the numbers the company would have needed to justify its substantial operating costs. At the time of OnLive's bankruptcy, the service was operating on a model of using one dedicated server per connected customer and had been unable to take advantage of emerging technologies for virtualizing graphics-processing unit (GPU) tasks that now make it possible to run cloud-gaming services in a far more cost-efficient manner.

Despite OnLive's high-profile bankruptcy, 2012 was a good year overall for the cloud-gaming industry. The emergence of GPU-virtualization systems like Nvidia's Grid architecture allows cloud-gaming services to attain the kinds of economies of scale that are possible with other forms of cloud computing. For example, as of the end of 2012, Nvidia Grid could support up to 36 concurrent subscribers per server—far more than was possible with legacy technology. At the same time, the business landscape for the cloud-gaming industry was changing very rapidly, with game publishers, telecommunications companies, and pay-TV providers beginning to offer their own cloud-gaming services, often in partnership with companies that provide specialized software, hardware, hosting, and the like for cloud-gaming ventures. For example, France's Orange IPTV service now offers its own branded cloud-gaming service to its pay-TV subscribers via white-label cloud-gaming provider G-cluster. In October 2012, Korean telecom LG U+ announced that it would begin offering cloud-gaming services to its IPTV subscribers in partnership with service-provider Ubitus, which also provides cloud-gaming services to NTT DoCoMo, China Telecom, and Verizon Wireless, among others. Meanwhile, Gaikai, another large-scale independent cloud-gaming service that competed with OnLive, ceased to exist as an independent entity in July 2012 after being acquired by Sony. Gaikai had already found a successful niche in providing game publishers with the ability to stream demonstration versions of their games instantly to potential purchasers. As of the end of 2012, Sony had not yet announced firm plans for what it intended to do with the Gaikai service, but possibilities could include using the Gaikai architecture to provide instant game demos to PlayStation users or to endow its upcoming PlayStation 4 console with advanced features like "virtual" backwards-compatibility with older game titles.

Other Significant Developments in 2012

  • Smart thermostats see success. Home thermostats with advanced features like remote wireless connectivity and the ability to "learn" and adjust to users' habits and preferences automatically have existed as niche products for many years. In 2012, however, such "smart" thermostats showed early indications of potentially becoming mainstream products, thanks mainly to the success of the Nest self-programming thermostat. In mid-2012, Nest Labs announced that the thermostat, which launched in late 2011, became widely available at more than 500 Lowe's locations (Lowe's is a major home-improvement retailer in North America). Analysts attribute the Nest's success to its combination of relatively low cost, high aesthetic appeal, and simplicity of installation and operation. Late in 2012, Nest began offering a new version of its thermostat that is compatible with a broader range of home-heating and -cooling systems than was the original model. Among other options, the new version offers optimizations for radiant and heat-pump systems, in addition to forced-air heating systems. Users can tailor their systems to the desired balance between comfort and energy efficiency.
  • Wi-Fi-based home automation enters the mass market. Home-automation solutions that use Wi-Fi in addition to (or instead of) specialized wireless-communication protocols like ZigBee and ZWave have been available in the marketplace for several years, but such solutions have previously been either too expensive or too enthusiast oriented to find mass-market appeal. Early in 2012, Belkin released the first widely successful mass-market Wi-Fi-controlled home-automation solution. Thus far, the Belkin WeMo home-automation system consists of an outlet-switch device, a motion-sensing device, and a software application for Apple's iOS platform. Both the switch and the motion sensor plug into a wall outlet and connect to a home user's existing Wi-Fi network. The software application allows users to control and configure the devices either over a local Wi-Fi connection or over the internet. Users can install and configure any number of motion sensors and switches, using the former to control the latter or simply using the switches themselves to turn lights or appliances on or off. Thus far, the product appears to have sold well, despite many users' reporting problems with the devices' being unable to maintain their network connections persistently.
  • Netflix secures exclusive right to stream Disney content. In December 2012, internet-video-streaming-service Netflix announced that it had entered into a licensing agreement with Disney that would allow the service to stream animated and live-action content from Disney-owned studios. Although limited to the US market, the streaming deal is nonetheless significant because it grants Netflix the exclusive right to stream first-run Disney theatrical content during the pay-TV release window, a content-industry term that refers to a time period during which new films become available for viewing on premium pay-TV networks (such as Sky Movies, HBO, or Canal+ Cinema). Given the importance that movie studios and content-distributors alike tend to place on release windows, this deal thus grants Netflix a kind of privileged status among distribution channels and is the first example of a major studio's favoring an independent internet-based distribution network over a conventional pay-TV network. Depending on whether the Netflix deal ends up being a one-off occurrence or the start of a new trend, the relative importance of conventional pay-TV networks versus the internet as a conduit for home-entertainment could shift significantly in the future.
  • Look for These Developments in 2013

    • Expect significant disruption in the tablet and smartphone market, with knock-on effects for home-electronics makers, digital-content providers, home-automation-equipment makers, and other connected-home stakeholders. Projecting from trends at the end of 2012, one may expect that Google's Android operating system—already overwhelmingly dominant globally—will continue its expanding growth trends to the point at which developers will need to shift serious resources over toward supporting Android devices. Ultimately, by the end of 2013, one may see a reversal of current market trends in which home-electronics makers invest in supporting Apple iOS devices (especially the iPhone) first and adding support for Android devices later (if at all).
    • Look for disruptions in the home console-gaming and PC-gaming markets to come from unlikely outsider sources, with market consequences that could end up being so severe as to set up an existing major game-console player's exit from the marketplace. For example, Valve Software, which runs Steam, the leading service for digital game distribution, has already unveiled its upcoming TV-connected game console that will work seamlessly with the service. Android-based console maker Ouya, a venture funded through an innovative "crowdfunding" model, is another potential disruptive force in the game-console business, although the latter's console will likely prove to be more of a threat to pay-TV providers, smart-TV makers, and other games-industry "upstarts" than to established game-console brands.
    • Do not expect any significant impact to flow from smart-meter rollouts that will continue to occur worldwide throughout 2013, albeit at a slower pace in some key regions (such as the United States and Europe). With so many critical metropolitan-area rollouts now all but complete and the overwhelming majority of installed smart meters serving as little more than replacements for human meter readers (instead of hubs around which to build a new universe of dynamic home-energy-management systems) and little serious interest among industry players in rolling out new demand-responsive energy-pricing schemes, the changes the smart grid will likely bring to most households in the near future seem almost certain to be evolutionary, not revolutionary.