By Matt Rosoff [bio]
Posted: Jan. 19, 2004

• Illustration: Portable Media Center Prototype

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

New pieces are falling into place in Microsoft's plan to establish the PC as a digital media hub, which the company hopes will drive consumer PC upgrades and garner licensing fees from device manufacturers. Partners who help Microsoft in this digital media strategy, particularly traditional PC OEMs, could gain entry to the consumer electronics business by creating devices that connect to the PC and take advantage of its digital media capabilities. However, other companies are pursuing similar strategies based on competing technologies, so format incompatibility and market fragmentation may limit the opportunity.

Several announcements at the Jan. 2004 Consumer Electronics Show (CES) illustrate Microsoft's continuing efforts in this area. Most notably, upcoming products from Microsoft and PC OEMs will allow users to connect a TV set to a Media Center PC over a home network, making it possible for the TV to serve as a "spoke" in a PC-based hub for home entertainment. Microsoft also announced new technology to enable consumer electronics devices to stream media stored on a standard PC, and new partners for Portable Media Center devices and other key technologies.

Strategy: PC as Hub, Devices as Spokes

Microsoft's strategy to establish the PC as the hub of home entertainment has several parts. First, Microsoft hopes to establish the PC as the best device for downloading, creating, and storing digital media. Then it hopes to spur partners to create devices to connect to the PC and play digital media. Microsoft's device reference designs and partner programs target both traditional consumer electronics devices (such as DVD players and TVs) and new classes of devices (such as portable digital audio-video players).

The short-term goal of this strategy is to drive PC upgrades. Although many existing PCs can easily work with digital audio, working with digital photographs and video requires significant processing power, memory, and storage. Long-term, Microsoft also hopes to earn fees from consumer electronics companies and content owners who license its digital media technology—particularly Windows Media and its associated digital rights management (DRM) system.

The Windows PC could theoretically become a home entertainment hub by offering native support for multiple digital media formats and DRM systems. However, Microsoft would prefer to see its Windows Media technologies play a dominant role. This is partly because Microsoft collects royalties when companies support Windows Media on non-Windows platforms (including consumer electronics devices). In contrast, royalties for other technologies, such as MPEG-4 and alternative DRM schemes, would flow elsewhere. In addition, by controlling its own digital media format and ensuring that this format is universally supported on PCs, Microsoft can quickly and easily improve the PC's digital entertainment capabilities—for example, in early 2003 Microsoft released a new Windows Media codec to support high-definition (1080p) video and surround-sound (5.1) audio. Finally, having its own DRM technology helps Microsoft reassure content owners that Windows PCs will have robust content protection capabilities, so these companies will not have to take extreme measures that would hamper the PC's use as a digital entertainment device, such as manufacturing CDs that cannot be played on any computer.

If successful, this strategy could not only help OEMs sell new PCs but could also help OEMs and consumer electronics companies sell new classes of devices that connect to those PCs.

CES Highlights Progress

Microsoft's announcements at CES 2004 were intended to show the company's progress both in establishing the PC as a digital media hub and in enlisting partners to build spokes that will connect to that hub.

Establishing the Hub

Two technologies, the Media Center PC and Media Center Connect, establish the PC as a digital media hub.

Media Center PC. Much of Microsoft's focus at CES was on the Media Center PC, a variant of Windows XP and an accompanying reference design for a remote-controllable PC with built-in digital media functions, such as the ability to record TV shows. Although Microsoft has never revealed sales figures, the first line of Media Centers, launched in late 2002 by Hewlett-Packard (HP), sold well enough to convince more than 40 other OEMs, including Dell, Gateway, and Sony, to offer their own Media Center PCs. In his CES keynote, Microsoft Chief Software Architect Bill Gates claimed the current crop of Media Centers (launched in late 2003) are selling about four times as well as their predecessors.

The only major new product announced at CES, the Media Center Extenders (described below), are intended to turn the Media Center PC from a stand-alone home entertainment device to a home entertainment hub by enabling a TV set to connect to the Media Center and access its digital media functions over a home network.

Windows Media Connect. Microsoft is developing a set of technical specifications that will enable any Windows PC—not just a Media Center—to serve as a digital media hub for other consumer electronics devices. These specifications, known as Windows Media Connect, will enable devices to connect to a PC over a home network, catalog certain types of digital media files stored on that PC, then transfer or stream those files over the network.

Despite the "Windows Media" brand, this technology will support other popular formats, including MP3 and PCM (uncompressed CD) audio, and AVI, MPEG-1, and MPEG-2 video, as well as a number of popular image formats (for digital photos). Microsoft also promised that Windows Media Connect would support widely accepted standards such as Universal Plug-and-Play (UPnP) and the Hypertext Transfer Protocol (HTTP), and would be fully interoperable with standards currently being determined by the Digital Home Working Group (DHWG), which includes major consumer electronics companies (such as Matsushita/Panasonic, Nokia, Philips, Sony, and Thomson/RCA) and PC industry players (such as Gateway, HP, IBM, Intel, and Microsoft).

Although Dell, Toshiba, and several other hardware partners have announced support for Windows Media Connect, no release date was given for any products based on the technology. Moreover, Microsoft's commitment to cooperation with the consumer electronics industry could be tested if major players in that industry decide to adopt non-Microsoft technologies, such as MPEG-4 or one of the many emerging DRM schemes.

Creating the Spokes

In addition to its progress in establishing the PC as a hub, Microsoft announced new products and new support for technologies that will enable various spokes to connect to that hub.

Media Center Extenders. Under development since 2002 under the code-name Bobsled, Windows Media Center Extenders are devices that will enable consumers with a sufficiently fast home network to control a Media Center PC from their TV, using an included remote control. Extenders will be available by the 2004 holiday season in the form of TV sets from PC manufacturers Gateway and HP, and TV set-top boxes from these and other OEMs (Alienware, Dell, Samsung, Tatung, and Wistron). An Xbox Media Center Extender Kit from Microsoft will give similar functionality to Xbox users.

The Extenders will allow users to access all functions of the Media Center 2004 interface, enabling them to record and play back TV programs; play DVDs, audio CDs, and music files from their hard drives; view digital photos; listen to streaming radio; and access Media-Center-ready applications, such as DVD-burning software from Sonic Solutions, and Web sites, such as the Napster 2.0 music download site. The kits will not, however, allow users to run other, non-Media-Center applications (such as Office) from their TVs.

Wired networks and 802.11a, b, and g wireless networks will all be supported, although users with 802.11b networks will be unable to stream video.

The Extender software will allow up to five Extender-enabled devices to connect to a Media Center PC concurrently, but Microsoft acknowledged that the hardware in today's Media Center PCs will probably not be able to handle such a load, and will be limited in practice to two simultaneous users. Microsoft expects hardware advances during the next two years, such as the emergence of 64-bit processors in the consumer market, to make the scenario of five concurrent users possible.

Pricing has not yet been determined, but the manufacturing cost of adding an Extender to a TV is expected to be about US$35, and the cost of materials in prototype Extender set-tops is about US$130.

Portable Media Center. First announced at the 2003 CES as "Media2Go," Portable Media Center is a reference platform and accompanying OS (based on Windows CE) for a new class of portable devices that will allow users to download digital video, audio, and pictures from a PC for later playback. Portable Media Center devices were originally expected by the end of 2003, but are now scheduled for the second half of 2004. (See the illustration "Portable Media Center Prototype".)

At the 2004 CES, Microsoft announced several manufacturers (Creative Labs, iRiver, Samsung, Sanyo, and ViewSonic) for the devices, and said that they will be supported by online content providers CinemaNow and Napster, as well as recorded music company EMI (which may have a significant role in the planned MSN Music Store).

The devices will feature an interface similar to the Media Center PC and will boast up to 40GB of storage space—enough for 600 hours of audio or 175 hours of video. They will support Windows Media video and audio, MP3 audio, and JPEG and TIFF static images (for digital photographs). However, two crucial factors that will influence the success or failure of the Portable Media Center—battery life and pricing—are still unknown. Moreover, it's not yet certain whether consumers, who have readily adopted portable digital audio players, will do the same for portable video.

Other devices. The first DVD players to support Windows Media Video (WMV) will be released in Apr. 2004 by Apex Digital. Kiss Technologies also plans to release a DVD player and DVD recorder that support WMV.

More than 500 models of consumer electronic device, from car stereos to home theater systems, now support Windows Media Audio (WMA) or WMV, including products from Matsushita/Panasonic, Pioneer, and Thomson/RCA—a number that has increased 150% since Jan. 2003. In addition, more than 4 million WMA-capable portable music players from companies such as Creative Labs and iRiver have shipped since 1999, making it the second most popular format for these devices after MP3. (Three and a half million portable MP3 players shipped in 2003 alone, according to Jupiter Research.)

In addition to broader support for Windows Media, Microsoft also announced new industry support for HighMAT, a technology that improves the user experience when using a consumer electronics device to play digital media files originally created on a PC. HighMAT is a metadata format developed by Microsoft and Matsushita that can be used to describe the contents of digital media files, making it easier to implement consistent navigation schemes for digital media playback devices and eliminating the delays experienced by some devices when playing files on writable disks. At CES, Microsoft announced that DVD-player manufacturer Apex, Malata North America, and several integrated circuit makers would support HighMAT in DVD players and other devices.

Bypassing Fragmentation?

Even as Microsoft forges ahead with products and technologies that will help it realize its goal of establishing the Windows PC as a home entertainment hub, other companies are following similar strategies based on non-Microsoft technologies.

For instance, while Microsoft has enlisted some partners to support WMA and WMV, many major computer and consumer electronics companies are betting on other formats. Apple's popular iTunes Music Store and the new RealPlayer Music Store both use AAC, and HP plans to create an AAC-based portable media player and ship software for Apple's iTunes Music Store on new PCs. Meanwhile, Sony is launching an online music store and CD players that use its own ATRAC format, as well as portable minidisc players that use a new Sony format known as HiMD.

The DRM picture is even more fragmented: Windows Media DRM faces competition from RealNetworks' Helix (also endorsed by IBM, which recently agreed to develop a digital media management system with RealNetworks); Sony's OpenMG; the system used by Apple's iTunes; and proposed systems from Philips (working with Intertrust) and an industry coalition known as Project Hudson (consisting of Intel, Matsushita, Nokia, Samsung, and Toshiba).

Instead of waiting for this tangle to resolve itself, Microsoft will continue to develop, design, and promote its own formats, along with reference platforms and services that employ those formats, in hopes that continued adoption of the Windows PC as a media hub will give its products an advantage with consumers.

There's no guarantee, however, that consumers will find Microsoft's version of the connected home compelling, particularly if they can achieve similar scenarios using formats with weaker or no copy protection, such as MP3 audio and the current generation of DVD video. Even if customers do accept the idea of the connected home and content protection, they may not believe that Microsoft is the best company to deliver it, but could instead turn to traditional consumer electronics players such as Sony and Philips. In this event, Microsoft may be forced to alter its strategy to encompass a broader range of technologies, and partners might have to move quickly to ensure that they are not left out.

Resources

More information on the Media Center Extenders and Portable Media Center is available on Microsoft's Web site at www.microsoft.com/windowsxp/mediacenter/evaluation/devices.

For a press release announcing Windows Media Connect, see www.microsoft.com/presspass/press/2004/Jan04/01-07CDSTechPR.asp.

For background on Microsoft's consumer strategy and the connected home concept, see "Three Imperatives Drive Consumer Strategy" on page 25 of the May 2003 Update and "Broadband Crucial to Consumer Strategy" on page 17 of the May 2002 Update.

For information on what's known so far about the MSN Music store, see "Music Download Service Planned" on page 17 of the Jan. 2004 Update.

For more details about the Media Center PC, see "Media Center Update Highlights Partner Roles" on page 5 of the Nov. 2003 Update.

For more details on HighMAT, see "New Media Publishing Format, Movie Maker 2.0" on page 10 of the Dec. 2002 Update, and www.highmat.com.

The DHWG is at www.dhwg.org.