Value Chain Consolidation and Digital Lifestyle Opportunities

With NDS’ announcement on December 4, 2006, that it is acquiring Jungo, we’re continuing witness consolidation in the market to deliver complete end-to-end access/service provider solutions. Today’s announcement also reaffirms they key roles that both home connectivity and enhanced WAN and LAN management tools will play in the competition between and among a number of service providers in television, broadband, and communications services delivery.

Recently, we’ve already witnessed significant acquisition and investment news from such companies as Alcatel (the Lucent merger took effect on December 1, 2006); Cisco Systems (Arroyo, Ashley-Laurent, KiSS, and Scientific-Atlanta, plus a significant investment in Widevine) and Motorola (Broadbus, Kreatel, and Netopia were all added to the fold recently).

A recently-released report from Parks Associates – Digital Living Forecasts – details the market opportunities available to the service provider community in the provisioning of advanced home connectivity products and services. Our numbers indicate strong growth (at year-end 2010 for U.S. households) in access-related services, including:

- More than 80 million broadband households;
- Sixty-five million bundled services subscribers;
- Thirty million bundled VoIP subscribers;
- More than 6.5 million residential Telco TV subscribers; and
- Nearly $3 billion in cable VoD revenue.

As households with advanced digital services grow, we’ll see residential customer premise equipment (CPE) similarly scale. The same Digital Living Forecasts through 2010 show solid growth in these specific categories:

- Nearly 20 million households using whole-house DVR solutions;
- Sales of networked-attached storage devices to exceed three million units; and
- Connected entertainment households (with multimedia and/or entertainment networked solutions) will exceed 30 million households.

What sort of trends will we see going forward? Whereas 2005 and 2006 have been mainly about building the end-to-end network and infrastructure solutions, we’re anticipating that residual products and services (both stand-alone and incorporated into service provider bundles) will begin to leverage the infrastructure for a host of new services and product solutions. Some key examples of these add-on solutions include:

- Sales of portable multimedia players, which will extend the entertainment experience to on-the-go environments, will reach revenues of $1.6 billion;
- Mobile phone revenues, which will incorporate many additional services beyond voice, will reach $181 billion;
- Online gaming subscriptions, fees, and derivative revenues will reach $4.4 billion;
- Digital music services will exceed $3 billion in revenue; and
- Internet video services (subscriptions, fees, and advertising) will reach more than $7 billion in revenue.

What remains exciting about the digital lifestyle space is the continuing trend toward innovation, which will not be contained to the large and highly-integrated companies. Some very interesting areas of opportunity that we will watch closely in 2007 include:

- Building smarter content delivery networks that allow service and content providers to better scale their existing infrastructure to deploy an even richer user experience;
- Continued work on the WAN and LAN management side. As service providers’ products and applications reach farther inside the digital home, they will need to build smarter and more dynamic management and reporting systems to help them solve customer issues with connectivity and customer service more dynamically;
- More advanced customer premise equipment (including set-top boxes, residential gateways, and other equipment) that help manage services and support inside the home;
- Greater storage capacity for mobile and portable platforms;
- The release of more robust home networking solutions (both wired and wireless) that enable the in-home connectivity environment to receive and distribute very robust content, including HD, from the service provider;
- Trends in alternative broadband delivery networks. As ownership of the network may become an even more critical piece of owning the customer, we may see alternative players invest heavily in broadband solutions beyond cable, DSL, and fiber;
- Enhancements to software that improve on the user experience for creating and sharing their own content; and
- Dramatic improvements to user interfaces, both physical and graphic. Service providers, end-user equipment manufacturers, and other players will need to invest both time and money in developing next-generation interfaces and search technologies to help end-users better find and organize their digital content libraries.