Field Trip Report from GameStop

I made two trips to two different gamestop stores in Plano and Frisco over the weekend, trying to do some informal channel research on the three next-gen game consoles.

Both stores have sold out all of their Wii consoles but have PS3 machines available. The store in Frisco, which is inside of one of the most popular mega-malls in the area, has two PS3s and the sales clerk said they've had them for more than 3 days. In contrast, besides a Wii for demo purposes, they don't have any Wii consoles left in store. The clerk, who owns a PS3 himself, said the PS3 is definitely scaring people off with its high price point and many consumers coming the the store have already made up their mind to get a Wii. The store features a promotion of PS3 on its front window-if you trade in your PS2 and some accessories such as wireless controllers, you'll get $100 off a new PS3 (the promotion is through GameStop, not Sony). It's hard to imagine a highly-desired game console would have needed such marketing gimmicks. It would have flown off the shelves all by itself like it had wings, wouldn't it? I heard that Gamestop is also running a similar promotion for the Wii (trade in a Gamecube and get $50 off a Wii) but I did not see the poster featured anywhere.

The field trip confirmed a few hypothesis:
1. The initial demand for the PS3 has waned off whereas Wii still has strong legs.
2. Price does matter for gamers outside of the small number of hard-core enthusiasts.
3. The negative press on the high price of PS3 has curbed the enthusiasm whereas the wrist-strap debacle of Wii may have actually increased people's curiosity about the innovative design of the Wii. By now you should have heard of the conspiracy theory about the wrist-strap, haven't you?
4. Blue-ray is not yet helping to sell PS3, making it harder to justify the high price point.
5. PS3 faces competition from not only Xbox 360 and Wii but also Sony's own venerable PS2.

The Gamestop guys, to their credit, did tell me they believe a year from now, PS3 will rule again because of its HD graphics and next-gen game capabilities. Nevertheless, he also told me how unhappy he was when he found out that the Monster HD cables he bought for the PS3 weren't compatible and he had to spend hours fixing the problem...

A Renewed Energy Emphasis and Interesting Areas to Watch

It's certainly heartening to hear business and government officials address the country's energy and environmental needs. President Bush's State of the Union Address from Tuesday night included proposals for increased funding for renewable and alternative energy sources, increasing fuel efficiency requirements for cars and light trucks, and an emphasis on domestic fuel production.

At the same time, The Wall Street Journal reported on Tuesday that business leaders - including those from industry heavyweights DuPont, Entergy, and Exxon-Mobil - are at least talking about ways to structure any potential policies regarding energy and the environment.

The White House provided a Fact Sheet: Strengthening America's Energy Security and Improving the Environment to accompany the President's speech. In the paragraph discussing President Bush's "Twenty in Ten" plan to "Reduce U.S. Gasoline Usage By 20 Percent In The Next Ten Years" is language that appears to link greenhouse gases (such as carbon dioxide) to climate change (such as global warming). Now, there is certainly room for disagreement on the amount to which human actions are responsible for global warming. With that being said, I think that there exists plenty of room for consensus regarding the country's basic needs when it comes to energy security, growth of renewable and alternative fuel sources, and environmental stewardship.

With energy issues in the forefront, it was interesting to be channel-flipping last night and come across The History Channel's Modern Marvels, which covered "Environmental Tech." From an electrical generating plant in Arizona that uses algae to reduce its CO2 emissions to new office construction in New York City that focuses on reducing water and electrical consumption to home building using recycled and sustainable materials, the show's emphasis was really on the practical ways in which companies and industries are not only increasing energy efficiency and focusing on environmental protection, but also building some potentially lucrative businesses. For example, the algae growing on the power plant's CO2 can be sold for a variety of manufacturing and energy-creating applications.

So, what impact may a renewed energy awareness have on consumers? Certainly, "green building" practices are one area in which consumers may begin to be impacted, in having some new and different options for considering alternative home building materials.

Also, our recently-released report - FTTx and BPL: Analysis and Outlook - discusses the role of broadband-over-powerline solutions for "smart grid" initiatives such as meter reading and outage detection. There may also be a role for BPL in more widespread energy management functions such as load shedding (sending a signal to a willing customer's home to increase or decrease the setting on their thermostat, depending on peak power consumption).

Here's hoping that 2007 will see some business acumen applied to policy decisions when it comes to energy and environmental issues. And, at the very least, maybe each of us will either increase or begin some of our own energy conservation practices like using compact fluorescent light bulbs and making sure that the tires on our car are properly inflated. As Lao-tzu wrote, "The journey of a thousand miles must begin with a single step."

Semi-technical thought of the day: Why do I find my two-tuner DVR already obsolete on Thursday nights, when I have three programs to record, all on at the same time? Thank goodness for the Media Center PC and its two additional tuners.

Completely non-technical thought of the day: If a radio station is going to play The Doors' "Light My Fire," my request is that they play the entire Ray Manzarek organ interlude. It's cheesy to shorten the song for radio play. Same goes for Elton John's "Funeral for a Friend/Love Lies Bleeding." C'mon folks, embrace the rock epic!

Apple and the Digital Home SWOT Analysis

Now that Apple has unveiled at least one piece of "Living Room" hardware (the Apple TV), the old argument "PC vs. CE" has now been adjusted to "Apple vs. PC vs. CE." Actually, although Apple's announcement seemingly stole quite a bit of thunder from the Consumer Electronics Show (CES) a couple of weeks ago, the same questions were being asked on the show floor and meeting rooms in Las Vegas. As broadband pipes grow more robust and the quality of the content available from sources other than the traditional television operator improves, there are plenty of people wondering where the future of digital entertainment in the living room will be in the next five years.

Yesterday's MacNewsWorld article ("Does Apple Have a Shot at Living Room Dominance?") offers some different perspectives on this subject. We were quoted in it, along with some other industry analysts and observers. The reporter did a nice job of compiling some different perspectives on what Apple brings to the table.

Here's a quick rundown of the points we offered in the article:

• Apple stands a good chance of having some success as a living room technology play -- but there are serious and well-entrenched alternatives that also stand to gain significantly;
• [Apple TV] brings more Web content directly to the TV. At the same time, however, there are a host of incumbent players and service providers -- set-top box manufacturers and their television operator customers -- who also deliver tightly integrated user experience, and who are at the same time incrementally opening up their walled gardens to more Internet content;
• It's too early to say what Apple's overall impact is going to be on the digital home. One key lesson that Apple has provided, however, is that easy-to-use products with intuitive interfaces [iPod] that tap into a well-organized and well-structured content source [iTunes] are a good model of success to follow in the digital home space.

I also found this MarketWatch article from January 11, 2007, to include some rational thoughts about Apple's chances in cracking the living room.

Non-tech Thought of the Day: Will 2007 begin the same way 2006 ended, with Roger Federer completely dominating men's tennis? We'll see what kind of fight Andy Roddick brings in the Australian Open semifinals tomorrow.

A Value-added Services Roadmap - Think "Hand-holding"

Today's press release from Radialpoint Inc. serves as a good reminder that - in the end - a little customer TLC may in fact be a value-added services offering! Amid all of the ado about "triple-play," "quad-play," and fixed-mobile convergence (FMC) solutions, there are business models being built around customer care and support.

Radialpoint has developed a business that helps broadband service providers deploy value-added services to their subscribers in a simplified manner. Right now, the company's emphasis is on Internet security enhancements, including parental controls, anti-spyware and anti-spam, and fraud protection. It has some well-known service provider customers, including Bell Canada, Aliant Telecom, BellSouth (AT&T), Verizon, Adelphia, ONO, and Ntl.

Today, Radialpoint announced some updates to its service in Radialpoint Security Services version 6.0. In addition to In addition to full Windows Vista™ compatibility and security enhancements across all core services, Radialpoint Security Services 6.0 also introduces two new services - PC Optimizer and Backup & Restore - to address consumer concerns regarding computer slowdown and data loss. Given Radialpoint's history in providing carrier-based solutions, the PC Optmizer and Backup & Restore functionality is a nice enhancement.

The data we're getting back from the industry on customer service support calls to service providers is significant. About one-half of calls to a service provider's help desk are "out-of-scope," meaning they're not connectivity related. If a help desk agent can ping a customer's modem and get a good response, then his or her job is finished. There are two problems with this scenario, however:

1. 1. A customer calling because of "slow Internet" service may have some unseen and unknown issue with an Internet cache that needs to be emptied or a C drive that may need to be defragmented. The customer service agent can't help with this in a proactive manner; and
2. Despite the fact that the help desk agent logged the call as "out-of-scope," it took anywhere from 9-25 minutes for the service provider to deal with that customer. That's extra cost, and it hits directly at the bottom line of a service provider that absolutely has to focus on the bottom line - increasing ARPU per customer, reducing churn, and attracting new customers in a highly-competitive landscape.

In addition, the maximization of potential revenues from value-added services can surely be supplemented with a back-up and safekeeping service for customer's data and multimedia files. Our own research (Managing the Digital Home: Installation and Support Services) indicates that there are specific segments of consumers willing to pay for online storage. Verizon recently announced a service called Verizon Online Backup that is aimed at small- and medium-sized businesses. We imagine that this type of service will trickle-down to more mainstream consumers in the next few years.

Amid all of the excitement that the digital home landscape offers, our advice is this: companies have much to gain by offering consumers some very basic and pragmatic services, and Internet security and backup are two key areas that are certainly targets. As recent reports such as Broadband Market Updates have indicated, there is money being left on the table without clear offerings. Consumers have indicated that they're willing to accept a certain amount of hand-holding and enhanced customer care, and there are businesses to be built around such support. We expect to see more announcements along these lines in 2007.

Did you catch last night's episode of The Office?

This entry does have a point other than my enthusiasm for NBC's Thursday night programming, so stay with me!

Last night was the first time I really noticed the unabashed product placement that The Office is using in so many of its episodes. When Dwight (Rainn Wilson's character) winds up working for Staples after he quits the Dunder-Mifflin, this was just another way in which the series is leveraging some tie-ins to advertisers (HP computers and the iPod are two other products that have been prominently displayed). And, this was not Staples' first appearance on The Office. According to a Boston Globe article I found, the retailer's $69.99 MailMate junk-mail shredder was featured in a November 16 episode (and shame on me for not catching that earlier!). There have been some other obvious ad links in the show's history - the restaurant chains Chili's and Hooter's are locations in which the overworked and underpaid Dundler-Mifflin Scranton employees gather!

Digital technologies such as DVRs and the fragmentation of the television viewing audience are certainly trends that are concerning to advertisers. In our recently-released Digital Living 2006 Forecasts report, we estimated that year-end 2006 penetration of digital video recorders was about 20 million U.S. households. And, as we reported in an earlier report - The Changing Face of Advertising in the Digital Age - the major broadcast networks had contracted with measurement firms such as IAG Research to measure audience recall of TV commercials and product placements.

In less than a month, the major media will be reporting on the TV ads that ran in conjunction with "The Big Game" (not sure I can use that term that the NFL has trademarked to describe the "U.S. professional league tackle football championship sporting event"), and agog at the price that advertisers paid the network (in this year's case - CBS) to air them. Meanwhile, the advertising industry is shifting well beyond the 30- and 60-second spots that have characterized the space for so long. We're continuing to cover the evolution of advertising models as they change in the digital age. Reports such as Internet Video: Direct-to-Consumer Services and the upcoming Electronic Gaming in the Digital Home: Game Advertising are a couple of interesting research projects.

In the meantime, I'll enjoy the The Office and try to do a better job of catching those placements! In the meantime, when are Jim and Pam finally going to end the suspense and start dating?

Quick Highlights from CES

The question that we we hear most often after the Consumer Electronics Show (CES) is “What did you see that was interesting or ‘cool’?” It’s not an easy question to answer. The press coverage of the show lends itself to pictures and video of huge televisions, tiny mobile handsets, and strange-looking devices (robots, for example). For Parks Associates, however, it’s not necessarily what we see that provides the greatest insight; it’s what we hear during demonstrations and briefings with companies that clue us into some interesting developments. And, every year, we tend to hear much about incremental improvements to devices and services, including (but not limited to) home networks, mobile communications, broadband-related services, digital entertainment, television-related applications, gaming, home systems and controls, and consumer electronics.

I honestly didn't have time to take in the 108-inch television on display at the show, as I was typically running from one meeting to another. However, I had some really interesting meetings with about 40 different companies. Below are some quick highlights of some of the key takeways that I had from the show:

• Eventually (if not quite soon), the home network will need to support HDMI transmission, meaning uncompressed high-definition video. This is for both quality reasons as well as for protecting the content (uncompressed HD content doesn’t fall through the “analog hole.”
• Related to this point, I'm wondering how soon a "wireless for HDMI" solution will hit the market. There is certainly plenty of buzz surrounding companies such as AMIMON, TZero, and the WirelessHD Consortium.
• Ultra-wideband (UWB) commercial products are coming this year and next. Companies were showing different form factors and implementations of the wireless. They have all kinds of form factors (PCMCIA, etc.) for cable replacement and wireless USB applications.
• The powerline debates continue. My colleague Michael Cai hosted a panel on powerline networking, and it's clear that there is little love lost between HomePlug and the proprietary powerline networking solutions. DS2 has some customers who speak highly of the technology's capability. This year will be a critical one for HomePlug to get large volumes of its HomePlug AV solutions out to market.
• It was interesting to hear Scientific-Atlanta talk about using OpenCable’s Linux and Java tools to incorporate Flikr and YouTube applications into the “walled garden.” The operators may likely be the real beneficiary of OpenCable in this respect. Obviously, retail availability of set-tops via CableCARD (another OpenCable part) is going to happen, but I think the key will be helping STB developers more rapidly incorporate the emerging content, services, and applications that the wider Web is going to bring.
• Continued “behind the scenes” talk about how the home network/digital home is going to be managed, and who will be the primary beneficiary of improved broadband and home network management tools. I hosted a panel discussion titled "Business Models for Managing the Digital Home," and we had representatives from Enure, Motive, HiWired, Linksys-Cisco, and Network Streaming to discuss the important elements of digital home management. Another panel on which I spoke ("The State of Home Networking") included this topic as well. Other companies in the space that I saw at CES included Affinegy, Bsecure (demonstrating at the D-Link booth), Cisco (their recent acquisition of RG software vendor Ashley-Laurent), Jungo/NDS, Network Magic, Nexort, and Peak8. I anticipate that 2007 is going to be a significant year in seeing more agreements formed between these vendors and new customers, including broadband service providers, home network equipment vendors, and consumer electronics companies.

China to Get Xbox 360 Soon

Chinese gamers will soon be able to get their hands on a shiny Xbox 360, a legitimate one. A Reuters article revealed that Xbox 360 may launch in China in the coming months. Microsoft has had its eyes on Chinese gamers' growing wallet for quite a few years and the launch of PS2 and PSP in China have provided precedents (when I brought my PSP back to China last year, several of my friends said they were planning to buy one). Piracy will continue to be a concern and such a launch does need blessing from the Chinese government. Nevertheless, the great growth and potential of the Chinese gaming market is obvious. The growth of MMOG gaming and microtransaction-based gaming has been tremendous. There are now quite a few Chinese gaming companies on NASDAQ. According to a new government report, in 2006 more than 30 million Chinese play online games, generating $800 million, a 70%+ growth compared to 2005. Maybe Microsoft can treak its model a little bit; rather than relying on retail boxes, it can focus more on Xbox Live! gaming services and digital downloads in China. Of course, Microsoft can also sell digital music and videos through the platform, bringing more revenue. Nevertheless, I doubt its IPTV announcement will apply to China anytime soon since the government has a tight grip on IPTV deployments, but I won't rule out the possibility of Microsoft leveraging Xbox 360 as its stepping stone into Chinese people's digital living room. The rumor about Xbox 360 entering China has been floating around in Chinese media for a while now. I also heard a rumor that the9.com, the publisher/distributor of World of Warcraft in China, is vying to become the sole agent for Xbox 360 in China. The9.com has been looking to diversify its revenue sources (90%+ comes from WoW). Will Xbox 360 be the answer?

Verizon FiOS Update

Verizon's Big Splash at CES
Boy, one couldn't miss Verizon's presence at the Consumer Electronics Show (CES) last week! With the demos set up and executives on hand in the Press Room, the media and analysts had the telco's bundled services and value-added services strategies laid out right in front of them. On the FiOS TV side, Verizon announced some enhancements during last week's show. Bob Ingalls, Verizon Telecom's Executive Vice President and Chief Marketing Officer, indicated that improvements were being made to the interactive media guide (January 7, 2007 press release - "Verizon Unveils Next Generation of FiOS that Redefines Home Entertainment Experience for Customers").

We were pre-briefed on the interactive media guide enhancements prior to the show, and the improvements are noticable. Verizon has done a good job of employing a variety of user search techniques, including "triple-tap" and QWERTY functionality. They've also pulled specific applications out from the Menu button (such as DVR content). Instead of having to first go to Menu and then Recorded TV, the user will see their recorded programming through the DVR tab. The speed and performance of the guide and the searches was quite impressive as displayed at the show. Verizon also indicates that 10% of its Verizon FiOS TV customers are subscribing to the Home Media DVR service, which provides whole-home DVR applications and interactivity with the PC(s) by allowing content to be pulled from home computers.

"Television 2.0" - What Does it Mean to the Digital Lifestyle?
Verizon's moves are emblamatic of the direction of "Television 2.0," as we've written about the impact that telco competition will bring to multi-channel television offerings. Key to the new direction of television and bundled services are these developments:
- Greater emphasis on home networking, including not only whole-home DVR applications, but the inclusion of advanced residential gateway platforms that help to manage voice, video, and data traffic from the access network and inside of the home; and
- Operators beginning to embrace "over-the-top" features and functionality, including bridging the set-top box to the PC and bringing in such services as Flikr and YouTube into the television provider's "walled garden." It was interesting to talk to Scientific-Atlanta (Cisco) at the show and see how they are using the Java and Linux tools of OpenCable to bring in this type of functionality. It's going to be an important direction that television operators take, as they begin to incorporate the "Wild West" of Internet content into their service offerings. We think that consumers will like this approach to delivering a more diverse array of content and choice while at the same time keeping the services managed and the quality of the experience as optimized as possible.

Opportunities for Vendors
Clearly, this "Television 2.0" era in which we're operating can mean some significant opportunities for vendors and solutions providers in the following areas:

• Network management (traffic routing, QoS, packet inspection, network delivery enhancements, etc.);
• Transcoding and transrating, not only for the "over-the-top" services, but also for quality control of commercial content that may be encoded in a variety of media codecs;
• Home networking (as the requirements of the service provider grow more diverse, so will their needs for more flexible home network solutions, including hybrids of wired and wireless solutions);
• Search and user interface enhancements; and
• Solutions that allow for "Inside/Out" and enhacements to mobile and portable content and communications experiences.

Verizon's Q3 2006 FiOS TV Update
Given Verizon's big splash at CES, we thought it would be helpful to give the latest public information about the status of Verizon's FiOS TV rollouts.

During Verizon’s Q3, 2006 earnings call (October 30, 2006), Doreen Tobin, the company’s Executive Vice President and Chief Financial Officer, noted that Verizon had 522,000 FiOS data customers and 118,000 FiOS video customers. Below are some key details:

Total Homes Passed by FiOS Service:
Total homes passed by FiOS service stood at 5.3 million as of the end of September; Verizon was expecting to reach its target of six million homes passed by the end of the year.

FiOS Data Services (High-speed Internet):

• Penetration of FiOS data customers (the high-speed Internet service) was 14% (522,000 subscribers from 3.8 million homes passed);
• Net adds of FiOS data customers in Q3 was 147,000, compared to 111,000 in Q2 2006 (32% growth); and
• On track to have 725,000 customers by year-end 2006.

Fios TV Services

• Penetration of FiOS TV customers was 10% (118,000 subscribers from 1.2 million homes passed);
• Net adds of the FiOS TV customers was 63,000 in Q3, compared to 35,000 in Q2 2006 (80% growth);
• Churn from FiOS TV subscribers is averaging less than 1.5% per month; and
• On track to have 175,000 FiOS TV customers by year-end 2006.

Costs to Connect a Home:

Verizon reports two costs:

• To pass a home (This is to simply enable a home to receive FiOS service, in other words, to “pass a home”): Verizon reports that the average cost was $845 per home at the end of September, down from $1,400 when they began the infrastructure upgrades; and
• To connect a home (when a home actually subscribes to a FiOS service): Verizon reports that the connect cost at the end of September was $900, a 25% decrease from the beginning of the year. It expected the connect cost to drop to $880 by the end of the year.

Total Costs:

In September 2006, Verizon had reported that it was spending $18 billion through 2010 to deploy the FiOS services.

"Content Everywhere" Equals "Ads Everywhere"?

These days service providers are all about fixed-mobile convergence, cross-platform, and three screens. Facing fierce competition in different business silos such as voice, video, and data, service providers are aspiring to become experience providers, offering a bundle of applications and consumer experiences through all the networks they own and all the consumer devices their services touch. One of the most important consumer experience is the consumption of entertainment content and it's therefore no surprise that has become the mantra of Orange, the leading French service provider. Service providers will deliver content in different ways, including subscription, a-la-carte, and of course, free advertisement-supported. Advertrisement seems to have become the panacea for new media and it is now invading the only remaining oasis, cell phones. Cross-platform content or experience will inevitably lead to cross-platform advertisement as service providers attempt to leverage multiple screens, collect user data, and deliver ads targeted to not only an individual consumer but also the distinctive platform he happens to use at a certain point of time. The hope is that they could then charge higher CPM from advertisers. AT&T has announced its first three-screen advertisement deal with Chase, opening the floodgates.

AT&T has secured exclusive rights to distribute video, music and images from "Swampstock 2006," an annual music festival and charity fundraiser held in Rayville, LA, and hosted by country music star Tim McGraw. Chase Card Services, which markets and services more than 140 million credit cards as part of leading global financial services firm JPMorgan Chase & Co. , has agreed to be the sole sponsor of the concert and related elements.The concert elements will appear on the AT&T blue room, a Website featuring music, sports, gaming and more; through video on demand (VOD) on AT&T U-verse(SM) TV and AT&T Homezone(SM) services; and via Cingular Wireless.As part of the agreement, Chase will receive banner ads on the Swampstock area of the AT&T blue room portal, air TV spots throughout the VOD segments, and distribution of "wallpaper" and voice tones on the Cingular platform.

The other service providers are likely to follow suit in the near future. Consumers will soon be bombarded by advertisements wherever, whenever, and on whatever platform. We can only hope that someone invent a cross-platform TiVo service to zap away those ads. Oh wait, TiVo probably won't be the one-isn't TiVo transformaing itself into an advertising company? Ok, let's settle for less; hopefully these ads will at least be creative and "relevant"...

Betanews Just Posted a Good Summary of my View on PS3, Worth Sharing

Analysis: Making Up Sony's PlayStation 3 Sales Gap
By Sharon Fisher, BetaNews
January 12, 2007, 4:35 PM
In examining the margins between Sony's end-of-2006 sales goals for PlayStation 3 and the actual numbers reported this morning by NPD Group - the accounting for which, Sony told BetaNews today, makes sense if you count those PS3s still on trucks - Parks Associates analyst Michael Cai told BetaNews there could be more serious factors at play...or at work.
There were several factors behind Sony's debacle, said Michael Cai, an analyst with Parks Associates.
First was the price point, especially considering the holiday season when people are buying gifts, Cai said. The people who did buy PlayStation 3s were the core early adopters, but once you get beyond them, price becomes a big factor - especially when it's parents buying consoles for their kids. In fact, he noted, the PS3 didn't even make its numbers in Japan, where the price was cut by 20%.
The second factor was the limited supply at the beginning, and that even when more machines became available, Sony didn't communicate that very well, Cai said.
The third factor was the Nintendo Wii, which got a lot of attention. Even the wrist strap problem served to help promote the machine. "Everyone has to wonder why you need a wrist strap," remarked Cai. "'What are they doing with that thing?'"
A fourth factor was the still booming popularity of the Sony PlayStation 2, which was often sold for $100 bundled with five games, Cai said. "Sony was competing against themselves."
Sony needs to do several things to recover, he advised. First, it needs to communicate with the market that the machine is available. Second, it shouldn't cut the price immediately, because that will increase the perception of failure. Instead, Sony should add value to the product by bundling games and movies with it, he said. Third, Sony needs to market the device to people in their 20s and 30s, who have a job and have their own purchasing power, leveraging social media such as MySpace and YouTube, he said.
Will there be a PlayStation 4? Cai thinks so, but not right away. Gaming machines such as the Xbox 360 and PlayStation 3 are so powerful, he said, that it's hard to see another machine coming out in five years. The next cycle will probably be more like eight years, he said. In addition, Sony needs to look at what Microsoft is doing with IPTV and turning the Xbox 360 into a set-top box and a living room entertainment center, and look for similar opportunities, perhaps making use of its own content, he said. To do that, Sony needs to create more synergy between its different corporate components.
The upshot is that the 2006 holiday season was a big shot of reality to Sony, Cai said. "Sony is no longer the Sony of four years ago," he said. "Apple is a lot cooler than Sony. They thought because of the PlayStation 1 and the PlayStation 2 that the PlayStation 3 would sell itself, but that's not what happened."

Is the iPhone too Vain to Succeed?

The central challenge in designing a smart-phone has always been the interface. Email, web browsing, and similar applications are only useful if the consumer can quickly and easily input information. For the humble, this problem is overcome by slapping a tiny keyboard somewhere onto the phone. The problem is that keyboards are ugly and putting one onto a sleek, sophisticated, mobile phone is as attractive as fasion model sporting an over-stuffed pocket protector.

Handset vendors have tried to find ways around this problem. Motorola and Treo both launched short-lived cellphones with a stylus interface and hope springs eternal for a good voice-interface. For those of us that aren't characters on Star Trek, however, the most fashion-conscious option is to conceal the keyboard somehow. Ask the super-model to put the pocket-protector into her purse and only take it out when others can't see. Danger's hip-top phone is the best example of this "cool on the outside, nerdy on the inside" approach.

Which brings me to Apple. The iPhone's functionality depends on a phone-size touch screen combined with a some innovative interface tricks. Now I will be the first to say it looks really cool and cool has always been a key factor in Apple's success. What happens though when I grow tired of staring at my iPhone and I want to start emailing people?

I admit I haven't gotten my hands on one of them yet but I'm dying to know how well it can hammer out an email. With a $500 price tag, I'd have some pretty high expectations. More to the point, an expensive smart-phone with an awkward email interface probably won't go very far among blackberry weilding road-warriors. At the same time, young hipsters are going to want a device that allows them to IM each other 24x7.

Herein lies the challenge. If the iPhone looks cool but isn't all that great for IM, email, and other 'smart-phone' functions, then what you really have at the end of the day is an iPod + voice. That will be enough for some but it won't be enough to make the iPhone into the category killer device people have been anticipating. Good looks are great but if you're too vain to do anything but sit there and look pretty, your prospects are limited.