Apple® iPhone May Struggle Initially to Cross the Chasm

High price point and doubts about utility of a convergence platform could inhibit early adoption

The Apple iPhone may find strong demand among early-adopter technophiles, but building a larger market may be difficult initially, according to "The iPhone: A Consumer Perspective." This new white paper from Parks Associates includes primary consumer data from "Mobile Entertainment Platforms & Services (Second Edition)," a 2007 survey of 2,000 U.S. Internet users. The survey finds only 3% of these consumers have a strong interest in purchasing the iPhone at its $499.99 price point and two-year contract.

"The underlying drivers for converging music, multimedia, and communications capabilities in a device such as an iPhone are certainly prevalent in today's market," said Kurt Scherf, vice president and principal analyst with Parks Associates. "However, the high price point may prevent the iPhone from achieving greater adoption over the short term. It may be an early-adopter product that appeals to technophiles but initially leaves other interested users on the outside looking in."

"The iPhone: A Consumer Perspective" is a free white paper available for download at http://www.parksassociates.com/iphone.htm

Beating the WiMAX Drum

I spent two days at NXTCOMM last week and that was more than enough for me. It seems the show is still hurting because of the split in 2006. The conference track I spoke at, WiMAX Strategies, was nontheless a good event. Many major industry players are present and the room was packed with more than 150 people. An opening keynote from Barry West, CTO of Sprint Nextel and President of Sprint 4G, and a closing keynote from Scott Richardson, the newly minted Clearwire COO, more than made up for the absense of the WiMAX Forum.

It was the same witty and convincing Barry. He went through many aspects of Sprint's WiMAX plans. Most were reiterations of previous announcements. Being the gaming guy, I cannot help but reporting that he talked about Webkinz, a virtual world set up for marketing Ganz toys to kids. The point he was making was that his grand daughter starts touching the web at a very early stage and her toys have Internet identities. Some of the key remarks Barry made include the following:

• Handoff is still an issue but it will be fixed soon with collaborations among vendors.
• WiMAX is not another voice network. It’s a true broadband network.
• Sprint will be very interested in leveraging its knowledge of its customers and generating “upside revenue” from the Web (the NTT DoCoMo model of some sort?).
• 3G technologies are not affordable for the volume of data demanded by mobile broadband and Mobile WiMAX delivers 10 times of 3G economics.
• Sprint will soft launch in Q4 2007 and then commercial launch in April 2008 to cover more than 100M pops in 35 markets before the end of 2008. In 2009+, it will focus on success-based build out and support a suite of embedded CE devices.
• The key focuses of Sprint’s new model are embedded devices, mobile Internet usage models and applications, and elimination of subsidies.
• Mobile carriers face new challenges with the new business model. They need to identify people as customers, instead of handset. There will be new identity management and authentication issues. For instance, one person might have multiple devices connected to the network.
• Back office is very important to manage the new business model and the myriad of devices and Sprint is spending a lot of time fine-tuning its back-office technologies.
• In responding to my question about the iPhone, Barry said that iPhone is a great device but it does not have true Internet connection. He won't say whether the exclusive 5-year AT&T/Apple contract will prevent the emergence of a WiMAX iPhone in the next five years.
• LTE will be a great technology but it is 3 year late.
• Mobile WiMAX will lock up CE devices (it’s real estate). If CE manufacturers already embed WiMAX, why should they spend another $15 to integrate other mobile broadband technologies.
• Mobile WiMAX chips currently cost about $25-45 and need to come down to under $15.

Scott Richardson also delivered a very good keynote and he leaked some interesting information about their progress. Since his Intel years, Scott has been involved in the WiMAX industry for a long time.

• DSL replacement is not Clearwire's strategy. Clearwire will support mobile and portable devices and even bundles of devices. The model will be similar to Sprint's.
• Clearwire's spectrum covers 223 million people and 85% of the pops are from the top 100 markets. It’s currently expanding into Tier-1 market, including Seattle and Honolulu.
• Clearwire currently charges $25-50 for the residential gateway service (768kbps to 3 Mbps guaranteed and up to 1.5 M-6Mbps). The ARPU is around $35.
• In Q3/Q4, Clearwire will launch its PC Card service. The price will be $50-60 for 1-1.5 Mbps.
• Subscribers can add VoIP for another $29.99.
• In markets Clearwire has operated for more than 12 months, it achieved 10% penetration in 18 markets, 7-9% in 4 markets, and 5-6% in 5 markets. The highest penetration is in Boise, Idaho, currently 20%.
• One in five Clearwire customers are subscribe to another ISP. This indicates Clearwire's services offer additional value prosposition. In May, 69% of Clearwire’s new subs either switched from Cable (40%) or DSL (29%). Only 27% upgraded from dial up, compared to 59% in Q1.
• Clearwire will turn the corner at 300,000 subscribers (EBITDA positive?).

There is no question that besides Ericsson, all the major vendors are sold on WiMAX. Now it's up to Sprint and Clearwire to prove to the world that mobile WiMAX will become a major piece of the mobile broadband pie. Our forecast predicts that by 2012, mobile WiMAX will account for 8% of global mobile broadband subscribers.

Survey Finds Social Networking Users Have Little Loyalty

Network-hopping, widgets & links connect, cross-pollinate the social networking market

MySpace users are chronically unfaithful, according to Parks Associates' "Web 2.0 & the New Net," a new report that focuses on the social networking market. Nearly 40% percent of MySpace users keep profiles on other social networking sites such as Friendster and Facebook. Loyalty among the smaller social networking sites is even lower, with more than 50% of all users actively maintaining multiple profiles.

These trends highlight a peculiar aspect of the market for social networking services. Nearly half of all social networkers regularly use more than one site; one in six use three or more. The result is an increasingly interlinked environment tied together by links, widgets, and the users themselves. "MySpace is a growing ecosystem and one that ironically now extends beyond MySpace itself," said John Barrett, the lead author of the report, "Web 2.0 & the New Net."

In Barrett's view, this environment creates fertile ground for new social networking sites and application providers. "A handful of users are all it takes to connect new services to the MySpace-centered environment. From there it can begin to spread virally, assuming of course that it offers something people want."

Notes from NXTComm June 18, 2007

Michael Cai and I will be at NXTComm in Chicago this week. You can catch us on some panels this week, including one I'm hosting tomorrow at the Telecommunications Magazine IP Video Village sessions. Michael will be moderating a panel on Thursday, June 21 titled Mobile WiMAX Devices - Cards, Handsets and More.

Today, I joined representatives from Calix, Motorola, Ruckus Wireless, Scientific-Atlanta (a Cisco Company), and TDS on an IEC panel titled In-Home Wiring and Home Entertainment Distribution. I thought it was interesting that the issue of customer support continues to be a recurring theme in these home networking sessions. Our own research - from the recently-released Digital Home Services: Carriers, Retailers, and the Consumer finds that broadband carrier support costs for home networking issues alone could reach $200 million annually by 2011 if carriers stay the current course and don't take steps to proactively address enhanced management, monitoring, and support requirements.

The good news is that the telecom industry (obviously profiled heavily at this show) has introduced several industry standards to address proactive monitoring and management. Chief among the standards are TR-069 and emerging working texts, including WT-111 and WT-135. The key theme from all the panelists today was increasing visibility for the service providers into what's actually happening inside the home network. To this end, they discussed such new needs as parameterized QoS (PQoS) and the ability to dynamically manage bandwidth, depending on the types of applications running into and through the home. Parameterized QoS is a model whereby bandwidth is reserved in an end-to-end fashion for high-throughput streams (such as HD video). We're starting to hear more about PQoS as implemented in the home network chipset, including last week's announcement from Entropic Communications (MoCA). One question that I'd like to ask the chipset vendors is whether a PQoS solution adds significant complexity (and therefore cost) to the final solution. I understand that there are varying views on the best way to implement quality-of-service for a broadband/IPTV network, including prioritized QoS.

The panelists are definitely open to the idea of including networked attached storage (NAS) devices as approved and manageable platforms on the home network. I was also struck with the notion that HomePNA3 is really making inroads into the service provider market (telcos, certainly). The panelists all expressed skepticism about powerline (at least as they know it today), and indicated that carriers may be more willing to support HomePNA because it may be lower cost and because it can be deployed over both coax and twisted-pair. However, Ruckus Wireless is being used by between 80-100 U.S. service providers (as indicated by Bob Payne, Ruckus' Vice President of Sales). Steve Mathesius at TDS indicated that the service provider has specifically chosen HomePNA as its network media of choice because cable service cannot run over it. Indeed, he said that TDS was implementing a "real showdown" with its cable competition and strongly locking customers in to its own service, using its choice of home networking as the key churn preventer. Now, that was an interesting perspective I hadn't heard before!

The panelists also said that they're not seeing powerline (HomePlug, UPA, HD-PLC) emerge as a required element in the home networking-related RFPs they're seeing from the service provider community, at least not in North America. We have suspected that the powerline solutions may be best aimed at markets such as Europe and Asia, where an in-home coax infrastructure is less likely to be found in as many households as here in North America. However, don't write off other home networking solutions in Europe. I learned that Swisscom is actually deploying a plastic optical fiber (POF) approach in some homes in Switzerland. The POF is thin and flexible enough to be threaded through the electrical conduits. It certainly is a good reminder that - in the home networking space - one cannot declare one technology over another as the true "winner." Service providers, CPE vendors, and consumers are all going to have different choices, based on such variables as the services being offered, the construction of a residential housing unit, and regulatory issues.

Finally, as we discussed the fact that the service providers are on the docket for a growing number of customer service support calls, Mathesius at TDS said that he doesn't mind that at all. In fact, he said that the support calls "keep TDS relevant." He believes that these calls can serve as the basis for an even stronger relationship with its customers, and even challenge Geek Squad in providing IT support services. I've got to tell you, this was the first time I'd actually heard a service provider embrace enhanced customer support, and it was an awfully refreshing comment!

Big Win for Clearwire and WiMAX

Clearwire's stock price jumped 20% this morning? Why? It finally announced the much-anticipated partnerships with DirecTV and Echostar. According to the press release from Clearwire, " The distribution agreements enable both satellite companies (DirecTV and Echostar) to offer Clearwire’s high-speed Internet service to their customers and contemplate that Clearwire in turn will be able to offer the video services of one or both satellite companies to its customers. This is expected to enable each of the three companies to offer high-speed Internet, video and voice in all current and future Clearwire markets. The launch is planned for later this year." We predicted something of this magnitude would happen back in 2005 and in 2006 when the two satellite carriers dropped out of the AWS bids, our belief were strengthened.

The deal makes a lot of sense. Clearwire, like DirecTV and Echostar, is considered a maverick which operates in a well-established market but provides a differentiated service. In order to scale up, it has to be able to compete in big markets against entrenched players such as AT&T and Comcast. Focusing on rural markets and filling DSL gaps won't get them very far. As a matter of fact, Clearwire recently revealed at an industry conference that it's growth is fueled by stealing customers from Cable and telcos. In markets where Clearwire has launched, 40% of its subscribers came from cable, 29% from DSL, and 27% from dial-up service. Clearly there's synergy among the three brands. Satellite companies also grew through competing against cable MSOs by offering something different.

There are also synergies between their technologies. Both are wireless. Satellite companies are desparate for a broadband strategy and a viable technology solution. Satellite broadband never worked well for them due to bandwidth constraint. They've been losing customers to Cable and Telcos lately because of their inability to offer a triple play bundle. DirecTV opted to buy a broadband service provider in the UK but the competitive dynamics in the U.S. is different. With this partnership, they finally have a path towards offering triple play. Clearwire already sells VoIP services using WiMAX. They can design new set-top boxes with wireless links that can communicate with Clearwire's WiMAX access points to enable video on demand. What's more, they can even potentially deliver multi-channel satellite TV services through WiMAX directly to portable multimedia players, allowing consumers to watch their favorite content wherever they are. Such a scenario will be more appealing than the current sync-and-go approach.

The deal is a big win for Clearwire. It now has a robust distribution channel with national reach. They've also increased their leverage through the partnerships and Sprint has begun to send out love signals. Craig McCaw is a master of big deals. He's putting all the pieces together for a glorious exit in the next five years. The divesture of Nextnet to Motorola for equipment procurement and financing, the acquistion of AT&T's 2.5 GHz wireless broadband spectrum, which give Clearwire about 14 billion POPs, covering about 223 million people in the U.S., and now this big announcement. Although Craig has failed a couple of times in the past 10 years, it seems he's on the right path to pull this one off. Its focus on portable and mobile Internet will be a strong differentiator, and by 2012, Clearwire will account for a significant portion of the 16M+ mobile WiMAX subscribers we forecasted for the U.S. market.

P2P going mainstream

Monday's announcement that Israeli-based Oversi received investment from companies including Cisco Systems gives us more pause as we consider the future of facilities-based media services delivery. Oversi develops P2P caching and content delivery systems, and the investment heralds - according to Oversi - the ability by service providers to increase their bandwidth capacities by 20x without relying on expensive network upgrades.

It makes me wonder where all of this new investment in FTTx and new interest from cable operators in digital simulcast, switched digital, and other bandwidth enhancements are really going. And, although Oversi is deploying a managed P2P specifically aimed at enhancing the capabilities of facilities-based providers to deliver more and enhanced content, wouldn't this type of solution (or other CDN, IP multicast, statistical multiplex, etc.) work for a company delivering media over the public Internet?

There are some wild theorists out there who speculate that the facilities-based media delivery model is simply going to disappear once the wide open Internet can support high-quality streaming with both guranteed quality-of-service and the appropriate security enhancements. All it takes, I've been told, is for Yahoo and Google to start lining up programming deals and they'll make all of the investment in IPTV and digital cable irrelevant.

Well, you know the old adage - if it sounds too good to be true, it probably is (Father's Day is coming up - time to give props to Dad for those words of wisdom). What do you all think? Are we a mere few years away from simply throwing the incumbent service providers out the door? Some would argue that what Apple is doing with the Apple TV is simply the first step toward buying a simple "black box" from retail, linking it to your home network, and then having all of the programming you want on the TV - all without paying the onerous monthly subscription.

I'd love to hear your thoughts on this subject. Feel free to e-mail me at scherf@parksassociates.com. Are we all about to get a free lunch?

Casting, Shifting, and Serving Simplified

So, maybe a little technology temper tantrum can get some attention after all! The folks at Orb Networks contacted me after reading my Curses! Foiled Again! write-up on my recent frustrations with a media adapter. To remind you about that hard-luck story, I tinkered with a media adapter to solve our problem of getting Media Center recorded television programming back in our bedroom from the PC located in the central area of the house. Everything worked great until the device didn't recognize the legacy TV tuners already installed on the Media Center. It was an unfortunate incident after having experienced very little pain and suffering during the preliminary installation and set-up process.

I had mentioned my use of the free Orb Networks software as a "stop-gap" measure to watch Media Center recorded TV programming in our bedroom. Basically, we take the laptop, boot it up, connect to the home network, open the Web browser, and then log into the Orb Networks account. They take care of all of the content manipulation by detecting the broadband/wireless network connection and adjusting the video quality appropriately.

It's an easy solution, and it's fun, too. I recently showed off Orb Networks to my in-laws in Indianapolis when we were visiting over Memorial Day weekend. Did you know that the Indianapolis 500 car race is actually blacked out on TV within a 50-mile radius of the city? My in-laws for years have been listening to the race on the radio, and using their imagination, I suppose. I was able to boot up my brother-in-law's laptop and bring up our ABC feed from Dallas so we could watch the race. Was it a perfect solution? No - the wireless connection at his house was such that there was a lot of buffering and pauses in the action. But, it demonstrated a good point - media shifting doesn't necessarily have to be frustrating and complicated. There are actually solutions that make it happen relatively easy.

I was able to catch up with the Orb Networks folks yesterday in a briefing, and they've made some substantial deals in recent months. For example, I didn't know that all Nintento Wii, PlayStation3, and Xbox 360 units can now use Orb Networks and serve as media adapters in their own rights. This makes sense to us Microsoft Xbox 360 owners have shown a strong propensity to using the platform to connect to Microsoft's own content services - the Microsoft Live Marketplace, particularly. The game console is really well positioned to act in a Trojan Horse fashion in the living room and perhaps challenge the existing set-top box model in a way in which no other platform to date has been able to do. Think about it - today's game consoles are going to be purchased because they do one thing really well - they give users access to great gaming content. However, if even a percentage of the consoles are used in conjunction with a broadband service to find, access, stream and/or download content such as high-quality music videos, movie trailers, TV shows, or movies, they instantly become the best-selling media adapters in the market. And, this is done without requiring the user to purchase yet one more black box in the living room. With all of the talk about what role the Apple TV is going to play in the living room, I dare say that the strongest threat may come from Microsoft, which has - despite lots of criticism aimed at its various CE strategies - provided an excellent platform in the Xbox 360 from which to access content well beyond games.

In addition to the game consoles, Orb has agreements with several major 3G handset makers and service providers (Nokia and Hutchinson, respectively). There are also several hardware/platform vendors using Orb as a value-added feature. Amino, one of the larger vendors of low-cost IPTV set-top boxes, Futarque (another set-top box developer), and ASUS showcased a media server at CEBIT that uses Orb for shifting.

The serving capabilities of Orb are also interesting. With the Orb 2.0 software, users can participate in what Orb Networks terms "MyCasting" applications, where a personal Website (public.orb.com) can be set up and where content can be shared without going through timely and sometimes frustrating uploading.

Speaking about the ease of using Orb - as it relates to mobile applications - Orb's Hervé Utheza said that it's as simple as having a Web browser, a decent connection, and a mobile plan that supports streaming. Doesn't that sound like a simple plan to get more people on board with the idea of interacting more with their content on their terms? Our role here at Parks isn't to endorse specific companies, but we can definitely support the notion of more flexible use of media, where a lot of the complexity gets taken out of the hands of the customer. We'll look forward to future updates from the Orb team.

In Response to Andrew Keen

In his new book, The Cult of the Amateur, Andrew Keen categorizes the Web 2.0 space as,

“…millions and millions of exuberant monkeys—many with no more talent in the creative arts than our primate cousins—are creating an endless digital forest of mediocrity.”

Obviously, much of the content being created by users is junk and Keen raises many fair points. I would like to offer a few quick thoughts in response, however:

1) Yes, many of the people producing content now are just kids and (shock! surprise!) kids act goofy, think it's funny to curse, and like to play make-believe. The only difference today is that now we get to see everyone else's kids acting goofy, not just our own. Moreover, the kids are much less inhibited (shudder) because the Internet allows them to goof off more anonymously.

2) Yes, much of the content being produced is inaccurate and of low quality. Technology is making content production cheaper which means more junk is being created. For the same reason, however, the absolute amount of quality content will increase. Moreover, the Internet hardly has a lock on poor quality content. TV, radio, and print media have a long and inglorious track record of producing shallow (soap operas) crude (shock jocks) and inaccurate (tabloids) content.

3) The problem is not that people can't distinguish good content from bad, it's that they genuinely desire bad content. Lip syncing teenagers are never going to be confused with Lawrence of Arabia. Factless demagoguery is clearly distinguishable from objective journalism. Yet we still watch the lip syncing and demagoguery because that's what we're looking for.


Web 2.0 opened a content floodgate by allowing consumers to produce. Unsurprisingly, the results have been amateurish. However, the democratic and chaotic production process should not be confused with anarchy. There is an method to the madness and quality content is being produced.

New Models for Personalized Media Distribution

A couple of articles from today's Wall Street Journal coincided nicely with a keynote at last month's CONNECTIONS conference from Dan Scheinman at Cisco Systems. I was reviewing the audio recording from his keynote this morning and writing a summary for our CONNECTIONS key takeways. Scheinman made four major points that caught my attention during that keynote:
1. Consumer-driven spending for electronics and services was actually helping to increase the rate of growth of overall IT spending - boosting the market from 5% year-over-year to a projected 10% YOY growth;
2. The old model for technology development and distribution - from universities, to big money banks, enterprises, and service providers has been turned on its heel. Consumers and service providers are now leading in many categories of technology development;
3. Hollywood and the major content providers' tight grip on content and its exclusive nature is slipping, as consumers become more empowered; and
4. Content associated with communities was going to characterize the new media distribution models.

When I checked the Journal at lunch, there were a couple of pieces that fit nicely with these main points. First, there was an interview with Radical Media's Robert Friedman, discussing the emerging trend of "branded entertainment" (basically, video content that is highly ad-oriented and aired outside the traditional realm of TV advertising, usually on cable TV or via the Web). Friedman spoke of the need for more (and higher quality) types of ad-oriented programming in light of the fragmentation of the TV audience, but also consumers' willingness to spend time in more immersive ad experiences, if created in a high-quality format.

Then, Carl Folta, Executive Vice President for Viacom Inc. wrote a scathing letter where he rebutted much of what was written in a previous article about the company in a June 2 WSJ article ("Viacom's Split: A Big Why?"). Folta stresses that Viacom has been among one of the most-active media companies in developing a digital strategy. He writes that Viacom has agreements with partners including iTunes, Yahoo, and Joost. In addition, they have 230 Web sites, with more on the way. He notes that the Viacom Digital is the number one entertainment destination on the Internet, and one of the many reasons why revenues attributed to digital entertainment are expected to double to $500 million in 2007.

So, while some might take issue with Dan Scheinman's point that "Why should consumers search for content; it should seek them out" (click on the link to one of our media attendees' reactions to the keynote), the fragmentation he spoke about and the need for media companies to figure out how to best link customers to their content in much more personal ways definitely does resonate. It's one of the reasons why we argue that the intrepid IPTV start-ups around the world should make their move into embracing more highly-targeted and measurable advertising solutions now, rather than wait for their cable competitors to get a leg up on them. It's also why we continue to be very interested in the whole search/user interface category as an emerging opportunity within digital lifestyle markets.

Circuit City's Turnaround Strategy

Interesting article in Thursday's Wall Street Journal about Circuit City's plans to turn its fortunes. It was nice to see some good references to the retailer's firedog installation and technical support service offering. I've been craving some decent data about both Circuit City and Best Buy's digital home support services (my efforts to get any public information about Best Buy's Geek Squad initiative are constantly thwarted!).

I've been completing our latest report on the market for digital home support services in a report that will be released next week titled Digital Home Services: Carriers, Retailers, and the Consumer. I received a great deal of support and insight from significant numbers of companies for this report (we profiled more than 40), so we really appreciate the insight.

Here's a quick recap of what's happening at Circuit City, particularly as it relates to the firedog services:

Circuit City formally launched its firedog service in September 2006. Its technicians provide in-home and in-store installation, optimization and repair services in-home, in-store. There are two main categories of services offered – TV and home theater installation services and home computer installation, optimization, and repair services. The service is also available online or by phone.

Circuit City’s decision to deploy its own branded installation and support service that includes CE installation (the retailer’s previous IQ Crew was more heavily focused on pure home IT troubleshooting) was driven by Best Buy’s recent success with Geek Squad. However, marrying higher-end CE purchases such as flat-panel TVs and home theaters with trained installers is also a critical strategic move by Circuit City, since it is much more dependent on sales of TVs to drive revenue than Best Buy. TV sales account for 32% of Circuit City’s revenues (compared to 20% at Best Buy).[1] A 50% decline in the prices of LCD TVs, in particular, surprised Circuit City officials, and the company is reporting that it will experience a first-quarter loss in the tens of millions of dollars.

In December 2006, Circuit City Chairman, President, and CEO Philip J. Schoonover reported that revenues for the firedog services grew 72% from the previous quarter, driven largely by home theater installations. Circuit City’s next fiscal year ends in February 2008, at which time the retailer expects to have 3,900 firedog staffers and post revenues of approximately $400 million (about 3% of Circuit City’s total revenues).[2]
[1] “Circuit City Enters New Turnaround Stage,” Kris Hudson, The Wall Street Journal, May 31, 2007.
[2] Ibid.

My opinion: If Circuit City is hitching its wagon on improving flat-panel TV sales volumes to make up for the price decreases, a technician-led installation service is a wise strategy. Not only can a service such as firedog improve the chances that a less tech-savvy customer will leave with a high-definition television set that is professionally installed, but the company stands a good chance of employing its technicians in “upsell” situations, where home theater and multi-room audio systems and accessories – perfect complements to an enhanced entertainment experience – can also be sold and installed.