Sunday, July 22, 2018

Early Indications June 2018: The Future of Home Entertainment

In the grand scheme of things, “home entertainment” of the electronic variety is a very young phenomenon. Radio is only about 100 years old, as is recorded music. For such a young technology, though, the industry does not stay static for very long. Consider how much instability (read: the need to buy new software and/or hardware) we have seen just since World War II:

1948           LP phonograph records
1963           Audio cassette
1966           Regular color television programming
~1969         Transistor audio amplifiers replace vacuum tubes
1976           VHS Videocassette
1982           Compact disc
1995           Sony launches Playstation in the US
1996           DVD
2001           MP3s/iPod players (and the beginning of the earbud/headphone surge)
2000           Streaming audio
2005           Scalable streaming video
2006           Affordable flat-panel television

While it can be shocking to see the changes in the past 20 to 30 years, never has this industry had fixed standards for more than a couple decades. What I find noteworthy now is the degree of instability at all layers — hardware, software (content), distribution, and business models — with which we are confronted today. Let us examine each of these in turn.

Beginning in 1970, driven in part by US soldiers with access to Japanese electronics while stationed or on leave in the Far East, a stereo was defined as a turntable, receiver, and loudspeakers, possibly augmented by a tape deck. TVs and stereos might have been in the same room, but there was minimal interoperation until the advent of the videocassette, and even then, loudspeaker magnets interfered with cathode-ray TV picture tube performance at close range. Wires connected everything together. After 1980, the compact disc player might take the place of the cassette recorder and/or record player, but the basic architecture still held. 

After the DVD and the near-simultaneous transition to flat-panel TVs, hi-fi systems became multimedia affairs: a center front channel under the display and between the left and right traditional stereo speakers carried dialog, and if one got serous, a subwoofer replicated some of the special effects magic of the big screen. In addition, computer gaming was often installed in the same system as the video performance of high-end consoles could drive high-definition displays.

At this time, copy protection entered the equation. Content owners saw how Napster began the catastrophic drop in sales of physical media, so movies and games in particular came with encryption to prevent copying. DVDs were soon cracked, but Blu-ray discs remain a challenge to copy. The copy protection takes a toll on usability however: getting players, processors, and displays to synch can be frustrating, audio signal is delayed by copy-protection switching lag, and the cost of both hardware and software went up. Many respected audio companies have refused to license the latest generation of high-resolution copy protection included in HDMI connections (HDCP 2.2), leaving only a small number of vendors in the market for what used to be called home theater receivers or processors. In part, this decision relates to business model issues we will discuss presently.

For whatever reason — usability expert Don Norman decried how complicated it was for an MIT PhD engineer (him) to set up a home theater — many home theaters are getting simpler. (Dolby Atmos, meanwhile, bucks the trend with an option for 7 surround speakers at more or less ear level, a subwoofer, and 4 speakers in the ceiling.) Soundbars are a 1- or 2-cable solution to multichannel audio, and they save domestic real estate for other things. Smart TVs can include sophisticated audio processing and cleverly compact, decent-sounding loudspeakers. Headphones are incredibly popular, including among hard-core gamers. Without a need for playback of physical media, the total box count might be as low as two: a smart TV, and a sound bar, maybe augmented by an Apple, Google,  or Amazon Fire streaming device. Music might come from YouTube, Spotify, Tidal, or Apple, either through a wonky music streamer box or a spare laptop PC. Finally, given the popularity of Bluetooth speakers, many hi-fi vendors are making wireless loudspeakers, including soundbars.

Another simplification play is to use “smart assistants” (Echo, Google Home, Apple HomePod) to play music. Apple has applied the same model it used on the iPhone X camera: machine learning performs tricks with sound or images, in this case, creating the illusion of stereo out of a single point. Expect more of this in the future, intersecting with steady interest in multi-room systems. This used to require extensive wiring and switch boxes, but now can be achieved wirelessly by Sonos and others. How smart homes, digital assistants, and entertainment hardware evolve will bear watching. Yes you can start the movie, lower the shades, and dim the lights with a single voice command, even now, but how many people will devote the necessary resources and energy to first build and then maintain the capability through multiple hardware, firmware, and software upgrades? 

The phonograph record has proven to be a durable medium, despite the delicate physical transaction required to get sound out of microscopic groves cut into plastic. The role of the large-format cover art (complete with liner notes that might be readable), the role of quasi-steampunk affection for turntables (sometimes along with typewriters, single-speed bicycles, and so on), and the role of analog sound quality all can be debated. In any event, LP and turntable sales are robust — but still must be counted as a niche market.

Physical tape, usually enclosed in a plastic case of some sort, does not age well, and fidelity is well below digital levels. Few people would claim affection for VHS tapes that regularly broke, jammed, or lost alignment with playback heads. Optical discs last longer, but in the case of compact discs, the choice of a cheap plastic “jewelbox” case format was, in retrospect, a liability. Hinges, spindles, and lids regularly crack, the liner notes are printed in tiny fonts, and opening the shrink-wrap is among the least pleasant unboxing exercises I know of. DVDs last pretty well and usually come in sensible packaging, but they too are in disfavor, in part because of space considerations: today’s 20-somethings often hold very little physical media, I’m noticing, whether books, newspapers, photo albums, movies, or music. Several engineering wizards I know have built private content clouds for DVD, CD, even photo and video content. One such tool is the Plex media server, which can be deployed atop a storage system. 

Obviously record stores, video rental outlets, and mega-sized media stores are scarce in the US. (I have seen the latter in other countries, however, including France.) Amazon, Apple, and Google move a huge percentage of US culture, joined by Spotify, Netflix, and the cable operators. Given the retreat from physical media, distribution gets much simpler in a streaming world, as witnessed Netflix’s ability to save on its costs for USPS mailing (two ways) of DVDs.

Distribution affects hardware too. Many towns had local vendors of televisions and hi-fi (including repair), but those stores are rapidly disappearing. For those who want to sample a TV’s color performance, Best Buy is one of a few options: such regional electronics retailers as Lechmere in Boston, Myer Emco in Washington, DC, and Pacific Hi-Fi in California are long gone, as are stores with larger footprints including Circuit City, Radio Shack, and Tweeter Etc. Some national mail-order firms made the successful transition to web retail: Audio Advisor in Michigan and Crutchfield in Virginia.

The latter had their start in car audio in 1974, answering the question: will model X tape deck fit my car? Yes, and here’s a kit with all the pieces and fittings to make it work: Crutchfield eventually built a vast database of part-fit descriptions for after-market car audio versus almost every kind of car. Another bit of audio business trivia relates to cars, in this case, burglar alarms: Marantz and Denon, now both Japanese companies, are owned by Sound United, which also owns Polk Audio and other brands. Sound United is owned by Charlesbank Capital Partners, a Boston private equity firm. Sound United began life in 1982 as Directed Electronics, which launched the Viper brand of car alarm and remote-start gear. The founder of Directed Electronics, now worth more than $400 million (and probably the richest member of Congress)? Darrell Issa, who recently announced he will not run for reelection in his Southern California district.

With the decline in the number of audio-centric retailers, other options for hardware distribution are emerging. Some companies sell direct to consumer: examples include Emotiva and Outlaw Audio in electronics, and Zu Audio for loudspeakers, cables, and phono cartridges. Both electronics firms build at least some products in the US, which is a selling point for some consumers. Zu gained (and continues to gain) strong market awareness by constant eBay auctions of their cables; the speakers are in high demand and sell direct from the Utah factory, often with custom paint jobs. Obviously Amazon moves a huge number of TVs, headphones, and soundbars (some of which conveniently include Alexa integration).

Business Models
Just as home entertainment technology has never really stabilized in its 100 years of existence, neither have business models settled into a long-term stasis. At the same time that advertising is driving some segments of the Web and mobile economies, print and television are having to experiment with alternatives: Netflix’s absence of commercials is a tangible selling point, NFL Network’s popular Red Zone bypasses all ads, and HBO has always enjoyed the cachet of being subscription-driven and thus able to deliver shows like The Sopranos that network TV couldn’t touch. While some recording artists must tour to make a living, other web video personalities are making a killing off YouTube revenues. Streaming music hasn’t demonstrated that Spotify et al can pay artists sufficient royalties, and the technicalities of the payment process are incredibly complex. For example, radio airplay royalties only pay songwriters, not performers. Songwriters must register to collect royalties, and this might mean multiple transactions. 

There’s also record-keeping: a Norwegian research team has examined Tidal internal hard drives that appear to have been manipulated to inflate play counts for albums by Beyonce and Kanye West — the wife of Tidal’s founder and the service’s co-founder, respectively. The numbers do smell funny: Tidal claims 3 million global subscribers but the researchers believe that number could be off by a multiple of 3. For the play count for West’s The Life of Pablo to be accurate, every Tidal subscriber would have had to play the album eight times a day for the first ten days of the record’s release. One entry in the database was a user who allegedly played Life of Pablo tracks 96 times in 24 hours; users also “listened” to multiple songs at the same time. 

Why would Tidal lie? Sony paid the service $2 million for The Life of Pablo’s plays. Other artists, meanwhile, are not being paid royalties, and industry reports suggest Tidal is perilously low on cash (as a company with only a million subscribers and an enormous playlist would be). Prince’s estate is suing Tidal over false reporting. The service’s high resolution Master recordings (encrypted using something called MQA, accessible only via the computer desktop app) are demonstrably better than CD-audio, and the playlist is impressively broad, but long-term survival seems like a shaky proposition. Anyone remember Rdio, Grooveshark, Liquid Audio,, or Ruckus?

It is safe to say the streaming music business model has not yet been validated, and Netflix is facing scrutiny for its solution to the  video content problem: rather than pay royalties, make your own franchises. The stock price reflects the risk/reward proposition of this strategy. A cornerstone of the Netflix strategy is stand-up comedy specials, of which there will eventually be too many, for example. What then? Disney, meanwhile, is buying Fox. Time Warner and ATT cable are merging. Comcast bought NBC to gain content access, effectively paying some royalties to themselves rather than only content providers like Scripps, Discovery, and Disney.

Cars are a final piece of the home entertainment business model puzzle. Velodyne was making home theater subwoofers in the early 2000s when the firm began making lidar for use in DARPA autonomous vehicle challenges; it has since spun the lidar unit out as a separate business. Such firms as Bose, Harman, Panasonic, and Denmark’s Dynaudio make consumer electronics equipment but also harvest a steady cash flow from the manufacture of OEM car audio systems. (Volkswagen orders millions of speaker drivers at a shot, many from Dynaudio, which also supplies Volvo.) Bose also developed a large-scale version of the technology used in noise-cancelling headphones for improving automobile ride quality that never was successfully marketed. That business has also spun out of the consumer electronics parent company.

Where does all of this lead?
Anecdotally, US single-family houses seem to be getting smaller, retreating from the McMansion era (as of 2016, Census numbers had not shown a drop, however). Increased urbanization means more concentrated housing in smaller spaces. Fewer malls might be one reason why there are 26% fewer movie theaters in the US than in 1995, but DVDs might also help explain the drop. Streaming media frees up room in those smaller domiciles where LPs, CDs, or DVDs might once have been shelved. Home theater seems to be a stronger category than it was a few years ago, though “smart home” numbers might be responsible. At the same time that TV screens are getting bigger, more and more viewing happens on handheld mobile devices (and the smartphone is _not_ the long-promised portable television that was promised to look something like this.

Thus we might look for a “donut hole” in the market for middle size displays. Streaming will continue to evolve, depending in part on the future of net neutrality (however it is defined) in different countries. Physical media consumption will ebb and flow, probably as a consequence of demographics (meaning nostalgia in some cases) and also as a response to shrinking movie rental availability: Netflix’s famous “long tail” of movie selection is no more. In domestic architecture, will home theaters continue to be a common feature?

Despite the fact that home entertainment is non-essential and not a terribly large contributor to any nation’s GDP, its implications are disproportionate. How people learn, laugh, cry, or root for favored teams has a lot to do with the available technology. How people organize and use their physical space — the primacy of the television is fascinating to compare when touring houses for sale — relates to their choices in this market. Finally, how people engage public spaces, whether football stadiums or comedy clubs, also relates to the options waiting in the living room. In the end, as home entertainment continues to evolve, the implications will reach far outside the home.