April Early Indications I: Convergence Management

Since as long as ten or twelve years ago, observers at the bleeding edge of technology have predicted the coming of something called convergence: as long as "bits are bits," television and computing, voice and data, and gaming and the Internet can somehow combine. Convergence was implied to be an end state, the logical extreme of which would be a master device capable of informing, educating, communicating with, and entertaining the owner at his or her whim.

The verdict on convergence is mixed. NTSC television, a standard over 50 years old, remains America's dominant medium. The most successful consumer electronics product of the last five years, the iPod, performs a single function elegantly. Fear and some would say ignorance on the part of content owners like movie studios and record labels has led to a lot of money and energy being devoted to inhibiting convergence through legal, technical, and other means.

On the positive side of the convergence ledger, the tendency toward content and device independence continues to increase. The daily newspaper can be read in a number of forms. Music is available streaming or by download, and on radio transmissions coming via analog airwave, internet, satellite, or digital airwave. Voice can be sent through a wide variety of technologies.

What does this tendency hold in store? Verizon and SBC have been aggressive in challenging the cable companies with fiber near (SBC) or to (Verizon) the premise. In both cases, Microsoft has announced it will supply the operating system for the set-top box, which can include Tivo-like digital video recording. Verizon has announced content partnerships with the likes of HBO, Starz, and other mainstream programmers, meaning that the same company might be collecting for a household's voice, Internet, mobile, and video connectivity.

A mere 15 years ago, a typical American household had as few as four monthly "utility" bills: electricity, telephone, water/sewage, and fuel. It's now possible to have as many as nine: Internet, mobile, local voice, long distance voice, electric transport, electric generation, water/sewage, cable or satellite, and fuel. How people choose to manage the communications components of this portfolio will shape the financial future of some of America's largest companies, including AOL/Time Warner, GE, Viacom, Disney, Motorola, and Comcast, as well as the aforementioned Microsoft, SBC, and Verizon.

One factor in that decision will result from choices as to platforms: how will people manage convergence? Will the model tilt predominately toward a single master device, possibly a Microsoft/Dell PC+TV? (Check out what Dell is doing to TV monitor pricing, by the way: their efficient supply chain is radically undercutting the likes of Sony, and on the global market, flat-panel manufacturers like Samsung and especially Philips are suffering from oversupply, selling at prices below the cost of production.)

Or will the U.S. follow other countries into increasing reliance on a mobile platform? As I pointed out on Bloomberg radio last week, Apple feels justifiably proud of moving about 5 million iPods per quarter. This year, though, we'll start to see phones with hard drives: even if 3% of global units impinge on the Apple domain, that's about 20 million units right there. Steve Jobs is skating along the edge between running a tech stock and running a consumer electronics company. Once he moves the company into the latter markets, volumes can get frighteningly big.

Apart from consumer preference, the other factor to watch will be the fight over who "owns" the customer. Is it really immaterial to Disney whether a viewer watches ESPN over satellite, cable, telco fiber, or on a cell phone? AOL used to be more vertically integrated than they became after selling off the cable properties: will they regret having to buy their way into people's houses on someone else's wires? And what of Microsoft: once they build the OS for the set-top box and maybe the smartphone, will the company be content to run "under" SBC's Cingular and Lightspeed logos? Everyone remembers the outcome when IBM let them do a similar thing on PCs 25 years ago.

Regardless of who ends up on which tier of the pecking order from a vendor perspective, the potential combinations will be fascinating to watch. Some people may opt for a single supplier (Google? Microsoft? Yahoo? SBC?) to eliminate the confusion and tedium of managing multiple logins or information repositories, for example. Others may pledge allegiance to a device (like the Danger Hiptop) regardless of which network it runs on. Finally, a customer's primary task may lead to a particular platform: convergence may mean little to someone who places high value on mobile text messaging.

Convergence implies tradeoffs. Just because you can watch TV on your computer, or read e-mail on your TV, doesn't mean the experience is completely fungible. Maybe the most popular convergence will be two-way rather than an n-way rollup into the "master" device. After all, you can open cans, uncork wine bottles, peel carrots, and cut meat with a Swiss army knife, but very few kitchens subsist on that one tool. Being able to carry voice and e-mail has made the Blackberry quite popular: it's unclear whether playing music would make it more so. The sales of cameraphones don't seem to be displacing standalone cameras, but that could change. Looking forward, will the mobile phone emerge as a serious gaming, wayfinding (GPS), image-capture, voice, messaging, data display, and music platform? Just from a user interface standpoint, it's hard to imagine how one would "naturally" use such a device for such different functions.

So there will be a lot to watch in the next few years. Verizon wants to connect 3 million homes with fiber by the end of this year. Samsung will be shipping 3 GB hard drives on cell phones this year, based on what they showed at CeBIT. Intel and Fujitsu will both sell WiMax chipsets in the near future, making fixed broadband wireless a further element in the connection mix. Handset manufacturers are relentlessly improving, and sometimes innovating. The next-generation DVD will arrive soon once the standard is finalized; HDTV is already here. In short, the technology landscape, particularly in the consumer markets, remains highly volatile, and the stakes look to be higher than ever.

If a company can turn convergence into economic consolidation, the payoff looks to be handsome -- which explains the ambition of the plays being made by most of the companies already noted: Motorola has Canopy, Verizon has FiOS, lots of folks have huge investments in search, and the list goes on. These are bet-the-business investments in most cases, so punishment for the also-rans will be harsh. Fortunately for most of us, it's plenty rewarding watching the story unfold.