IP: Tuning in to the Fight of the (Next) Century

[Dave Farber <farber () cis upenn edu>]

Date: Sun, 7 Mar 1999 10:45:13 -0500
To: OpenDTV Mail List <OpenDTV () pcube com>
From: Craig Birkmaier <craig () pcube com>


The New York Times reports on the real battle to control our DTV future...

http://www.nytimes.com/library/tech/99/03/biztech/articles/07sony.html

March 7, 1999

Tuning in to the Fight of the (Next) Century

By JOHN MARKOFF

SAN JOSE, Calif. -- Battle for control of the future of computing is
looming between the personal computer industry and consumer electronics
manufacturers.

Its roots can be found in meetings like one held here in July 1995, shortly
after Nobuyuki Idei became chief executive of the Sony Corp. Briefing Idei
on the importance of the Internet, Peter Sealey, a Sony consultant, noted
that the year before, the dollar volume of PC sales had surpassed that of
television sales in the United States for the first time.

"He stopped the meeting and challenged my data," Sealey recalled. "I think
it was a shock to him that this had happened."

But if Idei's education about the rapidly expanding world of personal
computing was abrupt, Sony's conversion to a digital products strategy has
been complete.

For decades the world's pre-eminent consumer electronics maker, Sony has
now realized that its core business is being profoundly transformed by
digital electronics, in ways that pose both opportunities and threats.

In a huge strategic shift for a company that long relied on the elegance of
its industrial design and the prestige of its brand name, Sony has come to
recognize, its executives say, that a new era is arriving in which clever
software, above all else, will determine whether products from televisions
to telephones will succeed or fail in the marketplace.

That sets the stage for a grand confrontation. On one side are Sony and its
peers in the consumer electronics business. On the other is the personal
computer industry.

The Microsoft Corp. and the Intel Corp., the twin engines of the PC world,
are eagerly looking for new markets in which to expand. Beginning with the
cable set-top box in the living room -- a box they believe will bring the
power of the Internet to tens of millions of TV viewers who do not now use
computers -- they have a vast range of Windows-based products on the
drawing board, including toys, phones, even computers for the car that will
do everything from read aloud your to help you with navigation.

Microsoft's strategy is to re-create the powerful business model of the
personal computer industry in consumer electronics.

At the center would be Windows CE, a scaled-down version of the Windows
desktop software that is now familiar mostly in palm-size computers, where
it has been slow to win converts. It would be the foundation for tens of
thousands of vibrant software applications and an intensely competitive
market of hardware makers all vying to compete on price and performance.

Moreover, the PC itself would control an ever-expanding world of "smart"
peripherals -- TVs, audio systems, telephones, kitchen appliances and other
electronic gadgets.

"This isn't the post-PC era; it's the PC-plus era," said Craig Mundie,
Microsoft's senior vice president for consumer strategy. "The PC may be
simpler to use in the future, but it will still broker lots of home
services and control other smart appliances."

That vision presents a potentially grim future for Sony's $38 billion
consumer electronics business. As a global standard setter, Sony has
enjoyed high margins and big market shares. But the "PC-ization" of
consumer electronics would most likely mean a world of increasing
uniformity and low margins, like those that computer makers have
experienced.

Sony's view of the digital future is far more decentralized. Its product
designers sniff that the PC is the obsolete "mainframe" of the home.
Instead, they envision homes in which dozens, even hundreds, of smart
appliances are seamlessly interconnected, perhaps without a PC involved at
all.

"Microsoft is going to have to change their business model to be effective
in the world of consumer electronics," said Mario Tokoro, the computer
scientist who is president of Sony's Information Technology Laboratories
and a top adviser to Idei on computing and networking issues.

The system envisioned by Sony would let the consumer control a digital
videocassette recorder from the television set, or vice versa -- or control
them both from a cellular phone. In recent demonstrations, the company has
shown an integrated audio and video system tied together by I-Link, a
high-speed digital connection to the cable box.

It will allow people to watch movies on demand, pause a live basketball
game in mid-jump shot to go to the kitchen for a sandwich -- then watch the
rest of the game on delay -- or transmit a home video to a friend on the
other side of the country.

Moreover, the new Playstation II, introduced last week and scheduled to
arrive in the United States next year, would connect to the network,
serving as a digital versatile disk, or DVD, player, and perhaps even as a
cable set-top box.

The collision of these competing visions has resulted in what one Sony
executive calls a "strategic dance." Publicly, Sony has announced ambitious
strategic alliances with Microsoft in the last two years to design consumer
electronics products; quietly, it has been reshaping itself into what is
likely to soon become Microsoft's most dangerous competitor.

"The relationship is fearful and respectful and wary," said Sealey, the
consultant to Sony.

One measure of Sony's commitment to a digital future is that by the end of
next year, it plans to employ an equal number of software and hardware
engineers, according to Akikazu Takeuchi, president of Sony's Platform
Software Development Center, which has recently built software laboratories
in Japan, Europe and the United States.

The outlines of Sony's new software-centric strategy are already clear at
the company's vast development and marketing center here in Silicon Valley.

A fast-growing group of software programmers are putting the finishing
touches on a new operating system called Aperios, which is intended to
control digital TVs, cellular phones, even robot "pets" that Sony plans to
introduce later this year.

Aperios and Windows CE will face off for the first time later this year,
too, as cable companies decide which operating system they will use in a
new generation of set-top boxes that will bring interactive television to
millions of homes.

Indeed, the introduction of the new cable boxes will be the first round in
the struggle for dominance over the next generation of computing. And for
Sony, its role as a leader in consumer electronics, an industry it
virtually invented, is at stake.

Conventional wisdom in Silicon Valley has long been that for all its
excellence in hardware design, Japan, for cultural reasons, has habitually
lagged behind in software development, which benefits from free-spirited
individualism.

Yet Sony's computer researchers defy the stereotypes. Regular visitors say
the company's computer laboratory in Tokyo could easily be mistaken for one
in San Jose or Santa Clara, right down to the comfortable beanbag chairs.
And Tokoro, who heads the labs, is not only a well-respected researcher but
also the acknowledged architect of the company's ambitious software
strategy.

"It was one of the first Japanese labs that was an American-style lab, with
open doors and no hierarchy," said David J. Farber, a professor of computer
science at the University of Pennsylvania. "The young researchers there are
happy to argue with Mario, which is unheard of in that culture."

Still, the arrival of Aperios will put Sony's commitment to computer
software to the test. And some Sony insiders worry that the company's
bureaucracy -- its many divisions' conflicting agendas and its stodgy
"salaryman" pay practices -- will thwart the software revolution.

Moreover, the company has occasionally chased down technological blind
alleys, most famously in the case of the, Betamax. And until last year,
when it re-entered the PC market with innovative, ultrathin laptops, it had
failed consistently in personal computers and work stations.

Still, executives say Sony has made the important leap of recognizing that
the very nature of its business has changed. "To Sony's credit, we now
realize that our competitor is no longer Toshiba or Panasonic, but it's
Microsoft and Dell," said one executive in the company's United States
personal computer business, who spoke on the condition of anonymity.

And Sony has hard-won experience with the business model it is counting on
for success in the software world.

The template is the company's conquest of the video-game business. In a
bruising battle with Tokyo, Olaf Olafsson, then president of Sony's
Interactive Entertainment division, persuaded the company to look for
profits in software and licensing, and to sell the game hardware at cost.

The fight ultimately led Olafsson to resign in 1996. But the Sony
Playstation became -- and remains -- a runaway hit in both the United
States and Japan. Sony Computer, which is largely the Playstation business,
provided 26.5 percent of Sony's operating profits in the first half of the
current fiscal year.

Olafsson, now president of the Advanta Corp., a financial services company,
said Sony had no alternative but to pursue a similar course as it confronts
the PC world head-on.

"Sony will never succeed as a just another clone manufacturer," he said.
"It's not a manufacturing company per se, and it won't make the cheapest
PC. I would say they have to find something else."

That something else could help change the way Wall Street views the
company, whose stock declined in 1998 as a result of the Asian economic
crisis.

"The whole Japanese market has been struggling," noted Peter G. Wolff of
the investment bank ING Barings in New York. But, he added, Sony has
recently begun to show promise. Among Japanese companies, "Sony has been
regarded as the most international, and with the best brand name," Wolff
said.

Increasingly, Sony executives -- like others in the consumer electronics
industry -- have come to realize that Microsoft covets markets that are not
part of the traditional personal computer business. It already sells toys
and games, and it is developing a growing array of smart consumer
electronic gadgets.

Sony also recognizes the risk of relying on Microsoft to set software
standards for the dawning age of digital consumer electronics. The broad
agreements between Idei and William H. Gates, Microsoft's chief executive,
to cooperate on a new generation of information appliances have so far gone
nowhere.

"This is a love-and-hate relationship," Tokoro said. "Each of us has our
own territory. But the computer people need consumer electronics markets to
grow, and by cooperating with us they want to expand into our territory."

Microsoft executives, of course, have a comeback.

"Sony has been recognizing, begrudgingly, that the microprocessor is going
to find its way into the traditional lines of business," said Mundie of
Microsoft. "But the PC will remain an important launching pad for them."

The ambivalence -- a rivalry fraught with mutual needs and fundamental
differences -- is nothing new. Immediately after arriving to head Sony's
United States business in April 1997, Howard Stringer, long a top executive
at CBS, called an internal meeting to develop a strategy for Sony's
relationship with Microsoft.

Stringer said last week that the company was still monitoring the
relationship closely.

"Sometimes we waltz and sometimes we stand on the opposite side of the
dance floor," he said. "And just like dancing, it's best not to talk about
the bedroom while you're on the dance floor, because who knows where you
might end up."

While the real engagement is still ahead, each side has already begun to
marshal its forces.

Microsoft and Intel have been signing up consumer electronics makers,
including Mitsubishi and Honeywell, to support a new standard known as the
Home Application Programming Interface alliance, or Home API. These
standards are intended to make the personal computer the control center for
all kinds of home appliances.

Sony, Philips Electronics and six other consumer electronics makers have
countered with their own standard, known as Home Audio Visual
Interoperatibility, or HAVI (pronounced HAH-vee).

HAVI operates in tandem with the I-Link digital cable developed by Apple
Computer, a technology designed to move digital video and audio efficiently
between home entertainment components. But it does not require a PC;
instead, the microprocessing power is within the components and appliances
themselves.

Sony recently began giving demonstrations of HAVI-equipped entertainment
centers that include not only TV, cable and audio gear but also a new kind
of device that works much like a digital VCR and performs many of the
storage and retrieval functions of a personal computer's hard disk. The
first HAVI-compatible systems may be introduced as early as this Christmas.

Through the cable set-top box, with the Aperios operating system, all this
equipment can be connected to the Internet at lightning speed.

Analysts expect Sony to complete the picture by announcing its own
multimedia "portal," a Web site from which music, movies and software can
be downloaded, with Sony charging a fee for each transaction.

Moreover, Sony and its allies announced last month that HAVI would
interconnect with Sun Microsystems' Jini software, which is also intended
to allow all sorts of computers and appliances to work together seamlessly,
independent of a Windows-driven computer.

The first big test of Sony's vision will come later this year when the
cable TV industry rolls out a new set-top cable box built by the General
Instrument Co., with the almost comically old-fashioned name DCT-5000.
Cable system operators will be able to decide whether to use Sony's or
Microsoft's software, or that of other companies, in the boxes they deliver
to consumers.

These operators have been promising powerful interactive cable systems
since the beginning of the 1990s; the DCT-5000 helps make it possible,
technologically. And AT&T's entry into the cable business, through its
pending acquisition of Tele-Communications Inc., provides the financial
muscle and competitive impetus that the industry may have lacked.

As powerful as today's most advanced personal computers, the new set-top
box will serve as the brain for dozens of activities, including Internet
browsing, local and long-distance telephone service, video games, movies on
demand and many new home applications, like easy-to-use electronic phone
books or call-screening based on Caller ID technology.

The possibilities are as limitless as software designers' imaginations. For
example, the TV might replace today's ubiquitous home audio baby monitor.
With a camera in the nursery, parents could keep tabs on a sleeping tot,
using the picture-in-a-picture feature of the family-room TV. And if the
baby does something cute, it will be possible to save a video clip and then
send it over the cable network to be viewed on the grandparents' television
on the other side of the country.

The cable industry and its partners are betting that when families want to
enter cyberspace, they would rather settle down on a sofa in front of the
TV than sit at a desk staring into a computer display.

"As a consumer, you will care less that this is not a personal computer,"
said David E. Robinson, senior vice president of General Instrument.

Eager to avoid re-creating the PC business model, the cable industry, led
by John C. Malone, the electrical engineer turned chairman of
Tele-Communications, structured a deal in which Microsoft, Sony, Sun and
other companies all are providing software for the set-top box. No company
has a monopoly.

The companies were eager to be part of the deal, in the hope that beyond
supplying their operating systems they would be able to sell highly
profitable services -- like pay-per-play video games -- directly to the
consumer.

Subscribers will pick different services from cable operators, rather than
worrying about hardware and software, Robinson said. But the kinds of
applications that the new set-top boxes will make possible are the sort at
which Sony has long excelled.

General Instrument, partly owned by both TCI and Sony, will make some boxes
with special Sony I-Link connectors. And soon, perhaps even later this
year, the cable industry plans to allow consumer electronics companies to
produce set-top boxes under their own names.

Then it will be possible to go to a store and buy a Sony-made set-top box,
or a cable-ready Sony digital TV with the Aperios operating system. Indeed,
they may compete directly with systems from other consumer electronics
companies with built-in Microsoft software.

And in the end, it will be the consumer who decides whether the future will
be a post-PC or a PC-centric world.