Whatever Happened To The Digital Home? Part I

Just over 8 years ago, I wrote a Forrester report titled “A Manifesto For The Digital Home,” outlining what needed to happen from a consumer’s perspective for the true “digital home” to become a reality. (We defined the digital home as a single, unobtrusive network environment where entertainment, communication, and applications could be shared across devices by multiple household members.) A lot has changed in the intervening years, but are we really any closer to that reality now?

From a consumer’s perspective, I hypothesized that four things needed to be in place to make the digital home a mainstream reality: flexibility (of connection, exchange, and ease of use); control (of sharing, data privacy, and what goes where); security (of personal information, bought content, and communications); and mobility (of devices, applications, and content). Of course, all of these needed to be underpinned by affordable technology and desirable content and applications.

For this to work, the digital home needed five key technology elements: a network (or, more likely, multiple seamlessly bridged networks); great interfaces on multiple devices; centralized storage; some form of central management function with the intelligence to manage the network, storage, and access issues; and great content that had been “digital-home-enabled” — i.e., able to be shared, backed up, and transcoded without licensing or technical issues.

Some things I got right:

  • Device-agnosticism. More and more stuff will run across a variety of devices. Interestingly, this has been driven by social media and content owners promoting browser-based or streaming solutions rather than (as predicted) standards organizations or by an altruistic streak in the hardware manufacturers — most of those efforts have got bogged down in copy protection or years of certification.
  • Streaming content. Referred to somewhat quaintly as “broadband VOD” at the time, the streaming of content has taken off in a big way in major markets, mainly to prevent other distribution methods (legal or otherwise) taking hold. Advances in broadband speeds and compression technologies have exceeded even my optimistic expectations at the time.
  • Easy networking. This has happened, sort of. Surprisingly, instead of the vision of a co-operating set of network technologies working together where they are best suited (3G/4G outside the home, Wi-Fi for computing, ZigBee/Z-Wave for appliances, etc.), we’ve ended up with faster Wi-Fi crammed into pretty much all devices with 3G as the “just works but it might be expensive” fallback. This certainly makes the network topology easier, and attaching to secure Wi-Fi routers is much easier today than it was 8 years ago. But I can’t help feeling we’ve missed a trick here; the reason those low-power, short-range solutions existed was to facilitate much broader connectivity without security or configuration issues. In addition, Wi-Fi is still an expensive option (both in terms of power and components), and this has held back the networking of non-traditional devices.

(I’ll continue this series with analysis of stuff that didn’t happen as expected and what has happened that couldn’t be anticipated in my next post)

Online Cloud Storage: Future Table Stakes Or Killer App?

Google has at long last officially announced Google Drive, and tech blogs are awash with comparisons to Dropbox, iCloud (slightly unfairly), SkyDrive, and other cloud storage services. The early consensus seems to be that SkyDrive just wins out in terms of free storage and incremental paid storage (particularly if, like me, you already had a SkyDrive account and opted in to the free 25 Gb capacity upgrade), while none of the main platforms support all the clients that you may have been hoping for (omitting Linux, Android, iOS, or Windows Phone depending on which platform you’re looking at).

This explosion in available online storage has looked inevitable ever since Dropbox (and several other firms) really hit home with simple desktop folder-like services that don’t try to do too much (sync calendars, offer workflow solutions, etc.). Security experts will argue about whether the encryption is up to snuff (it isn’t), but most consumers will be storing personal (non-confidential) material on there anyway.

Arguably, we’re only at day 1 of the real competition. Features (and third-party clients) will be added, the free storage amounts will (inevitably) increase over time, and different business models and audience segments will emerge — for example, services for SMB customers are already available.

The key question, though, is whether these firms can make a business out of this. In the short term, certainly — as long as they’re offering something that isn’t free elsewhere (remember those “premium” web email services that offered more storage before those limits pretty much disappeared — thanks, Google) or that has better functionality/is easier to use than the competition (Dropbox still scores well here). The problem for the pure-play offerings is that when storage becomes just another feature of Microsoft’s, Google’s, Amazon’s, or Apple’s online offerings — most of which are free or wrapped up in one easy subscription — the justification for paying separately for the service disappears.

This is where the dreadful “stickiness” term comes into play: Dropbox, ADrive, JustCloud, SugarSync, and hosts of others need to fight to make their service so attractive (or difficult to give up) that continuing to pay a reasonable fee seems the best option. But this is tricky; they can’t offer more and more storage, and erecting barriers to prevent consumers moving their files elsewhere defeats the whole object of the service. In fact, as the once-superior Dropbox client shows, any advantage is likely to be short-lived. One possible key to survival is making the storage useful to the user’s social circle, not just the user. I’m less likely to move my thrilling 4-hour video of the kids’ last birthday party if it means I have to bring the grandparents up to speed on how to register for and access a new online storage solution. Dropbox is introducing direct links to customers’ shared files, which is a nice step in this direction.* Its referral program’s offering of extra storage for each person you get to sign up has also swelled its customer ranks nicely to 50 million people – that’s a lot of people, and unlikely to decline too rapidly.

However, I’m not convinced that the best route for Dropbox and its ilk beyond the next 12 months isn’t to get bought by the likes of a Google or Microsoft looking to grow their own user base. An alternative, for the more ambitious pure plays, would be to partner into an emerging ecosystem to fight the established players; combine online storage with a social network, Twitter client, location service, and mobile data plans, and suddenly you are looking at a compelling bundle. Unfortunately, most of these other apps are free to use and already have privacy concerns, so online storage of personal files may not fit well with this. Google will have to face this challenge itself.

* (In fact, Dropbox’s official blog pretty much uses a [less cynical] word-for-word version of the previous example, which I’ve only just looked at, honest!)

What It Means: The Failure Of Game Retail For Publishers And Platform Owners

As discussed in previous posts, game retailers have to radically change their strategy if they are to survive on the high street, but what does this major shift in consumer buying habits and, potentially, retailers’ strategy mean for the titans of the videogame world: publishers and platform holders?

The good news:

  • More direct digital sales. A decrease in the physical availability of the product is bound to spur the (already growing) trend in digital downloads — particularly for more obscure titles or add-ons that are unlikely to be stocked/discounted by non-dedicated game retailers. The boom in indie PC games is a clear example of this already happening; boxed PC games have been a highly fragmented market prone to piracy for years, and systems like Steam have enabled otherwise unlikely titles to make it big via secure digital distribution.
  • The long-term decline of the secondhand market. As previously discussed, publishers have long considered secondhand games a thorn in their side, diverting sales from new titles — or so the theory goes. While an online secondhand market will continue to grow, the disappearance of high-street stores with lots of available secondhand titles (often shelved next to the same title, new) reduces impulse-buying opportunities.
  • A smoother supply chain. Obviously, digital sales don’t require holding inventory; in addition, much of the complexity of distribution, credit facilities, and returns will disappear if physical boxed games end up being distributed mostly via two or three massive online stores and major chains/supermarkets. However, there are significant downsides to dealing with only a few firms like WalMart, Tesco, or Amazon — see below.
  • Direct engagement with customers (or at least better information via partners). What do you, as a publisher, know about your end customer — or how many units were bought in a particular state? Perhaps a buyer is tied into your loyalty program or online service — but that doesn’t tell you where they bought from. By simplifying the supply chain and even selling digital goods directly, you gain insight into the buying behaviour of your customers and should be able to respond more quickly and effectively to their needs. Whether the big retailers like Amazon will share this information (even for a fee) is trickier; it depends whether they view the data as a revenue opportunity or a strategic advantage.

The bad news:

  • Supermarkets and multi-category retailers become the primary physical retail outlets. You may have simplified your supply chain, but when Wal-Mart becomes responsible for 50% of your title sales, you become overly reliant on its largesse. And firms like Wal-Mart and Tesco negotiate hard for discounts. A secondary consideration is that, like books, videogames will become a loss leader for multi-category stores: pull punters in with $10 off Mass Effect 3 and then sell them $200 of groceries. As a publisher, you still get your revenue, but this exerts downward pressure on price points and devalues games.
  • Online retail is still a mixed blessing. The gold rush in online shopping is largely over for most categories, including videogames. A few, well-behaved retailers dominate in multiple geographic markets; they don’t tend to discount massively and do now take part in pre-order and limited-edition promotions. But their long-term strategy isn’t necessarily obvious. Could Amazon become a leading competitive digital game distribution service? Will eCommerce (and rent-by-post) players jump into the gap left by high-street stores for secondhand games? The answer to both of these questions is probably ‘yes’.
  • A short-term spike in the secondhand market. A key strategy (as I see it) for those struggling physical stores is to up their game in secondhand and trade-in games. While long-term publishers and platform holders may be able to cut off the air supply to this market with digital downloads and a reduction in the number of physical game disks/cards, that is going to take some time. Be prepared for struggling chains to keep pushing the boundaries in terms of what they see as their right to exploit this (more) profitable segment.
  • The high-street showcase disappears. Often overlooked — especially by people who see GAME and GameStop stores as somewhat grubby holes (guilty as charged!) — is the showcase that these venues provide for new titles and new game systems — however seemingly badly organized to an outsider. 3D-based systems are the clearest example here: you can’t demonstrate a 3DS on TV or YouTube; you actually have to play with one in-person. Ultimately, this also means that videogames cease to hold a special place in consumers’ minds (just like books and music) — dedicated stores where you can browse and be immersed in your hobby/obsession, rather than just picking up the latest Call of Duty while you do the weekly food shop.

Today’s videogame market is such that both publishers and platform owners will probably benefit most from a slow, graceful decline in high-street videogame stores rather than catastrophic collapses — even if the threat of the latter accelerates plans around disintermediation.

How To Keep Videogame Retail Relevant

Globally, store-based videogame retail is suffering. In addition to the ongoing collapse of GAME Group in the UK (which is half-saved for now — sort of), NPD recently reported a decline of 34% year-on-year for store-bought games in January 2012 in the US, while hardware declined slightly more (38%). Admittedly, January can be a flaky month for retail, but the overall trend for physical software sales is down.

Why? Some of this is down to a struggling economy and cautious consumers, but it’s also a natural side effect of the trends outlined in the previous post:

  • Hardware revenues are declining. No new consoles for some months to come (aside from the PlayStation Vita) means reduced hardware sales; it’s pretty much just accessories and add-ons like Kinect and Move.
  • Digital distribution cuts out retail. Digital distribution means money flows directly to publishers (often via platform owners like Sony, Microsoft, and Valve). Even for shop-bought titles, downloadable content can extend play lifetime and put off the next boxed product sale. NPD also recently worked out that $3.3 billion was spent in the US and Europe on digital downloads in Q4 2011. Physical retailers would have seen virtually none of this (aside from selling gift cards).
  • Non-gamers don’t see game retail as a desirable shopping “experience”. Most worryingly for game retailing, market growth is almost all in social or mobile gaming. Even if there was a physical product, would mainstream consumers go to GameStop for these?

So what can retailers do? They need to change people’s perceptions of why a store is better than an online portal, otherwise they will follow music and book retailers into obscurity. While GAME group has had a stay of execution, it will need to do something different to secure its long-term future. Four foundations spring to mind (along with the current but declining day-to-day business of software sales):

  • Bring secondhand games to the fore (even more). Secondhand game sales are a controversial topic that retailers have typically had to tip-toe around. Publishers get angry at what they see as the lost revenue of a new game sale, but for retailers, a successful secondhand game section makes better margins than new game sales. They have to be well managed to do this though; this means more selective game trading (what you buy, how much you pay), better inventory distribution across multiple stores, and even offloading excess stock via an online portal, partner, or eBay. Making the secondhand section look less like a post-hurricane garage sale would help, too. Of course, publishers may object to this — and come the next generation of consoles, they may pretty much kill this market by withdrawing physical media — but for now, they continue to bring in money in tough economic times.
  • Stop toying with online and go all out. The game retail groups may have online portals and e-commerce facilities, some of which are even quite good, but they aren’t Amazon or Play.com good! Retailers need to bring their unique high-street presence to their online offerings: order and pick up in store, trade in and drop off at store, virtual events, and local store forums should at least level the playing field with the big e-commerce players.
  • Make the stores more relevant. Yes, I’m going to use the dreadful “retail experience” phrase — but I am going to try not to reference Apple Stores (darn — too late!). Physical game stores have limited square footage, a lot of stock, and cater to a young male audience; they are never going to be “minimal”, “airy”, or “smell good” — but they can change some things. Reduce front-of-store stock and countless racks and fulfill from the back room; introduce more demo pods and advice points. More interestingly, think about demo events, “parent evenings” where you explain things like age classifications and downloadable content — and refocus on supporting digital, with stored value cards, memory cards, and capacity upgrade advice. And always remember: customers without credit cards are your friends!
  • Get publishers more involved. Publishers might not like an increased focus on secondhand, but game shops still remain one of the most effective ways of directly reaching the more active component of their customer base. It’s time for them to help out more. Move beyond exclusive downloadable content (which costs publishers virtually nothing) and get publishers to provide previews and showcase material and to create competitions. Ironically, small PC game developers (most of which distribute digitally) may be the best bet here; they can offer show reels, demos, and individual levels that the in-store staff can support. This may also help revise the relatively poor image that store staff have in the eyes of the gaming community.