The Next Home Invasion

The promise of the digital living room has been around in one form or another for nearly 30 years.

Consumers have been told they'll be able to choose from an infinite library of movies and music, watch sports games from the camera angle of their choosing, order any product they want, or video-conference with Grandma, all from the comfort of their couch.

So far, the reality has fallen far short of the promise. Even if it hadn't, it isn't clear that most consumers would have paid for the nifty vision.

Despite past failures, at least some analysts think the digital living room will soon become commonplace in the U.S. With the popularity of everything from digital cameras to MP3 players, Americans are becoming increasingly comfortable with digital media. And the tools and devices needed to link that digital content to consumers' existing entertainment systems are already available, if not necessarily easy to use or easily explainable to consumers.

"All the trends point this way," says Jonathan Gaw, an analyst with market research firm IDC. "It doesn't make sense to me that we'd come this far and all of sudden we'd just stop."

A whole host of companies are betting Gaw's right. Intel ( INTC), Microsoft ( MSFT), Sony ( SNE), Yahoo! ( YHOO), Apple ( AAPL) and Time Warner ( TWX) are just some of the industry heavyweights hoping to benefit if and when consumers decide to digitally redecorate their living rooms.

But they first have to prove that there's a market for it. The cable industry has been trying to bring interactive television to consumers' homes since the 1970s, but nearly all efforts have been financial failures.

To be sure, it's not as if the digital revolution has completely passed the living room by. Microprocessors have been incorporated into amplifiers and other entertainment equipment for years. Digitally encoded CDs displaced LPs nearly 20 years ago and DVDs have done the same to video tapes in the last five years. According to the Consumer Electronics Association (CEA), 10% of American households now have digital video recorders, which store video on PC-derived hard drives.

But little of this technology has offered any kind of interactivity for consumers, and most has been completely disconnected from personal computers or the Internet.

While PC-like interactivity and connectedness has been a long time coming via traditional entertainment equipment or from cable providers, PCs over the last 10 years have been taking on more and more entertainment center functions. Consumers now store thousands of songs, movies and pictures on their computers. And many PCs now come with television-like remote controls -- or even TV tuners.

The problem is that most consumers don't seem to want to watch movies or television on their tiny computer screens or go through the expense or hassle necessary to plug a PC into their existing entertainment systems.

That's why many companies are starting to push a magical box or service that will do everything. Versions on the theme abounded at the Consumer Electronics Show, held earlier this month in Las Vegas.

Unfortunately, each industry and each company within them seems to be offering a different vision of the digital living room -- and some more than one. Microsoft, for instance, is pushing Media Center PC -- a multimedia version of its Windows operating system that typically runs on high-end computers -- as well as the Xbox 360 console, which can play movies and music as well as games.

The diversity of the solutions -- and the lack of a compelling reason why consumers should buy any of them -- reflects the continued "immaturity" of the digital living room market, says Josh Bernoff, a principal analyst at Forrester Research.

Creating the digital living room is "the problem that everyone wants to solve and no one can figure out why," says Bernoff. "It's a solution in search of a problem."

Consumers may still be at a loss as to why they need a digital living room, but the companies trying to sell them one have their own reasons for doing so. The motivations differ, but many come to it from a position of weakness. Traditional telephone companies see interactive television as a new market that could counteract the decline in their core businesses. Computer hardware and software makers are hoping for a big new market to replace the maturing PC business. Content companies such as Disney ( DIS) are worried about revenue in a world where growing numbers are no longer buying CDs or watching television commercials.

Whatever the motivations, there are signs that the reality may finally be ready to live up to the promise, that consumers really do want to do more in their living rooms than veg out on the couch while watching CSI. The demand for pay-per-view movies and DVRs has been growing steadily, for instance, as has the number of iPod accessories that connect the digital music player to users' entertainment systems.

As of last March, 23% of American households had a home computer network -- which many see as a prerequisite for the digital living room -- up from just 14% a year earlier, according to the CEA. As of the beginning of this year, nearly 40% of households had broadband Internet access, another prerequisite, according to the CEA.

"I predict widespread adoption of the digital home within five years," says Tim Deal, an analyst with Technology Business Research, "because the individual pieces are out there. It's just a matter of a vendor or vendors putting them together and offering an easy-to-integrate, low-cost solution."

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