Wednesday, February 15, 2012

Smart Devices: Evolution and Convergence

Paul Verna | February 14, 2012
Contributors: Michael Froggatt, Chris Keating

Executive Summary

The devices that power our digital lives have undergone disruptive changes over the past several years. Smartphones have evolved from text-based communication tools to multimedia hubs. Ereaders and tablets have grown from cool ideas to transformative technologies. Televisions, game consoles and media players have gained internet connectivity, and with it access to new worlds of digital content.

Most of the major device categories are poised for further growth and convergence. Tablets, smartphones and connected TVs will be even more integral to consumers’ lives in the coming years than they are today. Ereaders will look more like tablets. Game consoles will continue to develop into home entertainment centers. Even mature devices such as PCs will endure, thanks to their inherent strengths and future refinements that will keep them relevant.
Stimulated by these massive changes in the way technology plays into people’s day-to-day activities, participants in the device-and-content ecosystem are assessing the landscape in search of opportunities. Brand marketers, consumer electronics manufacturers, content owners, media companies, retailers, web publishers, internet technology firms and consumers are focused on getting the most out of a digital economy driven by connected devices and the media that flows through them.
This economy is made up of complex, interconnected factors. Innovations in product design, changes in consumer behavior, decisions around content licensing and the development of software and apps are just a few of the triggers that affect the marketplace. Companies that understand these dynamics will be in the best position to compete over the next several years.


Key Questions

  • How many people are using key devices?
  • What marketing opportunities does the current device landscape present?
  • How will the leading smartphone and tablet operating systems fare in the next few years?
  • Which devices will play the biggest role in shaping the future of digital media?
  • The eMarketer View

    A new generation of smart devices has revolutionized the way people communicate, socialize, stay informed and entertain themselves. Smartphones, tablets, ereaders, connected game consoles, internet-enabled TVs and other connected gadgets have become essential to a society that demands instant and constant access to digital media. These devices are seeing steep adoption curves and rapid technological changes, resulting in a fluid market that involves stakeholders across a broad spectrum, including consumer electronics manufacturers, marketers, content owners, internet technology firms, web publishers and consumers.
    As these device categories evolve and new ones come into being, consumers will continue to expect digital content to be available on all screens, at all times, in all locations. They will rely less on their laptop and desktop computers and more on their mobile gadgets, but PCs will remain strong anchor points in people’s digital lives. This will be especially true in office environments and for tasks that require substantial computing power.
    The growing presence of smartphones and tablets raises the stakes for competitors in the mobile operating system (OS) race. Apple and Google have emerged as key players as other companies, notably Research in Motion and Palm, have squandered their once-dominant positions. Microsoft is also expected to make a serious play for a larger share of the mobile OS market later this year when it unveils Windows 8, widely expected to be a hybrid computer/mobile platform.
    Each of these competitors is betting on a strategy that involves software, hardware, a digital content storefront and an app marketplace, all powered by operating systems that work across a growing range of devices, especially smartphones, tablets and PCs.
    As devices evolve, the lines between them are blurring. Competition and consumer demand will push manufacturers to develop devices that do more, thereby resembling one another. Already, we are seeing tablets morph with ereaders and portable game systems with smartphones. People use phones as GPS systems and remote controls, and they use tablets for a growing number of functions that may include TV viewing, gaming, video conferencing and social networking.
    Realizing that consumers expect more power, more flexibility and more functionality at affordable prices, device-makers are gravitating toward convergence. Some are experimenting with hybrids of smartphones and tablets; others are equipping TVs with browser-like interfaces to enable online video viewing, web surfing, social networking and other pursuits.
    Digital content is the raison d’ĂȘtre for advanced devices. Without movies, TV shows, games, photos, books, magazines, newspapers, video clips and music, few would care to own a tablet, a touchscreen smartphone, a connected console or an internet-enabled TV. These devices are designed for media consumption, particularly video. Consumer electronics manufacturers and marketers understand that people engage with video on an intimate level, so they have tailored their product designs and marketing strategies accordingly.
    Still, we have only scratched the surface with digital content on connected devices. As consumers continue to gravitate toward digital media consumption, and as content owners and device manufacturers continue to find ways to meet the demand for it, more content will become available in the digital domain.
    Monetization models will come into focus as digital content scales to meet the demands of marketers. Advertisers that understand the complexities of the device landscape will be able to realize greater reach and measurability than those that cling to traditional marketing concepts.
    But achieving success amid the tumult of technological change will not be easy for marketers. Budgetary constraints will force some to gamble on select devices or operating systems. Consumer preferences will shift as people become accustomed to certain devices or tire of others. The path forward won’t always be clear. Nevertheless, the market for ad-supported content on digital devices will continue to expand, so opportunities will abound for those who know where to seek them out.
    Devices and Platforms

    The past five years have brought about massive changes in the way consumers interact with technology. Devices such as smartphones, tablets, ereaders, connected game consoles and internet-enabled TVs have undergone massive adoption, to the point that many are essential to how people communicate, socialize and consume digital media. Forecasts for major device categories call for substantial growth in the next several years, promising a future in which technology will be even more intricately woven into people’s lives.


    PCs
    Despite the attention lavished on tablets, smartphones, ereaders and other newer technologies, the PC is still the centerpiece of most people’s digital lives. In the US, computers—whether in desktop or notebook form—accounted for 93% of internet traffic in mid-2011, according to comScore.
    International Data Corp. (IDC) estimated that more than 71 million PCs were shipped in the US in 2011. Although that number represents a nearly 5% drop from 2010, the US PC business is still considerably larger than that of newer technologies such as tablets and smartphones.

    On a global basis, IHS iSuppli estimated that PC shipments would grow to 479.1 million units in 2015, from 433.7 million in 2013 and 345.4 million in 2010.

    Notebook PCs will drive much of the growth in the PC category, according to NPD DisplaySearch. In January 2012, the company estimated that worldwide notebook PC shipments—a category that does not include netbooks—would rise to 432 million in 2017, from 187.5 million in 2011. This represented a slight upward revision of an earlier NPD DisplaySearch forecast.

    Within the notebook category, the emerging Ultrabook form factor is expected to become a major growth driver, according to NPD DisplaySearch and Juniper. Ultrabook laptops feature thin, lightweight designs that emphasize portability, efficiency and affordability compared to more fully-featured laptops. Ultrabooks typically feature solid-state storage drives, long battery life and fast load times.
    The name Ultrabook is an Intel trademark that applies to Windows-based systems, but Apple’s popular MacBook Air meets many of the design criteria of Ultrabooks. Further, the MacBook Air is widely considered to be the benchmark that Intel and other manufacturers are aiming to emulate.
    DisplaySearch indicated that worldwide shipments of Ultrabook-type notebooks would exceed 175 million in 2017, up from a negligible amount in 2011. The company’s “Quarterly Mobile PC Shipment and Forecast Report” noted: “Demand for ultrabooks will be driven by consumer interest in sleek design and convenience like instant-on and long battery life.”
    Similarly, Juniper Research estimated that worldwide shipments of Ultrabook-type devices would reach 176 million by 2016.
    Although personal computers are expected to hold their own amid a flurry of innovation from other device areas, some of the activities that people have been conducting on PCs are migrating to other devices. For example, a KPMG tracking survey from 2007 to 2011 noted that the percentages of respondents who preferred accessing news and information on PCs dropped to 76% from 96%. During the same period, the percentages of those who preferred mobile phones (including smartphones) for this activity rose to 14% from 1%. Similar patterns were noted for social networking and chatting/instant messaging.
    In another sign of a shift away from PCs and toward smartphones and tablets, a Sandvine report noted that, in September 2011, 55% of North American internet network traffic to entertainment destinations came from devices other than PCs, including connected TVs, tablets and smartphones. The company indicated that the pattern represents a significant change from earlier behavior.


    Smartphones
    The number of US smartphones users will grow to 148.6 million in 2015 from 106.7 million in 2012, according to eMarketer estimates. This category will enjoy double-digit user growth every year of eMarketer’s forecast period, and by 2014 smartphone users will make up the majority of mobile phone users.

    The number of US smartphone subscriptions is significantly higher than the number of users, indicating that many customers own more than one smartphone. MobileSQUARED and adsmobi estimated that US smartphone subscriptions would increase to 155.6 million in 2012 from 117.9 million in 2011.

    Even though feature phone users outnumbered smartphone users overall in 2011, smartphone sales made up 59% of total mobile phone sales in Q3 2011, according to NPD. By contrast, a year earlier, smartphones accounted for only 46% of the total. This acceleration in smartphone sales is a clear indication of the direction of momentum in the mobile phone market.

    A 2011 Yankee Group report provided further evidence of the growing presence of smartphones in the mobile phone universe. The company noted that smartphones accounted for 51.6% of US mobile phones in 2011 and forecast that this figure would grow to 83.8% by 2015. These figures measured number of units, as opposed to number of users or subscriptions.



    Tablets
    Nearly two years since the introduction of the Apple iPad, the US tablet market has blossomed into one of the most vibrant areas of the personal computing ecosystem. Growth prospects are excellent, with eMarketer forecasting double-digit increases in US tablet users over each of the next three years. By the end of 2014, there will be 89.5 million tablet users in the US, representing 35.6% of US internet users and 27.7% of the population.

    In 2011, 83% of US tablet users were iPad users, indicating the dominance of Apple’s category-defining product. By 2014, Apple’s share will contract to 68% as competitors continue to enter the fray, notably in the form of the lower-priced Kindle Fire and tablets from the likes of Samsung, Asus, Sony and Barnes & Noble. Despite this reduction, Apple will remain the clear leader in both market share and mind share. Its competitors will continue to imitate the iPad and play catch-up.

    Because tablets are often shared within a household, users exceed the number of units shipped. Using International Data Corporation figures, J.P. Morgan estimated US tablet shipments of 26.2 million units in 2011 and forecast growth to 50 million in 2013.

    Evolving pricing dynamics are playing a role in tablet shipment and sales gains. Amazon broke the $200 price barrier with its Kindle Fire tablet in 2011 and is expected to continue pushing the lower end of the market. In January 2012, Barclays Capital raised its forecast for Kindle Fire tablet sales based on robust holiday business in late 2011. The company expects Kindle Fire sales to reach 18.4 million in 2012 and grow to 27.8 million in 2014.

    Amazon’s aggressive pricing strategy assumes that its tablet customers will buy more of the company’s digital content and physical merchandise than customers who do not own tablets. Barclays estimated that combined revenue from ebooks, apps, video-on-demand and MP3s purchased through Kindle Fire tablets will top $5.2 billion in 2014, compared with $982 million in 2012.

    Barclays further estimated that the Kindle Fire would drive additional revenue in the form of subscriptions to Amazon’s Prime membership program. Prime memberships give Kindle owners free access to streaming video content, the ability to “borrow” a certain number of books at no charge, and other benefits. The study noted that incremental tablet-driven Prime spending would reach approximately $600 million in 2012 and roughly $4 billion in 2014. As much as 90% of this revenue will come from goods purchased by Prime members, with the rest coming from the annual $79 fee associated with the program.
    Even though Amazon is in a unique position to sell Kindle tablets as a loss leader against its formidable ecommerce and digital content portfolios, competitors will likely follow the company’s lead and populate the low end of the market with tablets aimed at specific segments such as readers of ebooks and eperiodicals. This will result in a bifurcation of the tablet market along price lines, with fully featured products such as the iPad and Samsung Galaxy series at the upper end and lower-priced, feature-limited products such as the Kindle Fire at the other end.


    Ereaders
    The ereader market has already experienced the price bifurcation that is just beginning in the tablet universe. Over the past year, price drops virtually eliminated cost as a purchase consideration, resulting in higher growth in 2011 compared with 2010. However, US ereader user growth will taper off to single digits by 2014, reflecting the inherent limitations of the market and the disruption caused by tablets.

    As device prices continue to drop and technological advances result in more attractive features and functionality at a lower cost of entry, dedicated ereaders will settle into a niche among users who value their unique benefits, including eye-friendly e-ink and simple interfaces geared toward reading as opposed to rich media.


    Portable Media Players
    Most smartphones and tablets support music software and apps that essentially turn those devices into fully featured portable players. Further, since those devices are usually connected to the internet, they allow users to access increasingly popular streaming services such as Pandora and Spotify.
    Nevertheless, MP3 players and iPods remain popular, particularly among the young. According to a 2011 study by YPulse, iPods and other MP3 players were among the most popular listening device categories for high school and college students, surpassed only by car radios and trailed closely by laptops. Those devices were far more popular than music streamed online or stored on mobile phones.

    Marketers and retailers targeting content or services on media players should not overlook their role in people’s digital lives, particularly among teens and young adults. Even though iPod sales have been declining on a quarterly basis since 2009, Apple continues to sell millions of units each quarter and has sold more than 336 million worldwide from the product’s October 2001 launch through the end of 2011, according to the company. That compares with 183 million iPhones and 55 million iPads sold through the end of 2011.
    In October 2011, Apple CEO Tim Cook estimated that iPod accounted for 78% of the portable player market, indicating that the total universe is considerably larger than the iPod’s installed base. Marketers and retailers should take these statistics into consideration, particularly when their target audience aligns with the youth-oriented demographics that make up the bulk of the iPod touch user base.


    Home Entertainment Devices
    As consumer electronics manufacturers continue their quest to make the living room the center of the digital home, connected TVs, game consoles, set-top boxes and Blu-ray players are all playing an important role in helping consumers access video and other digital entertainment content on their flat screens. A Leichtman Research Group (LRG) study estimated that, in February 2011, 30% of US households had at least one connected device to watch online video, and 10% of US adults watched online video via a connected device at least once per week.


    Connected TVs
    At a time when devices ranging from home security systems to refrigerators to automobiles are linked to the internet, consumer electronics manufacturers are focused on expanding built-in connectivity among TV sets. The vision of a digital home centered on the living room flat screen is driving innovations in product design and content offerings.
    The Consumer Electronics Association (CEA) estimated that US sales of internet-connected TVs would reach 9 million units in 2012, an increase of 52% over 2011. Despite average prices for these sets dropping, US revenue from internet-connected TVs will increase 27% to $7.7 billion in 2012, according to CEA.
    LRG estimated the US household penetration rate of connected TVs at 10% in early 2011. Similarly, a 2011 Frank N. Magid Associates survey found that 11% of US online video viewers watched through TV sets that were connected directly to the internet.
    These are promising numbers, but they will need to increase significantly to fulfill the promise of the connected home anchored by the TV screen. Fortunately, growth prospects are positive, both in the US and on a worldwide basis. In-Stat estimated that shipments of connected TVs with integrated apps would grow by a compound annual rate of 36% from 2011 to 2015.

    International forecasts also point to a breakthrough in the connected TV business. Digital TV Research estimated that the installed base of sets connected to the internet either directly or through intermediary devices would rise to 20% in 2016 from 6% in 2010. On a unit basis, this translates to 551 million sets in 2016, up from 124 million in 2010.

    If these increases materialize, they will translate to a 43% penetration rate for internet-connected TVs worldwide in 2016, compared with 11% in 2010.


    Game Consoles
    Although the video game console market is mature and ripe for a new generation of hardware to energize sales, the installed base of connected consoles is growing at a more rapid pace than consoles themselves. This indicates that more consumers are connecting preexisting consoles to internet services such as streaming video and online games.
    MAGNAGLOBAL estimated there were 61.6 million internet-connected consoles in the US in Q3 2011, a 34.2% increase over Q3 2010.

    By comparison, Nielsen found only a 3.9% increase in the penetration rate of game-console households in the US. In Q2 2011, there were 51 million households with consoles, compared with 49.1 million a year earlier. Because these figures measure households and not console units, they are not directly comparable to MAGNAGLOBAL’s. However, the growth rates noted by both firms point to the health of the US console market.

    During the same period, time spent on consoles jumped 14%, according to Nielsen. This statistic supports other Nielsen data that points to an increase in media activity on game consoles, particularly video consumption. These trends are likely to continue as more content and services become available on console systems, and as a new generation of hardware enters the market in coming years. Nintendo is expected to launch a new version of its popular Wii system in 2012, but the true next generation of consoles is not expected until 2014.

    Set-Top Boxes
    Despite phenomenal growth in online video viewing in recent years, no company has been able to tap into the obvious opportunity for technology that allows people to watch this content on their TVs. Manufacturers including Apple, Roku, Boxee, TiVo and others have marketed set-top boxes, but none has gained enough traction to emerge as a leader.
    Apple is rumored to be planning a bigger foray into the TV market, possibly with a connected TV that would presumably bypass the need for a dedicated box. Google is also flexing its muscle in this market, but with a different strategy. Since 2010, the company has been pushing the Google TV platform, which incorporates its Android operating system, a TV-optimized version of its Chrome browser and hardware interfaces manufactured by partners such as Sony, LG, Samsung and Vizio.
    At the same time, Google has licensed Android to some consumer electronics manufacturers that have incorporated the system into their connected TVs but not included the Google TV interface. These include Samsung, which is also a Google TV partner.
    This situation creates a complicated scenario for Google, but ultimately may spur market innovation by putting more web-enabled TVs in the hands of consumers.
    If Apple and Google continue along their respective paths, and if TV makers continue to focus on internet-connected models, dedicated set-top boxes will become legacy products.
    Similarly, Blu-ray players have garnered a place in the device ecosystem because they are the only technology that can deliver full-scale HD programs on disc, and because they are a good streaming conduit for users who do not have other options. Further, their prices have come down to within reach of large numbers of consumers. However, the emergence of web-enabled TV sets, coupled with widespread streaming choices, will eventually obviate the need for dedicated Blu-ray units.
    Operating Systems

    As the universe of connected devices expands, the number of operating systems that power these devices is contracting. The market has turned into a virtual horse race between Apple’s iOS and Google’s Android. Research in Motion (RIM) and Palm, once prominent in the smartphone OS space, have seen their shares dwindle, and Microsoft has yet to succeed in carving out a presence on smartphones and tablets.
    comScore estimated that Apple led the US mobile device market with 43.1% of the installed base in mid-2011, followed by Google at 34.1%. By comparison, onetime market leader RIM captured only a 15.4% share, reflecting the company’s ongoing struggle to recapture the luster it once had with its BlackBerry brand.

    comScore’s estimates of mobile internet traffic showed an even wider gulf between Apple and Google, and between the two market leaders and the rest of the pack. The company estimated that 58.5% of US mobile internet traffic came from iPhones and iPads in mid-2011, compared with 31.9% from Android devices. RIM’s share was a mere 5%.

    Apple’s dominance of US mobile internet traffic means iOS device owners are using a disproportionate share of internet bandwidth, likely because those gadgets have been successfully marketed for their ability to deliver high-capacity content such as video.


    Smartphone OS
    In 2011, Google and Apple started to pull away from RIM with regard to their share of the smartphone OS market. This pattern will continue through 2013, according to eMarketer estimates. In a sign of the rapidly shifting dynamics in this market, RIM’s share will shrink to 15% from 30%, while the combined shares of Google and Apple will increase to 74% from 52%. Google, which captured a leadership position in 2011, will retain that distinction through the end of the forecast period.

    During this period, the number of US smartphone users will double to 120 million from 60.3 million, according to eMarketer estimates. The number of Android smartphone users will more than triple and iPhone users will more than double.

    Like eMarketer, Kantar Worldpanel ComTech noted a steep gravitational shift away from RIM and toward Google and Apple in mid-2011, compared with a year earlier. Kantar estimated that Android more than doubled its share of US sales to 57% from 24.2% while Apple increased its share to 28.6% from 20.4%. Meanwhile, RIM’s share plummeted to 8.1% from 31.8%.

    comScore MobiLens took a longer historical view of the US smartphone market and came to similar conclusions for 2011, with Android, Apple and RIM in the first three spots, respectively. Data reaching back to 2005 show how Palm and RIM have lost their once dominant shares of this market to Google and Apple.

    Other researchers that noted a similar breakdown in the US smartphone OS share in 2011 included Nielsen and Yankee Group.


    Tablet OS
    Because of the iPad’s dominance, the OS landscape looks considerably different when viewed from the tablet perspective. Strategy Analytics estimated that Apple had a 57.6% share of the worldwide tablet OS market based on unit shipments in Q4 2011, compared with Android’s 39.1% share. Other developers had negligible shares.

    Although these figures point to a market lopsided in Apple’s favor, Google is actually gaining ground. Its share grew from a negligible 2.3% in Q3 2010, indicating a proliferation of Android-powered tablets in that timeframe.
    In addition to licensing its operating system to manufacturers that develop and market tablets as Android-based systems, Google is working with partners such as Amazon, whose Kindle Fire uses the Android kernel but is customized beyond recognition. End users might regard a Kindle Fire as a completely different animal from a Samsung Galaxy, but from Google’s perspective they both use its Android OS. This decentralized approach, which is markedly different from Apple’s, is helping Google grow its share of the tablet OS market.
    Another player likely to expand its presence in the tablet space is Microsoft. Windows 8, the next version of the company’s popular computer operating system, will support ARM-based processors, which power tablets, smartphones, media players and other portable devices. By designing Windows 8 as a hybrid system, Microsoft could gain long-sought traction in the tablet market and set a precedent for other software/hardware manufacturers.
    Convergence

    The success of smartphones, tablets, ereaders and game consoles has raised consumers’ expectations of what these devices can do. Manufacturers are constantly trying to strike a balance between product specialization and versatility. One result of this tension has been a gradual morphing of smartphones and tablets into control units for the digital home.
    For example, the Samsung Galaxy Note, which was released in most major markets in fall 2011 and is expected to debut in the US in early 2012, is a hybrid smartphone and tablet. It features a 5.3-inch screen, a touch interface and a stylus for applications where more precision is needed.
    “We’re trying to target people who use smartphones and are thinking about getting a tablet, but don’t necessarily want to commit to spending that much money.” —Kris Parris, market representative for Samsung, as quoted in The Las Vegas Sun, January 11, 2012 Although others such as Dell have not fared well with smartphone/tablet hybrids, this strategy makes sense considering the amount of multitasking occurring in people’s homes. Nielsen estimated that 81% of US tablet owners and 78% of smartphone owners used those devices at least several times a month while watching TV. Further, 42% of tablet owners and 40% of smartphone owners multitasked using those devices daily.

    A Yahoo! and Razorfish study found that 66% US laptop or desktop PC owners used those devices daily while watching TV. By comparison, 49% of smartphone and 46% of tablet users reported this kind of activity on a daily basis.

    More research is needed to fully grasp the implications of this data for marketers. Are consumers turning to their laptops, tablets and smartphones when they are bored with the TV program? Are they flipping to those other screens during commercials? Are they using smart devices to respond to calls to action in the shows or commercials they are watching?
    As more granular data emerges about how consumers are interacting with their devices while watching TV, marketers will be able to fine-tune their strategies for reaching their target audiences via multiple touch points.
    In the meantime, data on purchase activity among device owners and the effects of tablet ownership on the use of other gadgets could be useful for marketers. Ipsos OTX MediaCT found that owners of both smartphones and tablets made more m-commerce purchases in the year leading up to August 2011 than people who owned only smartphones. The company reported that 41% of owners of both tablets and smartphones made more than 20 mobile purchases during the span of that year, compared with 12% of smartphone-only owners.

    There has been no shortage of debate on the effects of tablets on other devices. Do they cannibalize or complement other products such as laptops, netbooks and portable gaming systems? A Nielsen study of US device usage in Q1 2011 found that tablets had a net-negative effect on usage of many categories of consumer electronics products, including game consoles, ereaders, laptops, desktops, netbooks and portable media players. On the other hand, the purchase of a tablet seemed to encourage greater use of portable gaming consoles, internet-connected TVs, set-top boxes (referred to in the survey as “internet-to-TV players”) and smartphones.

    The device market is evolving toward convergence of devices and functions. People use tablets as media players, smartphones as GPS devices, game consoles as home entertainment systems, laptops as secondary video screens, and so on. The more powerful the device, the more likely it is to be drafted into action for a variety of scenarios. Marketers, content owners, device-makers and other stakeholders need to keep a close watch on consumer behavior patterns to find new and productive ways to target their digitally diverse customers.
    Content Types

    If internet access is the common thread that unites the current generation of smart devices, digital content is the object of that connectivity. Video, games, books, periodicals, audio and news media content are among the biggest drivers of adoption of tablets and other connected devices.
    comScore estimated that, over the month leading up to polling in September 2011, 67% of US tablet owners had played a game, 65% had watched a video clip, 62% had listened to downloaded music and 57% had streamed music on their devices. Large numbers of respondents had also read electronic magazines, newspapers and books, and watched movies, on-demand videos, TV episodes and live broadcasts. This range of activities helps explain why tablets are one of the most rapidly growing device categories. People assimilate tablets into their lives in any number of ways, and tablets supplement their digital media consumption on other devices.



    Video
    Of all content types, video has been the most transformative because of its deep hold on people’s lives, its ability to cross from one device to another, and its marketability as an ad medium. With the exception of e-ink ereaders, most smart devices support video-rich tasks such as TV viewing and teleconferencing.
    Smartphones, despite their limited screen size, offer unparalleled convenience for people who watch short clips or sports broadcasts on the go. eMarketer estimates there will be 51.2 million smartphone video viewers in the US this year, and that number will rise to 77.3 million by 2015. A key tipping point will occur in 2013, when 50% of smartphone users will watch video on their phones at least once per month.

    Game consoles are another natural venue for video viewing. Consoles are typically installed in living rooms and dens, where they are connected to the same screen that tends to serve as the family TV.
    The three major console manufacturers have been pushing online connectivity for years. Sony and Microsoft, in particular, have built extensive content portals to entice customers to stream video through their PlayStation and Xbox units, respectively. Thanks to these efforts, game consoles were the top home entertainment device used to access video on TVs in early 2011, according to LRG.
    Recent data from Nielsen showed increases in video viewing activity on the three major console systems over the past year. In 2011, the percentage of console time users spent watching video on demand and streaming video increased on all systems compared with 2010.

    Strategy Analytics also highlighted the popularity of game consoles for online video viewing. In November 2011, the company estimated that 12% of US households watched online video content via their game consoles on their TV screens. This made consoles the most popular device to transfer video from an online source to a TV.
    A 2011 Yankee Group survey of US consumers’ online video viewing platforms found that tablets experienced the biggest upswing in usage compared with 2010. The percentage change in tablet owners who watched video on those devices was 26% for that period, compared with 4% for live TV, 2% for PCs and laptops and 1% for game consoles. Set-top boxes and DVRs experienced decreased usage by viewing audiences.

    Although newer technologies such as tablets, smartphones, connected consoles and internet-enabled TVs are on the radars of device-makers, content owners, marketers and consumers, most long-form online video content is consumed directly on computer screens. This is particularly true of streaming service Hulu, which specializes in episodic TV fare. According to Nielsen, 89% of Hulu users watched on their PCs in March 2011, compared with 20% who connected their computers to their TVs. Other viewing methods barely registered in the survey.

    There was more variety in the devices used to watch movies, which makes sense given that movies are typically enjoyed from the comfort of the couch on the best available screen. Further, the leading movie downloading and streaming services are fee-based, so paying users are more likely to go through the trouble of viewing films on devices connected to their TVs or internet-capable sets. In Nielsen’s survey, 42% of Netflix users watched on computers, 25% on Nintendo Wii game consoles, 14% on computers connected to TVs, 13% on Sony PS3 consoles, 12% on Microsoft Xbox consoles and 11% on connected Blu-ray players. Internet-enabled TVs, iPads, smartphones and set-top boxes did not register above 6% representation in the survey.
    These findings with regard to Hulu and Netflix users serve as another reminder of the staying power of the personal computer. An April 2011 Frank Magid Associates study provided further corroboration, noting that 89% of US online video viewers watched on PCs. The next-most-selected category was mobile phones, almost an order of magnitude lower at 15%.



    Ebooks and Periodicals
    Electronic book, magazine and newspaper content helped make a success of the first generation of the Amazon Kindle and, to some extent, the Apple iPad. As ereaders and tablets evolve, events on the content side will have strong market repercussions in 2012 and beyond.
    Key developments over the past year have included:
  • Apple’s early-2012 announcement of a textbook initiative for the iPad that includes book-creation software for consumers and publishers, a textbook reading app and a content storefront. Given Apple’s track record of redefining entire categories of products and digital content, the company’s entry into this space is almost guaranteed to have a disruptive effect.
  • Apple’s February 2011 rollout of a subscription program for epublications on the iPad and its October 2011 launch of the Newsstand feature in iOS 5. The latter development resulted in significant bumps in app downloads and digital subscriptions for publishers including Bonnier Corp., National Geographic and The New York Times.
  • Amazon’s ebook lending program based on membership to its Prime rewards program. That development, combined with Amazon’s decision to sell Kindles partly subsidized by marketer support, is part of the retailer’s strategy to use content and hardware as an incentive for customers to join the Prime program and—presumably—buy more merchandise on Amazon.com.
  • Price fluidity in the ebook market. Having fought bitterly with Amazon to keep ebook prices above the $9.99 baseline that Amazon preferred, publishers are now leading experiments to dynamically price some ebook titles at far lower levels. These experiments include limited-time offers for certain titles at 99 cents, book subscriptions and budget-priced deals of the day. Some self-published authors have also opted for bargain price points.
  • These moves are driven partly by consumer demand for lower-priced ebooks. A Verso Advertising survey of US ereader and tablet owners found that 29.4% were willing to pay a maximum of $9.99 per title. Another 20.3% were willing to pay up to $12.99 and 10% would pay up to $14.99, but willingness to go above that level was limited to small portions of the survey population.

    According to a 2011 Pew Research study, US tablet users have little appetite to pay for news content either. Only 21% were willing to pay $5, and an even smaller 10% were willing to pay $10.

    Pricing volatility is likely to continue, much to the chagrin of publishers, device manufacturers, retailers, content portals and consumers. From a marketer’s perspective, however, the current landscape provides opportunities to attach brands to print-driven digital content while keeping prices within the ranges consumers expect.


    Games
    Before the emergence of casual games, smartphones and tablets, gamers’ playing options were limited to consoles, handheld systems and PCs. Today, virtually any digital device can serve as a gaming platform. Not only has the technological landscape opened up for the gaming community, but changes in the types of games people play—notably social games—have also turned PCs and laptops into mass-market gaming devices.
    In fact, 96% of social gamers play on computer screens, according to a September 2011 PopCap Games study. By comparison, only 28% of social gamers use smartphones, 20% use game consoles and 12% use tablets.

    According to Nielsen, US video game console owners still spend most of their time on those devices playing games, as opposed to watching videos, listening to music or surfing the web. Time spent varies among console models, but the common theme is that avid gamers still use their consoles primarily for gaming.
    For game developers, app-makers and marketers looking to target the gaming population, the key to success is pinpointing which devices their target audience is using. A casual puzzle game might get most of its playing time on a smartphone or a tablet, whereas an immersive first-person shooter will still be played primarily on a console. The device mix will vary widely from game to game.


    Audio
    The recorded music industry has struggled more than any other in the transition from packaged media to digital files. Despite a better-than-expected year in 2011, the industry has contracted almost every year for over a decade.
    It is by no means clear whether the latest innovation in recorded music business models, cloud-based streaming, will reverse the industry’s sagging fortunes. However, what is fairly certain is that devices will play a central role in driving the next phase of the industry.
    Music content is the main asset for portable media players such as iPods, and many music listeners also use tablets, smartphones and game consoles to access their digital libraries. Apps from the likes of Pandora, Spotify and Shazam are among the top downloads on iOS and Android devices.
    The stakes in this industry will rise as Apple, Google and Amazon expand the cloud-based streaming services they launched in the past year. To some extent, all three companies will be using music as a lure to sell devices and subscriptions. These strategies will leave room for marketers to participate in the content economy to a far greater degree than was possible in the days when music was sold only in shrink-wrapped packages.

    Marketing Opportunities and Challenges

    The shift from 20th century technologies to digital platforms built on connected devices affects participants across the spectrum of content, technology and media—including brand marketers, retailers, content owners, media companies, consumer electronics manufacturers, internet technology firms and consumers. Like all major disruptions, this one will bring about its share of opportunities and challenges.
    Advertisers that understand the new ecosystem will be able to connect the dots between traditional marketing paradigms and new ones that rely on connectivity, social sharing, geotargeting, search optimization and a frictionless flow of content across devices.
    In January 2012, an ABI Research report estimated that consumer adoption of new formats such as video-on-demand (VOD) and viewing on smartphones and tablets would cause up to 30% of the US pay-TV advertising market to shift to new formats by 2016. This will amount to approximately $22 billion in advertising dollars moving to new platforms, according to ABI. The report noted that new audience measurement and tracking methods, targeted advertising, and VOD and multiscreen advertising would facilitate the transition for marketers and broadcasters.
    Online advertising is also changing as a result of smart devices. Advertisers and web publishers are working toward the common goal of delivering relevant ads to as many people on as many devices as possible. However, the two sides are not completely aligned in the technologies they support.
    For example, a November 2011 survey by DIGIDAY and Adap.tv found that at least 41% of advertisers bought online video ads on the iPad and iPhone but only 35% of publishers supported those platforms. There was a similar discrepancy with Android ads. Conversely, only 8% of advertisers bought ads on connected TVs, but 17% of publishers supported that platform. Further, the number of publishers who were on board with connected TVs grew substantially from 2010, according to the survey.

    There is too much flux in the device and content market to prescribe simple formulas for marketers to profit from the transition. However, the path to monetization begins with an understanding of how consumers are using smart devices to access content and advertising. Consumption trends are changing rapidly and product designers are responding accordingly, so grasping the dynamics of the market requires an ongoing examination of prevailing factors. Marketers should be asking themselves how they can best tap into surging interest in specific devices, changes in content consumption patterns, convergence among devices and other shifts.
    Conclusions

    Major devices are in a rapid growth phase that will continue in the next several years. Forecasts for tablets, smartphones and connected TVs call for aggressive growth in the US and other markets. More mature product categories such as PCs and game consoles will not grow as rapidly, but they will hold their own because of their unique strengths and ongoing refinements. Consumers are less interested in differentiating among device categories than in accessing content seamlessly on all screens at all times, so marketers should target both emerging and established products.
    Smartphone and tablet operating systems are coming into focus. What started as a contest among several developers has coalesced into a two-horse race between Google and Apple. Their Android and iOS systems now power most smartphones and tablets, and account for the majority of the internet traffic that those gadgets engender. The outlook for the next several years is for those companies to solidify their hold on the OS market. Brands should focus their efforts on making their campaign materials pop on both platforms.
    Devices will continue to evolve and converge. As consumers’ demands increase and competition intensifies, device-makers will be challenged to create gadgets that do more. This will inevitably lead to convergence among devices. For example, ereaders and tablets will become indistinguishable, and more companies will focus on hybrids of smartphones and tablets. Downward pricing pressures on devices will create opportunities for marketers to attach brands to products through sponsorships, ads and licensing partnerships.
    Content is the currency that drives the device economy. Most of the activity that takes place on smart devices centers on accessing digital content, including video, books, periodicals, games, audio and social media. Consumer appetite for all forms of content shows no sign of abating, which is good news for marketers whose businesses hinge on attaching brands to content.
    Monetizing digital content has proven to be a formidable challenge for content owners and marketers. As new business models emerge in areas such as video streaming, epublishing, gaming and recorded music, these parties are jostling for position at the negotiating table. The better they understand the dynamics of the device-and-content economy, the better their chances to secure a solid stake in it.