The Digital World without Borders

by Ken Friedman Wellesley, MA

Today, historically separate industries such as the communications, consumer electronics and media industries are converging into a single industry: the converged digital industry. This convergence is the result of a number of key trends: content digitalization, common standards, the increased utilization of mobile devices, and what is becoming known as the ubiquitous network.

To be more specific, digital convergence is the process by which separate media such as print, photographs, movies, music, telephone service, and broadcast content (TV), become digitized and delivered via a global network.

After a few false starts and unfulfilled promises, diverse forms of media are converging to form a single communications paradigm in the form of digital content. We are seeing this phenomenon take place and affect many areas of our lives. To list just a few examples:

• We now download and store music in a digital format using standard Internet protocols and MP3 players made popular by Apple’s iPod
  
• Television programs are delivered over a digital broadcast signal to enable more channels and high definition images
  
• TV manufacturers are equipping their products with microprocessors, hard drives and software to enable consumers to download and store content in digital format
  
• PC manufacturers such as Gateway and Dell are leveraging their expertise in LCD monitors and entering the market for digital television
  
• The market for personal digital assistants, which ramped up in late 90’s, is vanishing as consumers get the same functions integrated into digital functions on their cell phone
  
• As more consumer electronics go digital, networking companies such as Cisco are aggressively moving into the consumer electronics space with products such as a portable stereo that can download tunes off the Internet via a wireless, broadband WiFi connection
  
• Local cable, telephone, and satellite companies are recognizing that their future success depends on their ability to offer services and products which allow customers to retrieve, store, and manage digital content from the network
  
• Wireless service providers are offering a range of services than can be downloaded to your cell phone (ring tones, games, image transmission and retrieval, broadcast video)

With all of this convergence coming on strong, the question still remains -- which industry and companies are best positioned for the clashes ahead? In terms of the established players, three industries are competing for a slice of the expanding digital pie.

• The $1.1 trillion PC and software industry leaders such as Dell, Gateway, Apple, and Microsoft have each made significant inroads into new territory
  
• The $225 billion consumer-electronics sector of strong Asian competitors such as Samsung and LG are emerging as global giants due to aggressive investments in digital TV and consumer electronics
  
• The $2.2 trillion communications industry. Since content is always king, the players who enable distribution must be reckoned with

At the end of the day, none of these industries, much less a single company can assemble all the pieces so they will need to venture into new territories and forge partnerships to take on emerging rivals. As established companies launch initiatives and look to potential partners to ensure a role in the emerging ecosystem for networked digital machines, these fundamental shifts signal opportunity.

Who will emerge as the winners while the titans of technology and communications continue to compete and partner as the digital world proliferates?

Battery has already seen through our investments in SigmaTel and Pixelworks that chipmakers will clearly be beneficiaries as the widening galaxy of consumer electronics will require faster, highly integrated digital processing capabilities. Digital TV alone has already spawned significant markets that have served as a major boost to companies such as Texas Instruments, Silicon Image, and Zoran.

Digital TV is just the tip of the iceberg as digital convergence is a major opportunity for a wide range of semiconductor applications. Industry stalwarts such as Intel, AMD, and Samsung are competing for a leadership position in the $12 billion market for flash memory chips. This high density, readily accessible form of memory is another key enabler for mobile devices that can transmit and retrieve information to the network. As digital convergence drives the need for intelligence in devices outside the PC environment, the market for digital processors and memory will expand and translate into new opportunities for companies such as Intel, ARM, and Texas Instruments.

Whereas we all expect new opportunities for Intel, the dark horses of the digital age that have emerged are the slew of companies that provide analog semiconductors. As the digital content and complexity in PC’s grew at a frenetic pace over the last 20 years, industry experts viewed the analog market as more mature and with less exciting growth potential. To the contrary, in a digital age driven by convergence, analog semiconductors have resurfaced as a very profitable and high growth sector. Analog chips are needed for any type of interface or conversion between the digital world and real world phenomena such as temperature, power, motion, pressure, light and sound. As profiled in a previous Battery Charger article relating to power management, the proliferation of digital devices all require an array of analog components to regulate power and enable the conversion from digital bits to the output for the end user. To date, established companies such as Analog Devices, Linear Technologies, and Maxim have been the key beneficiaries of this insatiable demand for analog semiconductors.

While digital convergence has offered analog semiconductor companies an opportunity to leverage their existing core competencies, companies such as Samsung have emerged as industry leaders through a propensity to take risk and make the investment required to develop the next generation of digital devices. Along with several other Asian giants, Samsung has made a multi-billion dollar bet on emerging display technologies such as Liquid Crystal Displays (LCD’s) that are beginning to rival the semiconductor market in terms of a revenue opportunity. That being said, Samsung has also been one of the first Asian OEM’s to aggressively form partnerships to enable their success. This is evident through their partnership with Texas Instruments for the DLP chips that go into their rear projection televisions.

Whereas a partnership between two established companies helped create a new market for DLP based television, a partnership between a newly public company and four of the top mobile phone makers rode the digital convergence wave to reinvent the market for digital cameras. Due to a technological breakthrough at OmniVision for low-cost, high resolution sensors, mobile phone companies such as Samsung and Motorola are now the largest vendors of digital cameras. OmniVision will of course face competition in this market, however, but not before sales will soar over $400 million this year.

When discussing communications devices, one must account for the strategic possibilities that exist for companies such as Cisco. After sharpening its teeth through domination of the networked enterprise, Cisco has clearly identified the digital home as a core area for expansion. Cisco is an example of a company that tends to expand through acquisition and has made its first move through an acquisition of Linksys, a home networking company.

While Cisco targets its next acquisition, the software giant in Washington is deciding how to best spend their $50 billion in cash to participate in the digital age. Microsoft has been rolling out several major initiatives after feeling as if they were embarrassed by their non-presence in the MP3 market Apple now dominates. To date, Microsoft has been crafting a strategy around the applications that will manage and coordinate the digital platforms that emerge. However, unlike the PC, which Microsoft has held hostage since the emergence of Windows, Microsoft is not finding world domination at their fingertips. To date, Microsoft has not made the inroads one would expect from such a significant player.

The same comment could easily be made about Sony which is still a dominant brand in consumer electronics. With global distribution and a reputation for unsurpassed quality, one would expect Sony to be a leader in the latest generation of consumer applications enabled by digital convergence. Instead, Sony’s reluctance to conform to open standards or form the right partnerships has Sony playing catch up to companies such as Apple (iPod) and Samsung (LCD TV). As of late, Sony has begun to change their ways and has announced a few strategic alliances, most notably a joint venture with Samsung to build LCD Panels.

As the digital revolution continues to accelerate, established companies such as Sony, Cisco, and Microsoft will need to operate in a different manner if they plan to emerge as significant players. To date, we have seen companies such as Samsung, Apple and Texas Instruments choose strategies that have placed them in a leadership position in new markets, whereas other established players have yet to find their way.

As we go forward, the real question for those of us excited about digital convergence is -- What’s next?

The most interesting developments and perhaps lucrative opportunities for new companies relate to the potential for digital convergence to collapse business borders. Areas such as mobile banking, mobile TV, and ubiquitous access to a network of interactive games are a few exciting areas that are expected to gain traction. In the area of imaging that has taken off with the advent of CamPhones, companies such as Nokia and Kodak are collaborating to exploit the digital convergence taking place between mobile phones and digital imaging. Soon, we will see Kodak kiosks that will enable consumers to instantly develop and print pictures taken on their CamPhones.

Going forward, digital convergence will continue to transform the way the media industry connects and interacts with its customers. Similar to the technology sector, media companies that enhance and leverage the effects of digital convergence should prosper.

In summary, businesses and consumers continue to digitize almost everything including text, sound, speech, film, graphics, animation, and music. As digital convergence shifts the existing paradigm, companies are aggressively positioning themselves to emerge as leaders in defining new markets. As business borders collapse and digital convergence drives a technology revolution, a number of companies will prosper and benefit. Of course, as with any revolution, companies that miscalculate or simply remain stagnant will become fond memories of a technology landscape with defined borders.

Battery is interested in making investments that will capitalize on the opportunities presented by digital convergence. If you’ve got a great idea, and have already considered many of the same questions we’ve posed, then we’re very interested to talk with you. Please get in touch with Ken Friedman.