Executive Summary

The Personal Computer has had an impact on society and individuals like no other computing product in the evolution of computing. Yet, there are many indicators that the PC is being subjected to disruptive forces similar to those that decimated the earlier eras of computing. One of the first was the emergence of the <$1,000 PC. The recent quarterly announcements by computer companies indicate that these forces of disruption are extending to the individual companies as they struggle with rapidly changing market dynamics. As the Internet continues to shape the valuation of stocks one is left wondering what could lie ahead when a key platform for interfacing with the Internet faces unstable times. One response is that this is the beginning of the era of the free PC or Information Appliances (IA). Some PC companies respond that they must be more Internet like in their business models. A common element underlies all of this the future market is laden with turmoil and uncertainty.

A central issue resonates around virtually all attempts to understand these forces - they address near term tactical issues and fail to grasp more fundamental long-range market dynamics. 4th Wave maintains that there is a pattern in these changes, many of the forces for change can be understood and even quantified and one result is that the PC market has entered a time of lower growth and even decline. This is the onset of the fifth era of computing and it is happening now. With this transition, the future of many companies that rely on the established PC market face an assault on their core business. One of the first lines of defense to cope with these forces is to better understand the strategic market conditions, to look to history as a teacher, and employ analytical tools to discern market trends. This report accomplishes that. In the process a plausible end condition for the emerging market has been developed. 4th Wave assesses the total available market (TAM) in excess of $62 billion and this will grow to $23 billion by 2009. The fifth era of computing will not only eclipse the PC market but it will totally redefine it. A major conclusion of this study is that this future market is not based on products but services. In fact, by 2005 it is 77% service based. This further places enormous pressure on existing product centric companies to develop strategies to transition to the new market conditions. Equally important, in the transition there are important opportunities in the developing infrastructure. In addition, the market forces will be within the consumer sector not with the business uses of computers.

Much of the characterization of PC market shift has focused on the emergence of the Information Appliance (IA). That was our expectation when the study began and we have retained the Information Appliance portion in the study and thus the title of this report. However, as the study progressed it was clear that even this designator masked the scope of what is underway. In the process of studying the market 4th Wave continually sought to understand the underlying forces and key market determinants. We used many means for this including a historical perspective, an assessment of various parts of the US economy, the buying patterns of consumers in both products and services and the evolution of technology. As the reader will see the forces of technology are the less significant than many others which will define the emerging market. In fact, the fifth era of computing is not about the Internet, although the Internet is important, but it will be shaped by two underlying forces: free MIPS (Millions of Instructions per Second) and Pervasive Connectivity. We will explore this in more detail in this summary.

It is important to put this study and its methodology in context. The foundation for the results reflected here was a participatory multiclient study. No assessment of the market as broad as this could be accomplished in a vacuum. The value of doing the research and presenting it in over 600 tables, graphs and charts during the course of this effort was immense. Having to prepare study results and conclusions for some of the best executives and marketing professionals in the industry was a daunting task. The end product reflects the contribution of many as they sought to understand the forces that will shape their future and the companies they work for.

The study quickly came to the conclusion that the market transition is not just about Information Appliances but the emergence of the fifth era of computing (the other eras having been the mainframe, minicomputer, workstations and PC). This is shown in the following table. In this context the market potential is 10X what it is today which indicates up to 1 billion units a year, of which, we estimate, the US market could consume up to 400 million units. This represents a large and significant challenge given that the computer industry is already an important component of the GDP. For example, computing is a part of the largest category within the consumer and business purchases of durable goods. Thus, the significant expansion of the market will be what the report calls "GDP Influential."

The study examined the key forces in each era of computing. After considerable assessment we concluded that the forces in the fifth era will be Free MIPS and Pervasive Connectivity. The forces in each of the eras are shown in the last row of the table. The table also provides an interesting view into the contrasts and differences between the eras. Further, the eras were not about the disappearance of computing over time but how it surfaced to the individual and the form factors it morphed into. In this context the fifth era is but another morph. Key to the study was assessing the conditions of the change and the shape of the market morph.

To better understand existing market dynamics the study undertook an analysis of consumer spending patterns. From this it developed a unique result which showed for consumer spending a GDP Price Elasticity relationship. That is, using data from many consumer products and services it was possible to develop an upper limit for what consumers would pay when a specific number of units were bought or used in the market. If a product is on this line it represents the maximum a consumer will spend at that unit volume. This is independent of technology and is related to the GDP. We were then able to determine that at 400 million units this would result in a $70 ASP (average selling price) or a $28 billion market. Thus, independent of technology, the study was able to conclude the price point or market size given one of the parameters. The impact of this assessment is that if IAs are to lead to the penetration which is consistent with the fifth era of computing it must be at a price point much lower than many expect. In fact, further analysis also showed that already 65% of all consumer electronics are purchased at $70 or less.

Units vs. ASP for GDP Price Elasticity for Consumer Spending Chart

These trends fit closely with many of the observations made by Clayton Christensen in his recent book "Innovator's Dilemma." His underlying premise is that disruptive technology makes it very difficult for companies to succeed who have a strong presence in sustaining technology. The critical question is - is this next era of computing based on disruptive technology. The study concludes that the markets are more complex that a single technology, however, many of the characteristics fit within the context of the Innovators Dilemma. This only serves to reinforce the assessment that the PC market is under significant assault by disruptive forces.

The study also examined the forces of Free MIPS and Pervasive Connectivity. It was shown that processing power up to 500 MIPS can be purchased in an embedded processor for as low a 19¢ per MIP. Further, to accomplish this connectivity requires that the location be an independent variable. We identified four locations: home, work, automobile and the individual. These all have different requirements of which the most challenging will be to the individual. However, the emergence of the 3G cellular technology gives considerable promise by providing to up to 2Mb/sec to an individual. The home is the subject of many market initiatives for accomplishing both connectivity inside it and to it. This remains a market in turmoil as the effectiveness of getting broadband to the home remains very fragmented and incoherent. The study also concludes that the many market initiatives, which include DSL, LMDS, cable modems, wireless local loop and satellite, will lead to an abundance of broadband options. This will be in marked contrast to the situation today.

The PC and computing industry have largely been uninhibited by government involvement. It is just the opposite in the telecommunications business. The Telecommunications Act of 1996 was supposed to foster a more open and competitive market. That intent remains unrealized, in part, due to the efforts by the local phone companies to preserve their monopolies. In the fifth era of computing there will no longer be a clear delineation between the unregulated interests of the computer industry and its emergence into pervasive connectivity which will involve broadband connectivity to the home and the use of spectrum in many products and services. Thus, as it is characterized in the report, the computer industry will have a new friend in its emerging market - the government. This is expected to play a key role and there will be many market defining situations where the government will be a broker between two or more sides in the marketplace. The recent lobbying of the FCC on the cable unbundling issue is an excellent example of the role the government is expected to play. To be effective in these new markets will require a level of sophistication in the role and handling of government that has not been shown by the computing industries.

A significant conclusion of the report is that the fifth era of computing will not be driven by products, but instead by services. For the product space to dominate the market would require the sales of products which are a factor of 16 greater than what the economy absorbs today in consumer electronics, for example. Our analysis of the GDP Price Elasticity does not dictate either a product or service, thus a potential $28 billion market could arise from either. In fact, a $28 billion market can be achieved at a cost of only $23/month with penetration to the 100 million households in the United States. Further, the analysis indicates that this is well within the threshold of what is being spent on services by all households today.

The report develops a new approach to the relationship between content and products and services. Using data from the home penetration of consumer products and the services associated with them, the content to product and service to product ratio is computed as shown in the table below. This leads to the striking result that wireline telephony has a ratio of 47.5 to one as a service to product ratio while television and VCR's have ratios of only 2.7 and 2.0 as content to product ratios.

The analysis leads, as described in the report, to the assessment that casual media and the low price of products associated with this media are responsible for these ratios. Casual media is described as the anytime anywhere media between two or more individuals. In fact, the success of e-mail can be linked to it as a form of casual media that is called casual text. In addition, the success of the cellular telephone and it reaching the GDP Price Elasticity line in less than 15 years, is a direct result of it being the service that completes the implementation of casual voice. Note that the service to product ratio for cellular phones is considered to be infinite in that most of the cell phones today are bundled with the service. The report then derives the conclusion that casual media and services will be a major component of the future market. Casual video is also expected to be a significant factor in the market. The report goes further and develops product examples to illustrate the role of casual media.

The report also examines the dynamics between platforms, products, content and services. As part of this analysis the concept of a platform is extended to include any product, service, business or organization from which a market can be built. Within this context there are a wide range of platforms, largely undeveloped, which the report explores, such as schools and libraries, as illustrations. Further, the home is an obvious platform and the issues attendant here are explored in detail. An important study finding is that there is a need for a home assistant which serves multiple functions in the connected home. Some may consider this to be the set top box but the requirements go well beyond this. Some of the functions defined for the home assistant includes: broadband connectivity, media interface, personal information repository, home status, personal profiles and interests and home cache. The technical challenges for the home assistant are significant. These include: it should be a sealed box with no moving parts, it should operate without being serviced or upgraded for a minimum of 3 or more years, that there be at least three levels of distinct security and that it be capable of being completely managed remotely. The home assistant differs from the set top box in one key aspect - its focus is on providing a broad range of services to and within the home while the set top box is media centric. Another factor emerges from the study - that it will be difficult for the home assistant to emerge in the market because economics dictate a proprietary platform yet public policy is increasingly against such market dominant implementations.

An underlying premise of the study is that the fifth era of computing is focused on providing high value services to a very broad range of consumers. We develop a number of examples, including a kitchen network concept that is provided free. This enables many services that impact the time that consumers spend in kitchen and meal related activities. An important point from this analysis is that these services and products are not about the Internet, browsers, computers or even overt e-commerce but on how technology can be made very simple, non-intrusive and of high value. In fact, one can describe the morphing of the fifth era of computing as easing the burden of individual lives through technology. This is fundamentally no different than the role that technology played 100 years ago when electricity, the automobile, the telephone and radio communications emerged.

The analysis in the report indicates that achieving a $28 billion market, as developed from the GDP Elasticity line, will not be accomplished just from the growth in the GDP and its related sectors. It is expected that significant market cannibalism will take place. Markets that are currently subject to such predatory actions include wired telephony, cable and broadcasting. The study further assesses that broadcasters are faced with a challenge to their economic existence from the rapid roll out of DTV and the slow development of the audience. In the context of the emerging markets, the availability of digital broadcast spectrum with DTV is examined as a vehicle to provide simplex data services. A key advantage is its pervasive availability including nationwide coverage by 2002 and the 19Mb/sec of bandwidth it provides. There are a number of applications that can leverage this simplex form of pervasive connectivity and these are developed in the study. Thus, the market turmoil will not be confined to what has been the traditional computer industry. In fact, the fifth era of computing is about the convergence of the turmoil of the Internet and the decline of the morphing of the PC into new forms of compute intensive products and services.

The low price points of devices and the drive to infinite service to product ratios also forces a new look into the many elements which will make up this market. We describe this as components. Components can include speech recognition, security, streaming video and many more. The study develops 24 examples of components. Components stem from the low ASPs and the need to bundle or give away the product. Thus, services and devices will utilize only those components that are absolutely necessary for the target market. A component perspective immediately puts the PC in context. That is, the PC and its future can best be seen in terms of its components that include interfaces, boxes, power, surfaces (displays), and media elements. With the emergence of narrowly defined component based products and services the PC becomes a high cost difficult to use manifestation of the last generation of computing. The study defines and evolutionary path to the Future Computer (FC) which is based on components that are task specific. Thus, the only enduring minimum components are a display surface and connectivity. Even the manual input devices including a keyboard and pointing device are optional and considered task driven. Thus, the long-term foundation for what is taken for granted in today's PC market, i.e., Windows and the X86 architecture, does not exist in either the FC or the services based fifth era of computing. In fact, the FC is seen as a spectrum of devices that take on characteristics which are driven by the underlying tasks to be performed. Thus, the fifth era of computing is completely fragmented in terms of a computing platform. From the consumers perspective it is not even a computer.

The market analysis identifies categories of products and services which include: media centric, information centric, personal activities, home operations, security, education, fun and entertainment. These are examined in terms of market potential with numerous examples in each category. The study shows 36 product and service illustrations. The result of the market assessment is a TAM (Total Available Market) of $62 billion of which $54 billion is from services and $7 billion from products. Then, in order to develop a scenario for the timing of the market from 1999 to 2009, key events are outlined which are likely to pace the market are laid out. This includes actions by the government, the roll out of satellite services and many other factors. From this the market estimate is developed.

Our forecast of the market is summarized below:

The total market rises to $5 billion by 2001, crosses $20 billion in 2008, and reaches $23 billion in 2009.

The cross over from products to services as the larger market happens in 2003.

The services market in 2004 is $8.3 billion and the product market is $4.8 billion.

In 2004 the rank order services are: Personal; Control/Management; Information Centric, Education; Entertainment and Media Centric.

By year 2009 this shifts to: Media Centric; Entertainment; Information Centric; Personal; Control/Management and Education.

By 2005 Services represent 77% of the market.

The ASP for products begins at $291 in 1999 and drops to $119 by 2004 and lands at $55 in 2009.

Services remain fairly stable beginning at $217 in 1999 and going as low as $134 in 2006 and ending at $140 in 2009.

Market Scenario Chart

In summary the key factors which will shape the emergence of the fifth era of computing include:

Home markets will drive the next era of computing;

A significant part of the markets will be based on services and not products;

The government will have a much higher level of involvement in these new markets than in the PC market;

The PC market will level off and decline as these new services and products emerge. At the same time the PC will evolve into what we describe as the Future Computer whose central component is a screen. The FC will be just one point in a continuum of products which have free MIPS and pervasive connectivity;

The network is the platform for the services and as such, a major level of activity is required to build a robust network which can manage home assistants and casual media, to name only two;

A major and complex network infrastructure that will be required that is at least a factor of ten more complex than the telephony infrastructure based on SS7;

The winning markets are those that focus on a high service or content ratio.

The fifth era of computing is going to be radically different than the PC era. This is essential as computing becomes pervasive and the transition is made to the markets of the 21st century.