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A Look at the Software, Hardware Battles of 2005 and 2006

By Rob Enderle
Dec 19, 2005 5:00 AM PT

Over the last few weeks I wrote about the companies I expect will be in trouble in 2006 and several of the major trends we can expect to see develop next year as well. This time let's look at a few of the knock down, drag out battles I foresee for the coming year, ending with my final gift recommendation for this holiday season.

A Look at the Software, Hardware Battles of 2005 and 2006

2005: Some Weird Conflicts

The most pronounced vendor battle we saw this past year was the battle between Microsoft and the open-source community. This one was particularly strange to watch because it seemed that both sides were doing more to help, rather than hurt, the other. Almost every time a large number of open-source folks spoke or acted out they scared the heck out of potential technology buyers, who in turn fled back to Sun and Microsoft. On the other hand, virtually every time Microsoft attacked open source or Linux they discredited their own supporters and drove increased interest and business to Linux. It often felt like both sides were pointing their big guns at themselves and, if nothing else, it made for a unique and disquieting experience.

On the hardware side we had AMD vs. Intel. In what should have been a huge mismatch, David once again pounded Goliath. AMD just flat out executed and often it seemed as if Intel was struggling to understand just who they were fighting. To AMD's delight, Intel seemed to be at war with Microsoft and currently AMD is pounding Intel across a number of consumer and corporate markets. Particularly strange was the fact that AMD did this while apparently winning a number of legal actions against Intel for unfair trade practices. It is kind of scary to think, if they really were hobbled, what AMD could do if the playing field was more even.

Meanwhile, the music industry went to war against its customers. Going well beyond the running-with-scissors analogy the music industry decided to get serious about piracy and went after customers who were legally buying music. Aggressively moving to restrict legal rights, the year ended with the Sony BMG rootkit fiasco, which did massive damage to loyal Sony customers, resulted in equally massive litigation, and had me and others recommending you not buy products from Sony during their critical fourth-quarter buying season.

Before I begin talking about 2006 I'd like to point out one battle that may have ended before it even really started. There was a lot of anticipation surrounding the battle between Toshiba's HD-DVD and Sony's Blu-ray optical technologies. At first Blu-ray seemed to have won but their failure to support HP's consumer-friendly request to modify the platform effectively eliminated the advantage. Recently a replacement technology called Holographic has emerged that is better than both platforms. I believe that both Blu-ray and HD-DVD are effectively obsolete.

I'm expecting the battles of 2006 to be equally interesting but more logical: Microsoft is increasingly focusing on improving its products rather than disparaging Linux and its supporters -- in other words, Microsoft has been behaving more professionally. Second, Intel and AMD will continue to pound each other, but there is a bigger battle brewing that may put them both on the same side. And third, the extreme negative nature of the response to the Sony BMG action has scared the music industry half to death which makes it more likely that the industry will choose not to go to war with customers next year.

And now, the big battles of 2006...

Telecom War

The telecommunications war will be enormous next year, with many fronts and changing alliances. The weapons will be VoIP and high-definition video conferencing. The benefits will be a massive reduction in communications and travel costs. The fighters will be a mix of the major telephony carriers, cable TV companies, telephone hardware companies, HP, Microsoft, and handset manufacturers.

The telephony carriers are in the unenviable position of being on both sides of this. Wanting to increase their data penetration they also need to protect their legacy analog telephony revenues and, particularly for long distance, these revenues will be at increasing risk and should fall into sharp decline.

The release of HP's new Halo high-definition video conferencing system puts the travel industry at risk as this is the first system that could dramatically reduce business travel between large companies and provide opportunities that could do the same for smaller firms. Now that this system has been released, it is clear that many underestimated the impact of the poor picture quality of the older video conferencing systems as a limiting factor in adoption rates.

On the telephone side, the increasing move to VoIP technology will be fascinating to watch. With solid long distance cost advantages (unless government taxes kick in) and features that exceed those available in the most advanced PBXs, the customers' and businesses' desire to make the switch will be almost irresistible. This should have an increasing adverse impact on traditional cell phone and land-line telephone systems and favor companies like Cisco.

Set-Top Boxes vs. PCs

The home will be a major battle ground as longtime enemies Apple, Microsoft, HP, Dell and Gateway find themselves on the same side against the new set-top box giant Scientific-Atlanta, now a division of Cisco. The sides will be the PC companies and their collective resources against the cable companies -- and the cable and satellite companies clearly have the high ground.

It will be interesting to see how the processor companies play this. Both AMD and Intel have low cost parts geared toward the set-top box market but clearly they would rather see the PC side win because the revenues and margins are vastly better. VIA may actually have the best path because they have little to lose with this change as well as one of the most aggressively priced parts in the segment. This could put AMD and Intel on the same side fighting VIA or even IBM Microelectronics, which has a near-monopoly of the game console market, similar to the emerging situation in the multi-media set-top box market.

If successful and tied to the continued drive to morph software and hardware into services, this could easily be a precursor to the general move away from PCs as we know them to a next-generation platform. And this platform might not come from any of the current major PC companies or have a Pentium derivative processor in it. Even though Microsoft also produces a very low-cost operating system, it's possible that we could see a vastly less powerful or wealthy Microsoft in the future if this market evolves in this way.

Finally, the market has repeatedly demonstrated that it wants an appliance-like product and we have yet to see one from any of the major vendors. Only Apple seems to fully get what is needed here as they have demonstrated with the iPod. If they can build the right product, only Apple may be positioned to hold off what could be a massive move to smart set-top boxes. However, even Apple may have a problem here as set-top boxes are subsidized, and it is almost impossible to sell against subsidized products unless you either have a substantial cost advantage, which they don't, or can gain access to the subsidies, which is unlikely.

The only long-term "if" working in the PC vendors' favor is the possibility that the Cisco-Scientific Atlanta merger may fail. However, I can think of nothing more dangerous than betting on anything less than a successful future considering Cisco has in the last five year successfully completed more mergers than virtually any other large technology firm.

Xbox 360 vs. Playstation 3 vs. PC

The gaming console battle will probably be one of the bloodiest of all next year. This is because Sony currently appears to live or die on the success or failure of the Playstation 3 and the projected success of their Blu-ray technology was based largely on the anticipated success of the Playstation 3.

The first real engagement began a few weeks ago when the Xbox 360 launched to mixed reviews. Selling out in Europe and the U.S., it bounced in the Japanese market and the first few weeks of its launch became a case study in good and bad practices. On the good side was the incredibly good pre-launch work and a launch event that was magic. On the bad side was inadequate product for the geographic areas targeted and a relatively small number of games; but games make or break a console gaming platform. Post-launch marketing was light and damage control for the anticipated breakage of any new system inadequate. This is not uncommon in the tech market and particularly not uncommon at Microsoft, which has historically focused heavily on the initial launch but has done poorly in post-launch.

However, Sony was unable to get their new product to market at all and while they may have executed a plan to disparage the Xbox 360, the impact of that plan may have only been felt in Japan. In addition, Sony BMG's rootkit fiasco put a cloud over everything Sony ,creating problems for the company that extended to all branded products. But the big problem for both may be the combination of problems associated with programming for multi-core platforms and the massive drop in price for game-capable PCs.

The previous wave of consoles cost under $200 in a world where PCs that could play games cost over $1,000. The current wave, in fully configured form, costs $400 and game-capable PCs now cost under $800. This means we have moved from a 5-to-1 difference between the systems to a 2-to-1 difference and PCs continue to decline in price dramatically. With one of the hot products selling this Christmas being a $450 HP laptop at Wal-Mart, which moved 75,000 units in a matter of hours on Black Friday, next year buyers, particularly parents, may decide that for the same money, or a little more, a PC is simply a better buy for their kids than a game console, any game console.

PCs have also started to go multi-core this year and this technology will drop into value-priced products next year. Programming skills for multi-core systems, be they consoles or PCs, are very difficult to find. Game performance is closely tied to the ability to use this new technology effectively. Programming for the new Xbox, which uses an advanced but relatively traditional approach to multiple cores, has been difficult. Most of the initial games are not yet fully reflecting the power of this platform, and programming for a system like the Playstation 3 that has a large number of virtual cores is a nightmare -- which is fueling rumors that this product will slip into 2007. Programming for the PC is relatively well known and this creates a higher level of parity between the platforms at launch than we have ever had before, in terms of game quality and capability.

In the end, it may be more of a battle between PCs and consoles than between Sony and Microsoft next year and the Sony system may not even ship until 2007. Given Windows forms the core of both the PC and the Xbox this may actually, next year, be a battle between embedded Windows and Windows Vista.

Wrap-Up

The one battle I didn't bring up is the battle for the next iPod. Apple has so far easily held off all attackers. The only firm that had a chance was HP and Apple tricked that company into a horrible arrangement, locking them out of the market until next year -- when I expect HP will be back with a vengeance. Until I see what HP has I can't even describe this battle and given the previous competitive failures I think it is wise to hold off until more is known.

Regardless, if you get a chance to see the HP Halo system take it, as it will be the closest thing to business implementation of HDTV you're likely to see this decade. Try out VoIP, too. You may be amazed at how good it has become. And finally, take a moment to look at cutting-edge PC and Xbox 360 games -- you may be amazed at how visually stunning they are and how similar.

Gift Idea #3

With Christmas coming next weekend, this will be my last gift suggestion this year. Surveys suggest the top three gifts on people's wish lists this year are an Apple iPod, an Xbox 360, and a digital camera. You'll note there is no brand name next to "digital camera" -- but recently one came to market that I think stands heads and shoulders above the rest: The Pentax Optio S6.

This camera is amazing. Retailing for US$350 with a street price closer to around $300, it has 6 megapixels, a full two-inch screen and a 3x optical zoom lens. Inside it has a unique photo processing chip which does incredible things for the quality of the photo and increases dramatically the low-light performance of this camera. It's the first to be able to capture DivX video, which is a highly compressed form of DVD-quality video. There is no other camera that can touch what this one does at anything near the price.

Oh, and if you get stuck, remember there is always the Amazon.com gift certificate. This is one of the few gifts you can buy and deliver electronically on the same day, including Christmas. I hope you and yours have a wonderful holiday season!


Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.


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