Windows Media Center Takes on New Life
Reforecast of the Digital Home Market
By Roger L. Kay
When Windows Media Center Edition (WMCE) was launched in late 2002, Microsoft had high
hopes for it.  Finally, home PCs were going to be able to deliver digital content to consumers, and
the PC would be safely ensconced as the hub of the digital living room.  Initial forecasts projected
that by 2008 annual shipments would reach nearly 20 million units.  

However, except for the first couple of quarters, shipments were disappointing.  The market failed
to develop at the projected pace for many reasons, but they boil down to three: Microsoft and its
partners failed to deliver the experience, the ecosystem, and the price.

The experience and the ecosystem are intimately intertwined.  In order to have the experience, the
ecosystem must be in place.  Microsoft has always believed in ecosystems (as long as it gets to
control them), but the far-flung ecosystem necessary to the success of the media center includes
some pretty cantankerous characters, for example, the cable companies, Hollywood, and the
music companies in addition to the usual PC hardware OEMs and other PC industry suppliers.  
So, if the content you want isn't available because the owners haven't released it for digital
consumption or your cable provider hasn't licensed it, then you, the user, get frustrated and blame
Microsoft for something it can’t control: availability of desirable content.  The experience is
damaged because the ecosystem lacks coordination.

The experience was a bit dinged by the fact that extender wasn't available at launch.  It's hard to
watch recorded TV in the same room as a desktop whose fans are roaring like a 747.  The lack of
related peripheral products (Media Center Extender, Portable Media Center, and Xbox adapter) at
launch also limited the experience.  In addition, not much software that took advantage of the 10'
interface was in place.

Price is something else.  Initially, WMCE systems were around $2,000, but came down to half that
two years after launch.  Microsoft has had something to do with the decline, lowering the price of
the OS, both in general and promotionally, and also loosening some of the hardware restrictions
on qualifying for a WMCE logo, which has enabled hardware OEMs to produce tighter packages.  
Along with a price lowered to within a skooch of Windows Home Edition, at least in the short term,
Microsoft announced the less-stringent requirements for WMCE in the autumn of 2004, when it
told the OEMs that neither a TV tuner nor a remote was required anymore.  Also, Microsoft relaxed
the electronic programming guide requirement as part of loosening up the tuner restriction.

Be that as it may, by mid-2005 about 2.5 million WMCE media center PCs had been shipped,
most of them desktops, but a growing number going out as notebooks.  Meanwhile, various other
companies, including Dell and most of the Japanese hardware OEMs, were putting out their own
media center interfaces.  After all, why pay Microsoft a premium for an OS when the main feature
is just an HTML interface, which anybody can program?  The Japanese initiatives took off,
saturating homes from Makubetsu to Kagoshima with PCs that contained a TV-tuner, sported a
“big-button” interface, and came with a remote control.  Dell backed off introducing its interface,
Dell Media Experience, as a full media center, and instead put it out as a basic offering on all
home PCs.  If buyers wanted a tuner, they had to pony up for the full WMCE package.  

So, what we saw right up until midsummer 2005 was a picture of another wobbly Microsoft
product, potentially failing because the company wouldn’t drop enough cookies to get its hand out
of the cookie jar.

But then suddenly in July 2005, WMCE shipments picked up dramatically, as recorded by both
NPD and Current Analysis, accounting for more than 40% of all desktop shipments in retail.  No
random act, this.  Gateway switched its consumer desktop line midsummer to 100% WMCE
enabled.  At BestBuy, a Gateway 831GM desktop goes for $699 with WMCE but no tuner.  A dual-
core-processor version starts at $1,049, also without tuner.  The company is shipping one model
with a tuner at $1,249.   And Gateway is not alone.  Dell and HP are offering, both through the
direct channel and in retail, similar product mixes, with some XP Home units and some with
WMCE, both with and without tuners.  Although longer term pricing of the media center
functionality in the Windows Vista timeframe may not be as beneficial as today's, recent favorable
terms have definitely helped jumpstart the market.

However, the really big boost for WMCE has yet to roll out.  At Fall IDF 2005, Intel filled out its vision
of the Digital Home concept, and it included WMCE as the OS layer.  Intel is in a position to tip the
balance on this one, and in fact seems likely to do so.  Essentially, Intel had looked around at
other media center interfaces (Dell’s, the Japanese’s) and decided that, although it was flawed in
some ways, WMCE was still the best out there, and the company would endorse it as the OS of
record for the “premium” Digital Home platform if Microsoft would cooperate in a few areas,
notably by allowing the OEMs to brand the interface and even modify it in distinctive ways
(incentives for the Japanese in particular to join the party).  The hardware OEMs would be
positively motivated by having the right to put their logo and individual look on the screen that the
users see, and until now Microsoft has reserved these rights for itself.  Microsoft appears to have
agreed to these minor concessions, and so now there is no barrier to keep WMCE — or its heritor
functionality in Windows Vista Home — from becoming an integral part of all “premium” home
PCs by 2008 or 2009.

One final development will act as a booster to WMCE functionality in 2007: high definition.  Some
problems remain to be worked out (the cost of an HD cable card is around $100, an inhibiting
factor), but the excitement of HD, bundled one way or another with media center, will drive further
adoption of WMCE-enabled clients.

So, here’s the new forecast based on the scenario laid out above and the assumptions
delineated below (Figure 1).

Figure 1
Shipments of WMCE enabled should reach 53 million by 2009, a number composed of 70% of all
home desktops and 33% of all home notebooks.  Growth will accelerate this year (2005), as
better-positioned premium home packages start to catch on, and will receive an additional boost
in 2006, as the premium version of Windows Vista Home is adopted.

Assumptions

  • Home users buy PCs for two basic reasons: to communicate and to be entertained;
    productivity, which is the principle reason, besides communications, that commercial
    users buy PCs, is a distant third for home users

  • The growth in quantity and quality of digital entertainment is the big driver for media center
    adoption

  • A media center is a Windows PC with a “big button” interface.  It may or may not have a TV
    tuner, HD or otherwise, and it may or may not have a remote control

  • Microsoft will allow the PC hardware OEMs to brand and modify the interface by 2006

  • The price premium for a media center OS over a basic home OS will shrink significantly as
    media center functionality is incorporated into Windows Vista “Premium” Home Edition

  • The electronic programming guide, TV tuner, and remote control requirements will remain
    relaxed in the Windows Vista timeframe

  • Throughout the forecast period, the bulk of media centers will continue to ship without
    tuners, remotes, and dongles (for the remotes) because of the high cost of these
    hardware components

  • All “premium” Windows home clients (desktops and notebooks) will be WMCE enabled by
    2008

  • Growth in media centers will mirror growth in premium home PCs after 2008

  • Retail and most other consumer channels will switch over to Windows Vista Home Edition
    during 2007, including both basic and premium versions

Conclusions and Recommendations

This forecast illustrates how WMCE will become the norm for premium home computing during
the next few years.  Its widespread adoption will be aided by the fact that its definition has become
loose enough to make the decision to incorporate the interface in high-end offerings much easier
for PC hardware OEMs.  However, this watered-down version of the original conception, this
compromise, will help Microsoft (and Intel) achieve the long-cherished goal of making the PC the
hub of the digital living room.  Of course, with many DLNA-compliant devices in the home —
interoperating digital entertainment servers, players, and control points — one could argue that
there will be no hub, just a lot of devices talking to each other in digital harmony on the home
network.  But nonetheless, the media center PC will be an important element in this network, and
Microsoft has made sensible changes necessary to further this end.

Microsoft will continue to improve the media center experience, notably with an “away” state that
appears to the end user as an instant on-off capability and an internal management system that
restarts processes automatically from time to time, a feature that will help bring reliability nearly
into line with expectations for a consumer electronics device.  The company should do everything
possible to deliver as much media functionality as possible for as little money as possible in
order to promote maximum penetration.  One area worthy of looking into is the cost of the dongle,
which is currently single sourced and could be sourced from multiple vendors.  

PC hardware OEMs should prepare to adopt media center for their premium offerings in the
Windows Vista Home timeframe or before.  Decisions to be made include whether or not to have
a remote control and one or more TV tuners in the package, and whether to feature the same level
of media functionality in notebooks as in desktops.  All vendors — including the Japanese —
should take advantage of the program to brand and modify the interface, a program that
represents an opportunity to promote themselves to their end customers.  Both Microsoft and Intel
are making it easy, particularly in the short term, to advocate this platform , and although details
on market development support for it over the longer haul have yet to be fully defined, such
support is likely to be generous.  

By the time Windows Vista Home launches, many of the remaining features will be worked out.  
Extender will help propagate content around the home, deals with content providers should be
hammered out, and a digital rights management scheme is likely to be in place.  Consumers may
not all use the TV features, but anyone wanting to listen to music, look at digital pictures, or play
digital movies from an attractive interface will have a media center PC of one sort or another,
either in their living room or in their den, from where it will be projecting to an extender in the living
room.
© 2006 Endpoint Technologies Associates, Inc. All rights reserved.
The Tide is Rolling in