Ten principles for establishing the mass market for interactive media

Trip Hawkins
Chairman, Electronic Arts
President and CEO, SMSG, Inc.

Interactive software veteran Trip Hawkins recently stepped down from active management of his pioneering videogame firm Electronic Arts to head SMSG, Inc. — a new venture formed by Electronic Arts, Time Warner Enterprises and the venture capital firm Kleiner Perkins Caufield & Byers. Its charter is to catalyze the market for interactive media. Thus it’s safe to assume that the following principles will find their way into SMSG’s business plan.

It’s like a high school algebra problem: can you find the missing $12 billion?

In 1990, U.S. consumers spent $5 billion on movie tickets and $7 billion in arcade machines. So the “location-based” markets for movies and “interactive entertainment” would appear to be similar in size. Why, then, did those same consumers spend $14 billion to watch videos at home, but only $2 billion on interactive entertainment (home computer and video game software)?

The huge success of the VHS videotape standard explains the $14 billion. The convenience, quality, and price of VHS meets consumers’ needs. But until we have a comparable interactive media system, one that both meets consumers’ needs and is an industry standard, the interactive media software market at home will fall billions and billions of dollars short of its potential.

There is hope. Fortunately there is hope for interactive media. It is technically feasible for an interactive system with features as compelling as a VHS player to be marketed as early as 1993 or 1994. Can the industry get organized to create and establish a standard interactive system in that time frame? Here are ten guiding principles that can help us get there from here.

1. The interactive media system of the future can ride a Trojan horse. An interactive system requires digital computer technology, which is predominantly used in the PC and video game markets. And soon we will witness the complete computerization of consumer electronics. Audio has already gone digital. Now the cable, film, and TV are starting to go digital as well. Interactive media, and the consumer, will benefit from the inevitable synergy. For example, a consumer may justify the purchase of a CD-ROM drive because it can be used to watch digital films.

2. The mass-market interactive media box may be a computer, but it could also be a cable TV receiver.

The cable industry is moving to fiber optics in order to transmit up to 1,000 channels at once. It takes a computer to keep track of that much information. Cable operators install a new box in a home every five to seven years. With over 60 million cabled homes now, up to 10 million new boxes could be installed in a single year. Great synergy will result if those boxes can be expanded with a CD-ROM drive into complete interactive media systems.

3. The film industry, not the computer industry, will drive the future of compression technology. The biggest future customer of compression technology will be the movie companies. Whatever technology they bless as “good enough” will become a de facto standard in all other applications. For the same reasons, VHS videotape players have replaced professional players in schools and most business uses. If the film industry supports a digital movie format based on CD-ROM, the victory will be for interactive media, and the spoils will go to the consumer.

4. Despite the high profile, digital HDTV is not a key factor. Some experts think it will be 2005 before the U.S. installed base of digital HDTVs reaches one million. It’s a simple and unavoidable cost problem. Meanwhile, the world’s population of analog color TVs is well over 300 million, and most will still be in use at the start of the next millennium. Interactive media can therefore focus on the simpler digital problem of driving pixels on current TVs, with an eye towards supporting HDTV in the future.

5. Real-time animation is more important than full-motion video. Only something really new can drive the creation of a new market, and the only new thing about interactive media is that it is interactive. This means that the screen must respond to the user’s input, hopefully at a speed of animation that feels like TV. TV’s effective animation rate is more than six million pixels per second. By contrast, current PCs, video games, and CD-ROM systems are typically in the range of a million pixels per second.
Adding compression technology to current PCs may create full- motion digital video, but it won’t increase the interactive animation capability. With digital video, we are merely spraying a firehose of pre-computed digital frames onto the screen of a digital projector: a marvelous capability but not an interactive one. Interaction requires significantly changing the content of the individual frames, which is not possible if they were only pre-calculated and stored as a digital filmstrip.

6. CD-ROM is a two-edged sword. CD-ROM is a critical storage device for multimedia. But it is only a storage device; the computer architecture determines what the consumer will see and hear. Current efforts to match CD-ROM with 16-bit PCs and video games may backfire. CD-ROMS are slower than hard disk drives and cartridges. And while the quality of real-time animation of one million pixels is outstanding for a $150 cartridge game system, consumers will expect much more from a CD-ROM system’s higher price. Matching CD-ROM technology with a 16-bit computer architecture is like trying to pull an 18-wheel truck with a bicycle.

7. The consumer will not pay $1,000 for an interactive system. Sure, maybe a few will. Maybe even a million. But not 300 million. Consumers don’t have that kind of money, and they aren’t educated about interactive media. Yes, VCRs and CD audio were launched at $1,000. But nearly every household was already a consumer of TV and music, and with an educated market that big, there were enough innovative consumers to jump-start the marketplace. The industry shouldn’t foot a probable $100 million marketing and education bill unless it is sure the consumer, once educated, will buy. Nintendo did, but its price point was $100. With enough capability, a $500 player might work for interactive media now that the benefits of CD audio and video games have been established.

8. We need to turn a new page in market and technology history. Every single CD-ROM system that has been announced is based around a 16-bit microprocessor architecture, typically with a PC or video game bias. These systems, even in an evolved form, lack the requisite performance for establishing a new mass market. Designed for general-purpose computing, they also carry excess baggage that adds unnecessarily to manufacturing cost. A fresh start is needed, using 1990s technologies that focus on the precise needs of interactive media alone.

9. The politicians and lawyers may be as important as the engineers. Interactive media needs legislation to make CD-ROM software rental and consumer write-once optical disc drives illegal, and to adapt “fair use” law to address multimedia copyright issues, such as the question of “fair modification.” New pricing structures need to be developed for the use of copyrighted materials. A multimedia equivalent of ASCAP is needed.

10. We need a SPARC or an ACE for interactive media. The interactive media market cannot be built by a single company. The business PC industry has recognized the need to move beyond the current generation of technology, and the opportunity for cooperation that is provided by the currently lax antitrust climate. Sun’s SPARC chip, the ACE alliance, and the Apple-IBM partnership are examples. The interactive media industry needs such coalitions that will address the issues raised above.

In the same sense that Hollywood’s movie libraries awaited VHS video to unleash their huge market potential, the world’s software and media companies sit and wait for an interactive media future that makes sense. Like a boulder at the top of a cliff, these companies have the energy potential to bust open the market, but need an organized industry effort to get the ball rolling. Only then will we find the missing $12 billion.