Marketing Breeds New Class of Market Leaders

As we enter into the post-PC era, the PC leaders of today will not be the computing leaders of tomorrow. There will be a new class of market leaders, which could very well be companies like Sony or Sega, as marketing and branding become more important than technology.

At first glance, it may not seem an obvious leap in logic to associate Sony's PlayStation or Sega's DreamCast video game consoles as a viable PC alternative for consumer computing and Internet access. However, the attributes of the these gaming consoles — backward compatibility of games, broad channel penetration in consumer electronic stores worldwide, ease of use and simplicity of design — are also attributes that will be required as the PC evolves into a consumer electronics device.

The downfall of the market dominance enjoyed by traditional PC makers such as Compaq, Hewlett-Packard, Dell and IBM will be their lack of understanding of the consumer electronics mentality. This stems from a combination of cumbersome hardware designs and a lack of interoperability among peripherals. At the same time, none of the major PC vendors truly understands the consumer retail model. Furthermore, none of the PC makers is positioned as well as the gaming manufacturers to penetrate the large percentage of households that do not own a PC.

Sony, for example, has a base of more than 70 million installed PlayStation systems. In addition, Sony has brought to market a variety of high-quality consumer electronics products that span from televisions to stereos to computers. As a result, a key strength of Sony in competing for market share in the next generation of computing devices stems from its strong brand recognition and its massive shelf presence throughout stores.

Additionally, the appeal to young adults and children is another competitive advantage for the gaming manufacturers versus traditional PC makers. One means to penetrate non-PC-owning homes is through kids, which are often a driving force in a household's purchase decisions. For example, within minutes of the PlayStation2 sale online, Sony received more than 100,000 hits on its Web site, forcing the company to shut down its site briefly. This level of enthusiasm is unparalleled in the PC market.

Even Microsoft, the dominant software provider to the PC industry, recognizes the opportunities of these gaming machines to penetrate new customer segments. In March, the company announced its X-Box Vision, a gaming console with built-in Internet access and e-commerce capabilities.

As the low end of the market moves beyond the traditional PC for e-mail and Internet access, Sony is squarely positioned with a low-cost alternative with its PlayStation. Given the simplicity of the PlayStation's design, Sony can easily integrate a keyboard for e-mail and a modem for Internet access.

In contrast, PC makers have to go back to the drawing board to create low-priced Internet access devices. Yet if the PC manufacturers try to apply the concepts they have learned in the general-purpose computer market, they are bound to miss the mark on what consumers want. There has been much hype around the $1,000 PC market, and it is true that PCs are continually pushed to new, lower price points. But it is still not enough. Sub-$300 is the magic price point to drive high consumer volume. Consumer electronics companies have a business model that is tuned to building high numbers of low-cost-margin products.

Unlike the gaming manufacturers, which make their profits on the games rather than the hardware, many PC manufacturers cannot compete in the sub-$300 appliance market. The profit margins on low-end devices could not be recouped through enough volumes for the model to be viable for most PC manufacturers.

Another critical distinction between consumer electronic devices and traditional PCs is the emphasis on content or specific applications. The PlayStation, for example, has evolved from a single function of providing high-quality video games for home use. The PC has evolved as a general-purpose machine offering access to Internet services and content. PC makers are linking with Internet service providers to provide a broader range of customized content that can be accessed through the PC. Yet none of the applications is specific to one particular PC brand. This precludes consumer pull for a given PC platform based on the application or content that is available through the device.

In contrast, Sony and Sega have the content for which consumers anxiously wait. In a sense, the leap from a PlayStation or DreamCast to an Internet-access device is less of a stretch than positioning a general-purpose PC as the device of choice to access the Internet. Sony and Sega are offering consumers more functionality in a package they recognize.

The strategy emerging from Sony and Sega is so simple that it may be hard for PC manufacturers to see. These gaming manufacturers are trying to control the gateway of information in and out of the home.

The evolution of the gaming console is in many ways a Trojan horse to build consumer trust in the brand and then expand the functionality to replace the traditional PC. It has been a slow and subtle transition, and PC makers may overlook the real threat that these gaming companies pose. Yet the strategy will clearly make sense to the millions of users that are snatching up the latest PlayStation and DreamCast.

It also does not bode well for PC companies that their chief software supplier, Microsoft, is hitching future product development on the gaming console idea. PCs may become the ugly stepsister to the fantastic imagery of video games.

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