• Sidebar: Event Highlights Digital Media
• Chart: Consumer PC Sales, 2000-2005

To broaden the audience for Windows XP Media Center Edition, a customized version of Windows XP for home entertainment PCs, Microsoft has added and improved a number of features and is making the OS available to OEMs and system builders for use on less expensive hardware. Because Microsoft charges a premium for Media Center Edition compared with Windows XP Home, a shift to Media Center PCs would increase Windows revenues more quickly than the growth rate of consumer PC sales, which is slowing.

The new Media Center strategy, built around a new release, Windows XP Media Center Edition 2005, will provide mixed opportunities for OEM partners. At the low end of the market, less restrictive hardware specifications and a broader manufacturing channel could dilute the Media Center brand and lead to commoditization. On the other hand, OEMs that successfully design and market high-end entertainment PCs based on Media Center Edition 2005 could find themselves with a profitable new niche, if they and Microsoft can convince consumers that a PC is a viable replacement for traditional home entertainment systems based on consumer electronics components.

Today: Successful Niche Product

Windows XP Media Center Edition (MCE) is based on Windows XP Professional (XP Pro) and adds a remote-controllable interface for performing tasks related to digital media, such as watching and recording TV shows and playing music stored on a PC's hard drive. The design specifications for this interface dictated that it had to be usable at a distance of 10 feet from a 17-inch PC monitor.

In theory, MCE could run on any PC capable of running XP Pro. However, when Microsoft first introduced it in Oct. 2002, OEMs were only allowed to ship MCE on PCs with specific hardware, including a drive capable of playing CDs and DVDs, an approved TV tuner card, and enough hard-drive capacity (80GB or more) to make it useful as a digital video recorder.

Other OEMs, particularly Sony, had previously offered PCs with similar capabilities. However, these OEMs had to evaluate and test hardware components (such as TV tuner cards) to ensure they'd work together, then write their own interfaces or rely on multiple third-party applications for various digital media functions (e.g., a TV-recording application from a tuner card manufacturer; a DVD playback application from a DVD drive manufacturer), often leading to a poor user experience. With MCE, Microsoft took care of these tasks and unified them in a single, simple interface.

The first MCE PCs sold well for their price category. For instance, Hewlett-Packard's mid-range Media Center cost US$1,649 and was among the top 15 sellers in Jan. 2003, according to market research firm NPD Techworld; 12 of the other PCs on that list retailed for less than US$1,000. Seeing an opportunity to sell more high-end, high-margin hardware without having to do difficult integration and interface work, more than 40 OEMs, including Dell, Gateway, and Sony, signed on to create MCE PCs in 2003.

MCE 2004, an incremental upgrade released in Oct. 2003, added support for new features, such as FM radio tuners and wide-screen video, and links to digital media Web sites that support the MCE 10-foot interface. (For details, see "Media Center Update Highlights Partner Roles" on page 5 of the Nov. 2003 Update.)

MCE 2005: Moving Beyond the Niche

Introduced as part of a wave of digital media announcements on Oct. 12, 2004, MCE 2005 represents a fundamental shift in Microsoft's Media Center strategy. Instead of a special-purpose OS for a very specific type of PC, Microsoft is trying to reposition MCE as the preferred OS for a wide range of consumer-oriented PCs. (For news on other digital media products announced at the same time, see the sidebar "Event Highlights Digital Media".)

Microsoft envisions three broad categories of MCE PCs, although OEMs will probably mix and match features and styles to meet market demand:

Basic MCE PCs for consumers who are primarily interested in computing functions but prefer to use the spare and simple MCE interface for working with digital media, rather than the Windows Media Player that comes standard with Windows XP. Such PCs would probably not have a TV tuner card and might lack a remote control.

Traditional MCE PCs for consumers who want an all-in-one device for both PC and home entertainment functions. Microsoft hopes to make this scenario more appealing with the introduction of Media Center Extenders—thin-client devices that let users access content on a MCE PC from television sets in other rooms over a home network.

Dedicated home entertainment PCs that can replace one or more components in a home theater system. Such PCs would be styled like a consumer electronics device and would be used almost exclusively for home entertainment, while a second PC in a different room would serve as the household computer. Among the OEMs releasing PCs in this category are Hewlett-Packard and Niveus. (Intel is also building "Entertainment PCs" that fit into this category and boast features such as instant-on and support for high-definition TV, but not all Entertainment PCs will necessarily run MCE.)

Reasons for the Shift

The company is making this strategic shift for several reasons:

Grow revenues faster than run rate. Because MCE is based on XP Pro, Microsoft charges more for it than for XP Home, which is the usual OS bought by consumers. By selling a higher proportion of MCE-based computers (a type of sales trend that Microsoft calls "mix shift"), Microsoft can increase Windows revenues from consumers more quickly than if it relied on growth in consumer PCs running only Windows XP Home. This is particularly important now that consumer PC growth appears to be slowing after a rebound in 2003. (For statistics on consumer PC sales from IDC, see the chart "Consumer PC Sales, 2000–2005".)

Specifically, the most recent statistics available from IDC estimate that about 550,000 MCE PCs will be sold in 2004—that's less than 1% of all PCs sold to consumers. At a meeting for financial analysts in July 2004, Windows Client Senior Vice President Will Poole said that Microsoft hopes to sell more than 20 million MCE PCs in 2008, which would probably be at least 20% of all PCs sold to consumers.

Give OEMs what they want. Some OEMs saw demand for low-cost PCs with remote-controllable digital media functions. However, Microsoft's hardware requirements for MCE—particularly the TV tuner card and large hard drive—made it difficult to keep hardware costs down. As a result, some OEMs rolled their own remote-controllable interfaces into PCs instead of using MCE. For example, Dell now offers a Media Experience UI and optional remote control on all its consumer PCs (Dimension desktops and Inspiron notebooks). Loosening MCE's hardware requirements satisfies these OEMs.

What's New with MCE 2005?

Microsoft intends to popularize MCE 2005 by improving its video support, adding new features, and broadening the channel.

Better Video Support

Earlier versions of MCE forced users to make some compromises with regards to video: in exchange for the convenience of having all their digital media functions in one box, consumers had to sacrifice video quality and features such as dual-tuner capability (which lets users record one TV show while watching a different one). As a result, the MCE PC has been a non-starter for many home theater enthusiasts.

Microsoft hopes to reverse this impression with MCE 2005. Because video output quality depends largely on hardware components, Microsoft not only made changes to the OS but also worked with suppliers of graphics and TV tuner cards. For example, Microsoft provided documentation, reference materials, and a test kit for partners to evaluate video quality and troubleshoot problems.

Specific video-related improvements available in PCs running MCE 2005 include the following:

Multiple tuner support. MCE 2005 will support up to two analog tuners so users can record one program while watching another. MCE 2005 will also support adding a third tuner capable of picking up over-the-air, high-definition TV signals, but this feature will only be available in the United States and will not work with high-definition signals received via cable or satellite.

High-definition displays. MCE 2005 can output video to high-definition (720p or 1080i) digital TV displays.

Better video quality. With MCE 2005, live television is compressed at 9Mbps instead of 6Mbps, making the Media Center more suitable for fast-motion video material such as sports and action movies. Color reproduction for NTSC output (the standard North American TV format) is more accurate, especially through S-Video outputs. A new Display Setup Wizard helps users configure the Media Center interface based on the display type, optimizing video resolution, scaling (which determines how a video picture is "painted" on the screen, line by line), positioning, and user interface layout.

Because Microsoft is also relaxing the hardware specifications for MCE, the company has partnered with the Imaging Science Foundation (ISF), an independent testing group devoted to evaluating video quality in home theater systems, to establish a certification program for Media Center PCs with high-quality video components.

Other Improvements

Microsoft is adding exclusive features to MCE 2005 that will not be available in any other Windows OS, as well as improving existing features. Among these additions and improvements are the following:

Integrated DVD burning capability based on technology from Sonic Solutions. MCE 2005 is the only version of Windows with this capability built in.

MSN Remote Record is a forthcoming password-protected Web site that will let users program TV recording on their MCE 2005 PC from any computer with Internet access.

Movie Finder helps users find movies on TV to record. Users can search by genre, title, actors, director, rating (as rated by All Movie Guide), and other criteria. The service also includes movie descriptions.

Radio pause lets users pause live FM radio broadcasts and replay up to 30 minutes. (The tuners in MCE PCs don't support AM frequencies.)

AutoSync makes it easier to transfer content to portable devices directly from the Media Center 10-foot interface.

Windows Messenger, the instant messaging client that ships with Windows, is now available from within the 10-foot interface.

New online content will be accessible through the 10-foot interface, including AOL's Music On Demand (which provides free music videos), Kodak's Ofoto (an online repository for digital photos), radio programming from National Public Radio, and news from Reuters.

New music-related features. MCE 2005 includes music-related features originally found in Microsoft's Plus! Digital Media Pack, such as a CD label-making application; an audio converter that will scan the hard drive for audio files and convert them into MP3 or Windows Media Audio at various bit rates (including "lossless," which shrinks audio files without losing any fidelity); and a feature called Windows Party Mode, which offers a variety of full-screen psychedelic displays ("skins") and an interactive playlist so guests can add new songs.

Microsoft has also removed one function from MCE 2005 that was found in previous versions of the OS: the ability to connect to a domain (as Windows XP Pro can do).

Broader Distribution

To lower the cost of MCE PCs, Microsoft is significantly loosening their hardware specifications and making MCE 2005 available through the system builder channel.

For example, MCE PCs will no longer be required to include a TV tuner card or FM radio tuner, and may run low-cost chips like Intel's Celeron processor. In addition, Microsoft will sell MCE 2005 to system builders—OEMs who sell PCs in smaller volumes.

A new Designed for Windows XP Media Center logo program will be used to identify MCE 2005-compatible hardware, such as graphics and tuner cards. (This is distinct from the ISF certification, which will be used to identify MCE PCs that offer high-quality video.)

Currently, Microsoft has not announced plans to release MCE 2005 as a retail upgrade for users with other versions of Windows. However, the company is likely to follow this path in 2005, perhaps with a new edition of the OS.

Will Consumers Bite?

Although MCE 2005 is a significant improvement over past editions of the OS, Microsoft's revised Media Center strategy still faces some challenges.

Overlap with XP Home. Low-end MCE PCs may have trouble competing with regular Windows XP PCs. Apart from the Media Center Extenders, all of Microsoft's recently released digital media products and technologies—Windows Media Player 10 (which makes it easier to acquire, rip, organize, play, and transfer digital media to portable and networked devices), MSN Music (Microsoft's online music store), Portable Media Centers (portable devices that can play audio, video, or pictures transferred from a PC), and Windows Media Connect devices (networked devices that can stream digital media from a PC over a home network)—work with any version of Windows XP. The same goes for most third-party digital media services and peripherals. It's not clear that consumers will pay extra simply for the MCE interface.

Transport. MCE PCs have suffered from the fact that most consumers want to watch TV on a television set rather than a computer monitor. Although consumers could hook an MCE PC up to a television, most users want to perform traditional computing tasks (word processing, online banking) in a quiet room, away from where the rest of the family might be watching TV or playing video games. The Media Center Extenders address this problem for customers who are willing to pay an extra US$300 (or more) for a device on each TV, and who have or are willing to install a home network (estimated by IDC to be the case in about 16 million U.S. homes by the end of 2004). But overall, this is a costly and complicated solution compared with dedicated digital video recorders, such as TiVo and ReplayTV, as well as the bundled digital video-recording hardware and software that many cable and satellite TV providers are beginning to offer.

Why a PC? The TiVo example illustrates the biggest risk with Microsoft's new Media Center strategy (and, indeed, with its overall efforts to establish the PC as a home entertainment hub): consumers are already accustomed to using multiple dedicated consumer electronics devices for home entertainment, such as separate DVD players, digital video recorders, radio tuners, CD players, and televisions attached to an amplifier, and may not see the benefits of switching to a PC.

PCs certainly offer some advantages, including upgradeability—software and hardware updates can add significant new functionality at less expense than swapping out components in a home theater system, for instance—better interfaces for organizing and working with large libraries of content, the ability to transfer material among portable and other devices (using removable media or networks), and traditional PC functions (like sending e-mail, surfing the Web, and online banking). However, PCs also take a long time to start up, crash more frequently, require users to apply security patches, are susceptible to annoyances such as viruses and spyware, and may not perform any single function as well as a dedicated device can. With the Media Center, Microsoft is placing a big bet on convergence—the idea that consumers will pay more for a device that performs many functions. Historically, however, the market has favored divergence in nearly all consumer products, from home electronics to mobile devices.

Resources

Microsoft's MCE 2005 site, with extensive product information, as well as information about Media Center Extenders, is at www.microsoft.com/windowsxp/mediacenter.

Details about Windows Media Player 10 can be found at www.microsoft.com/windows/windowsmedia/mp10, and in the article "Media Player Update Moves Strategy Forward" on page 23 of the Oct. 2004 Update.

MSN Music is at music.msn.com. For insight into the strategic goals of the service, see "MSN Enters Music Store Race" on page 26 of the Oct. 2004 Update.

For more information on Portable Media Centers, see www.microsoft.com/windowsmobile/portablemediacenter and the article "Portable Media Centers Launch" on page 29 of the Oct. 2004 Update.

Microsoft's Windows Media Connect page is at www.microsoft.com/windows/windowsmedia/devices/wmconnect/.