information, communications & entertainment digital ...€¦ · clever, consumer-made video...

A Quarterly Digest for Industry Professionals

Digital InsightsMay 2007

04ISS

UE

INFORMATION, COMMUNICATIONS & ENTERTAINMENT

1 Welcome

2 Online Video Becomes a Key Marketing Platform

4 Connected Consumers Make Tech, Entertainment Firms Cooperate

6 Consumers Driving Hard in Storage Market Growth

8 Data Protection Takes Center Stage in Network Security

10 Companies Aiming to Plug USB Data Leakage

13 Digital Music Retailers Hope to Bundle Success

16 Carriers Cast Eyes on Remote Monitoring Services

Contents

© 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independ-ent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 17700SVO

We're pleased to provide this edition of our quarterly digest Digital Insights,

and hope you'll enjoy these articles analyzing issues and emerging trends in

the technology, media, and communications industries.

Consumers continue to drive profound shifts in digital entertainment,

in part by demanding access to content whenever and wherever they

want. Technology and entertainment firms are increasingly collaborat-

ing on products designed to work together in the digital ecosystem to

enable a shift in the time and place for content delivery.

Storage firms are responding to this phenomenon not only with

ever-larger disk drives, but also with server – like storage that allows

consumers to centralize and distribute videos, music, and photos

throughout their homes and onto portable and wireless devices.

This shift has not escaped the attention of brand marketers, and online

video is emerging as a viable advertising medium in its own right.

The portability of digital content is also creating problems for corporate

information security pros, who have to balance the enterprise's needs

to make data and applications widely available to remote users, cus-

tomers and business partners—while also protecting that data.

Companies are redirecting their focus from protecting network access

toward safeguarding how data is accessed and used, regardless of how

someone comes into a network. Increasingly, companies are turning to

identity-based security solutions in which who you are dictates what

information you'll be able to access, and how you can use it.

We hope you'll find the enclosed articles helpful and informative.

Gary MatuszakGlobal ChairInformation, Communications and Entertainment

Welcome to a New Quarterly Digest fromKPMG’s Information, Communications &Entertainment Practice


2 Digital Insights

SPECIAL INDUSTRY REPORT

Online Video Becomes a Key Marketing PlatformBy Kathleen Kiley, Managing Editor, Consumer Markets Insider

Clever, consumer-made video touting the virtues of consumer products is generat-ing considerable buzz and Internet ad revenue. But traditional broadcast media isfighting back.

As broadband online access has become common, consumer product companieshave shifted more of their ad budgets to the Internet. By March 2006, 42 percentof Americans had high-speed Internet access at home, compared to 30 percent inMarch 2005, according to the Pew Internet & American Life Project.

Meanwhile, the number of people viewing video online is exploding. YouTube, theInternet site that hosts videos, says that its videos are accessed more than 100million times a day.

The ubiquity of high-speed Internet access, giving the consumers the ability towatch videos and other high-density media, has led to a proliferation of consumer-generated videos, says Jason Alves, business development manager at InternapNetwork Services Corp.

Alves says that video—especially streaming video—offers demographic advantagesover traditional media.

"With streaming video, a marketer can capture the [viewer's] IP address and knowhow many times it's being viewed," he says. "With downloads, it's easier to pass itaround over the Internet, but you can't track it."

Nick Loria, general manager of North American sales and operations for video tech-nology provider Joost, said that Internet advertising can be targeted better thantraditional marketing, and the response can be measured.

"One hundred right people are more valuable than [millions] of TV viewers you don'tknow," Loria said at the recent Media Summit conference in New York.

The popularity of online video comes as the Internet ad market is taking off. TotalInternet advertising sales totaled $13 billion in 2005, according to the InteractiveAdvertising Bureau's latest stats. Ads supporting streaming video generated $121million in ad spending in 2005, and by 2010, 10 percent of all Internet advertisingwill involve video placements.

In addition, podcasts, which are non-music audio and video files downloaded toportable music players such as Apple's iPod, are expected to generate largeamounts of advertising support. Last year, advertisers spent only $80 million onpodcast advertising, but that is expected to reach $400 million in five years, accord-ing to research firm eMarketer.

Whether streamed or downloaded, videos are inexpensive compared to a typical30-second commercial, and hold the promise of consumer interaction. Forinstance, a car featured in a video clip could contain a hyperlink that transports theviewer to the manufacturer's Web site or to another video with purchase informa-tion.

Consumers have been developing their own videos, many of which end up onsocial networking sites such as MySpace. Some videos have turned ordinary folksinto media sensations. "This is an opportunity for companies to add value," saidElizabeth Coppinger, vice president of video services for Real Networks. "Videos

“Consumer product companies,especially those with youth-ori-ented brands, are finding onlinevideo a cost-effective and trendyway to reach consumers.”

–Carl Geppert


May 2007 3


can be used to create community on the Internet."

Consumer product companies, including Colgate-Palmolive Co., Procter & GambleCo. and Unilever, have developed campaigns revolving around online video.Unilever's "Dove Evolution" video, a 75-second film created by Ogilvy & Mather,attracted millions of YouTube viewers.

Brokerage Piper Jaffray reports that social network sites like MySpace and YouTubeattract young audiences, a key market segment. About 60 percent of YouTube view-ers are between 25 and 34 years old.

“Videos need to be interesting and entertaining”, says Stephen Condon, vice presi-dent of Entriq, which provides video technology to media companies. "Web videosare the new media platform and it can help build an interactive relationship withconsumers," he says.

Last April, General Motors ran an online contest, inviting viewers to create ads forits new Chevy Tahoe SUV. It provided the video clips and music, allowing users tocreate the video. The contest ran for four weeks and drew more than 30,000entries.

Still, marketers are only reaching a small percentage of consumers on the Internet,especially compared to television, says Jeffery Miller, vice president of Telescope, atelecommunications company. Consumer product companies can develop a deeprelationship with consumers through video advertising, but they won't reach themasses that broadcast TV can, he says.

Losing ad dollars to the Internet, broadcast television is incorporating interactivefeatures into programming. Thanks to the success of reality shows that encourageviewers to vote on contestants such as on "American Idol," many other televisionshows have been built around this model, giving viewers a vested interest in theoutcome.

TV shows are also making it easier for viewers to cast votes by providing themwith codes allowing them to vote via mobile phones. Marketers can capture voters'area codes, which provides valuable demographic information. "It also providesimmediate interaction, rather than [making viewers] go to the show's Web site andvote," says Telescope's Miller.

Online videos still get smalleraudiences than TV commercials,but consumers watching tar-geted videos may prove to bemore loyal than a general audi-ence.


Instead of creating individual products addressing specific needs, electronics firmsare collaborating with entertainment companies on technical standards to create a"digital lifestyle ecosystem" that can distribute content to multiple devices.

While consumers' thirst to acquire and create entertainment content has createdtremendous growth for the technology and entertainment industries, those compa-nies are trying to make it less confusing for consumers to manage digital media.

For instance, technology providers are working with record labels to improve thecompatibility of media files by distributing unprotected MP3 files online or installingInternet connectivity in television sets that allows video downloads without a PC.

"The computing industry as we knew it no longer exists," said Satjiv Chahil, seniorvice president of global marketing for HP, at the 2007 International ConsumerElectronics Show in Las Vegas. "The consumer electronics industry used to besomething that computing companies had very little to do with or knew little about,but now we're looking at this industry from the standpoint of digital entertain-ment."

So far, that transition has been profitable. According to the Consumer ElectronicsAssociation, factory-to-dealer sales of CE products reached approximately $146 bil-lion in 2006, a 13 percent increase from 2005. TV sets accounted for nearly $26billion in revenue, up from $19 billion in 2005, and portable entertainment devicesales reached $9.5 billion, up from $7.3 billion in 2005.

And consumer sales have become important to PC manufacturers, according toTim Bajarin, president of research and consulting firm Creative Strategies. Bajarinsaid consumers account for about 12 percent of global technology spending, andwithin five years, that figure is expected to reach 30 percent.

But maintaining growth will depend in part on making technology easier to use—and allowing consumers to access their digital content from different types ofdevices, according to Scott Symers, chairman of the Digital Living Network Allianceand vice president of Sony Electronics' network system and architecture division.

"What's missing is not technology—we have plenty of technology," Symers said."What's missing is a transition plan for how consumers will use technology four tofive years from now."

For instance, Mary Francia, vice president of sales and marketing for Philips' con-sumer electronics division, said media files in incompatible formats—such as filesfrom Apple's iTunes music store not working on Microsoft's Zune music player—has hampered overall market growth.

"We haven't met the promise of delivering content everywhere," Francia said.

Another common problem is that files are encoded to play on specific devices. Amovie file intended for viewing on a portable media player with a three-inch screenhas to be compressed to reflect the player's limited storage capacity, but that filewould look terrible if displayed on a 50-inch flat-screen TV.

As consumers demand access to digital content on a variety of devices, technologyand entertainment companies are working on alternative distribution methods. In

4 Digital Insights


“Consumers are increasinglyfrustrated by the complexity andlack of interoperability of elec-tronic products, butmanufacturers and content pro-ducers are working together toaddress those concerns.”

–Tom Lamoureux

Connected Consumers Make Tech,Entertainment Firms CooperateBy Dave Pelland, Managing Editor, Technology Insider


mid-January, online DVD rental firm Netflix said it would allow subscribers to watchstreamed movie files on their PCs.

In addition, entertainment companies are holding preliminary discussions aboutoffering movie downloads in bundles that include multiple copies of the movie for-matted for different devices, such as a full-length DVD with a smaller file to betransferred to a portable media player.

"The content companies see the opportunities and are starting to pursue them,"said Symers. "Until now, content has been offered in [company-specific] silos, and'Take it or leave it' is not a compelling choice for consumers."

Similarly, technology companies are trying to make it easier to move content fromroom to room, such as saving a program to a digital video recorder in one room butwatching it in another. To enable such sharing, cable providers and hardware firmsare offering "whole-home DVRs" that allow content stored on one set-top box to bestreamed to another device.

Several technology firms are offering storage devices intended to serve as mediaservers on home networks, but such devices haven't taken off.

Digital rights management (DRM) software and piracy also are clouding the pic-ture—even when a content provider lets consumers shift digital files amongdifferent devices, the provider needs to be concerned about those files beingdownloaded online.

"Most of us will pay a fair price for fair use, but for most consumers, DRM justgets in the way," said Eric Kim, senior vice president of Intel's digital home group."If a product experience is not simple, consumers won't bother. Simplicity turns outto be a challenge because simple solutions require technological sophistication."

While content providers and tech firms make DRM more palatable to consumersand content easier to share, the distrust of the past is fading, according to GielRutten, senior vice president and general manager for the home business unit ofNXP Semiconductors.

"Technology and entertainment companies understand the importance of coopera-tion," Rutten said. "It's much better than it was three or four years ago."

May 2007 5


Technology companies are tryingto make it easier to move con-tent from room to room.


6 Digital Insights


Consumers Driving Hard in Storage Market GrowthBy Dave Pelland, Managing Editor, Technology Insider

As consumers' appetite for electronic media keeps growing, technology firms areresponding by introducing larger disk drives and other products to help consumersstore and manage their photo, music and video files.

"Customers are looking for ways to centralize, protect and manage their data," saidMaureen Weber, general manager of HP's personal storage business unit, at theStorage Visions Conference in Las Vegas, held in conjunction with the 2007International Consumer Electronics Show (CES). "They want to manage assetsstored on different devices, and to be able to get to their personal [content] easily."

Technology companies hope consumer demand for digital content will open a mar-ket for server-like storage products not only with higher storage capacities, but withsoftware to organize massive amounts of information.

Bill Gates, chairman of Microsoft Corp., said at CES that Microsoft was collaboratingwith HP on a product called the Media Smart Server. The device, scheduled forrelease in the second half of the year, attaches to a consumer's home network andaggregates files from the PCs and devices on the network, similar to how enter-prise servers save documents and spreadsheets.

The home server offers automated backup, and files stored on the device aredesigned to be accessible from any PC, set-top box or other device. Consumerswould be able to stream a movie file from a PC in one room to a television inanother, or easily move song files and digital camera images among PCs andportable players.

Similarly, consumers would also have the ability to access files stored on the net-work from outside their homes.

"If you want to grow the capacity, you don't have to think about volumes or differentdevices," Gates said. "You plug the new storage in and automatically the softwarewill see that storage and move the data around, so that any drive problems you runinto, it makes sure you're not losing information. You can get up to literally terabyteson this device."

The storage industry is locked in a perpetual arms race to increase the capacity ofits products. As a rule of thumb, the storage density of hard drives—the amount ofdata that can be recorded per square-inch of magnetic media—doubles annually,while the price per gigabyte falls 50 percent.

Because of the dynamics of storage, companies continually offer larger storagecapacities in hopes of maintaining market share. In March, Hitachi Global StorageTechnologies will release a one-terabyte (roughly 1,000 gigabytes) internal hard diskdrive for personal computers and video recorders for about $400, according to JohnD. Osterhout, director of business management in Hitachi's consumer electronicshard disk drive unit.

A one-terabyte hard drive can store about 250,000 song files, 350 movie files ormore than 500 hours of video. Such capacity may seem greater than anything mostconsumers will actually use, but Osterhout noted that similar sentiments wereexpressed when the industry crossed thresholds such as the introduction of a 3.5-inch, one-gigabyte hard drive in the early 1990s.

“As consumers produce more oftheir digital entertainment con-tent, they need more storagecapacity, and companies areresponding with high-volumestorage products that offerremote-access and securitycapabilities the same as enter-prise servers offer.”

–Gary Matuszak


May 2007 7


"Recording and storing high-definition content is going to lead to higher storageneeds," Osterhout said. "We used to think of personal storage as primarily beingpurchased for backup, but now it's becoming as important for sharing content as forbackup."

As with most aspects of the technology industry, consumer sales in storage isgrowing faster than the traditional base in IT products. According to research firmIDC, shipments of hard disk drives for consumer electronics products (barely exis-tent in 2001) are growing about 33 percent per year, while drives for traditional ITapplications are growing about 8 percent.

For instance, HP offers an expandable networked-storage Media Vault product in300- and 500-gigabyte models that allow consumers to back up files from multiplePCs and to stream entertainment content to different devices at the same time. Thelarger model lists for about $550, and both models have room for an additional harddrive.

HP's Weber said the ability to stream content from room to room, as well as to eas-ily search for specific files, can provide a more compelling product than storagecapacity alone.

"If we as an industry look at these products as just offering storage, and not as asolution, we're going to go the way of the dinosaurs," Weber said. "If we look atease-of-use and approach these as a consumer could approach them, we'll be a lotmore successful."

Storage manufacturers are also taking aim at the auto market with hard drives beingembedded in cars. Auto companies are incorporating hard disks into high-marginoptions such as audio systems. Hard drives are also being used to store mappingdata in advanced navigation systems that receive live information such as real-timetraffic or weather conditions over radio waves and alert drivers to potential delays.

"There's a lot of opportunity to take the next level of navigation beyond getting frompoint A to point B, and to [help drivers see] what's going on around [them]," saidScott Wright, manager of hard disk drives for Toshiba's storage device division.

Wright said that in Japan, half of new cars hitting the road have embedded harddrives.

Hard drives designed for automotive use generally offer about 40 gigabytes ofcapacity, and have greater tolerance for temperature extremes and road vibrationthan drives intended to sit in PCs.

"Consumer electronics products are altering car buyers' expectations," Wright said."As consumers become more familiar with portable devices and wireless technolo-gies such as Bluetooth, automotive electronics are evolving rapidly."

Sales to consumers are provid-ing faster growth rates forstorage equipment and softwarefirms than their traditional corpo-rate IT base.


As information security threats emerge faster than traditional methods can containthem, companies are adopting an "info-centric" approach to security based on pro-tecting data, not just restricting network access.

"For too long, security has focused on the [network] perimeter and not on protect-ing the information itself," said Art Coviello, president of EMC's RSA securitydivision, at the RSA Security Conference in San Francisco.

"It's like we've protected the moat and the castle, when we should have protectedthe king," Coviello said. "Static solutions are not enough for dynamic attacks. Weneed an inside-out approach to security that's based on [protecting] the informationitself."

Emerging approaches to security are a generational shift from methods that reliedheavily on signature-based products such as antispyware and intrusion-detectionsoftware to detect previously identified threats. Instead, enterprises are turning toencryption, pattern-recognition software and other technologies to safeguard dataas they link the protection of information to their business strategies.

"Security can't be a tactical afterthought or a technology that's bolted on as adefense," Coviello said. "Security can do more than protect the business—securitycan accelerate the business."

Different approaches to network security have evolved because the threats are get-ting worse. Sam Curry, vice president of security management for CA, says thatinstead of the stereotypical teenage hackers erasing data or defacing Web pages,professional crooks are launching high-quality attacks that harvest data sold to iden-tity thieves or use corporate servers to relay spam.

"Malware is constantly evolving," Curry says. "It's becoming more professionallyproduced and it's designed to resist detection and steal personal or corporate infor-mation.

"This isn't vandalism motivated by notoriety—once this stuff gets on PCs, it'sdesigned to stay there as long as possible. These attacks are motivated by money,and the more systems hackers can control, the more money they can collect."

Eugene Kaspersky, head of research for antivirus provider Kaspersky Lab, said thattargeted attacks are often designed to sneak onto a single corporate network orserver. The number of malicious software samples Kaspersky Lab examined in2006 increased threefold from 2005.

The evolving threats mean companies are trying to ensure information is kept safefrom unauthorized access while remaining available to those who need it. Forinstance, companies are encrypting data stored on servers, which helps reduce thechance of the organization being compromised if an attack hits.

Enterprises are also encrypting e-mail messages that enter and leave the organiza-tion. If an outbound e-mail appears to have sensitive information, the message canbe encrypted or even blocked at the message gateway.

8 Digital Insights


“Hackers used to be an expen-sive nuisance, but nowcompanies are being targetedspecifically by professionalthieves interested in stealing cor-porate or customer data, or usingcorporate servers to relay spam.”

–Tom Lamoureux

Data Protection Takes Center Stage in Network SecurityBy Dave Pelland, Managing Editor, Technology Insider


"Even if the corporate perimeter is breached, which unfortunately does happen, theattack is much less effective if the data is adequately encrypted and can't be ren-dered," says Greg Porter, a Pittsburgh-based manager in KPMG's IT Advisorypractice.

Better end-user education about information security is also expected to protectcomputers and networks, according to John Thompson, chairman and CEO of secu-rity provider Symantec.

Thompson said security firms need to give users better information about Websites as they connect. This can involve adoption of one-time-use credit cards to pre-vent accounts from being stolen after a transaction is completed; giving usersbetter information about a Web site's certificates to validate identity information;and providing third-party information about a site's reputation and business prac-tices.

"Users need better tools to challenge the sites they do business with," Thompsonsaid. "The need to protect identities today dictates that we help our customerswith better information about sites, security and reputation."

EMC's Coviello said technologies such as pattern-recognition software that moni-tors network traffic and establishes a baseline of normal activity have madenetwork defenses more dynamic. This is expected to give companies the ability todetect abnormal behavior on the network, such as the installation of spyware orother unwanted malicious code.

For instance, an online banking customer logging in with a computer they've usedbefore could be granted access with just their password and by recognizing animage displayed on their screen. But that customer would have to answer a seriesof security-related questions if he or she deviates from their normal usage pat-terns, such as by using a different PC or logging in from outside their homecountry.

Some companies are exploring so-called "white list-" based approaches that specifywhich applications will be allowed to run on the network. Unlike antivirus or intru-sion-detection software that identifies programs as malicious (using a "black list" ofknown threats) and prevents them from running, white list programs will only allowapproved programs to run.

"Security is less about what the widget of the week is—it's more about a philoso-phy that gives companies the confidence that their IT systems and data are secure,and can be reached only by those people who should be reaching them," says CA'sCurry. "If there's not a business reason for someone to access some data, thataccess needs to be turned off."

May 2007 9


Technologies that monitor net-work traffic and normal activityhave made network defensesmore dynamic and better able torespond to rapidly evolvingthreat.


Corporate security professionals are trying to regulate the internal use of flashmemory sticks, digital music players and other portable storage devices that canprovide an unguarded route for documents to leave an enterprise.

The growing ability of workers to take and use data outside network boundaries israising concerns about information being misappropriated or exposed if a portablestorage device is lost.

For instance, a California university in November reported the theft of a portabledisk drive containing personally identifiable information for 2,500 students andapplicants. In September, health care providers in Tennessee and Michigan eachreported the loss of flash drives containing more than 4,000 names and SocialSecurity numbers.

"Data used to be locked in sealed file cabinets at night, but those days are wellpast us," says Dennis Szerszen, senior vice president of security providerSecureWave. "Now employees are demanding mobility and portability, and remov-able media scares the pants off a lot of companies."

In addition to the threat of losing sensitive information, enterprises are also afraidthat a worker who joins a competitor will take data with him or her; they are alsoconcerned that documents transferred to portable storage may be accessiblebeyond the dates specified in a company's retention policies.

While the amount of information that can fit on a flash drive varies, a typical 2-giga-byte flash drive, available in mass-market retailers for under $50, can easily storethousands of word-processing documents and spreadsheets.

The problem is multiplied with hard-drive equipped music players, which can beused for document storage and offer capacities up to 80 gigabytes.

"These devices give someone the right to bypass your security and store and trans-mit data without being detected," said Richard LeVine, global leader, digital rightsmanagement and intellectual property rights management for Accenture, at theRSA Security Conference in San Francisco.

LeVine said most information security managers would probably like to banportable storage devices outright. But the popularity of flash drives and music play-ers make such bans tough to enforce in a corporate setting. (Military organizationsoften apply epoxy to USB ports to prevent unauthorized devices from beingattached to PCs.)

According to John Geldman, senior level technologist on Lexar Media's emergingproduct team, flash-based storage devices are becoming extremely sophisticated.Along with memory, flash drives also have small processors and often come withbackup, synchronization and antivirus software. They can contain operating systemsthat give drives the ability to run programs such as Internet telephony or virtual pri-vate network clients.

"The upside is that workers can be more productive, but the downside is that thedevices can carry more risk," Geldman said. "Like a PC, USB flash drives can behacked."

1 0 Digital Insights


“Companies need to protectdata first and foremost, butmany also want to find a way tomeet employee demands to useportable storage devices fornumerous mobile data storagerequirements.”

–Wade Loo

Companies Aiming to Plug USB Data LeakageBy Dave Pelland, Managing Editor, Technology Insider


According to the Consumer Electronics Association, factory sales of flash mediaproducts to dealers are expected to reach $4.7 billion in 2007, up from an esti-mated $3.4 billion in 2006.

Producers of flash memory drives hope the inclusion of security software will helpthem avoid the commoditization of their products in the face of falling prices formemory. According to Nomura Securities, indicated that the spot market prices for4-gigabyte NAND modules fell nearly 25 percent between the second week ofDecember 2006 and January 2007.

To help reduce the risk of data loss—while still allowing removable media—compa-nies are installing encryption and management software on flash drives, PCs andnetwork appliances to oversee the use of portable storage devices.

"Enterprises are paying a lot more attention to endpoint policy management, andextending [those concepts] to applications and devices," says SecureWave'sSzerszen. "They're making administrative decisions about the devices with whichend-users can access the network and trying to eliminate a lot of security risk."

For example, companies can create a "demilitarized zone" between the networkand a portable storage device in which software monitors the flow of informationbeing stored on flash drives. The software can prevent sensitive data from beingcopied to unapproved devices, according to Ron LaPedis, product marketing man-ager, security enterprise products, for storage producer SanDisk.

When a flash drive is plugged into a laptop, the device checks with a security appli-ance to make sure it is assigned to an active employee with appropriate access. Ifnot, the device can be prevented from accessing the PC or data stored on thedevice can be erased.

Software also tracks the documents being transferred to and from an authorizedflash drive, and compares that activity with an organization's business rules. Forinstance, a chief financial officer may be allowed to download spreadsheets or pre-sentations that other employees would be blocked from copying.

"If someone is downloading a lot of Excel files and you're not seeing those filesbeing updated or brought back to their PC, that can trigger rules and raise somesecurity flags," LaPedis says.

Similarly, the Trusted Computing Group, which develops open, vendor-neutral secu-rity standards, is working on mutual authentication protocols that would create aframework for specifying access control and encryption between flash drives andhost devices (such as desktop or laptop PCs). For instance, this would allow com-panies to link flash drives to specific laptops.

Szerszen says the use of flash-drive encryption remains in the early stages, withadoption first emerging among financial services and health care firms, as well asgovernment agencies.

"The demand is there, and companies are starting to provision end-users withremovable media with embedded encryption and sometimes biometrics," he says.

May 2007 1 1


Producers of flash memorydrives hope the inclusion ofsecurity software will help themavoid commoditization.




Record labels are redefining the "album" as a digital bundle that often includes ring-tones and ring-back tones, videos and games. They hope such content will shiftconsumer demand away from single-track downloads—currently dominated byApple's iTunes Music Store—to sales through mobile carriers and subscriptionservices.

"Our challenge now is finding new product configurations," said Rio Caraeff, generalmanager, Universal Music Mobile North America, at the Digital Music Forum organ-ized by Digital Media Wire and the Consumer Electronics Association.

"Is the album relevant in the digital future?" Caraeff asked. "The question we'redealing with is what the products of the future are going to be for us."

Though digital content sales account for about 20 percent of domestic revenue,record labels are searching for new product configurations because sales of down-loaded music have failed to keep pace with declines in CD sales, which peaked at$13.2 billion in 2000, according to the Recording Industry Association of America.

At the end of 2005, the latest year for which figures are available, CD sales were$10.5 billion, while downloaded single-song sales were $367 million and down-loaded album sales were $13.6 million.

Mobile content, including ringtones, full-length songs and videos, accounted for$422 million in sales.

As the recording industry shifts toward digital distribution, labels are experimentingwith products and formats that extend beyond a three-minute song file or 30-sec-ond ringtone.

Thomas Hesse, president of global digital business and head of U.S. sales for SonyBMG Music Entertainment, said more than 75 digital-content products were cre-ated for Justin Timberlake's CD releases in 2006 and 2004. Products included"clean" and "explicit" versions of digital tracks, ringtones and wallpaper images forcellphones.

"Ultimately, this is about selling music in different configurations, across differentwindows at different price points to different clients," Hesse said. "Some cus-tomers [want] all-physical [products], some all-digital, and most a mix. But thereneeds to be a coherent approach.

"The digital revolution is not a gradual change. It's not a change from one format toanother—it's more fundamental than that."

The music industry says it's pleased with sales growth for authorized digital music.According to David Card, vice president and senior analyst at research firmJupiterKagan, legal downloads generated an estimated $800 million in sales lastyear. JupiterKagan projects the amount to double over the next five years.

Digital music subscription services such as RealNetworks' Rhapsody service,which allows consumers to download music to PCs and transfer it to portablemusic players, accounted for an estimated $180 million in revenue last year, whichis expected to reach $750 million in five years.

In addition to promoting product bundles, record labels hope to introduce variablepricing models designed to increase the price of new or popular releases andreduce the cost of back-catalog downloads.

To make digital songs easier tofind, wireless carriers arestreamlining handset menus soconsumers can find and ordertracks with fewer clicks.

Digital Music Retailers Hope to Bundle SuccessBy Dave Pelland, Managing Editor, Technology Insider


May 2007 1 3


While record labels have advocated variable pricing, Apple has resisted it, sayingconsumers prefer the simplicity and predictability of song files being offered for 99cents and digital albums for about $10.

In a pilot project, PassAlong Networks, which offers music downloads and operatesmore than 40 download services for consumer brands, plans to offer songs fromartists managed by Canadian firm Nettwerk Music, including Sarah McLachlan, AvrilLavigne and Barenaked Ladies, for prices ranging from 29 cents to $1.39 per down-load.

Dave Jaworski, co-founder and CEO of PassAlong Networks, said prices for MP3files from these artists will rise and fall depending on each track's popularity.

"This is a period in which the music industry has a chance to experiment," Jaworskisaid. "We're not sure where all of this is going to go, but we'll let the marketdecide."

But music industry executives acknowledge that two factors are inhibiting growth:the complexity of buying music through a wireless handset and the inability to playdownloaded songs on all portable devices.

In response, wireless carriers are streamlining handset menus so consumers canfind and order tracks in two or three clicks, and are bundling related content soconsumers can order different products in a single transaction.

"One key in the mobile space is making the purchase experience really simple,"said John Burris, vice president of wireless data at Sprint-Nextel Corp. "If someonewants the latest Akon song, a ringtone and a ring-back tone, they're not going togo to three retailers for that. The more that we can make it easy for people to buythis experience, the more we'll see this market take off."

The issue of a protected universal format is a tougher challenge because, from therecord labels' standpoint, the convenience of transferring digital content to severaldevices needs to be balanced with not allowing those copies to be distributedonline.

Another challenge for wireless music retailers is "sideloading," which describes con-sumers transferring existing song files from PCs directly to their handsets.

"There's a behavior shift going on now, so anything that encourages people toenjoy digital music on their phones is inherently a good thing," said Matt Schwartz,manager of mobile operations and business development for Verizon Wireless.

"That music could come from piracy networks, so it's a double-edged sword, butnow the benefits outweigh the negatives because if consumers don't adopt thisbehavior, this market won't work at all."

Handsets' physical constraints may also inhibit wireless carrier music sales. Thequality of sound is lower than for devices specifically designed for music, and theperceived awkwardness of using a cell phone and a portable music player that havebeen melded together is another hurdle.

In addition, "if someone is using a phone to listen to lots of music, their ability touse the phone as a phone will be affected due to limited battery life," says SanjayaKrishna, a Tysons Corner, Va.-based senior manager in KPMG's IT Advisory practice.

“Record labels are searching fora format that can replace theCD, and they're experimentingwith bundles that combinesongs, ringtones and imagesinto a single downloadable prod-uct.”

–Carl Geppert




Another factor that could influence the American online music market is the intro-duction of Apple's iPhone, scheduled for release in June. The device, which will beoffered by AT&T's Cingular, is expected to allow consumers to download digitalcontent to a wireless handset without a carrier.

"Apple is playing a role we haven't seen thus far in the digital music ecosystem,"Krishna says.

"They're going to be a branded hybrid content aggregator and third-party host fortheir wireless carrier partner, enabling music to get on to their own end-userdevice."

To make digital songs easier tofind, wireless carriers arestreamlining handset menus soconsumers can find and ordertracks with fewer clicks.


May 2007 1 5


As competition intensifies between communications firms and cable companiesover bundled offerings, voice and wireless carriers are offering services that moni-tor consumers' homes on cell phones and Web browsers using cameras andsensors.

"Broadband has become a commodity, so service providers are looking for ways todifferentiate themselves by offering value-added services that generate revenueand reduce churn," says Reza Raji, president and CEO of Palo-Alto, Calif-basediControl Networks, which is testing remote monitoring technology with voice andwireless carriers, cable providers and security companies.

"This is a very sticky, addictive service," Raji says. "We have a subscriber base thatlogs on multiple times a day to check their family and property."

Remote monitoring services are a part of a broader strategy in which telecomfirms, wireless carriers and cable providers offer integrated service bundles thatoften include each other's traditional products. Such so-called "triple-play" or"quadruple-play" offerings often combine voice, video, Internet access and wirelessservices on a single bill.

Service providers hope that adding remote monitoring to the mix will help cus-tomer retention. For example, if customers can monitor their homes through a Webconnection or a wireless handset screen, it increases the value of the broadbandconnection and cellular services.

Remote monitoring services generally include video cameras and sensors. Thecameras provide live images inside the customer's home or yard, while the sen-sors allow users to check conditions such as the temperature or when a door orwindow is opened. Systems can be programmed to send text alerts when motionis detected or if a sensor detects water leaking from an appliance.

"You put a bunch of simple sensors around the house and if you never hear fromthem, great," says Bill Diamond, president of New York-based Xanboo, which pro-vides monitoring technology for AT&T's Home Monitor, Motorola's HomeSight andseveral international carriers. "If you do, at least you know there's a problem."

The average hardware cost for basic systems generally runs about $100 for a cam-era and a couple of sensors, while the monitoring service costs about $10 to $15 amonth.

"Basically this is a play on offering advanced services over newer phones," Diamondsays. "We're offering an application for controlling and monitoring your home, andthe system's pretty much plug-and-play."

Service providers say remote monitoring has moved past technology enthusiastswiring their own equipment toward a broader market of consumers curious aboutwhat's going on when they're not home.

According to research firm Parks Associates, the self-monitoring market in theUnited States is expected to generate about $75 million in revenue for hardwareand services this year, with services accounting for about $12 million of that total.Over the next five years, Park expects the overall self-monitoring market to reach$400 million annually, with services reaching $170 million.

Carriers Cast Eyes on Remote Monitoring ServicesBy Dave Pelland, Managing Editor, Technology Insider

“Carriers allowing customers tomonitor their homes remotelywill generate revenue from themonitoring service, but the realbenefit comes from increasingthe value of that customer’sbroadband connection and wire-less service.”

–Carl Geppert




"[Remote monitoring] has less to do with the revenue [than helping] endear the car-rier to its customers and making the carrier's services more sticky," says BillAblondi, director of home systems research for Parks Associates. "There's enoughcompetition for video, phone and all the variations, and here's another service theycan add to the bundle."

Diamond and Raji say popular uses for remote monitoring include people with eld-erly parents living alone, or latch-key children at home after school, owners ofvacation homes and consumers interested in checking in on their pets.

Over the next couple of years, remote monitoring services are likely to add mod-ules such as tracking appliances' energy use and security-related technologies suchas allowing neighbors to share video images for when a out-of-town homeownerhas neighbors keep an eye on his home.

Remote monitoring is also likely to add pattern-recognition software that alertshomeowners if specific problems emerge.

"If the camera sees someone entering your house who's over five feet tall insteadof your kid, [remote monitoring] could send an alert that prompts you to look at thecamera," says Ablondi. "That could be the kind of enhancement that mainstreamusers would enjoy."

Diamond says the adoption of broadband services in the United States and therelease of cell phones with high-speed video capabilities are helping remove thehurdles the remote monitoring market has faced in recent years.

"Being able to monitor your home on a mobile phone is really what's going to drivethis market," Diamond says. "It's cool if you can do that on your PC, but if it wereonly the PC, [the service would be] kind of geeky. The fact that you can do this ona phone changes a lot."

Users interested in tinkering with the software can combine a series of events,such as when the front door opens, the lights can be turned on in the front hallwayand a camera can take a picture and e-Mail it to the homeowner.

Providers also hope making the technology easier to use will also promote adop-tion. For basic systems, installation is a 15–minute process that involves installingsoftware on a PC, connecting a device into a router and plugging in the sensors.

"Making something that does all of this is one thing, but making it so someonecould just plug it in and use it is the hard thing," says Diamond. "We're hoping thisis moving past the hobbyist audience. We don't want to be an early-adopterproduct."

Popular uses of remote monitor-ing include people with elderlyparents living alone or latch-keychildren at home after school.


KPMG’s Information, Communications &Entertainment PracticeIn an industry characterized by rapid change, disruptive innovation, global competition,

and ever-changing business models, KPMG’s Information, Communications & Enter-

tainment practice helps companies measure, manage, and mitigate their financial,

operational, and regulatory risks. Our partners and professionals are deeply experi-

enced in serving global technology industry leaders in the provision of audit, tax,

and business advisory services. Executives in the Communications, Electronics,

Software, Business Services, and Media segments call on KPMG when they require

advisers who understand their businesses and their unique business issues. Our

people are equipped to “hit the ground running” to help mitigate risk and solve

complex business problems.

To learn more about KPMG’s global Information, Communications & Entertainment

practice, please contact one of the following practice professionals:

Gary Matuszak

U.S. National Leader, Information,

Communications & Entertainment

[email protected]

Carl Geppert

U.S. Sector Leader, Communications & Media

[email protected]

Jim Bickell

Audit Sector Leader, Communications

[email protected]

Rusty Thomas

Tax Sector Leader, Electronics,

Software & Business Services

[email protected]

Tom Lamoureux

Advisory Sector Leader, Electronics,


[email protected]

Dut LeBlanc

Tax Sector Leader, Communications

[email protected]

Wade Loo

National Segment Leader, Electronics

[email protected]

Brian Allen

Audit Sector Leader, Software &

Business Services

[email protected]

Tony Castellanos

Tax Sector Leader, Media

[email protected]

Richard Hanley

Transaction Services Leader, Electronics,


[email protected]

Rob Ernst

Transaction Services Leader,

Communications & Media

[email protected]

Audit

Tax and Advisory


All information provided is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although we endeavor to provide accurate and timely information, therecan be no guarantee that such information is accurate as of the date it is received or that it will con-tinue to be accurate in the future. No one should act upon such information without appropriateprofessional advice after a thorough examination of the particular situation.

© 2007 KPMG LLP, a U.S. limited liabilitypartnership and a member firm of the KPMGnetwork of independent member firmsaffiliated with KPMG International, a Swisscooperative. All rights reserved. Printed in theU.S.A. KPMG and the KPMG logo areregistered trademarks of KPMG International,a Swiss cooperative. 17700SVO

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