PC vs. CE Page 2

"Microsoft is a software and services company at the core," says Xbox Live marketing director Aaron Greenberg. "Both Xbox and PlayStation 3 are really powerful, they're both high-definition, they both have great games, but the key difference is software and services. Sony is a traditional consumer-electronics company. The fact that they've built Blu-ray into the PS3 and have really been pushing and investing heavily in the format speaks to their strategy."

FAST COMPANIES The videogame arena is in many ways a microcosm of what's going on in home entertainment today. Over the past 5 to 10 years, traditional consumer-electronics companies such as Sony and Panasonic have seen their turf invaded - with varying degrees of success - by computer companies such as Microsoft, Apple, Dell, and HP and by smaller, nontraditional consumer-electronics companies such as TiVo, Kaleidescape (movie-storage servers), and Elan Home Systems (interactive touchpads for integrating home A/V gear). These PC makers and nontraditional CE companies have been introducing innovative products that take advantage of the major advances in digital technology: hard-disk-based portable audio and video, home music and video servers, home automation and networking, and broadband content delivery.

Most of the tech innovations of the past 10 years - real steps forward, as opposed to refinements such as higher-rez screens - have emerged from an IT approach. (For a timeline of the past decade's most innovative home-electronics gear, see "Ten for Ten," below.) When it comes to home entertainment and how we enjoy it, the two most revolutionary pieces of hardware of the last 5 years are both hard-disk-based products with rabid fan bases. The most celebrated is, of course, Apple's iPod, which you might have heard has irrevocably changed the way we listen to and store our music. The other is TiVo, which has redefined how we watch and store TV shows (and was such a success that companies like Motorola and Scientific Atlanta spun its basic concept into DVR set-top boxes for cable companies). But neither of these products would be much more than a sleek piece of hardware without its elegant, user-friendly software - iPod has iTunes, which seamlessly integrates with an online music store, and TiVo's software is so kind as to recommend shows it thinks you might enjoy based on the fact that you've been recording Bela Lugosi movies and Sanford and Son reruns.

"There's no question right now that the innovation is occurring in new entertainment products that use convergence technology," says Michael Malcolm, founder, chairman, and CEO of Kaleidescape. "The center of gravity is shifting a little closer toward Silicon Valley than Tokyo. At Kaleidescape, our software and hardware engineers all came out of the computer industry. We had to learn audio and video - and there's a lot to learn. But I think it's easier to make that transition than to go in the other direction - coming out of the traditional A/V world and learning how to build computer systems."

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