Upbeat Over-the-Top Projections Accompany New Supplier Moves

October 30, 2009 – The market for over-the-top service providers appears poised for fresh growth and competition, led by new developments from alternative set-top box provider Roku and Web-to-TV service Boxee.

In late October, Roku expanded its line of set-top players from one to three, and Boxee readied a new interface for launch this month. Both companies are also striking new content deals for their services.

These deals, as well as the service upgrades, are fueling what continues to be a very small niche market for alternative devices. While Roku and Boxee report significant growth, the two players combined account for fewer than one million users.

Lending credence to their growth aspirations, a recent report from research firm The Diffusion Group found the market for Internet video to the TV will grow nearly six times in the next five years. By 2014 revenue from over-the-top services will reach $5.6 billion, the group found.   

Roku is doing its part to capture a share of that. The company introduced two new boxes in October. The new versions include a higher-end model that lets users connect the device wirelessly to their routers and a lower-end model with just standard-definition streaming. In all cases the Roku boxes allow viewers to watch Web video on a television set.

As for Boxee, while the Web-to-TV service counts nearly 700,000 users, many of those customers have complained about the clunkiness of the user experience. Navigation is still difficult on Boxee, and finding content can be an exhausting process. The company's vice president of marketing Andrew Kippen said Boxee is aware of the concerns and has hired an executive to focus exclusively on improving the user experience. The planned November upgrade will give users the ability to search for content for the first time and will offer a smoother experience for navigation, Kippen said.

Despite a very public spat with Hulu earlier this year, in which the network-owned site pulled all its content from Boxee, the service continues to grow. Boxee landed an additional $6 million in venture money in June in a round led by General Catalyst, and its user base has jumped from just 100,000 at the start of the year. The company, with plans to shift from "alpha" to "beta" testing later this year, recently expanded computer access beyond Macs and Linux machines to include Windows-based computers.   

Boxee is also adding more content. Boxee's most notable content partner is Major League Baseball, which came on board in June with its online streaming of games. Boxee also added the Web series "Dorm Life" and continues to pursue new content partnerships, Kippen said.

Roku, too, is lining up new programming to go with existing marquee partners Amazon, Netflix and Major League Baseball. Once the new boxes are introduced in the market, Roku plans to focus on its upcoming channel store, through which it will offer a new range of content from smaller niche Web providers like blip.tv, TWiT.tv and Revision3.  Roku, which prices its main HD/SD box at $99.99, has been steadily growing in penetration and counts well over 100,000 users.

"The over-the-top market continues to grow, and there is no question Netflix has been a primary driver," said Will Richmond, analyst with VideoNuze.com. "The ones that have surfaced as having the most success are Xbox, which is a gaming platform now integrated for TV viewing. Roku is having a good degree of success with Amazon and Major League Baseball. The big news here is that consumers are continuing to look for choices in how they bring video to their homes. These new over-the-top devices offer real choice."

What's still unknown is whether the people trying out Roku, Xbox, AppleTV and Boxee are using those services to supplement or replace their existing cable and satellite subscriptions, Richmond added.

The Diffusion Group has found that, so far, consumers who use over-the-top services are supplementing existing pay TV services and are drawn in large part to the streaming movie capabilities many of these alternative devices offer.

This year, pay-per-view services will account for 96 percent of global over-the-top revenue, with subscription revenue earning only 4 percent of the revenue mix, senior TDG analyst Colin Dixon said. By 2014, however, subscription revenue will account for 31 percent of the mix, according to TDG.   

"Current hardware trends [are] fueling this growth, specifically the ongoing shift to broadband-enabled TVs and the rapid diffusion of ancillary Web-enabled platforms such as game consoles, Blu-ray players and hybrid set-top boxes," Dixon wrote in a recent report. "Widespread penetration of such platforms will set the stage for a rapid uptake of Internet-to-TV video services, both pay-per-view and subscription-based."