Web-Linked HD Sets Contribute To Chaos Hitting TV Marketplace

Yaron Raz, director, video solutions marketing, BigBand Networks

Yaron Raz, director, video solutions marketing, BigBand Networks

January 4, 2010 – Could 2010 be the year of the Internet TV?  Hardly, if one looks at raw numbers, but, it could be the beginning of a new force behind a reordering of the programming marketplace if consumer electronics companies succeed in driving consumer demand for their new devices.

The first quarter is bookended by two events that could be barometers for this new type of device, whose impact spans everyone from operators to movie studios to set-top-box (STB) vendors.

The first event is an obvious one: The Consumer Electronics Show in January, where dozens of Internet TV models were to be announced as ScreenPlays went to press. The second is college basketball's March Madness, perennially one of TV's biggest draws but now a major driver behind consumer interest in over-the-top (OTT) viewing.

In 2003, the NCAA began offering live audio and video streams of March Madness. In 2008, the line-up expanded to all 63 games, including the Final Four – all free, thanks to sponsors such as AT%26T. (The tennis U.S. Open and golf's Masters are among the other sports content available online for free.)

March Madness' online viewership skyrocketed between the 2008 and 2009 playoffs: 7.52 million unique visitors in 2009, marking an increase of 58 percent. The amount of content viewed – 8.6 million hours – increased 75 percent.

But that viewership is relatively small compared to the number watching on TV. Internet TVs could help close that gap by providing an alternative to PC viewing – not just among basketball and other sports fans, but also for audiences of everything from movies to TV series. One attraction: Although PC monitors keep getting bigger, TVs remain much larger, making for a better, not to mention a more communal, viewing experience.

 "For the consumer, it's a way to get online content to the TV directly, without going through a PC," says Michael Inouye, an ABI Research analyst. "So this really isn't tied to the service provider. It's more of an over-the-top platform."

10 Million and Growing

The installed base of Internet TVs currently is relatively small, but some analysts predict healthy sales over the next few years.

"We project that worldwide sales will grow from 10 million units in 2009 to more than 80 million units in 2013," says Kurt Scherf, vice president and principal analyst at Parks Associates.
The installed base includes some sets that were sold years ago. For example, toward the end of a recent meeting with Panasonic, Jeremy Thorpe – founder and CEO of Latens, whose products include cable and IPTV middleware – mentioned the Panasonic TV that he bought in late 2008.

"I asked them jokingly, 'So when are you going to upgrade my TV?' They said, 'Probably in February.'''

Thorpe's TV already has an Ethernet port, so the upgrade would consist of a software stack and applications that let him find and view content delivered over the Internet. His set also isn't unusual in that regard.

"Many current TV models are nearly capable of being networked, at least for basic functions," ABI's Inouye wrote in a July 2009 report. "Basic networking often only entails additional memory, Ethernet support at the chip level (and active port) and software – the hardware component being relatively inexpensive."

For other consumers, Internet TVs will take the form of a "regular" set that gets Internet access via another device, such as a game console or an STB. Future TVs also could rely on HDMI (High Definition Multimedia Intreface) 1.4, which lets devices such as STBs share their Internet connection with TVs.

The myriad options are worth noting because they affect OTT's addressable market, revenue potential and competitive impact, as well as where OTT fits in with other home-networking initiatives and technologies.

"Sometimes it will make more sense for the TV to have direct internet connectivity – for example, via Ethernet or Wi-Fi – but sometimes it will make more sense for the Internet connectivity to go to another device in the home network first for processing, such as an STB, PC or media server," says Leslie Chard, president of WHDI, LLC, the organization promoting the Wireless Home Digital Interface standard.

"One of the advantages of making use of these 'edge' devices is that they are typically cheaper and get replaced more often than the TV," Chard says. "This makes it easier for consumers to upgrade the technology in these devices then if they had to replace their TV."

Some OTT content providers are hedging their bets. Netflix, for example, is in Internet TVs from vendors such as LG and Sony, as well as in game consoles such as the Xbox 360 and Blu-ray players from Samsung and Sony.

"Netflix's goal is to be ubiquitous: on all the devices that get to the TV and the TV," says Steve Swasey, vice president of corporate communication.

Under the Consumer Radar?

Regardless of exactly how it's accomplished technologically, this emerging option for accessing online video has far-reaching implications. For example, if MSOs and telco TV providers can use Internet TVs and IP networks to deliver content, then some households might need only one or no STB, reducing the operator's overhead costs. That's also an example of how Internet TVs affect STB vendors.

The market for both Internet TVs and OTT content also depends on how much of a premium consumers are willing to pay for those sets.

"In the last study we conducted, consumers indicated that they would pay more than a $50 premium for a Web-connected TV," says Parks' Scherf. At least one manufacturer, Vizio, has decided not to charge more for its new line of connected TVs, now slated for rollout in February, on the assumption that there's a bigger payoff to be had by ensuring rapid scaling of connected TV penetration.

"Scale is going to be really important when we start deploying content and services to end users," says Matthew McRae, vice president of products at Vizio. "We thought if we could be one of the first TV companies to have millions and millions of connected TV sets out there, then when we turned around and started talking to content companies, the service companies, we would become a more important partner going forward."

In any event, consumers' willingness to pay a premium will likely depend on the content that's available.

"I think that consumer interest has been mixed," says WHDI's Chard, who formerly was president of HDMI Licensing, LLC. "A lot of Internet-ready TVs are attempting to create small walled gardens, where users can access a few selected sites that have partnered with the TV vendor."

But how many consumers know that Internet TVs even exist? If reviews are any indication, not many.

"The jury is still out as to how much perceived value these bring to the end user," says Rich Phipps, product manager for North America cable STBs at Thomson. "I was going through some reviews of these TVs, and it's interesting that oftentimes the reviewers don't even mention the Internet connection."

Who's in Control?

As Internet sources bring more content to TVs, the influx creates an opportunity for tools that help viewers navigate all of that content. Those tools also affect the competitive landscape.

For example, suppose that a TV vendor bundles in a navigation tool branded by it or its OTT business partner. In the home, which takes precedence: the TV's navigation tool or the one provided by the customer's multichannel provider?

"That's going to significantly affect what content I end up getting," says Yaron Raz, director of video solutions marketing at BigBand Networks. "When I press 'On Demand,' I'm sure that Comcast would want me to get their on-demand library rather than some OTT [provider's] on-demand library."

If an MSO or telco TV provider views the TV's navigation tool as a competitive threat, it almost certainly would look for ways to thwart it. For example, if it can't block the tool's access to OTT programming, one alternative could be to develop its own tool that's easier to use, offers access to a wider range of content or both.

In a sense, Internet TV navigation tools are like Internet portals a decade ago: Give bewildered consumers an easy way to find – or, better yet, have suggested to them – content that interests them, and then hope that most of them won't wander to other providers.

"A lot of effort will be spent on navigation and ease of use to capture the subscriber," Raz says. "If you control the navigation, you control the whole content consumption."

Navigation tools also are among the hardware and software that will blur the line between content that's delivered over traditional RF channels and IP. For example, a navigation tool could put OTT content alongside RF content in the channel guide, while another product – such as Ipera Technology's video enhancement engine – sits in the network or STB and formats Internet video on the fly so that it looks good on a big-screen TV.

"You can watch the BBC followed by YouTube and get as good a quality as possible on screen regardless of the bandwidth or original production values," says Greg Ellis, Ipera's vice president of business development.

Where's the Business?

If Internet TV owners are satisfied with the selection of OTT content, will some drop the video portion of their triple- or quadruple-play bundle? Whether that's a problem or an opportunity depends on what the subscriber does next and on the operator's business model.

For example, although video typically contributes the biggest share of revenue in a triple-play subscriber's ARPU, broadband usually has the highest margins. If a subscriber drops video but then upgrades to a faster broadband tier because he needs the speed for an optimal viewing experience, does that upgrade offset enough of the lost video revenue?

"Losing the video subs would be devastating," says BigBand's Raz. "I don't think you can make up for that with [subscriber upgrades to] higher Internet speeds."

Content ultimately will determine how many Internet TV owners drop video service. Penny-pinchers might make do with free OTT content, while others might be willing to pay a company such as Apple for ‡ la carte OTT access only to networks they want, instead of tierfuls they don't.

One thing is clear: Programmers and other content providers have to proceed carefully, lest they risk cannibalizing other revenue sources – such as DVD sales and fees from MSOs, telco TV providers and satellite operators, whose distribution will remain critical for years to come.

"The content guys will be careful about how much they put out there," says David Grubb, vice president for technology and business development at Motorola. "That said, there will always be some class of customers for whom that amount [of OTT content] is enough. So you will have customers who cut the cord and go with OTT video. We see that as a niche, not a mainstream phenomenon."

Who Cares About Quality?

Multichannel operators have several options for co-opting the OTT threat. One way is by getting into the content business, such as by buying or partnering with one or more content providers, as Comcast is doing with NBC Universal. Depending on the operator's strategy, the competitive environment and the types of TVs its customers have, that content could be delivered via RF, OTT or both.

Operators also could work with programmers to limit what's available OTT, as some operators are already doing to mitigate the PC-viewing threat. One example is Cablevision: In June 2009, it cut a multi-year deal with the YES Network that makes live Yankees games available online only to broadband customers who also have at least expanded basic video. That strategy could be applied to Internet TVs, too, as a way to discourage subs from dropping the video portion of their bundle. Indeed, this strategy is already implicit in the cable industry's OTT TV Everywhere model.

Yet another option is to focus on quality of service (QoS). For example, the operator could charge OTT providers, OTT viewers or both for QoS- and bandwidth-related guarantees that, say, enable 1080p HD or make the viewing experience comparable to RF-delivered video. Or if the operator has an OTT content division or partner, it could ensure that those streams get priority.

"One could imagine a situation where an operator manages its network so that it provides better QoS for its own video than for video coming from outside its network," says Latens' Thorpe.

But is quality a decisive factor for consumers and content providers? Not always, judging by sites such as YouTube, whose popularity shows that many consumers are willing to put up with low-quality video simply because they find the content compelling. And on the content provider side, many local TV stations are using Skype for live remotes because it saves money, even though they look as if they were shot with a cell phone.

At the same time, some content providers are ratcheting up the quality of their Internet-delivered programming – not in terms of the video, but rather in the actors, cameras and lighting. Paramount Pictures, for example, reportedly spent up to $3 million to produce a movie, "Circle of Ei8ht," that was distributed via MySpace, where it attracted about 5 million views.

Such investments further blur the lines between IP and RF video. If consumers start to perceive the Internet as a source of high-quality productions, they're more likely to consider buying devices and services that let them watch that content, including Internet TVs.

RF and IP, Side-by-Side

Regardless of whether it's because of video quality, production values or both, the competitive environment changes when consumers notice less difference between IP video – including OTT content – and what's delivered over RF.

In the late 1970s and 1980s, cable helped level the playing field between VHF and UHF stations by putting them next to one another on the dial, giving the latter a wider audience and a way to escape the stigma that came with inhabiting the spectral hinterlands. At the same time, satellite made low-power UHF stations such as WTBS into national brands.

Time will tell whether the blurring of RF and IP will do for OTT content providers what cable and satellite did for UHF. But what is clear is that the line will blur, a trend that affects everything from the core network out to the STBs.  

"I won't even know whether I'm consuming content over IP or over cable," says BigBand's Raz. "That's going to drive a lot of the decisions and architectures that cable providers are making today as far as supporting IPTV."

For example, having RF and IP – including OTT – in separate silos means higher cap ex, which undermines the operator's ability to price its services competitively. As more consumers buy Internet TVs and other devices that support OTT video, operators will have to shift resources accordingly.

"As more and more of these TVs get deployed, you'll see more and more consumption over IP versus over RF," Raz says. "One of the great challenges for cable operators is going to be, 'How can I allocate my resources automatically so that I don't have to put in more CMTS (cable modem termination system) boards in order to support more IP and remove some of my video QAMs (quadrature amplitude modulators)?'"

Putting RF and OTT content side-by-side in the channel guide also could be a market differentiator for multichannel operators. The trick, some vendors argue, is to integrate it all in a way that's so seamless and user-friendly that customers don't develop a wandering eye.

"Operators need to offer very good integrated services," says Latens' Thorpe. "Otherwise, customers will go out onto the Internet and get their services. The content owners will be able to disintermediate the operators."