Apple, Google drive pay-TV innovation

OvumIn December 2010 Apple and Roku both hit sales of 1 million units of their video streaming boxes. This is a strong performance but the figures are not yet directional relative to the installed base and shipment volumes of the incumbents: the games console majors, pay-TV operators, and CE manufacturers.
 
The main effects these new entrants are having on the market is to light a fire under the innovation cycle of the incumbents, as demonstrated by two recent bleeding-edge CPE programs from Comcast and Iliad.
 
As Google may be about to demonstrate through its acquisition of Widevine, the smart play may be to embed oneself in the emerging web video supply chain, rather than try to take ownership of HDMI port 1. Even in the fight for the second port Apple faces stiff competition, although if it is successful then pushing its App Store ecosystem onto the television will prove strategically very powerful.
 
Sales of video streaming boxes not yet directional relative to incumbents
 
On December 21, 2010, Apple announced that it would hit sales of 1 million units of its revamped $99 Apple TV streaming media box by the close of the year. Likewise, this week Roku, a US-based specialist player in this market and Apple TV’s closest competitor, has reported that it is also pulling close to 1 million units sold for its HDMI-equipped media-streaming device which supports Netflix, Hulu Plus, Amazon VoD, and Pandora.
 
It has not been a straight fight to the 1-million mark. Roku’s box has been available since 2008, but is only available in the US. Apple’s second TV product has only been available since late September 2010, but is also shipping in markets outside the US – notably Australia, Canada, the UK, Germany, and France. However, Apple only has a subscription VoD service in the US thanks to its prelaunch Netflix integration, and in Ovum’s view this is likely to be skewing share of sales towards the US market.
 
An aggregate figure of 2 million video streaming boxes, plus a small number of D-Link Boxee units and the limited shipments of Sony and Logitech Google TV units that have made it into the supply chain, is a long way from being directional relative to the total size of the three other strategic axes converging on control of the TV interface. Axis one – the games console platform operators – have a worldwide aggregated installed base of 162.1 million units of their latest-generation hardware. Axis two – the CE vendors – dwarf this number again. Samsung’s annual sales of TV sets alone stand at an estimated 50 million. Finally, the third axis – the multi-channel broadcast platform operators – will alone have shipped an estimated 180 million subsidized set-top box (STB) devices through their customer channels during 2010.
 
 
It is not fair to compare the shipment volumes of Roku, Apple, Boxee, and first-generation Google TV devices with the major games consoles and multi-channel STB market at this early stage in their strategic development. The new entrants are being strategically pragmatic in using application development platforms, partnerships with disruptive content providers such as Netflix and Amazon, and, in the case of Google and Apple, their existing customer ecosystems to try to carve out footholds in this highly competitive, heavily fortified, but rapidly evolving market.
 
Iliad and Comcast – evidence of the new innovation
 
By bringing disruptive innovation into the market, Google and Apple are also pushing the other axes – in particular the CE manufacturers and the cable, satellite, and IPTV operators – to accelerate their own innovation cycles. There was much hype during 2010 around the HbbTV projects in Continental Europe and the YouView project in the UK. And in the past two weeks, the market has seen the covers come off two pay-TV operator projects that owe some of their genetics to video-streaming-based products, rather the traditional linear multi-channel EPG architectures.
 
Iliad’s Freebox Revolution v6 is a high-grade consumer electronics product that even boasts Philippe Starck’s name on the chassis. A two-box home gateway, home media server, and hybrid DTT and IPTV STB, it incorporates open web video access, home media sharing, a network gaming service, and an SDK that will soon be available for third-party application development. Iliad is experiencing some domestic market challenges and it will be hoping that this feature-loaded box makes up for its lack of mobile offerings relative to its quad-play competitors. However, this is an operator that is taking the best of what is being pushed into the market by the likes of Roku, Boxee, and even disruptive gaming service providers such as a On-Live, and using it to drive customer acquisition and retention, and all through a subsidized sales channel.
 
In the US, information has been leaking into the market about Comcast’s trials of its Xcalibur project in homes in Augusta, Georgia. Far more than just an enhanced STB with access to Comcast’s Xfinity on-demand service library, Xcalibur delivers access to a controlled set of web video content from Comcast’s content partners. It also delivers integrated search across available web content, video stored in the user’s PVR library, and linear programming available through the EPG. This latter innovation is at the heart of the Google TV proposition in this market.
 
The market is seeing sophisticated innovation from the incumbent players to respond to and exploit content and technology strategies being brought into the market by new market entrants. It is arguably easier for Comcast and its technology partners such as NDS to copy the technology innovation being driven by Google than it is for Google to replicate Comcast’s defensible subscriber and content partner assets.
 
 
Is Google regrouping to embed itself in the video supply chain?
This reality may have had some bearing on why Google pulled its latest Google TV hardware from CES, and may have been one of the reasons why it acquired Widevine, an established DRM and video distribution technology provider, in late November. Widevine’s DRM technology is widely used in operator CPE hardware, is trusted by content providers, and is one of the five DRM technologies approved by the Digital Entertainment Content Ecosystem (DECE) project. Rather than go for straight displacement of multichannel operators’ hold on HDMI port 1 of the end user’s primary television, Google may be repositioning to leverage itself deeper into the emerging supply chain architecture of on-demand web video – the overarching trend that cuts across all players in this market.
 
The challenge for Boxee and Roku, if they invest to grow beyond their current limited market niche, will therefore be to innovate fast enough to stay ahead of the pay-TV platform operator, CE manufacturer, and games consoles platform operator. Traditionally that would have been an easy challenge, at least relative to the pay-TV operator, but today that strategic advantage is closing fast.
 
Can Apple trap lightning in a bottle twice?
The outlier scenario for Apple is that it manages to trap lightning in a bottle twice and push the App Store and iTunes Store ecosystem onto the television via the Apple TV’s UDP-based AirPlay feature. This in theory allows the user to view, share, and interact with content from iPhone, iPod Touch, and iPad devices on the television. The success of the App Store was hugely important for the successful launch of the iPad in 2010. Ovum’s experience with AirPlay on the Apple TV is that it is not yet fully stable, but extending the iTunes and App Store music, video, and gaming library onto the TV has the potential to be a very powerful move. Whether it will be powerful enough to give Apple TV critical mass in the market is a question that may be answered in 2011.

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