Why Consumers Want Connected TV

Monday October 25, 2010 – Stewart Wolpin

Thanks to a wave of connected TVs, media streamer set-top boxes and the recent introduction of Google TV by both Sony and Logitech, the way consumers buy and watch television is undergoing a radically fundamental change. This change is buoyed by the usual spate of new set-top boxes and services, hampered by the usual spate of consumer confusion, and accompanied by the usual spate of intended and unintended consequences.

According to DTC, 26 percent of all digital TVs estimated to sell this year will be connected, growing to 38 percent next year and more than half in 2013.

Source: DTC

Ironically, the one agent soon to bring the most radically fundamental change to an increasingly educated tube may be sowing the seeds of its own business model destruction.

What's turning the boob tube into "smart TV" is consumers now can access not only the usual spate of local and cable/DVR TV content, but content from the Web and content from their own PCs.

It's the GUI, stupid

While initial cable, Web and local content organizing attempts are interesting, they all miss a key TV watching fact: we're called "couch potatoes" for reason. TV is a lean back and relax environment. TV taters don't want to figure out behind which icon or menu listing content is buried. They don't want to worry about "walled gardens," they're not fond of more boxes piling up in their living rooms, they don't want a remote control with a QWERTY keyboard requiring more than one hand to conduct basic controls, they don't want to surf the net on their big screen TV. They want to watch TV on their TV, and they want finding content no more complicated than perusing the EPG.

Enter TotalGuide from Rovi, formerly known as Macrovision. In early 2008, Rovi bought Gemstar-TV Guide and now supplies the EPGs for 450 cable MSOs in North America. TotalGuide puts all the content available to a consumer – cable, Web-based subscription services (i.e. Netflix, Blockbuster, CinemaNow) and local networked PC-based – into the familiar EPG grid, with all the universal search capabilities of Google TV and without an extra box. A consumer can search for "Casablanca" as they would on any cable EPG, and TotalGuide will bring back all results from all available sources, cable, Web and local. Similarly, clicking any program on the grid results in a list of access choices.

Rovi has signed 35 content partnership deals and is working to sign more. Rovi plans a mid-2011 launch, and says MSOs merely need to push the new TotalGuide out to its subscriber, instantly giving all cable subscribers Google TV-like access.

And there's the rub.

Cutting the cord

Folks like Yahoo! and Google and the TV makers all are excited about connected TVs under the mistaken belief that consumers are interested in enhancing their current TV watching experience – looking up information on an actor while watching a movie, check stock quotes, news or weather, sports fantasy league stats during a game, etc.

They're wrong. Consumers can conduct these simultaneous supplementary watching/surfing without any new gear – just a PC or iPad on their lap. Nielsen reported, as of December 2009, nearly 60 percent of TV taters already prop a PC on their lap while watching TV. And anecdotal reports indicate only 20-30 percent of connected TV buyers actually connect their connected TVs to the Internet.

No, some consumers want connected TVs so they can cut the cable cord someday. They’ll still want some of the programming they get on cable and to pick up extra programming that is available on the Internet. They’d also like to cut or lessen their pay TV bills. In a perfect world consumers want to cherry-pick, to pay only for what they want to watch. That's why consumers want connected TV.

And with TotalGuide, MSOs could be giving their subscribers a reasonto cut back on premium cable subscriptions.

Cable MSOs already are scrambling to herd the cats of their increasingly shifting and diverse revenue streams. The scrum between Cablevision and Fox, which has resulted in the blackout of all Fox stations on Cablevision systems in the New York-Philadelphia area, is just the latest in a series of such broadcaster/carrier disputes. Traditional network broadcasters, faced with dwindling advertising revenue and increased programming costs are attempting to squeeze more cash from their one sure cash cow – mainstream cable subscribers. MSOs, leery of laying off these increased fees on their already angry cable subscribers, are attempting to identify other revenue streams, such as targeted advertising and their own online opportunities.

TotalGuide might help content providers, broadcasters and MSOs solve some of these revenue issues, but may result in the unintended consequences of enabling cable subscribers to go the cherry-picking DYI programming route.

TV taters may like lazily watching a smarter, connected boob tube, but they won't act like boobs given the chance to tell a hated monopoly what they can do with their wares.

Smart phones: The Latest Bubble?

Monday October 18, 2010 – Myra Moore

The latest incarnation of the smart phone has set off a kind of gadget lust that is landing these palm-top computers into millions of hands. DTC estimates that more than 300 million will ship worldwide in 2010 representing a 60% growth rate over 2009 – all during the worst economic downturn in recent history.

Cash may be tight but many consumers are willing to pay more in monthly service charges (than for a feature phone) and to be locked into a service contract in exchange for the $500-$750 they’d otherwise shell out to buy the sans provider-contract devices. Nothing new? Technically, no. The service/device subsidy is a well-entrenched business model. But the smart phone fever launched by Apple reveals some subtle but important changes in the seemingly unlikely relationship among consumers, their phones, factory workers, intellectual property owners, and companies selling devices and services.

To date, service providers have mostly sustained the smart phone service charge premium. But some percolating trends suggest that service providers may not want to take for granted that smart phone costs will stabilize with increased competition for the iPhone. Nor should they assume that consumers’ relationships to their smart phones mirror that of their old-school feature phones.

Then there is the potential expectation trap. The escalation of technical sophistication, combined with high-level design and marketing, is one of the defining characteristics that make these devices so appealing. Higher-quality camera functions, HD video recording, and multiple cameras are now populating the higher-end of smart phones (e.g., iPhone4). They aren’t just highly-designed jewel boxes, but they are jewel boxes filled with the jewels that enable communication, entertainment, productivity and are increasingly regarded as an essential life element by a growing number of consumers.

Improvements to these devices and services will only drive up prices despite some cost savings realized from technical evolution and economies of scale. The subsidy model will continue to work only as long as consumers will either sign up for higher monthly fees and/or longer contract terms.

The high-end extras add cost, but according to tear-down reports and analysis from industry insiders, the cost of manufacture and assembly is one of the smallest expenses of smart phones. That, too, is changing. As the Chinese economy fueled by its status as the world’s manufacturing plant has soared, heightened workers’ expectations are resulting in successful demands for higher wages and better working conditions especially in the special economic zones of southern China, Add to that continued increases (albeit gradual) in Chinese currency value and smart phone makers and their service partners may be facing an uncomfortable squeeze on their margins.

And anyone who doesn’t get the high competitive stakes among smart phone suppliers need only read the business press to see how the intellectual property slugfest among smart phone could inject more near-term costs into the exploding market. (see article here)

Does all this really portend a smart phone bubble? Perhaps this is an overly dramatic characterization of a booming market segment that is delivering profits (after all, Apple’s stock price hit $300 last week). Nevertheless, it might be advisable to occasionally look backward at the dot com era and the housing market debacle – both largely declared sure bets in their day. Just in case.

Apple Did Not Create a Tablet Market

Monday October 11, 2010 – Stewart Wolpin

Suddenly, iPad is the biggest star on TV. Apple's tablet has made appearances in episodes of The Good Wife, NCIS, CSI: New York and Parenthood in the last two weeks.

And many businesses are supplying their employees with iPads, including the nursing school at New York's Pace University – I know this because my neighbor is a professor there and I've been enlisted to give her an iPad lesson.

iPad's sudden initial popularity is impressive, considering for the last decade, "experts," including Bill Gates, have been touting how tablets would take over the computing world.

Gates & Co. may have been right, but not in the way they predicted. After a 10-year lackluster tablet market, suddenly everyone – Dell, BlackBerry, Samsung, Microsoft with Windows Mobile 7 this week, and, at some point webOS tablets from HP – is pouring through the hole in the tablet wall Apple has breached. Tablet PCs appear to be the current darlings of the computing world.

But has it occurred to anyone that perhaps Apple's iPad didn't so much create a market for tablets as much as it created a market just for Apple's iPad?

Why Apple succeeded

In Star Trek II: The Wrath of Kahn (warning: geek drooling ahead), Capt. Kirk is trying to thwart Kahn's initial attempt to steal the Genesis device by punching in Reliant's prefix code number. Vulcan navigator trainee Saavik asks Kirk what he's doing, and Kirk sagely replies, "You have got to learn WHY things work on a starship."

1. Specs Don't Matter. It’s unlikely that a long list of high-powered specs will be the magic bullet that will make their devices more popular than the iPad. There will likely be some attraction to features on the new devices that aren’t included on the iPad, (such as cameras, expandable memory, USB jacks) but it’s not clear that the sum of the parts will be greater than the whole.

And yet Apple has sold nearly 3.5 million iPads so far and is selling around 1.3 million a month.

Source: DTC

2: The App Gap. Apple’s closed system, which guarantees uniformity, differs from the Android operating system. Each Android app has to be optimized to work on a particular Android device. As a result, not all Android apps will work on all Android devices, especially tablets. Samsung has said there will be around 200 Galaxy S Tab-optimized apps at its launch out of tens of thousands of available Android apps.

If consumers want the most interoperable experience, they may choose the closed system that Apple provides. But even if they have things to do on their tablets, new non-iPad tablets have one other major drawback:

3: No Desktop Client. A smartphone doesn't really need apps. It has instant utility. You take it out of the box and you can make calls and send/receive texts. Apps and multimedia capabilities are nice, not necessary.

However, loading content onto a Wi-Fi only tablet out of the box is not as seamless or intuitive as it is with a closed ecosystem like Apple’s. I constantly run into Android phone users who tell me they have no content on their phones because they don't know how.

Although third party software developers offer iTunes-like desktop content sync clients client (http://www.doubletwist.com) for the Android operating system, they aren’t really as seamless or accessible as iTunes.

Without understanding WHY things work for iPad – especially necessity of an official desktop client – it's hard to imagine that iPad competitors can duplicate iPad’s initial success.

The new Blu-ray equation

Monday October 4, 2010 – Stewart Wolpin

In the Isaac Asimov novella, The Bicentennial Man (and not the treacly Robin Williams movie version), the protagonist, Andrew Martin, is a robot who believes he can become legally human by replacing his robotic components with organic ones. Once the replacement process is complete, the question remains: is Andrew really "human" or something else?

Blu-ray players are undergoing the same bizarre "What is it becoming?" self-transformation.

Back in the good old days – last year – Blu-ray deck manufacturers had a hard time differentiating their wares from those of competitors. All Blu-ray decks pretty much did the same thing – they played Blu-ray, DVDs and CDs, and let you connect to exciting (he said sarcastically) BD Live content. Maybe one manufacturer could conjure up some obscure video processing bit rate improvement or faster boot-up time or specialized DAC or high-end construction materials, and maybe there'd be an add-on compatibility such as DivX or DLNA thrown in or, of late, 3D, to differentiate their decks.

By-and-large, though, consumers just bought a Blu-ray deck from the same manufacturer who made their HDTV to gain unified remote control functions. Folks figured, rightly, one Blu-ray deck was pretty much the same as another.

Not any more.

Online land rush

In the last few months, manufacturers have been rushing to build-in "connected" features – internet widgets, often by Yahoo!, and a plethora of content-on-demand services from such brand names as Netflix, Hulu, Vudu, Amazon, Pandora, et al. Blu-ray decks makers suddenly have lots of points of differentiations.

But can these new connected boxes truly be called "Blu-ray players" anymore?

Each manufacturer seems to be taking different connected approaches: which widget platform is used, which and how many content services are included, the number of widgets (while there are a total of 67 Yahoo! widgets with 100 more in the development pipeline, each manufacturer has to test each widget on their connected HDTVs and Blu-ray players before making them available for download on that device), putting one grouping of widgets/content services on their HDTVs and another set on their BD players, and especially the user interface – and none of them are exactly Apple-like in the latter regard.

For instance, Sony segregates widgets and video content in separate areas within its UI, expecting the consumer to have no trouble knowing, identifying and locating a particular "widget" or a content source. Another supplier, LG, limits widget updates to just the model year, after which the device is "locked." Why? Presumably they want you to buy new gear every year. This may not be a problem as consumers will be reluctant to buy a set with such limitations, or that they'll have to deal with a poked hornet's nest when the previously unadvised consumer discovers this state of affairs.

Then there are the varying connectivity options. All connected BD decks have a physical Ethernet jack and some wireless option – either the dongle is an optional extra (dumb), includes a dongle (not as dumb) or, thankfully, a growing number of sensible suppliers are just building in Wi-Fi.

While all these connected capabilities create obvious advantages to the $69 play-only, not-connected Blu-ray players expected to pop up on Black Friday, BD makers have gone from not enough differentiation to way too much.

What are Blu-ray decks becoming?

More to the point, Blu-ray players aren't exactly Blu-ray players any more. They're morphing into media streamers with Blu-ray drives, or something else entirely – and for good reason: people are buying BD decks, but aren't necessarily buying Blu-ray discs.

Sales of BD hardware continue to impress. Manufacturers at CEDIA reported first quarter sales were triple digit over the same period last year, settled in around 70 percent year-over-year during the summer, and are expected to grow back to triple digits again during the fourth quarter.

Source: DTC

But sales of Blu-ray software are moving in the opposite direction. Nielsen VideoScan says BD sales revenue is down 26.11%from 2009; last week, disc renter Blockbuster entered Chapter 11 bankruptcy protection, and Blockbuster's nemesis, disc renter-by-mail Netflix, is swiveling 180 to compete with the new streaming content threats.

Now given the opportunity to reduce or cut their expensive cable monopoly, consumers are buying and connecting their BD players to view online content and, periodically, play a Blu-ray disc. It's only a matter of time before a manufacturer adds an ATSC tuner and a hard drive for DVR and local storage to complete the transformation from BD player to a…?

So at what point do Blu-ray disc player makers consider changing the name of their content boxes to better reflect both what these decks do and how people are increasingly using them?